What are the Different Classifications of DeFi Tokens?

DeFi (Decentralised Finance) created a lot of stir in the cryptocurrency space in Summer 2020. That’s because it enables the use of conventional financial tools on blockchain. With the growing popularity of DeFi platforms, DeFi token development also picked up the pace. The DeFi tokens reside on blockchain and are used for different purposes on different protocols.

DeFi coin development is carried out in a way that seamless transferability and transparency of cryptocurrency are maintained. However, there is a big difference between the two. While cryptocurrency is an asset, the DeFi tokens are also backed by a financial logic that runs on blockchain. To state an example, CDAI, a DeFi token of Compound represents the interest a user had earned on the loan DAI.

Interestingly, DeFi opened up staking, lending, and borrowing for blockchain users. As a result, a lot of experiments have been happening around DeFi token development. Based on the results, the DeFi tokens have been classified into the following three categories.
• Fee Tokens
• Governance Tokens
• Collateral tokens

Fee Tokens
Fee tokens are DeFi tokens designed to claim a set percentage of fees that is generated by a particular DeFi protocol. Every DeFi protocol attracts usage fees from the users. The DeFi protocol developer can help design the Fee token in a way that these can be distributed as stable coins or the native coin of the DeFi protocol.

In addition, this can also be left for token holders to choose how the fees can be accrued by them. Also, a buy and burn mechanism can be used to make the fee tokens deflationary in nature which helps increase the value of the tokens. Basically, the DeFi tokens used for fees enable the basis of cash flow and help users evaluate the protocol in comparison to others.

Governance Tokens
These tokens became very popular with users who are very interested in the growth of the DeFi protocol. That’s because the Governance tokens give holders the governance rights like how the project will develop over time. The main developers of the DeFi protocol propose changes and the community can use the governance tokens to vote on the proposals.

Sometimes, developers combine the functionality of Fee tokens and governance tokens into a single token.

Collateral of last Resort Tokens
These are the tokens whose price is pegged to the price that the DeFi protocol is trying to maintain. This is important for protocols where synthetic assets are created. Because of these assets, it sometimes might happen that there is not enough external collateral to resort the peg of the asset that was synthetically created.

If this happens, the network token is used for liquidity and to restore the peg. A prominent example of collateral of last resort tokens is the MKR token.

Conclusion

DeFi token development is a very interesting element of the entire ecosystem as it comes with intrinsic values. Apart from this, these are used to incentivize participation in the protocol. In short, these tokens have a great role to play in the growth of the protocol.

However, as these tokens are based on smart contracts, the security of the code has become an area of concern. For the sake of security, it has become very important to make sure the DeFi coin development is carried out with the best security practices and these smart contracts must be well-audited too.

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