Bitcoin too hot to handle? Alt Coins may be your answer.
If you’re not in the market to lay out $52K (USD) for Bitcoin or you’re a staunch HODlr, now’s the time to explore the value of DeFi. As the crypto market continues to soar, more traders are looking to diversify their holdings and ride the wave of mainstream and institutional interest in these decentralized digital currencies.
Talk with any DeFi enthusiast and they will tell you how the sector outperformed Bitcoin (BTC) in 2020, as the category surged more than 3300%.
Every smart trader who is trading to win probably has a few DeFi coins in their wallet. But with almost $42B (USD) total value currently locked in DeFi, it’s a good time to dig a little deeper into this diversified segment of the digital market.
DeFi coins are divided into five categories: Lending, Derivatives, Dexes, Assets and Payments.
Lending is the most recognizable category in DeFi. Lending platforms allow users to borrow one asset and use another as collateral. Lenders are in it to earn interest on their coins, which currently outpaces what you can earn on your fiat currency.
Maker (MKR), Aave (AAVE), and Compound (COMP) are well-known and the market leaders in the lending category. As the demand for Ethereum continues to rise, lending protocols are extremely popular and create opportunity for traders who understand the benefits of each lending protocol.
With DeFi lending protocols, “anyone can take out a cryptocurrency loan backed by collateral or gain interest by lending out their own crypto, irrespective of their identity and financial history,” techradar.com says.
Derivatives are tokens that have various uses, ranging from asset-backed tokens to alternative insurance and more. The spotlight doesn’t shine often on derivatives and they may not be the first coin a trader will explore. However, as the crypto market continues to explode, derivatives can play a key role in a trader’s portfolio.
“Indeed, derivatives play a crucially important role in financial markets by performing key functions,” according to International Banker. “For one, they allow traders to speculate today on future prices of assets without having to purchase the underlying asset itself today. This means that the trader does not have to spend as much to gain exposure to the market.”
Synthetix (SNX) accounts for more than 82% of the $3.1B USD locked value in this category, with Nexus Mutual (NXM) following behind.
“Derivatives also function as important risk-management tools for traders. Futures, forwards, swaps and options can all be used to lock in prices and prevent adverse price movements from incurring significant losses to the trader,” International Banker points out. “This is known as hedging a position and is used by many market participants to protect themselves against the market moving unexpectedly and out of their favour.”
Unlike Derivatives, DEXes do get their share of attention in the crypto sphere. DEXes are pure peer to peer (p2p) services that allow users to transfer cryptocurrency directly Uniswap (UNI) and Sushiswap (SUSHI) are examples of DEXes.
DEX users point to the total anonymity of using this service to exchange currencies as the major benefit. While a DEX may sound convenient, they are not without risk. Downsides include the inability to restore access, low liquidity, and no support service. Not to mention that you lose the freedom to choose your own DeFi tokens and buy/sell/trade at your convenience.
Rounding out the DeFi categories are Assets and Payments. Assets is a broad term for a large group of coins that provide various services. “I see eight distinct crypto asset classes — reserve, currencies, platforms, utility tokens, security tokens, commodities, appcoins and stablecoins,” explains one Hackernoon contributor.
With a total value locked of $4.29B, assets are the third largest segment of DeFi tokens.
Payments is the smallest segment of the DeFi Market. “Payments are an interesting use-case of decentralized finance with products that utilize both Bitcoin and the Ethereum blockchain,” a Medium contributor said. “In the payments sector, DeFi products have tried to make micro-payments more efficient and inexpensive, thereby improving the scalability of blockchain networks.”
Flexa (FXC) represents more than 80% of the payments category.
With so many options in the alt coin sector, traders can build a portfolio of coins that meets their long-term trading and investment goals, as decentralized finance is here to stay.
“Decentralization is one of the two great forces reshaping financial services. Along with the unbundling of the three traditional core banking activities of lending, payments and deposit-taking, decentralization is transforming how we consume financial services and how banks operate,” said Brian Brooks, acting comptroller of the currency of the US Treasury’s Office of the Comptroller of the Currency in a Cointelegraph interview. “My view is that we are still in the first quarter of a longer game and many of the greatest benefits and advancements are still ahead.”
Joyce Pavia Hanson