I’ve been hearing a lot about DeFi coins lately but honestly, I’m a bit confused about what they are exactly. I get that it’s short for “Decentralized Finance”, but what does that mean practically speaking? Is a DeFi coin like Bitcoin and Ethereum, or is it something different?
What exactly defines a coin as being DeFi? Also, could anyone clarify how these DeFi coins work? I’m aware that most of them are built on the Ethereum network, but I don’t really understand what makes them unique or why they are getting so popular.
Also, how are DeFi coins valued? I mean, how is it determined how much one DeFi coin is worth? Is it the same methodology that traditional coins such as Bitcoin and Ethereum use? Wow, I just realized I have so many questions about this. I’d love it if you guys could break it all down in layman’s terms. I’m pretty new to this whole crypto world and there’s so much to learn.
DeFi, or decentralized finance, refers to financial applications built on blockchain networks. They aim to create an open-source, permissionless, and transparent financial service ecosystem available to all and operating without central authorities. A DeFi coin is simply a token associated with a DeFi application. They’re not exactly like Bitcoin or Ethereum – those are standalone cryptocurrencies, while DeFi coins are tied to specific apps. They’re popular because they can offer immense returns (and risks!) and they’re democratizing finance. DeFi coins’ value is determined rather like traditional cryptocurrencies: it’s a product of supply and demand. So if a DeFi project is successful and many people want its token, the token’s value goes up.
Just to add onto what Speedrun7 said, DeFi coins are also unique because they take the ‘decentralization’ concept to a new level. With normal cryptos like Bitcoin, you’re moving away from traditional banks – but with DeFi, you’re moving away from any central organization at all, be it banks or crypto exchanges. Think of it like using apps on your phone without needing Apple or Google as a middle man. Also, DeFi’s popularity isn’t just about potential returns, it’s about creating a more inclusive system. For instance, there are billions of unbanked people who do have access to smartphones, and DeFi can provide financial services to them. Lastly, in terms of valuation, while supply and demand do play a role, there can also be other factors such as the utility and the role of the token in the DeFi system, or even speculation about the future success of the project.