DeFi token

DeFi token stands for decentralized finance token; it is a digital token that allows users to take part in a crypto space/ ecosystem, whether for transactions or decision making (vote on any governance proposals submitted by the community), as well as to benefit from other exclusive features provided on the platform. Decentralized finance (DeFi) offers a variety of supportive and security tools for blockchain ecosystems, so that users can manage their crypto assets, carry out transactions in a secure manner, and utilizing certain enabling tools such as smart contracts. The DeFi tokens grant holders the rights to participate in governance (of the own network), access exclusive features and benefits, and stake for rewards (in  the form of network tokens – by means of staking).

Risks of DeFi tokens

DeFi tokens carry a number of specific risks that should be assessed by market participants before investing in such cryptoassets. The risks include but are not limited to:

• Smart contract risk: smart contracts could expose users (parties to transactions) to certain vulnerabilities or security loopholes that can be exploited by malicious actors. Bugs in the code (of DeFi applications) may jeopardize projects and underlying assets as hackers and malicious actors may exploit such weaknesses to .
• Regulatory risks: DeFi may attract stricter regulatory scrutiny and measures which negatively impact the value of DeFi assets and token trading.
• Market risk: this risk represents the fluctuations in the value of DeFi tokens due to market forces. These tokens can be highly volatile and holders/ traders can sustain potential financial loss. This reflects another types of risk- i.e., volatility risk as an inherent nature of tokens as an asset class.
• Liquidity risk: certain DeFi tokens may not be widely traded, in which case buying or selling large amounts would negatively impact the market price and the perceived value  of such assets.
• Rug pull risk: developers may abandon a project before completion and disappear with the funds raised for it. This would cause a certain token either to completely collapse or its market price to drop to zero.
• Project closure risk: over its short history, DeFi have experienced times when projects close down for various reasons. New projects shall be assessed before participants buy into such investments. Assessment involves the degree of complexity and the fluctuating yields associated with DeFi tokens. Users have to consider various risk and cost factors before holding or investing such volatile and risky assets.