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FN 104 - Tokens
DeFi would not be very useful if you could only move funds around using the chain's native currency. Thankfully there are many different tokens for us to choose from. This course will cover the following topics:
- Defining Tokens
- The SNOB Token
- Avoiding Scam Tokens
Tokens are everywhere in decentralized finance and allow for a more robust financial system. This is because in chains without smart contract capabilities, you can only buy and sell the chain's native currency. However, with smart contracts, it's possible to create tokens for a variety of different purposes. But what is the value of these tokens?
Similarly to traditional financial markets, an asset is only worth something if someone is willing to buy it from you. If no one wants to buy your dollars at a specific exchange rate to another currency, then your dollars aren't worth that much. The reason why people would want to buy your asset, is due to some utility that it provides; its purchasing power, store of value, potential appreciation, etc. There are tons of physical assets in the world, such as currencies, precious metals, stamps, houses, cars, and so on. People choose to hold what they think has the most utility for them.
In DeFi, these tokens follow the same logic. BTC, for example, has been often described as a great store of value, similar to gold. AVAX has the utility of making transactions on its blockchain, and so on. But those are both native tokens that have their own blockchains. What about tokens that simply exist within DeFi? These tokens are smart contracts, following a token standard. The most common token standard is the ERC-20 token standard, used in almost all EVM-compatible chains. This standard allows tokens to be transacted between wallets and to contain information about themselves such as their name, symbol, and who holds the token in their wallet. Let's look at Snowball's own token as an example.
As can be seen above, the Snowball token has its own logo, contract address, a price, a marketcap, a total supply, is being held by over 7,000 wallet addresses and has been transferred over 490,000 times. It is also important to note that the token's symbol is 'SNOB' in this case. By clicking on the contract or on lower parts of the page, a lot more information can also be found regarding the token or its transactions as well.
The economic mechanisms of a token that govern its supply are coded into the contract upon its creation, and are called the token's tokenomics. In the case of Snowball, it has a maximum supply of 18 million tokens. This maximum supply is interesting for those looking for a token's utility as a store of value. Since no more tokens can be created after that number, its supply will be static, and any increase in demand should increase price.
Other than solid tokenomics, a token also needs to have some utility if it is to see a good level of adoption in DeFi. The SNOB token, for example, can be staked (deposited into another contract) in order to gain many benefits when using Snowball's platform, including a percentage of the platform's revenues every week. This utility creates demand for the token.
The prices of tokens can be seen through any decentralized exchange, or an external website that provides such services. CoinGecko, for example, is one of those sites. You can see the price history of the SNOB token here.
While there are many great tokens out there, providing a ton of utility for their respective DeFi ecosystems, there are also a lot of really bad tokens, or just outright scams. This is because anyone can make a token, with whatever tokenomics or name they want. There are many things you can look out for when trading or investing in a token:
- Tokenomics - Are its tokenomics sustainable? If its supply is increasing faster than its demand or a large percentage of its supply is in the hands of a few individuals, then it might not be a wise investment.
- Utility - Does the token provide any utility to its holders? If not, its demand might be inflated and/or temporary.
- Liquidity - Are a lot of people buying and selling the token? If not, you might have a hard time selling it later.
- Promises - Is the token's platform or team behind it making promises that sound too good to be true? Steer clear. Good tokenomics and utility speak for themselves, with no need for outlandish promises of massive profits.
To learn more about token scams and other types of common scams in DeFi, check out our EX 151 course on 'Spotting Scams'.
Tokens form the backbone of transactions, portfolio diversification and yield farming in DeFi. As long as you understand how to avoid the blatant scams out there you can take part in the massive ecosystem of decentralized finance, and all the financial freedom it brings with it.