Many parallels can be drawn between the crypto market and the traditional stock market. Fundamentals and economics are primary factors that drive stock prices. Non-stablecoins, or assets not pegged to a fixed value, also move with changing fundamentals, supply and demand, sentiment, etc. Like stocks, they may be grouped into sectors with unique characteristics which affect price and investment strategy. Understanding these layers helps users make better decisions in DeFi.
Feeder Finance Non-Stable AutoStaking and AutoFarming
Before we continue, let's define a couple of terms:
- 1."Cryptocurrencies" (or "coins") are traditionally defined as native network currency used to validate transactions (pay gas fees), take $BTC for Bitcoin, $ETH for Ethereum, and $BNB for Binance Smart Chain, for instance.
- 2."Tokens" are currencies created using a smart contract deployed within a particular blockchain with unique characteristics; they may exist in some form on multiple blockchains. $LINK tokens, for instance, which can be found in most blockchains, aren't used to pay gas but were created to pay for usage of Chainlink products and act as its governance token.
Generally, though, industry participants do use them interchangeably. The confusion for new people joining crypto revolves around "what are tokens?" should clarify that.
While there are infinite ways of dissecting the crypto market, we'll try to keep it relevant and straightforward in this article.
These are the blue chips of crypto, the big brother being $BTC (Bitcoin), followed by $ETH (Ethereum), and $BNB (Binance Coin). More recently, multiple new blockchains have been launched to try to solve Ethereum's gas fees and scalability limitations (although this may change with ETH 2.0); the major ones are $SOL (Solana), $LUNA (Terra), $AVAX (Avalanche), and $MATIC (Polygon), among many others.
What typically drives prices and yields of native cryptocurrencies?
The fundamental use-case for native cryptocurrencies is for rewarding validators that put in the work and/or capital to validate blocks (aka confirm transactions on a blockchain). Naturally, what drives the prices of these assets are actual or expectations of future usage demand of that particular blockchain and how the supplies are getting created. Each blockchain has different Tokenomics for how the cryptocurrency is created and consumed. Still, generally one can assume that the more users there are, the more likely it would be reflected in the price.
Generally, holding native cryptocurrency as a single asset and staking/lending them provides only marginally higher yields than stablecoins. This is because they are considered safe and is abundant. However, providing liquidity and farming native cryptocurrency and stablecoin as a pair offer very attractive yields! A substantial volume of trading is generally between stablecoins and native cryptocurrencies, thus rewarding liquidity providers with high trading fees APR.
DeFi (Decentralized Finance) tokens represent projects that provide financial products or services on the blockchains of native cryptocurrencies. There are thousands of DeFi tokens, large and small, but typically within any blockchain, you have large-cap DeFi tokens that are most heavily traded. Examples of these are $UNI (Uniswap) and $COMP (Compound) on Ethereum, and $CAKE (PancakeSwap) and $XVS (Venus) on Binance Smart Chain. Another generalization is that these are typically tokens of the top AMM and lending protocols on a blockchain.
What typically drives prices and yields of DeFi tokens?
They typically have a usage-driven demand; in other words, usage of products/services drives the need for the token. This demand could either be through higher rewards redistributed or buybacks and burn, but other forms exist too. On the supply side, many DeFi projects use their token to incentivize the usage of their product and services. Minting new tokens as rewards and therefore creating supply that flows into the market.
Similar to how the usage of their representative blockchain drives native cryptocurrency prices, DeFi token prices are, in the long run, primarily driven by demand from use and scarcity of supply. In the short- and medium-term, however, sentiment could be behind price movements.
Typically investors would stake DeFi tokens on its respective projects' staking or farming pools; yields largely represent how the token price has been moving recently. The range of APY will primarily be driven by the stage at which the project is; newer projects with high inflation offer higher APY. However, token growth may or may not translate into $ value growth over time; the outcome is subject to the project's success or failure.
As the cryptocurrency grows, its ecosystem has become more and more diverse. Investors must be diligent and understand the tokenomics underpinning each token; this is true for all sectors.
The following are some of the other crypto sectors you should be familiar with:
- Play to Earn: Games, and especially games that pay players in crypto ("Play to Earn"), have become one of the hottest sectors in crypto in the early part of 2021, led by $AXS (Axie Infinity), which is powering an entire economy in some emerging countries.
- NFT: Digital assets can be copied and shared easily; verification of their origin and authenticity is virtually impossible. That was until the introduction of the NFT technology. Non-Fungible Tokens (NFTs) allow digital assets to be verified and tracked, creating value for authors and owners of digital assets (art, music, etc) like never before. CryptoPunks, a digital avatar, commands value in the millions as one of crypto's most prestigious NFT collections.
Investing in any cryptocurrency or token ultimately comes down to figuring out demand and supply imbalances. What drives the demand for the token will come down to real demand from usage and sentimental demand from traders based on relevant development that impacts its future. On the supply side, it comes down to how fast new supply is coming into the market versus how much gets used. Investors should be aware of the different sectors. In most cases, the market focuses on one or two sectors at any given time, and tokens within the same sector generally share similar tokenomics. Understanding this helps speed up the diligence process and makes keeping up with the crypto market far easier.
Disclaimer: Nothing written here should be considered investment advice. The article is intended for informational purposes to guide investors only. For investment advice, please consult a licensed professional.