Blockchain analysis firm Chainalysis has added advanced investigation and compliance support for six more widely-used ERC-20 tokens. All six crypto tokens are decentralized finance or DeFi related and five of them “specifically belong to top DeFi protocols,” the blockchain firm noted in a recent update.
The Chainalysis team added that, collectively, the six new tokens had over $155 billion of trading volume during Q2 2021, accounting for about 1.4% of all virtual currency trading.
These crypto tokens include:
- AAVE: The governance token of Aave, a decentralized lending protocol. It “allows users to borrow assets and earn interest on deposits,” and they also “offer uncollateralized flash loans.”
- CRV: The governance token of Curve Finance, a decentralized exchange (DEX) “optimized for efficient stable coin trading.”
- renBTC: An ERC-20 token “pegged to the price of Bitcoin.” Through a bridge between the two blockchains, it “allows the permissionless transfer of BTC to and from Ethereum for use in decentralized applications.”
- UNI: The governance token of Uniswap, a decentralized exchange and “currently the biggest DEX.”
- SUSHI: The governance token of SushiSwap, a decentralized exchange. SushiSwap “began as a fork of Uniswap.”
- YFI: The governance token of yearn.finance, a decentralized asset management platform. It “offers yield farming strategies that aim to automatically maximize users’ yield, as well as other services including liquidity provision, lending and insurance.”
The growth in DeFi usage has been “one of the major crypto trends” during the last year, Chainalysis noted while pointing out that in July 2020, DeFi protocols collectively “held $1.8 billion of assets.”
As stated in the report, that figure began “to grow quickly in August, and now, as of July 2021, consistently stands above $60 billion of total value locked in DeFi.” As DeFi usage grows, it’s important that providers such as Chainalysis “adapt accordingly so that DeFi transactions can be carried out as safely as those in the centralized cryptocurrency ecosystem,” the blockchain firm noted in its update.
While commenting on DeFi governance tokens, the company noted that five of the six new tokens they’ve added support for are governance tokens “for popular DeFi protocols.”
While explaining what this all actually means, Chainalysis wrote that the core idea of DeFi is “enabling financial services purely through code run on a distributed blockchain.” Through “carefully designed” smart contracts, DeFi protocols bring together users and investors and “automatically control funds, doing the necessary coordination required for a financial service to operate.”
Due to the security and immutability of the underlying blockchain, the protocol smart contracts “can’t be edited, stopped, or taken down, unless they’ve been specifically designed to allow changes,” the report explained.
The report also mentioned:
“A DeFi protocol shouldn’t let just anyone change the underlying smart contracts as they please, as this could allow the protocol to be hacked and for users’ funds to be stolen. At the same time it may not be ideal to prevent all changes; bugs and vulnerabilities get discovered, improvements are developed, and new opportunities to grow the market appear.”
The report further noted that a select group of individuals or an organization could “permanently be given permission to make changes to the smart contracts, but this goes against the philosophy of decentralization” and that’s where “governance tokens come into play.”
DeFi protocols issue governance tokens to users and project backers, the Chainalysis team explained while noting that the tokens vary “in the exact powers and utility they provide to the holder, but nearly all provide the power to propose and vote on changes to the associated DeFi protocol.”
They also noted that this works “much like shareholder votes, with code changes or fund distributions put forward to be voted on and potentially enacted on-chain. Each governance token gives the holder a specific number of votes.” The “more tokens you hold, the more votes you get,” the company noted.
It also mentioned that different protocols allow “different levels of flexibility in the changes possible but can include things like changing financial variables, adding new features, blacklisting certain users, repairing vulnerabilities, distributing fees, spending development funds, and more.”
As explained by Chainalysis:
“Usually some of the governance tokens are set aside on launch for the initial project backers such as the development team and investors, similar to startup equity. However, most of the remaining tokens are distributed publicly based on usage of the DeFi protocol, a bit like a rewards program. They’re not exclusively distributed to liquidity providers, as users of the service can receive them as well. Each time you do a swap on a DEX or act as a liquidity provider, you can earn governance tokens. This gives power to those who use the protocol most and incentivizes them to continue using it.”
Some other key features added to governance tokens include:
- Requiring holding or spending of governance tokens in order to use the protocol, e.g. to pay fees or as liquidity
- Discounts or improved rates for holders
- A share of the profits earned by the protocol
- Staking to provide additional security or insurance
- Access to additional features or services
The voting rights and features such as the above may give governance tokens value. Just like nearly everything in crypto, governance tokens may be traded and as the usage of DeFi protocols has grown, “so has the popularity of trading their tokens.”
Chainalysis further noted that users who aren’t so interested in the governance of the protocol can “earn tokens as they use the protocol and then sell them.” The value of governance tokens can “therefore work like a rewards scheme, giving financial incentive to use the protocol,” Chainalysis explained.
For more details on this update, check here.