The crypto world has gained widespread popularity over the past few years. More institutions and individuals are turning to popular digital assets like Bitcoin and Ethereum as alternative investments amid worsening economic conditions.
As the cryptocurrency industry bursts forth, it has opened the door for a new movement that facilitates decentralized lending and borrowing. DeFi offers great opportunities for investors to earn passive income by putting in their crypto funds to any protocol’s liquidity pool. The influx of capital into DeFi since the summer of 2020 has demonstrated the potential of the nascent sector to transform the traditional financial system.
Although the concept of DeFi has already disrupted the structure of the legacy financial system in many ways, it still has massive potential for growth. By integrating multiple protocols into their smart contract, emerging platforms can offer a wide range of solutions that serve the evolving needs of users.
New protocols can empower projects to create robust and resilient tokens and help transform the budding DeFi sector into a multi-faceted global ecosystem.
This article looks at evolving functions and features that allow DeFi applications to provide increased utility, generate more community rewards, and meet their social responsibility.
Reflection tokens are the latest wave of DeFi tokens that are helping projects garner loyalty from the crypto community. Reflections refer to a mechanism that offers autonomous rewards to holders of a specific token. The rewards are reflected into the holder’s wallet on a regular basis, enabling them to earn passive income.
Reflection mechanics deduct a fixed transaction fee and disburses it to existing token holders. Some projects charge an additional tax on sell transactions that goes into holder rewards, thus incentivizing buying while deterring investors from dumping coins during the price discovery phase.
This new approach is garnering massive popularity in the DeFi space, as they allow users to receive a regular flow of extra native tokens. Projects such as Rainbow Token ($RAINBOW) integrate a reflection mechanism as part of the seven protocols that compose its tokenomics. The function automatically reflects tokens to users’ wallets based on their holdings, incentivizing new investors to purchase more $RAINBOW and generate autonomous yields.
Several other DeFi projects have employed the concept of token reflection to attract investors and build a strong community of holders. Numerous dynamics determine the attractiveness of token reflections, including daily trading volume, distribution percentage, and the coin’s price growth.
Newly-listed projects typically start with low volumes, translating into lower reflections. As the volumes build, so does the amount of tokens distributed back to holders, a factor that benefits early investors.
As environmental and social issues continue to combat the world at an alarming rate, some tokens have welcomed the charity trend to help save the world. Projects looking to fulfill their social responsibility and invest in the future of humanity are starting to integrate a charity protocol that channels a portion of their transaction fees to charitable causes.
For instance, the Rainbow Project deducts 1% from all transactions that go into a charity donation pot, which is then disbursed to charitable organizations across the globe. Such ethical projects committed to contributing to charitable work go a long way in relieving the burden of overwhelmed NGOs struggling to make the world a better place.
Community members on similar projects can vote on which areas of charitable work they can invest in including healthcare, poverty alleviation, animal welfare and environmental conservation. The beauty of charity protocols is that they can give back to society and the environment in a transparent manner thanks to the immutable nature of the blockchain.
A growing number of DeFi projects have incorporated an auto-liquidity function designed to grow the underlying liquidity with each buy and sell trade.
The auto-growing liquidity feature expands the funds pool on decentralized exchanges (DEXes) like Pancakeswap, providing long-term price stability for the native token. It also increases liquidity for users swapping tokens to create a more substantial token and maintain higher trading volumes.
Token buyback is an increasingly prevalent tool on DeFi apps seeking to make their token hyper-deflationary. Projects routinely buy back a portion of coins from each transaction that they subsequently take out from circulation forever. This strategy enables the emergent token to take flight and achieve its moonshot potential by instantly reducing supply.
Newflanged tokens like $Rainbow implement a buyback function that triggers each sell transaction to buy back coins from the liquidity pool. All coins in the buyback wallet are then burnt, tightening the supply and ultimately pumping the token price.
DeFi projects with multi-faceted protocols often include a hyper-deflation mechanism that further tightens supply by sending a small percentage of each trade to a burn address. The burn function works in tandem with the buyback function, enabling the underlying token to appreciate over time.
The DeFi ecosystem has exploded at an astonishing rate since 2020, attracting billions of USD into the ecosystem. The growth is mainly led by applications built on Ethereum and the Binance Smart Chain.
Multiple projects have emerged promising to challenge traditional finance and usher in the vision of a new blockchain-based decentralized monetary system.
By integrating manifold protocols into their smart contracts, DeFi apps can offer more value to users with practical functions, including reflections, charity, and auto-growing liquidity.