You will be able to question a token's purpose, supply and backing before buying it.
A new token is all over Darren's feed. The posts say it will power a gaming network, holders can vote on its future, and early buyers earn a yield of more than 20% a year for "providing liquidity". The website has a slick roadmap and a countdown. Darren cannot tell whether he is looking at a real project, a long shot or a trap. This lesson gives him a set of questions that work on any token, before he spends a dollar.
Most tokens are created by a smart contract on Ethereum or a similar blockchain, which you met in lesson 2.1, Ethereum runs programs, and ether pays for them. Creating one is cheap and quick, which is why there are so many of them.
Projects describe their tokens in different ways. A utility token is meant to be used inside a product, for example to pay fees on a platform. A governance token lets holders vote on changes to a project's code or treasury. A meme token admits it is mainly a joke or a community badge.
What almost none of them give you is a legal claim. When you buy a share in a Singapore-listed company, you own part of that company, with a right to dividends it declares and a share of what is left if it is wound up. Most tokens carry no such right. If the team behind a token builds a profitable business, the profits belong to their company, not to token holders, unless the token's legal terms say otherwise. And if the project fails, holders usually have nothing to claim against. Read the token's documents with that in mind. If they use the words "investment" and "returns" but cannot point to a legal right, the price rests only on demand, like bitcoin in lesson 1.3, What gives bitcoin a price, and why it swings.
Supply is the first thing to check, because it is where many token buyers get hurt. Look for the total supply, how much is in circulation now, and how the rest is allocated. Projects usually publish this in a document called a whitepaper or on a "tokenomics" page.
Here is a made-up example of why it matters. A token has a total supply of 1 billion. Only 150 million are circulating today, and the price you see is set by trading in those. The team and early investors hold 400 million, locked for twelve months. When that lock ends, insiders can sell up to 400 million tokens into a market where only 150 million were trading before. If even a portion of them sell, the price can fall hard, and you will have bought at a price that never reflected the coming supply.
So ask three things. Who created the token and are they named? What share did the team and early backers keep? When can they sell? A project that cannot answer these clearly has told you something.
DeFi, short for decentralised finance, means financial services run by smart contracts instead of firms. You can swap tokens through a contract that holds pools of them, lend tokens to a contract that lends them on to borrowers, or deposit two tokens into a pool so that traders can swap against them, which is what "providing liquidity" means. In return you earn a share of trading fees or interest.
The appeal is that it runs all day without paperwork or a company deciding who may use it. The cost is recourse. If a contract is exploited, if the price feed it relies on is manipulated, or if the team behind it walks away, there is no customer service desk, usually no regulator overseeing it, and often no legal entity to pursue. When something goes wrong on a licensed platform, you at least know who to complain to. With DeFi, you are often on your own.
Back to the yield in Darren's feed. Every yield is paid by somebody. In a lending pool it comes from borrowers paying interest. In a trading pool it comes from fees traders pay. Those sources are real but they move with demand, and a trading pool also exposes you to losses when the two tokens in it move apart in price.
Often, though, a large advertised yield is paid in the project's own newly created tokens. That is not income from any activity. It is the project printing more of its token and handing it out, which adds supply and tends to push the price down. The yield looks generous in percentage terms while the value of what you are paid shrinks.
So treat any yield with no clear source of income as a warning sign. Ask who pays it, from what activity, and what happens to the rate if new deposits stop. If the honest answer is "new money coming in", walk away. Fake platforms that invent yields and profits outright are a different problem, taught in Scam-proof your money. This course deals with real projects, which can still fail on their own terms.
Darren now has a short routine. For any token he hears about, he answers: who issued it, what it is for, what the total supply is, how much insiders hold and when they can sell, and where any yield comes from. He writes the answers down with the source for each, because "I read it somewhere" is not a source. If he cannot answer one of them from the project's own documents, he records the gap instead of guessing.
Pick the token you have heard the most about recently, and run it through the same questions.
For one token you have heard about, answer five questions: who issued it, what it is for, total supply, insider holdings and source of any yield.
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