It is no secret that the world of traditional finance is difficult to understand. Unfortunately, decentralized finance (DeFi) is even more difficult to find.
Decentralized finance is a growing collection of financial instruments built on a blockchain – a digital leader that resides in the middle of a collection of dedicated servers. These platforms and protocols allow users to trade cryptocurrency, borrow and lend money, and receive interest, all without a central bank or third -party intermediaries. .
A quick Google search returns research into DeFi’s unpredictable and unimaginable annual growth percentages. Likewise, you’ll learn more about hacks, scams and inefficiency in his ecosystem. A non -regulated gray area, decentralized money is a combined bag. That said, when approached properly and prudently, DeFi can serve as a viable and cost -effective investment option.
Aside from your thoughts about cryptocurrency, one thing is clear: It has a stability. In May 2022, more than $ 74 billion in cryptocurrencies were locked in DeFi. And as DeFi continues to gain widespread use, a lot of education is being done about basic terms, guidance protocols and best practices.
That is why we have created the DeFi dictionary, a living resource for you to guide your familiarity with this new level of money. After reading this article from beginning to end, you will have a high overview of the major pillars of decentralized finance.
Ethereum is a decentralized blockchain system, widely used for its ability to run smart contracts. Ethereum is the first blockchain of the DeFi ecosystem.
Distribution License (dApp)
A decentralized application is a system or application that runs on a blockchain. DApps are fully utilized by smart contracts, opening up the possibility for a third party.
The smart contract is a blockchain native software that is easily implemented when pre -selected requirements are met. Smart agreements are the lifeblood of all DeFi applications and protocols.
Ether (ETH) is the real money (or “token”) of Ethereum and is used to pay transaction fees on all decentralized Ethereum applications. To access decentralized funding, you need two tools: an ETH and an Ethereum wallet.
The Ethereum wallet
A wallet is a software or physical device that allows users to interact with a blockchain. Wallets hold users ’money and data and can be used in all decentralized applications. Each bag comes with its own private and public keys. While we will use Ethereum for this example, there are some wallets for other blockchains such as Bitcoin and Solana.
Metamask is the most popular and compatible Ethereum platform with most dApps.
A cryptographic string of numbers that gives users access to their money and data. Private keys are used to sign up and authenticate blockchain transactions.
Don’t give this to anyone, as it is the fastest way to steal your cryptocurrency. You will not provide your archive password, so do not provide your personal key.
A public key, or “Wallet Address,” is a string of letters and numbers that allows users to find cryptocurrency or other tokens in their wallet. Just as someone sends an email to your account, people send cryptocurrency to your wallet account.
People have to pay a fee (gas fee) for each transaction completed on a blockchain site. Gas fees (paid in real blockchain currency) are used to pay miners by purchasing the digital power they use to validate the trade.
For example, all Ethereum gas fees are paid at ETH.
A server exchange is a regulated organization, in order to earn money to maintain (and sometimes guarantee) users ’cryptocurrencies. Currency exchanges such as Coinbase (COIN) handle the vast majority of cryptocurrency volume, due to their simple interface and ease of use.
Server changes are protected, which means they are held by users’ private keys. This allows users to log in with a standard password, instead of having to keep their private keys.
A decentralized exchange (DEX) is a peer-to-peer digital cryptocurrency exchange that operates without the consent of a third party or administrator. Instead, trade -offs and transactions are streamlined by effectively executing smart contracts on the blockchain. All transactions are atomic, which means that Coin A is sent at the same time as Coin B is received.
DEX eliminates the traditional order book, and thanks to automated marketing tools, you don’t have to be a buyer or seller to trade.
Automated Marketing Tool (AMM)
Retailers under the protocols define the value of assets in a decentralized exchange. The backbone of decentralized exchanges, AMMs allow users to trade against water that is encapsulated in smart contracts called water ponds. They allow someone to act as a lender (LP) when they meet the pre -selected terms of the intelligence agreement. All you need is enough water in the drinking water and an AMM smart deal to make the market work for you.
Uniswap is the most popular automate market maker, with more than $ 42 billion in market volume in April 2022 alone.
Water supply is a two -pronged market that is created when water suppliers have the same number of shares in a smart deal. From there, buyers and sellers can directly purchase this property without waiting for an order to be processed.
Property Manager (LP)
Investors make significant amounts of money to ponds that control DEX. To become the LP of a two -value liquid, you need to give the same value of both properties.
Let’s say you are entering a Bitcoin/ETH trading column and Bitcoin is at $ 20,000 and ETH is at $ 2,000. To become an LP in this pool, you need to lock in 1 Bitcoin and 10 ETH.
In exchange for securing assets in a liquid pool, LPs receive a small percentage of each trade. The amount of the commission is equal to the amount of the supplier in respect of the entire reservoir. In addition, donors also receive LP certificates – a unique symbol of someone’s ownership interest in the entire water. These signals can be modified and changed on their own, and can be stored in the DeFi ecosystem for the acquisition of additional products.
Providing liquidity (or mining liquidity) is a great way to earn passive income on your stocks, as LPs will always experience permanent losses.
The constant loss is that it is more valuable to keep a cryptocurrency in your pocket than it is to be a two-factor investor. Due to the nature of the value of an asset at the time, it is better to manage the asset than to use it to supply water to a freshwater source. While there can be permanent losses with double -digit wells, it is even more so when it comes to the most complex assets.
Slippage is the difference between the executed price and the initial trading price. This is especially true in DeFi, where volatility has always been common in the price of goods and the liquidity of stock markets. When trading decentralized exchanges, always monitor the flow and try to avoid market orders if possible.
Decentralized lending is an alternative to traditional lending that uses smart contracts and blockchain technology to streamline the process of lending. On platforms such as Compound and Aave, users can borrow and lend anonymous cryptocurrencies without the need for third -party authorization.
Smart agreements bind all lending transactions and separate the collection of interest on all loans. Decentralized lending is a great way to earn passive income in your crypto.
Staking is the process of locking the cryptocurrency to help secure and maintain the integrity of the blockchain by allowing verification-of-stake. In return, stakers are paid with a portion of the block fee generated by the system. “Fruit farmers” can earn passive income by securing their plots or LP certificates to asset classes such as Aave and Curve. NFTs can be recorded for DeFi availability.
Farming is the process of using DeFi thresholds and protocols to pursue the best possible return. It involves continued borrowing, borrowing, staking of cryptocurrency to earn interest, and then injects this interest back into new pools to earn more interest. Fruit farming is very difficult, very expensive play.
Stablecoins are cryptocurrencies that are denominated in the value of government -backed currencies, such as the US currency. Although most cryptocurrencies are very simple, stablecoins are used to avoid these fluctuations. While most popular stablecoins, such as USDC, are backed by U.S. financial institutions, other stablecoins are backed by algorithms or other cryptocurrencies.
As for Bitcoin and Ethereum, fiat -backed stablecoins such as USDC and Tether are a low -cost way to explore the benefits of DeFi. Today, stablecoins are available most hold tight. But with the fall of Terra, many are questioning if they can hold on to their peg in time.
Now, you need to know more about DeFi principles. But I would like to take a moment to reiterate one important message: These topics very difficult, with many assuming high levels of stress. Always do your own research before approaching any investment, and do not participate in FOMO.
We plan to make frequent improvements to this dictionary as the world of DeFi grows rapidly.