By removing intermediaries and barriers to entry, Decentralized Finance (DeFi) ecosystem is trying to bring financial markets to everyone. However, despite all the promising possibilities, this market comes with its own baggage: Acronyms!
But no need to worry, because we’re here to help!
Let’s walk through some of the most common DeFi terms together.
Decentralized Exchange (DEX)
Unlike common crypto exchanges, like DIFX, a DEX doesn’t offer a wallet to its users which simply means that you can trade directly with other users from your own wallet. In this way, you don’t have to keep your assets in the exchange wallets, but you may suffer from low liquidity and transaction speeds.
Although with DIFX, everything is quite different. DIFX offers fully insured wallets using Fireblock’s custodian services. Read our article to learn more.
Decentralized Application (DApp)
Instead of a central system, a DApp runs on a distributed network of systems which makes it censorship-resistance and quite secure as no single entity controls it.
For example, PancakeSwap is a DApp that offers DEX services to its users.
A computer code that enforces a specific action based on some predefined set of rules. They can be used for a wide variety of use cases but are mainly known for their application in the DeFi sector.
A liquidity pool is an infrastructure that most decentralized exchanges rely on. It’s a collection of funds that users can trade against. For example, let’s consider PancakeSwap. If I decide to exchange my Bitcoins with DIFX tokens, I just need to find a pool that contains my desired amount (enough liquidity).
The exchange of two coins without an intermediary, as we did with Bitcoin and DIFX token in the previous example.
Liquidity Provider (LP)
As explained, we need enough liquidity in our liquidity pool to execute our trade. Liquidity providers are users that provide this liquidity for a pool and earn trading fees.
As a user, you can become a liquidity provider and gain a new source of income from your dormant crypto. All you need to do is deposit an equal amount of two different coins.
Remember: watch out for impermanent loss which refers to any price movement during your staking period.
Liquidity Pool Token (LP Token)
Alongside trading fees, some DEXs offer their liquidity providers extra tokens as a way to incentivize them to provide more liquidity. PancakeSwap, for example, gives you LP tokens based on the amount of liquidity you’ve provided.
This is a new opportunity as you can lock up these tokens in other DeFi protocols and earn extra profits!
It refers to the process of locking up crypto assets to earn more crypto. It’s a complicated strategy that involves staking multiple LP tokens in different DeFi protocols to earn rewards or more LP tokens.
The amount of locked-up crypto assets in a smart contract or platform. It’s a good measure for analyzing the overall market condition of a DeFi protocol. 2021 was a good year for DeFi as the total TVL across all DeFi protocols grew by 767%.
A kind of loan specific to DeFi space that allows users to borrow money instantly without providing any collateral. Flash loans are executed by smart contracts and can be vulnerable to attacks if not implemented properly.
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