Common Terms Used in DeFi – Ultimate DeFi Glossary
Welcome to cryptomarketblog, the number one blog for crypto education. Here we explain the topics of cryptocurrency using examples so that anyone can easily understand them. In this article we are going to lean about common terms used in DeFi.
Decentralized finance (DeFi) provides decentralized financial services to end users on blockchain network. With DeFi, you can do most of the things including banking, earn interest, borrow, lend, money management, payment processing, buy insurance, trade assets, trade derivatives and more by eliminating the need for a third party. Here are some frequently used words in DeFi.
Decentralized Autonomous Organization (DAO) – A decentralized autonomous organization is a community-led entity structure, where token holders participate in the management, decision-making, proposals and voting with no central authority. It is fully autonomous and transparent. DAOs use smart contracts, which are algorithms that run when certain criteria met.
Decentralized apps (dApps) – Decentralized applications are open-source applications built on top of blockchain networks that use a smart contracts backend and a user interface frontend. dApps are decentralized, transparent and trustless, meaning they are free from the control of a single authority, anyone is free to use them. Hundreds of dApps exist today, OpenSea, CryptoKitties, Brave and MakerDAO are some of the popular dApps.
Centralized Exchange (CEX) – Centralized Exchanges are online platforms that allows you to buy, sell or trade cryptocurrencies. Exchanges acts like a middleman to conduct a transaction. In the crypto sector, some well-known CEXs are Binance, Coinbase, Gate and Kraken.
Decentralised exchange (DEX) – Decentralised exchange is a peer-to-peer crypto currency exchange that allows users to buy, sell or trade digital assets without a third party or intermediary. In the crypto sector, some well-known DEXs are Uniswap, pancakeswap, Curve and 1inch.
Gas fees – When you make a transaction on the blockchain, you have to pay a transaction fee. That fee is called a gas price. Gas fee paid to network validators for their services. Gas prices depends on supply and demand of network’s validation requests.
Yield Farming – Yield farming is a way of earning more crypto with your crypto holding. It involves you lending or borrowing crypto on a DeFi platform and earn interest in return for your services.
Liquidity – Liquidity in cryptocurrency is a measure of how easily you can convert digital currency or token into cash or another asset without impacting the price.
Liquidity Mining – Liquidity mining is a decentralized finance mechanism where crypto holders lend assets into liquidity pools to earn rewards. In this way, both crypto exchange and token issuer reward the users with fees and tokens based on their share of the total pool liquidity.
NFTs – An NFT is a digital assets or tokenized versions of real-world assets like art, music, videos and in-game items etc. NFTs are unique, like other crypto tokens. They can be transferred between wallets but they can’t replicate.
Smart contract – Smart contract are computer program stored on a blockchain, that run automatically when predetermined terms and conditions are met. Smart contracts allow developers to build apps on blockchain.
TVL/TLV – Total value locked is a metric that is used to measure the total value of all assets locked into DeFi and yielding market. TVL includes all the coins in staking, lending, borrowing and liquidity pools.
Staking – Crypto staking is the way of earning rewards for holding or locking digital assets.
For example, if you deposit money in your savings account then bank lends it out to others and shares interests with you. Same way if you stake your crypto assets to participate in maintaining the security of a blockchain network in return you will earn rewards.
Stablecoins – stablecoin is a type of digital currency that is designed to maintain a stable market price. These coins pegged to a stable reserve asset like the U.S. dollar, even commodities, like silver or gold. Some stablecoins pegged to the price of other cryptocurrencies.
Collateral – If you take a loan from a bank, collateral is required for that loan. For example, for a house loan, the house itself is collateral. Same way in DeFi one cryptocurrency used as collateral in order to borrow in a different cryptocurrency.
Collateralization Ratio – To borrow tokens from a DeFi platforms users must put more collateral than the loan amount. Most of DeFi lending protocol runs between 125% to 150% collateralization ratios of the loan amount. Means to take 100USDT as loan you need to provide 125-150$ worth of collateral. Users must maintain the collateralization ratios to prevent liquidation.
Liquidation – In DeFi, When the value of collateral drops below the collateralization ratio then defi platform automatically liquidates (Sells) your collateral to pay back borrow amount.
Liquidation Ratio – Liquidation Ratio is a level at which the collateralization ratio dips and triggers a liquidation for collateral.
Lending Rate – Lending Rate means amount of interest investors earn on lending assets.
Liquidity Provider – Liquidity Providers refers to users who deposit coins/tokens to provide liquidity to liquidity pools. In return Liquidity Providers earn interest on their investment.
Liquidity pools – An LP, or Liquidity Pool is a collection of funds locked in a smart contract. Liquidity pools are an essential part of decentralized trading, borrow-lend protocols, yield farming etc.
Yield – Yield refers to the interest or dividend earnings that are generated on an investment.
Yield Aggregator – Yield aggregators, also known as ‘auto-compounders’ or ‘yield optimisers’ are tools that shifts assets between various protocols to maximize yield for its users.
Voting Rights – This refers to rights given to all governance token holders. DAOs encourage more community members to take part of decision-making process.
Audit – Audit is a security check done by professional security teams to finds bugs, weaknesses and security vulnerabilities in a product.
APY (Annual Percentage Yield) – APY represents measure of interest applicable to an investment or loan that takes into account compounding (compound interest).
APR (Annual Percentage Rate) – APR represents estimate of rewards you will earn in crypto over the selected time frame or estimation of interest a borrower has to pay for borrowing assets over the period of time.
Automated Market Maker – An automated market maker (AMM) is a type of decentralized exchange (DEX) that enable users to buy or sell cryptocurrencies without need for any middlemen. AMMs are non-custodial and permissionless in nature.
Flash Loan – Flash loans are uncollateralized loans without borrow limit. However, borrows funds must be repaid within the same block/transaction otherwise smart contract cancels the entire transaction and returns the funds to lender.
Slippage – Slippage is the difference between the trade’s expected or requested price of trading two assets and the actual order execute price. Crypto markets are highly volatile, slippage percentage shows how much the price for a specific asset has moved.
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