Top 10 DeFi Terms Explained

DeFi, or decentralized finance, is the most exciting thing to happen to money in centuries. Instead of having to hand over your cash to bankers and investment managers, people can now use DeFi to save,Uniswap clone invest, borrow and lend to each other using cryptocurrencies throughfully automated digital " smart contracts ".

Hard to believe? Actually, it is quite simple. Just as technology is changing the way we do everything else in our lives, it’s also changing the way we make money. Now, instead of enriching bankers and CEOs like in traditional centralized finance (or "CeFi") models, with DeFi we can keep all those fees and charges and continue to save and invest our money.

What’s even better, everything in DeFi is done through the blockchain: an incorruptible ledger that keeps track of every single transaction made. Of course, this does not mean that DeFi is risk-free, and that is something that we will cover later in our series of guides. Uniswap clone script However, to begin with, we are going to start with an explanation of the key DeFi principles and terms, listed in alphabetical order.

1. Collateral

On many DeFi platforms, users post collateral in a cryptocurrency or token in order to borrow in another cryptocurrency or token: Ether (ETH) for DAI, for example. This is like putting up your house as collateral for a loan with a bank. Typically, you will need to provide a larger percentage of a cryptocurrency or token as collateral for a DeFi loan, such as $100 of ETH as collateral for $70 of DAI, for example (i.e. 140% LTV — loan-to-value — loan ratio). to value). This helps maintain system stability.

2. DAOs

A DAO is a decentralized autonomous organization. In short, it is a company that has no managers or human staff. Everything that happens in the organization is fully automated and based on "open source" computer programming codes that can be seen and used by anyone. Since it runs on the blockchain, just like DeFi, a DAO is also immutable and resistant to censorship.

3. dApp

Like a DAO, a dApp is an application that essentially runs on its own, without administrators or intermediaries, allowing users to transfer funds between them. The Ethereum blockchain is like a dApp library where most DeFi dApps exist. There are also other blockchains such as Tron and EOS that also allow developers to code applications. Uniswap clone software

4. DEX / CEX

A DEX is a decentralized exchange and a CEX is a centralized exchange and you can buy and sell cryptocurrencies and tokens on both. Like the difference between DeFi and CeFi, DEXs are autonomous and run by algorithms and smart contracts, while a centralized exchange (CEX) is run by a human-run organization. Some examples of big-name DEXs are Uniswap and Kyber, while well-known CEXs include Coinbase and Binance. Centralized exchanges may mean less costs than decentralized exchanges, but users have no influence on their management, as is the case with some DEXs.

5. Ethereum

Ethereum is surely the most important blockchain after Bitcoin and is the home of DeFi. As mentioned above, it acts as a library for most of the dApps in the DeFi world and is the architecture by which everything is currently possible. Ethereum is often confused with Ether (ETH), which is its native currency but is different from the Ethereum blockchain itself.

6. Fees or gas rates

Gas fees are the charges or commissions that Ethereum "miners" receive to process transactions on the blockchain. They are charged in the native ETH token, usually broken down into small increments called Gwei. The more transactions are made through Ethereum, the higher the gas fees, which can make smaller operations less profitable (more on this later).

7. Liquidity mining. Also known as Yield Farming

Liquidity mining (or yield farming) is a key feature of DeFi that allows people to deposit (or place, "stake") a cryptocurrency or token into a DEX or dApp to earn rewards. Some platforms reward users with another token that can then be staked in the same or another DEX or dApp, indefinitely. The appeal is that each coin or token pays a return (such as interest on savings) and you can chase (or "farm") higher returns through the staking process. It’s a bit like depositing cash at different banks, except you need individual tokens from each bank before you can deposit at the next one, for higher returns.

8. Pools or liquidity funds

Liquidity pools are characteristic of DEXs and allow people to trade with each other without intermediaries. Smart contracts govern their operation and keep the pools balanced between different cryptocurrency and token trading pairs or pools. Users are often rewarded for putting their coins (or liquidity) into these pools with DEX tokens that earn commissions on transactions made on each platform.

9. NFTs

Non-fungible tokens (NFTs) are a huge innovation in the world of tokens. Unlike other tokens on Ethereum, NFTs are completely unique and are not tradable with other tokens. As such, they are used to buy and sell unique art and collectibles, with interesting test cases on more complex financial products. They also come in two different versions: the original and individually unique ERC 721 token, and the ERC 1155, which is a hybrid version used in video games.

10. Pump and dump — Pump and dump

The English term "pump and dump" refers to buyers who accumulate in a cryptocurrency or token to inflate its price and then sell it all at once, causing the price to crash. It is a fairly common occurrence in new token listings, where hype and private presales cause an initial spike in price before it crashes. Since not everyone can check out at the same time, many unlucky buyers suffer huge losses.decentralized exchange script