From where we’re standing, it looks like everyone has caught the DeFi fever. If crypto is the future of money, then some people might say that DeFi is the future of crypto. We’re so big on the future, you’d think we were time travelers. So, it’s time you came on the journey with us.
We’ve put together a few DeFi terms that you might be hearing a lot over the next few years. So, when next someone comes and throws some DeFi lingo at you, it’ll be a much smoother conversation.
Let’s get into it.
When you go to a bank to get a loan, you have to put up collateral – money or property that the bank takes if you can’t repay the loan.
The same thing happens with DeFi. If you have Bitcoin, you can borrow another currency like USDT on a DeFi lending platform and drop your Bitcoin as collateral. When you repay the loan, you get your Bitcoins back.
Some DeFi services have specific rules for the cryptocurrency you can stake as collateral, while others allow you to use any crypto.
A smart contract is the heartbeat of any decentralized network. Like its name suggests, it enforces agreements between two parties without the need for a middle person.
Let’s say you want to buy a house. You go on a decentralized network and get someone who wants to sell their house. Both of you design a smart contract where you send the money to a crypto wallet, and the seller sends the house key to you at a specified date. If the key doesn’t get to you when due, the smart contract doesn’t release the money to the seller.
Smart contracts’ terms can’t be changed or tampered with. So, once a smart contract is created, it runs until all conditions have been met.
DAO is a short form for “Decentralized Autonomous Organization.” A DAO is basically a company that runs on its own. Imagine a company running without human staff members or managers. It might not be a great business model for a restaurant, but it works perfectly for crypto. A DAO operates and runs based on smart contract rules.
For transparency, anyone can view a DAO’s smart contract and check it for errors. This way, you can be sure that the DAO you’re working with is safe.
Short for “decentralized application,” a DApp is a platform that runs on a decentralized blockchain network. A DApp could be anything. It could be an app on your phone or even a website. The only difference between a DApp and other regular software applications is that no single company or person controls a DApp.
Normal apps like Twitter allow people to create and consume content, but can control how you use the app. If Twitter sees a tweet as offensive, they can take it down on their end.
On the other hand, you could create a Twitter-like DApp on the Ethereum blockchain. Anyone will be able to use the app, and no one will be able to delete posts – not even you. 😱
DEX and CEX
Cryptocurrency exchanges are split into two – centralized exchanges (CEXs) and decentralized exchanges (DEXs). CEXs are run by companies with human management. On the other hand, DEXs work on their own and are run by smart contracts.
An order book is a list available on every centralized exchange CEX. Its job is to show buy and sell orders for each cryptocurrency.
On every CEX, you will find order books with some numbers in green and others in red. Those in green are the prices that other traders have set to buy the cryptocurrency at that time. Those in red are the sell orders, showing the prices that traders want to sell their cryptocurrency for.
Order books can also give you information on the latest prices.
You know how Decentralized exchanges (DEXs) allow people to trade without any middleperson? Well, you’ve got liquidity pools to thank for that.
Liquidity pools handle the jobs of order books in DEXs. It works like this: users deposit funds into a DEX’s liquidity pool, and the funds are shared among buyers.
So, if you go to a DEX and want to buy Bitcoin, you’re not actually doing business with someone else that wants to sell. Instead, you’re doing business with the liquidity pool. Once the liquidity pool has enough money, your trade can go through. So, you don’t need to have a seller on the other side to buy the Bitcoins – just enough money in the liquidity pool.
Gas fees are charges you pay when you send crypto on the Ethereum network. It’s the same way MasterCard or VISA charges a fee when you pay for something with your credit card.
Gas fees go to miners on the network-. These miners are in charge of processing transactions, so they take a cut for their hard work. The more transactions there are on the network, the higher the gas fees.
It’s common to call every cryptocurrency a coin. But coins are actually different from tokens and here’s how: while coins usually have their separate blockchains, token’s don’t.
Tokens come in different forms. The most popular types of tokens are:
- ERC-20 tokens: These are tokens with the ERC-20 standard. This is basically a design that every token on the Ethereum network has to follow.
- BEP-20 tokens: BEP-20 is the standard for the Binance Smart Chain. But, it goes one step further. Tokens on other blockchains can be ported to the Binance Smart Chain in the form of BEP-20 tokens. Big token energy, baby! 💪💪
Yield farming is simple. You put your money in a Decentralized exchange or DeFi platform’s liquidity pool, and your money is used to run everyday activities on the platform. People looking to buy, sell, or get loans will be able to do so because of the money that you and other “yield farmers” put into the pool.
For your troubles, you get to earn interest on your investment. 🤑🤑
To increase your earnings, you will need to search (or “farm”) for the market with the highest interest rates. Remember to always stay where the money resides! 💸💸
When you stake, you hold cryptocurrencies in a wallet to support a DeFi market. Your money is used to support the network and confirm transactions. Staking helps you qualify for rewards. The more funds you’ve staked, the more the rewards.
A token swap is a process where cryptocurrency holders exchange one crypto for another without having to buy a local currency. Usually, exchanges allow their customers to do this but in some cases, you might be unable to do it.
A perfect example of this is when you want to exchange your Bitcoin for a coin like TRON or BNB. You might have to convert your Bitcoin into your local currency before buying the TRON elsewhere. Asides the inconvenience involved, this process also means you will have to pay double fees.