DeFi Terms Explained
Master the essential terminology of decentralized finance (DeFi). Each term includes a detailed explanation and real-world example to help you understand these important concepts.
Blockchain
What is it?
A distributed digital ledger that records transactions across a network of computers. Think of it as a digital book where each page (block) contains a list of transactions, and once written, cannot be altered. Every participant in the network has a copy of this book, ensuring transparency and security.
Example
Like Bitcoin's blockchain, which records every Bitcoin transaction ever made.
Cryptocurrency
What is it?
A digital or virtual form of money that uses cryptography for security. Unlike traditional currencies issued by governments, cryptocurrencies are typically decentralized systems based on blockchain technology.
Example
Bitcoin (BTC) and Ethereum (ETH) are the two most well-known cryptocurrencies.
DeFi (Decentralized Finance)
What is it?
A financial system built on blockchain technology that removes traditional intermediaries like banks and institutions. DeFi allows for lending, borrowing, trading, and earning interest on crypto assets through automated systems.
Example
Using Aave to lend your crypto and earn interest, or Uniswap to trade tokens directly.
Smart Contract
What is it?
Self-executing programs stored on a blockchain that automatically run when predetermined conditions are met. They automate agreements so all participants can be immediately certain of the outcome, without an intermediary's involvement.
Example
A smart contract that automatically sends payment to a seller when a courier confirms delivery.
Wallet
What is it?
A digital tool that allows users to store, send, and receive cryptocurrencies. It consists of a public address (like an email address) and a private key (like a password). There are hot wallets (connected to the internet) and cold wallets (offline storage).
Example
MetaMask is a popular hot wallet, while Ledger is a well-known cold wallet.
Token
What is it?
A digital unit of value created on an existing blockchain. Unlike coins, which have their own blockchain, tokens are built on top of existing platforms like Ethereum. They can represent assets, utilities, or governance rights.
Example
USDC is a token on Ethereum representing US dollars, while UNI tokens grant voting rights in Uniswap.
Decentralized Exchange (DEX)
What is it?
A peer-to-peer marketplace where users trade cryptocurrencies directly from their wallets, without a central authority. DEXs use smart contracts to execute trades automatically and maintain liquidity pools.
Example
Uniswap and SushiSwap are popular DEXs where users can trade any ERC-20 tokens.
Stablecoin
What is it?
A type of cryptocurrency designed to maintain a stable value by pegging it to an external asset, usually the US dollar. They provide stability in the volatile crypto market and serve as a bridge between traditional and crypto finance.
Example
USDC and USDT are stablecoins that maintain a 1:1 value with the US dollar.
Yield Farming
What is it?
A practice of maximizing returns by deploying crypto assets across various DeFi protocols. Farmers move their assets between different platforms to earn the highest possible combination of rewards and interest.
Example
Providing liquidity on Uniswap while staking the LP tokens on another platform for additional rewards.
Liquidity Pool
What is it?
A collection of crypto assets locked in a smart contract to facilitate trading on DEXs. Liquidity providers deposit token pairs and earn fees from trades that occur in their pool.
Example
The ETH/USDC pool on Uniswap where users can swap between ETH and USDC.
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