Crypto 101: DeFi
Decentralized Finance or DeFi is a massive part of why cryptocurrencies have seen an increased presence over the last year.
DeFi makes financial products such as loans available on a blockchain without the need for a central authority to oversee them. Instead, DeFi is controlled via a series of smart contracts written to ensure that all participants in the financial ecosystem have their best interests represented. All of this simply says that you've got a decentralized network (the blockchain) responsible for ensuring that all financial participants are happy. If you've ever heard people discussing DeFi, you might be wondering what half of the things they mention mean. Hold tight as we explore the more common terms and statements you might encounter when looking into DeFi.
Key DeFi Terms
Yield Farming: A yield farmer doesn't tend crops; they tend cryptocurrency. Yield farming is a method of lending or staking assets to get high returns on their investment. On a DeFi platform, a user will have the option to put money into their system and then borrow based on how much money they put in. It's a risky practice, but the potential for returns is enormous. Yield farmers usually have massive transactions in and out of their wallets as they quickly switch their currencies around to what offers the best returns on their particular DeFi platform. These rates change daily, so it's not a "set-it-and-forget-it" investment. Rather, yield farmers have to constantly be aware of what's going on in the market and adapt to changes. They might seem like the Forex traders of the DeFi environment.
APY: The Annual Percentage Yield (APY) is the amount a yield farmer stands to gain over the course of a year if they were to stick with a particular investment. APYs also factor in compounding interest, allowing an investor to feed their earnings back into their account. Annual Percentage Rate (APR) is also used, but generally, APR is non-compounding while APY is. Unfortunately, APY and APR are used interchangeably in some contexts when they really shouldn't be. If the discussion is about earnings, knowing the difference will tell you whether the investment is compounding or non-compounding.
Liquidity: In the finance world, liquidity is the ease by which a particular investment can be "liquidated" or turned into ready cash. In the world of DeFi, liquidity is provided on an exchange using a liquidity pool. Just like it sounds, a liquidity pool is a collection of cryptocurrencies that are locked into a smart contract to facilitate the easy swapping and exchanging of one coin for another.
Ape: Not the primate, but rather the act of investing in something before doing proper research. Someone might "Ape" into a new cryptocurrency and then lose their initial investment as it tanks. It pays not to be an Ape.
Degen: Another term that refers to someone investing without taking their time to appreciate the market. It's a shortened form of the word "degenerate." See also Ape above.
FOMO: The Fear of Missing Out. FOMO is a well-known psychological term that refers to someone wanting to get into something because they're afraid they'll no longer remain popular with their peers. It's used quite impressively in marketing campaigns. In some cases (such as some NFTs), FOMO is part of the adoption drive, with many people wanting to get in on it while it's hot.
NFT: Decentralized finance not only offers assets in the form of monetary instruments but also digital creations. NFTs can be anything, from artwork to video, to gifs and memes. NFT stands for non-fungible tokens, and when they're minted, they are unique. When a person sells an NFT, they're not just selling a copy of a digital asset. They're selling the rights to the digital asset itself. They're a bit like the collectible trading cards of the DeFi world.
Hopefully, armed with this information, you're in a slightly better place to discuss DeFi and how it might affect you. Unfortunately, this is just the surface, and there's a lot more to discuss DeFi. With a bit of patience and interest, you might be surprised at how much innovation goes on in this space.
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