The Most Popular Defi Terminologies Explained (Market Cap, Trading Volume, Circulating Supply, and More)
Introduction
Decentralized Finance (DeFi) is a new crypto paradigm that provides financial services without traditional financial institutions. It is based on the blockchain, a decentralized network that allows users to transact with one another without the use of intermediaries. As DeFi is gaining popularity, it is important to understand its key terminologies.
This article will explain the most popular DeFi terminologies every crypto trader needs to know.
See also: Defi is a Game Changer, But Centralized Exchanges are Standing in the Way
Market Capitalization (Market Cap)
Market capitalization, or market cap, is a metric used to quantify the total market value of a cryptocurrency. It is determined by multiplying the current price of the cryptocurrency by the total amount of coins or tokens in circulation. Market capitalization is the total dollar value of all coins and tokens in circulation for a given cryptocurrency.
This value is a useful indicator of a cryptocurrency’s size and popularity and can be used as a yardstick for comparing different projects. A cryptocurrency’s market capitalization is an essential metric that investors use to evaluate its size and potential.
Trading Volume
The trading volume of cryptocurrencies refers to the total number of coins or tokens exchanged during a given period, typically 24 hours. It measures the level of market activity and provides valuable information regarding the demand for a specific cryptocurrency. It is also an essential metric that indicates a cryptocurrency’s liquidity and demand.
Strong demand for a cryptocurrency is reflected in its high trading volume, which indicates healthy demand for the asset. This also means that traders can more easily buy and sell the cryptocurrency at the market price because there is a lot of liquidity. Conversely, a low trading volume may make buying or selling a cryptocurrency difficult and may indicate a lack of demand or interest in that particular project.
Circulating Supply
The total amount of coins or tokens in circulation and available for trading is called the “circulating supply.” Investors consider it a crucial statistic to assess the rarity and worth of a coin. This metric includes any currencies distributed or sold to users, investors, or other stakeholders in the project or network.
Because it greatly impacts a cryptocurrency’s market value, circulating supply is a crucial indicator in the cryptocurrency world. Generally speaking, assuming all other conditions remain constant, the higher the circulating supply, the cheaper the price per unit of the cryptocurrency will be.
It is important to remember that the total supply — which refers to the total amount of coins or tokens created or issued by a project or network — differs from the circulating supply. Sometimes, a portion of the total supply may be locked up or held by the project team or unavailable for sale or circulation.
Bitcoin, for instance, has a total supply of 21 million BTC, but not all of these are currently in circulation. As of May 2023, the Bitcoin supply in circulation is approximately 19 million BTC, as some coins still need to be mined or have been lost.
Total Supply
The total supply of a cryptocurrency refers to the maximum number of tokens that can ever exist within its blockchain ecosystem. It is crucial in determining the token’s scarcity, value, and overall market dynamics. Investors, traders, and enthusiasts closely analyze the total supply when assessing the potential of a cryptocurrency.
Total supply typically comprises tokens in public circulation (tokens distributed to initial investors, participants in token sales, or as mining rewards), tokens for staking rewards (tokens that exist on the blockchain but are not immediately accessible or tradable), and tokens in reserve (minted tokens that have not been distributed or accessed by users).
Maximum Supply
The maximum supply of a cryptocurrency is the maximum number of tokens or currencies that can ever be created or exist. It represents the upper limit or cap on the total number of tokens that will ever be available in circulation.
The maximum supply is pre-determined and often established during the creation or launch of the cryptocurrency. It is a fundamental characteristic of the token or coin and is typically set to maintain scarcity, control inflation, or align with the project’s objectives.
Maximum supply is primarily employed in cryptocurrencies that utilize a fixed or capped supply model. In contrast to inflationary currencies, which allow for the perpetual creation of new units, cryptocurrencies with a maximum supply are designed to have a fixed number of tokens. This characteristic can increase scarcity, which may increase the value and demand for the cryptocurrency.
Only 21,000,000 Bitcoins will ever be created. This means that no more will be created after the maximum supply of 21,000,000 Bitcoins has been mined. Satoshi Nakamoto, the inventor of Bitcoin, set a hard cap on the currency’s issuance at 21 million coins.
See also: Total Value Locked (TVL) and Why It Matters in Defi
Liquidity
Liquidity in crypto refers to the ease with which a cryptocurrency can be purchased or sold in the market without influencing its price significantly. In other words, it refers to the simplicity with which a cryptocurrency can be converted into fiat currency or another asset, or vice versa, without causing a significant price change.
A highly liquid cryptocurrency can be traded readily at a fair market price. In contrast, an illiquid cryptocurrency may be difficult to sell or purchase and must be sold at a price significantly below its actual value. Several factors influence the liquidity of a cryptocurrency, including its trading volume, the number of exchanges on which it is listed, the market depth, and the number of market participants.
Decentralized Exchange (DEX)
A decentralized exchange (DEX) is a cryptocurrency exchange that operates without a central server or authority. In a decentralized exchange, users can directly trade cryptocurrencies without the need for an intermediary such as a bank or centralized body.
In a DEX, users retain complete control over their funds and private keys, and all transactions are executed on a distributed ledger, such as a blockchain. Using a decentralized exchange has several advantages, including increased security and privacy, as well as reduced transaction fees.
