DeFi Concepts for Beginners
DeFi is an accessible and global financial system designed for the internet age — an alternative to an opaque, tightly controlled system kept together by decades-old technology and practices. It gives you financial control and visibility. It exposes you to global markets and provides alternatives to your local currency or banking options. DeFi devices enable anyone who has an internet connection to access financial services, and they are mostly owned and managed by their customers. So far, tens of billions of dollars in cryptocurrency have passed through DeFi applications, and the amount is growing by the day.
If you are new to the cryptocurrencies, DeFi might sound a new and tricky concept for you. However, it occupies a very essential position in the cryptocurrency ecosystem. In this article, we will address the definition of DeFi, the main differences between DeFi and TradFi (traditional finance) and some of the concepts that we think you should know!
What’s DeFi?
DeFi refers to financial products and services that are available to anyone who can use blockchain — that is, anyone with an internet connection. The marketplaces are always open with DeFi, and there are no centralized authority to stop payments or deny you access to anything. Services that were formerly slow and vulnerable to human error are now automatic and safer, thanks to code that anyone can view and evaluate.
There is a thriving crypto economy out there where you can loan, borrow, long/short, earn interest, and do a variety of other things. Crypto-savvy Argentinians and Turks, for example, have adopted DeFi to avoid catastrophic inflation. Companies have begun to webcast their employees’ wages in real time. Some people have even taken out and payed off multi-million dollar loans without providing any personal identity.
DeFi vs TradFi
Understanding the difficulties that exist today is one of the effective methods to see the value of DeFi.
- Some persons are denied the ability to open a bank account or use financial services.
- People who do not have access to financial services may find it difficult to get work.
- Financial services can prevent you from receiving payment.
- Your personal data is a hidden cost of financial services.
- Governments and centralized institutions can shut down markets whenever they want.
- Trading hours are frequently restricted to specific time zones’ business hours.
- Due to internal events, money transfers can take days.
- Financial services command a premium because intermediary institutions require a share.
Smart contract
A smart contract is a blockchain-based computer program that may run itself when specific circumstances are satisfied. Contracts between a buyer and seller (or token holder and protocol) are thus immediately encoded into lines of code. Smart contracts are the DeFi “money lego” building blocks because they allow advanced interoperability between many different financial products without the usage of third parties. Dapps (decentralized apps) can, in principle, run automatically with little to no human interaction after a smart contract is uploaded to the blockchain.
Gas
The gas fee is the price that all users must pay in order to perform any function on the blockchain. Gas fee is among the concepts which enable DeFi to become decentralized and immune to the effects of third-parties.
Wallet
This may seem basic, but many individuals still struggle to understand the many types of wallets and how they might be utilized. The primary distinction is between non-custodial wallets, in which you have complete ownership, possession, and accountability for your assets, and custodial wallets, in which a third party keeps your private keys for you. Wallets come in a variety of styles, including:
- Hardware wallets: A physical device, such as a Ledger or Trezor, contains your private keys.
- Web3 wallets: Access to the next generation of internet apps is possible with a self-custody wallet. MetaMask, for example.
- Smart-contract wallets: These are wallets that exist on the blockchain as a program rather than supplying the user with a secret keys pair.
Stablecoin
Stablecoins are intended to reduce price fluctuation by keeping a fixed value. There are three categories in general:
- Fiat-collateralized stablecoins, for example, Tether (USDT) and TrueUSD are backed by dollar deposits and are tied 1:1 to the US currency.
- Crypto-collateralized stablecoins, for example, DAI — while tied to the US dollar, its reserves are stored in ETH.
- Commodity-collateralized stablecoins, for example, Digix is a gold-backed stablecoin.
- Stablecoins with no collateral (algorithmic). For example, failed UST
Staking
Staking in DeFi typically entails depositing liquidity pool tokens into a smart contract in order to collect incentives. Staking is analogous to earning interest on a bank account in that the longer you keep it, the more you earn.
Liquidity pool
Liquidity pools are a market-making mechanism that is utilized in decentralized exchanges such as Uniswap, Curve, Kyber, and Bancor. Although various exchanges use diverse approaches, at their heart are transactions exchanged against a smart contract rather than other traders, as in the classic order book model. Anyone can become a liquidity provider by putting cryptocurrency into a liquidity pool and earning trading fees based on their part of the pool.
Liquidity mining
Liquidity mining is a community-based market-making and protocol governance approach. To offer liquidity for a certain token, a token issuer or exchange can compensate a pool of miners. On the Compound system, for example, users who deposit tokens will receive both interest and a portion of the Compound governance token, COMP.
Yield farming
Your crypto can be put to use across a variety of DeFi instruments by using the benefits of liquidity mining. Yield farming seeks to optimize returns by earning native governance tokens on protocols, and it often employs recursive investment to do so.
DEX/CEX
Centralized exchanges (CEXs) are financial institutions that coordinate cryptocurrency trading, comparable to traditional asset exchanges such as stock exchanges.
Exchanges are, in essence, marketplaces. They are useful when a large number of people are attempting to purchase and sell the same sort of asset at the same time. Famous exchanges in the traditional economy include the New York Stock Exchange and the London Metal Exchange. Binance, Coinbase, Gemini, and Kraken are some well-known cryptocurrency exchanges.
A decentralized exchange (DEX) is a peer-to-peer (P2P) marketplace that links buyers and sellers of cryptocurrencies. In contrast to centralized exchanges (CEXs), decentralized platforms are non-custodial, which means that when using a DEX platform, the user retains custody of their private keys.
LP Tokens
An LP token, also known as “pool tokens” or “liquidity tokens,” is a crypto token granted to users who lend their crypto to a liquidity pool. The LP tokens reflect a user’s part of the pool and can be redeemed for the original tokens at any time.
Whitelist
In the blockchain and cryptocurrency world, whitelists are associated with IDO events. Cryptocurrency projects may provide a whitelisting phase for investors who wish to participate in the token’s public sale. As a result, any investor who wishes to participate in the IDO should give some information or fulfill some tasks before being whitelisted.
Allocation
Allocation refers to the amount that is assigned for an investor to use. On the other hand, it might refer to the tokeneconomics of a token and in this context, it means the percentage of a token that would be used for specific purposes (marketing, team allocation, etc.).
Slippage
Slippage is the difference between the expected and actual price of a trade. It is quite typical while purchasing and selling cryptocurrency. When you trade, you have a set price in mind at which you will purchase or sell. However, because the cryptocurrency market moves so quickly, the price of your order may change between the time it enters the market and the time the deal is completed. As a result, you may find up buying or selling at a higher or lower price than you expected. Slippage is the discrepancy between the price you wanted and the price you have to accept.
APY/APR
The annual percentage yield (APY) is a fixed rate that reflects the yearly returns on your investments after a set period of time. For example, if you invest $10,000 at 10% APY, you will make $11,000 in a year.
APR, or annual percentage rate, refers to the ordinary interest applied to the principal amount of an investment or loan, whether in traditional banking or the crypto realm. It does not account for the concept of compounding interest.
Tokenomics
Tokenomics is a word that describes the economics of a token. It outlines the elements that influence a token’s use and value, such as the creation and distribution of the token, supply and demand, incentive systems, and token burn schedules. Tokenomics is important to the success of crypto initiatives. Assessing the tokenomics of a project before opting to engage is critical for investors and stakeholders.
About Babylons
Babylons is the ultimate GameFi destination, pioneer launchpad, blockchain tooling provider, and NFT platform with its 100+ gaming partners and a young and active following of GameFi enthusiasts. For its gaming partners, Babylons offers INO hosting, IDO hosting, and secondary sales services tailored to their exact needs. Babylons has a vibrant gaming community that is eager to participate in new gaming projects private, and public token offerings & IDOs; while the platform aims to democratize this process with its innovative mechanisms.
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