DeFi provides investment vehicles like loans on a blockchain without requiring a central authority to oversee them. DeFi is instead controlled by a series of smart contracts written to ensure all participants in the financial sector have their best interests in mind. All of this simply means that you have a decentralized network (the blockchain) that is responsible for ensuring that all economic operators are happy. If you’ve ever heard someone talk about DeFi, you won’t be familiar with many of the terms.
Keywords of Defi:
- Annual Yield Percentage (APY): Annual Yield Percentage (APY) is the amount that a yield grower originally intended to produce over a period of one year. APYs also account for compound interest, which allows an investor to reinvest their earnings. The annual percentage rate (APR) is also used, but the APR is generally not cumulative while the APY is. Unfortunately, in some contexts, APR and APY are used interchangeably when they shouldn’t be. When it comes to income, understanding the distinction will let you know whether the investment is non-interest bearing or non-interest bearing.
- Liquidity: In the world of finance, liquidity refers to the ease with which a particular investment can be “liquidated” or converted into cash. Liquidity was provided on an exchange using a pool of liquidity in the world of DeFi. A liquidity pool is a collection of cryptocurrencies locked in a smart contract to facilitate the easy exchange and exchange of one coin for another.
- Yield Farming: A yield farmer does not grow crops; Instead, they cultivate cryptocurrency. Yield farming is a technique that uses or lends assets to optimize return on investment. A user on a DeFi platform can deposit funds into their system and then borrow based on the amount deposited. It’s a risky business, but the potential rewards are enormous. Yield farmers typically have many transactions between and within their wallets as they quickly switch currencies to find the best yields on their specific DeFi platform. These interest rates fluctuate daily, so this is not a set-and-forget investment. Instead, yield growers must constantly monitor market conditions and adapt to changes.
- Monkey: Not the chimp, but the act of investing in something without doing thorough research first. Someone can “ape” into new crypto only to lose their original investment if it falls in value. It is advantageous not to be a monkey.
- FOMO: FOMO stands for Fear of Missing Out. FOMO is a common psychological term that refers to anyone who wants to get involved in something out of fear of losing their popularity among their peers. It has been used effectively in marketing campaigns. FOMO is in some cases part of the adoption campaign (e.g. some NFTs) that many people want to be part of.
- Degen: Another term for someone who invests without taking the time to evaluate the market. It’s a contraction of the word “degenerate.”
- NFT: Decentralized Finance provides assets in the form of digital creations as well as monetary instruments. NFTs can take on anything from artwork to gifs to videos and memes. NFT stands for non-fungible tokens, and each one is unique when minted. When someone sells an NFT, they are not simply selling a duplicate digital asset. You sell the ownership of the digital asset. They are similar to trading cards in the DeFi universe.
Diploma
All of this information should put you in a slightly better position to discuss DeFi and how it might affect you. Unfortunately, this only scratches the surface, and there is much more to consult regarding DeFi.
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