ZoneBitcoin EditorialLa Decentralized finance which is commonly called the Challenge, as opposed to centralized finance (classic, that which we have known until now, managed by central financial institutions therefore) is progressing very quickly.
New terms, expressions and new functions are constantly emerging. It is a sector that is changing before our eyes and that is what makes this "discipline" so exciting. However, we can quickly become lost with these new words and definitions to know.
This is what I propose to do here in this short article. Explain the best-known and most fundamental terms of DeFi.
This is a first article because yes there are really a lot of terms to know. This is especially true if you want to take full advantage of this incredible opportunity to enrich yourself that decentralized finance offers us.
➜ CeFi versus DeFi
Yes, we'll start with the basics. So, know that when we talk about CeFi, we are talking about centralized finance. That said, be aware that there are still so-called centralized services within the Blockchain itself.
To differentiate between CeFi and Defi, tell yourself that when you are asked for a password and your email address, in general, this means that you are dealing with a centralized site. In this case, this means that there is a company behind it, with a certified commercial register, a team of employees and everything that belongs to a classic legal company. It is not you who controls your private keys (no-custodial in English) and it is therefore the company which has control of your funds.
This is for example the case with the majority of sites we use to buy cryptocurrencies, whether Coinbase or Binance for example.
There, these are certainly sites that work in the blockchain, but the fact remains that they are centralized sites in the sense that there is a central organization which manages the company behind it.
This brings us to the second point in a magnificent transition.
➜ DEX/CEX exchanges
Now, we will move on to the difference between DEXs and CEXs which arise directly from the difference between CeFi and DeFi.
It is certainly the place where the most activities are concentrated. This is in fact the function that we do the most in DeFi: exchange, buy and resell tokens.
☛On a CEX, Centralized Exchange, you can buy and sell cryptocurrencies. It is centralized and therefore we do not have our private keys. It is the company that controls access to our funds. Kucoin, Binance for example are CEXs.
☛ On a Dex, Decentralized Exchange, you can also sell, trade and buy cryptocurrencies but in a decentralized way. Uniswap or PancakeSwap are, for example, DEXs. There, to connect, no email or password, you connect directly with your blockchain wallet. You directly hold your funds. This is what we call a decentralized exchange. No central institution holding the keys to your wallet.
—-> Read the article on difference between CEX and DEX.
➜ DAOs
DAO is the acronym for a Decentralized Autonomous Organization. By the idea of organization, understand this as an organization (whether it is an association, a company or whatever) that does not have a manager or vertical hierarchy like what we see in our classic companies. Similarly, in DAOs, there is the word autonomy which refers to the idea that everything happens automatically, without human personnel thanks to an "open source" computer program that can be consulted by everyone.
We will come back to this point because it is perhaps the most interesting thing about the blockchain…Yes!
➜ 4/ A dApp (Decentralized Application)
Most of the services you use are dApps, which is the great innovation that blockchain has brought. It is an application that works by itself, without a manager and without an intermediary. In fact, you can imagine Ethereum as a kind of awkward library of dApps. Indeed, as Ethereum was the first blockchain to design Dapps, it turns out that the vast majority of applications are on Ethereum. However, there are currently other blockchains with protocols that allow developers to code applications, such as Cardano, Tron and EOS to name but a few.
However, a dapper is not necessarily a protocol (here again, we often mix it up). Read the article on the difference between dApp and protocol.
➜ 5/ The tokenomic(s)
As you see it, tokenomic, it is a word made up of the terms Token and Economy. There are several meanings to this term depending on the context but simply put, it is the token economy.
So, this includes the number of tokens that will be issued, how they will be distributed and the power they will have (governance or not, etc.). It is essential to learn about tokenomics before investing because you can learn a lot about the future profitability or viability of a project. Also, tokenomics takes on a broader dimension over time because it now and very often refers to the economy of cryptocurrencies in general.
It is essential to consider tokenomics when we want to do crypto fundamental analysis. Here is also a list of useful sites to make your DYOR (Do Your Own Research)
➜ 6/ Collateral and LVR
It’s definitely a word you’ve heard or seen very often. As you know, on DeFi there are many crypto loan services (lending) and borrowing. In fact, in DeFi, to borrow other cryptocurrencies, you have to deposit a certain amount of a crypto or token as collateral. This is called “collateral”.
Very often, we must post collateral higher than the amount borrowed. Typically you deposit $100 of ETH to be able to borrow $50 DAI if the LTV is 50%. This is where the Loan to Value Ratio (LVR or LTV) – loan-to-value ratio. This is the maximum amount the lender will consider lending you as a percentage of the property value. …
This system helps balance the system as a whole.
➜ 7/ Tokens and cryptos
Even if we tend to use them without paying too much attention, you should know that the two words refer to two different realities. Among the DeFi terms, it is very important not to confuse them. In a broad definition, in fact, all currencies on the blockchain are cryptocurrencies. In a stricter sense, a cryptocurrency is a currency that evolves in its own blockchain. Typically Bitcoin and Ether are cryptocurrencies and evolve on their own blockchains which are Bitcoin and Ethereum.
Conversely, tokens that are created and evolve on other blockchains like tokens created on Ethereum dApps are tokens. Thus, the vast majority of tokens we use are ERC-20 type tokens which evolve on the Ethereum blockchain. For example, the BAL token (Balancer) is a token of the Ethereum blockchain. THE APT token is a token of the Solana blockchain.
➜ 8/ The TVL: Total Value Locked (TVL/TLV)
In French, the T can be translated as “Total Value Locked” which is a central notion in DeFi. When you go to news sites like DeFiPulse, this is the first data that is displayed as it is indicative of the financial health of the protocol or the Dapp.
This is the entire amount that a project has been deposited. It reveals and allows us to measure the success of a project but it doesn't necessarily say everything either. This is not the only indicator to observe.
We often add up all the T of all DeFi projects to estimate the attraction and enthusiasm that users have. For example in 2020, we had a TVL of more than 662 million dollars and it had increased to 11 billion at the start of 2021. It was a record.
While the first iterations of DeFi launched in 2017, the banner year for DeFi was 2020, with TVL growing from a value of $662 million in January to over $11 billion in November. This was explained by the boom in NFTs in particular. TVL is often used as a measure of success in DeFi, but it should not be considered as a single factor…For estimate the value of a crypto, we must indeed consider several criteria…
—-> Learn more about T
➜ 9/ Liquidity pools
It's still a new term because it's still a new service in deFi, casually. Pool in English means the tank or swimming pool.
On Defi therefore, this is the place where we deposit liquidity, that is to say tokens on a 50:50 pair.
Liquidity pools make DEXs work because users can therefore exchange assets without any intermediaries. These are smart contracts (smart contacts) that govern the operation of the pools and maintain a certain balance between the different pairs. Users who deposit crypto into these pools are called "liquidity providers". To reward them for depositing their crypto, they receive a percentage of the fees from transactions made on the platform.
👋 To learn more, read our article on how become a liquidity provider (Liquidity Provider)
➜ 10/ Gas costs
The gas fees are data that any good DeFi user will look at closely. This is one of the DeFi terms you will encounter the most.
Fees are costs related to operations and transactions carried out on the blockchain. There are sites like blockexplorer which allow us to know the current costs.
Those which vary according to the number of people on the network, ready to pay (the most expensive) for their transactions to be processed quickly.
This is the first series of DeFi terms to know. The second series not to be delayed.
Do not hesitate to read our article on the degens dictionary to discover new terms and expressions such as “ crypto shilling "for example, among many others.
Read other related articles
- Furucombo: Managing your investment strategies in DeFi
- Learn more about CULT token and its DAO
- Know how to stake AZERO token
- Discover Pera Finance
- Learn about the Kava project
---
Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.
To buy cryptocurrencies (simple way):
To generate interest on your cryptocurrencies:
To secure your cryptocurrencies:
To have fun and play
- The best for Esport and Bitcoin sports betting : CloudBet
- Discover the reliable bitcoin casinos
