Home The 10 DeFi terms to know

The 10 DeFi terms to know

8 min read

Decentralized finance , commonly known as DeFi, as opposed to centralized finance (classic, the kind we have known until now, managed by central financial institutions), is advancing very rapidly.

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 the first article because, yes, there are indeed many terms to learn. This is especially true if you want to fully take advantage of the incredible wealth-building opportunity offered by decentralized finance.

➜ 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, understand that when you're asked for a password and email address, it generally means you're dealing with a centralized platform. This means there's a company behind it, with a certified business registration, a team of employees, and all the trappings of a traditional legal entity. You don't control your private keys (no-custodial), and therefore the company holds control of your funds.

This is the case, for example, with the majority of sites used to buy cryptocurrencies, such as Coinbase or Binance.

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 beautiful 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 the difference between CEX and DEX.

➜ DAOs

DAO stands for Decentralized Autonomous Organization . By "organization," we mean an organization (whether it's an association, a company, or anything else) that doesn't have managers or a vertical hierarchy like those found in traditional businesses. Similarly, the word "autonomy" in DAOs refers to the fact that everything happens automatically, without human intervention, thanks to an open-source software program accessible to 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; in fact, this is the major innovation brought about by blockchain. A dApp is an application that runs independently, without a manager or intermediary. You can think of Ethereum as a kind of cumbersome library of dApps. Since Ethereum was the first blockchain to develop dApps, 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 a few.

However, a dApp is not necessarily a protocol (again, the two are often confused). Read the article on the difference between a dApp and a protocol.

➜ 5/ The tokenomic(s)

As you can see, tokenomics is a word made up of the terms token and economy. It has several meanings depending on the context, but simply put, it refers to the economy of tokens.

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's essential to consider tokenomics when conducting fundamental crypto analysis. Here's also a list of useful websites for doing your own research (DYOR).

➜ 6/ Collateral and LVR

This is certainly a word you've heard or seen very often. As you know, in DeFi, there are many crypto lending and borrowing services. In fact, in DeFi, to borrow other cryptocurrencies, you need 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 though we tend to use them casually, it's important to understand that the two words refer to two different realities. Among the DeFi terms, it's crucial not to confuse them. In a broad definition, all currencies on the blockchain are cryptocurrencies. In a stricter sense, a cryptocurrency is a currency that operates on its own blockchain. Bitcoin and Ether are cryptocurrencies and operate on their respective blockchains, Bitcoin and Ethereum.

Conversely, tokens created and issued on other blockchains, such as those created on Ethereum dApps, are tokens. Thus, the vast majority of the tokens we use are ERC-20 tokens that operate on the Ethereum blockchain. For example, the BAL (Balancer) token is an Ethereum blockchain token. The APT token, on the other hand, is a Solana blockchain token.

➜ 8/ The TVL: Total Value Locked (TVL/TLV)

In French, TVL can be translated as "Total Locked Value," which is a central concept in DeFi. When you visit information sites like DeFiPulse , it's the first piece of data displayed because it's so revealing of the financial health of the protocol or DApp.

Here on the **DeFiPulse website,** we have an indication of the protocols with the most TVL.

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 TVLs ( Value-Added Loans) of all DeFi projects to estimate user appeal and enthusiasm. For example, in 2020, we had a TVL of over $662 million, and it had jumped to $11 billion by the beginning of 2021. That was a record.

While the first iterations of DeFi launched in 2017, 2020 was DeFi's record year, with the value of technology leaking from $662 million in January to over $11 billion in November. This was largely due to the NFT boom. TVL is often used as a measure of success in DeFi, but it shouldn't be considered the sole factor. Estimating the value of a cryptocurrency requires considering several criteria.

—> Learn more about TVL

➜ 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 enable DEXs to function because they allow users to trade assets without intermediaries. Smart contracts govern the pools' operation and maintain a balance between different currency pairs. Users who deposit cryptocurrencies into these pools are called "liquidity providers." As a reward for depositing their cryptocurrencies, they receive a percentage of the transaction fees generated on the platform.

To learn more, read our article on how to become a Liquidity Provider.

➜ 10/ Gas costs

Gas costs are a factor that any serious DeFi user will pay close attention to. It's one of the DeFi terms you'll encounter most often.

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.

Don't hesitate to read our article on the degens dictionary to discover new terms and expressions such as " crypto shilling ", for example, among many others.

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Learn more about CULT token and its DAO
Know how to stake AZERO token
Discover Pera Finance
Learn about the Kava project

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