To be sure, decentralisation finance and DEFI are almost one of the most exciting things of the century. Now, instead of handing cash over to bankers and investment managers, people can save, invest and borrow in cryptocurrency through a digital "smart contract" that is fully automated by DEFI.
It sounds crazy, but it's not that complicated. As all kinds of technologies change our lives, DEFI is changing our way of making money. Unlike the traditional "cefi" model, we can still save and invest, but we can save the fees that were originally charged by intermediaries.
The best thing is that everything in DEFI is done through blockchain: a decentralized book that will not be damaged and clearly records each transaction. Of course, this is not to say that there is no risk to DEFI. We will introduce it in detail in the follow-up article of science popularization. This issue starts with some of the most important terms of DEFI (listed below by the letter A-Z)!
On many DEFI platforms, users can mortgage in one cryptocurrency or token to borrow another cryptocurrency or token, such as using eth to borrow Dai. It's a little like using your house as collateral for a loan to a bank. In general, you must provide a larger percentage of cryptocurrency or token as collateral for a DEFI loan, such as using an eth of $100 to lend a Dai of $70 (i.e. 140% LTV, or a loan by value). This helps to support the stability of the system.
Dao is self-contained by decentralized individuals to contribute to the community. In short, like a company without any human resources manager or employee, everything in the organization is fully automated based on "open source" code that anyone can view and use. Dao and DEFI are both running on blockchain, so it is not changeable or audited.
Dappp is a decentralized application that is the foundation of all DEFI. Like Dao, dappp is an application that runs by itself. Without manager or middleman, it allows users to transfer funds between programs. Ethereum blockchain is like a dappp library, where most of the DEFI dapps exist, while other blockchains (such as Tron and EOS) allow developers to code applications.
DEX / CEX
DEX is a decentralized exchange, CEX is a centralized exchange, both of which can buy and sell cryptocurrency and token currency. As the difference between DEFI and cefi, DEX is automatic, run by algorithms and smart contracts, while CEX is run by companies with manual management. The well-known DEX includes uniswap, sushiswap and kyber, and CEX is numerous, including coinbase, binance and so on. CEX may be cheaper to operate than DEX, but users may know little about how they run, and so does DEX.
Ethereum is perhaps the most important blockchain next to bitcoin at present and the "birthplace" of DEFI. It works like most of the DAPP project libraries in the DEFI world, building the underlying infrastructure, making it possible for all of the present. Ethereum is often confused with etheric coin (ETH), which is the original token of Ethereum, but it is different from Ethereum blockchain itself.
Miner fee is the cost of the "miner" in Ethereum when dealing with transactions on the blockchain (also known as transaction cost in blockchain network). The original token eth of miner Fei Ethereum is collected, which is generally calculated by Gwei, the most basic unit in Ethereum code. The more transactions are conducted through Ethereum, the higher the miner's fees, which may reduce the cost-effectiveness of smaller transactions (more will be introduced for "high miner fees" in the follow-up of this science popularization Series).
Liquidity mining (also known as yield farming) is a key feature of DEFI, which allows people to obtain rewards by depositing (or "mortgage") an encrypted currency or token on DEX or DAPP. Some platforms reward users with another token, which can be mortgaged on the same or another DEX or dappp without limitation. What's more attractive is that each cryptocurrency or token can get benefits (such as savings interest) and can be obtained (i.e. "dug") higher through the pledge process. This is similar to cash deposit in different banks; the difference is that you need to get separate tokens from each bank before you can deposit in the next bank to get higher returns.
Liquidity pool is a function of DEX, which enables investors to trade without any middlemen. Smart contracts dominate the work of the liquidity pool, keeping it balanced between pairs / groups of different cryptocurrency and token transactions. Users can gain revenue by putting tokens in dex into these pools to provide liquidity and facilitate transactions.
NFT is a major innovation in the token world. Unlike other tokens on Ethereum, NFT is completely unique and cannot be exchanged with other tokens. Therefore, they are often used to sell unique art and collections, and there are also interesting test cases in more complex financial products. There are two main NFT standards currently used on the market: the original and unique ERC 721 token, and the mixed version based on ERC 1155 protocol used in the game.
Pump and dump
The term "pump and dump" refers to the fact that the buyer enters a virtual currency or token at the same time, raises its price and throws it all immediately, which leads to a price collapse. This is common in new tokens, which allow prices to soar before the plunge through hype and private pre-sale. Because not every investor can be present at the same time, this kind of operation has brought many buyers a great loss unfortunately.
We have mentioned smart contracts many times, because without smart contracts there is no DEFI, which is very important. The code in the smart contract can determine the working mode of dappp and other blockchain protocols accurately. Unlike traditional contracts, these contracts cannot be changed once they are written and published. Errors in smart contracts can lead to hackers' vulnerability, which is why most legitimate projects need to be scrutinized before they start.
The core pillar of DEFI is the stable currency, which can be compared to the "legal currency" or the traditional currency in the token. There are two types of stable currency: one is algorithm stable currency, which does not need traditional French currency to support (or mortgage) in a ratio of 1:1, while the centralized stable currency needs to be linked to French currency. For example, Dai belongs to the former, while Teter (usdt) and usdc belong to the latter. Since users don't have to worry about price volatility, stable currency accounts for most of the deals in DEFI.
Tokenomics is a bit like the prospectus for investors of Listed Companies in the stock market. It describes the key functions of the new bank token and its future ideas. It may include how many tokens will be issued, how tokens will be allocated and what effect the tokens will have. This is the key to understanding before buying tokens, especially in the pre-sale phase.
Tokens (also known as tokens) are often confused with cryptocurrencies such as bitcoin and etheric. Tokens are more like corporate stocks in the stock market, which can be traded to profit, but "stocks" are not, after all, US dollars and euros. Moreover, not all tokens are valuable. The most common tokens are erc-20 tokens, which run on the Ethereum blockchain and are a majority of the components of DEFI. Some tokens grant holders the right to vote on the way Dao, DEX, or dappp is issued, and are also known as "governance tokens.".
TVL represents the total lock-in value, which means the amount of money held by a single DEX, dappp, or the entire ecosystem in the DEFI world, also known as the total lock in value (TLV). Although early versions of DEFI have appeared in 2017, the year of the real harvest of DEFI is 2020, and the value of TVL has been rising from $662million in January, exceeding $11billion in November. TVL is often used as a measure of DEFI success, but it cannot be all explained.
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