DeFi Guide
Decentralized Finance (DeFi)
Decentralized Finance (DeFi) refers to a movement aimed at recreating traditional financial systems and services using decentralized technologies, primarily on blockchain networks. DeFi applications eliminate intermediaries, enabling peer-to-peer transactions and providing financial services like lending, borrowing, and trading.
Smart Contracts
Smart contracts are self-executing contracts with the terms of the agreement directly written into code. In DeFi, they automate transactions and enforce agreements without the need for intermediaries, allowing for trustless interactions between parties.
Liquidity Pool
A liquidity pool is a collection of funds locked in a smart contract that provides liquidity for decentralized exchanges and other DeFi applications. Users contribute their assets to the pool in exchange for a share of transaction fees and rewards, enhancing market efficiency.
Automated Market Maker (AMM)
An Automated Market Maker is a type of decentralized exchange that uses algorithms to determine the price of assets based on supply and demand. AMMs rely on liquidity pools and allow users to trade cryptocurrencies without relying on order books or centralized intermediaries.
Yield Farming
Yield farming is a DeFi strategy that allows users to earn rewards by providing liquidity to DeFi protocols. Users lock up their assets in liquidity pools or lend them to platforms, receiving interest or additional tokens as compensation for their participation.
Decentralized Exchange (DEX)
A decentralized exchange is a trading platform that allows users to buy and sell cryptocurrencies directly with one another without a central authority. DEXs utilize smart contracts to facilitate trades, enabling greater privacy and control over funds compared to centralized exchanges.
Stablecoin
Stablecoins are cryptocurrencies designed to maintain a stable value by pegging their price to a reserve asset, such as a fiat currency or commodity. They play a crucial role in DeFi by providing a stable medium of exchange and store of value within the ecosystem.
Governance Token
Governance tokens are tokens that grant holders voting rights and influence over the decision-making processes of a DeFi protocol. Holders can propose and vote on changes, upgrades, and funding decisions, enabling community-driven governance in decentralized ecosystems.
Lending Protocol
A lending protocol is a DeFi platform that enables users to lend and borrow cryptocurrencies without intermediaries. Users can earn interest on their deposited assets while borrowers pay interest on the loans they take, with smart contracts facilitating the entire process.
Interoperability
Interoperability in DeFi refers to the ability of different blockchain networks and protocols to communicate and interact with one another. This feature allows users to seamlessly transfer assets and data across various platforms, enhancing the overall functionality and user experience of decentralized finance.
