If this is your first time entering the crypto space or a veteran who wants to brush up on their crypto terminology, here are the top 10 Defi terms that you need to know when exploring DeFi.
1. Protocol
There is a high probability you have seen this term being used throughout the crypto space, such as the Ethereum protocol, Sushi protocol, and even a Meme protocol.
In terms of crypto, a protocol is a set of basis on how the blockchain and code functions. For example, the Ethereum protocol is built for flexibility and functionality in providing various types of smart contracts, whereas for Bitcoin it mainly focuses on p2p.
2. DeFi
This is short for Decentralized Finance. This refers to financial services that are executed and built on top of smart contracts.
In centralized finance, intermediaries such as banks or lawyers are needed to enforce an agreement, whereas, with DeFi, agreements are automated.
3. Liquidity Pools
When encountering this word, liquidity pools are essentially pools of tokens that are locked in a smart contract.
The most notable exchange, Uniswap, has liquidity pools to facilitate trading by providing liquidity.
4. Yield Farming
Also known as liquidity mining, it is similar to staking as one can receive crypto rewards by locking up their cryptocurrency.
By contributing your token to liquidity pools such as Uniswap, in return, you will receive a UNI token that rewards you for your contribution.
5. Smart Contracts
They are an automated, self-executing agreement between two parties, which allows both parties to directly communicate with each other without a third-party intermediary.
Essentially a middleman is not needed to ensure the exchange between two parties is true or not.
6. APY
The Annual Percentage Yield(APY) offers a return based on the percentage and the amount you have in your balance.
You have likely heard about ridiculously high APY percentages ranging anywhere from 50% to 1000%. Essentially, if there is an APY of 5% for every $100, you will earn $5 per year. Of course, within crypto, APY can be extremely volatile.
7. Collateral
Within the traditional world of finance, one may use their car or a piece of property as an insurance in case the person isn’t able to repay the loan of what they borrowed; thus, the person issuing the loan can seize their collateral
The same concept is true within crypto, but instead, you are using your crypto as collateral to borrow other tokens.
8. DAO
Decentralized Autonomous Organization is a decentralized organization or business that can make decisions that are entirely based on computer codes or through the votes of its members.
Overall, it is a system that defines which actions the organization will take, based on the hard coded rules.
9. ERC-721
Not to be confused with ERC-20 tokens, ERC-721 are described as non-fungible or unique tokens that are on the Ethereum blockchain.
You may have heard about CryptoKitties or Gods Unchained cards where users have ownership of that item and which can be used within that ecosystem.
10. Voting rights
This term is tossed around when users are given a governance token that gives them the ability to have a vote or voice on issues that affect the protocol’s future.
For example, Uniswap has a UNI token that is a governance token which allows that specific user voting rights to the Uniswap protocol.
Other Missing Terms?
These are the top ten terms one will likely encounter when navigating through any DeFi related materials.
What do you think? Do you agree with the list or do you think there are other terms that are more important? Please comment below and would love to hear your thoughts!
