It is no exaggeration to say that decentralized finance and DeFi are almost one of the most exciting things of this century. Instead of handing over cash to bankers and investment managers, people can now use cryptocurrencies to save, invest and borrow through DeFi's fully automated digital "smart contracts."
Sounds crazy, but it's actually not that complicated. Just as various technologies change our lives, DeFi is also changing the way we make money. Unlike the traditional centralized finance ("CeFi") model, we can still save and invest now, but we can save the fees charged by the middleman.
The best part is that everything in DeFi is done through the blockchain: an incorruptible decentralized ledger that clearly records every transaction. Of course, this is not to say that DeFi has no risks. We will introduce it in detail in the follow-up articles of this science popularization. In this issue, let’s start with some of the most important DeFi terms (arranged by alphabet A-Z below)!
On many DeFi platforms, users can stake in one cryptocurrency or token in order to borrow another, such as using ether (ETH) to borrow DAI. It's a bit like using your house as collateral for a bank loan. Typically, you have to provide a larger percentage of a cryptocurrency or token as collateral for a DeFi loan, such as using $100 of ETH to get $70 of DAI (that’s 140% LTV, or loan-to-value). This helps support system stability.DAOs are decentralized individuals autonomously contributing to the community. In short, like a company without any HR managers or employees, everything that happens in the organization is based on "open source" code that anyone can see and use, fully automated. Both DAO and DeFi run on the blockchain, so it is also immutable and not subject to audit.dApp (Decentralized Application)
dApp refers to decentralized applications, which are the foundation of all DeFi. Like DAO, dApp is an application that runs on its own, without a manager or middleman, and allows users to transfer funds between programs. The Ethereum blockchain is like a dApp library where most DeFi dApps live, while other blockchains such as Tron and EOS also allow developers to code applications.
DEX / CEX (centralized exchange / decentralized exchange)
DEX is a decentralized exchange, and CEX is a centralized exchange, both of which can buy and sell cryptocurrencies and tokens. Just like the difference between DeFi (centralized finance) and CeFi (decentralized finance), DEX is automated and run by algorithms and smart contracts, while CEX is run by companies with human management. Well-known DEXs include Uniswap, Sushiswap, and Kyber, and there are countless well-known CEXs, including Coinbase, Binance, etc. CEXs may be cheaper to operate than DEXs, but users may have little knowledge of how they operate, and the same goes for DEXs.Ethereum is perhaps the most important blockchain right now after Bitcoin and the “birthplace” of DeFi. It acts like the project library of most dApps in the DeFi world, building the underlying foundation and making everything possible at present. Ethereum is often confused with Ether (or ETH), the native token of Ethereum but distinct from the Ethereum blockchain itself.The miner's fee is the fee incurred by the Ethereum "miners" when processing transactions on the blockchain (it can also be understood as a transaction fee in the blockchain network). The miner fee is charged by Ethereum’s native token ETH, which is generally calculated using the most basic unit in the Ethereum code, Gwei. The more transactions that go through Ethereum, the higher the gas fee, which may make smaller transactions less cost-effective (more on "high gas fees" later in this science series).Liquidity mining (aka yield farming) is a key DeFi feature that allows people to earn rewards by depositing (or “staking”) a cryptocurrency or token on a DEX or dApp. Some platforms reward users with another token that can then be staked without limit on the same or another DEX or dApp. What's more attractive is that each cryptocurrency or token can earn income (such as savings interest), and can obtain (that is, "mine") higher income through the pledge process. This is similar to depositing cash into different banks; the difference is that you need to get separate tokens from each bank before you can deposit at the next bank for a higher yield.Liquidity pools are a feature of DEXs that enable transactions between investors without any middlemen. Smart contracts govern the work of the liquidity pool, keeping it balanced between pairs/groups traded across different cryptocurrencies and tokens. Users can provide liquidity and facilitate transactions by putting tokens in DEX into these pools to obtain income.NFTs are a major innovation in the token world. Unlike other tokens on Ethereum, NFTs are completely unique and not interchangeable with other tokens. As such, they are often used to buy and sell unique artwork and collectibles, but also have some interesting test cases in more complex financial products. There are two main NFT standards currently in use on the market: the original and unique ERC 721 token, and the mixed version based on the ERC 1155 protocol used in the game.Pump and dump (raise prices, sell on rallies)
The term "pump and dump" refers to the simultaneous entry of buyers into a virtual currency or token, pumping up its price and then dumping it all at once, causing the price to plummet. This is common among newly minted tokens, where hype and private pre-sales drive prices up before they plummet. Since not every investor can enter the market at the same time, this operation has unfortunately caused many buyers to suffer huge losses.
We have mentioned smart contracts many times, because there is no DeFi without smart contracts, and its importance is self-evident. The code in smart contracts can determine exactly how dApps and other blockchain protocols work. Unlike traditional contracts, these cannot be changed once written and published. Bugs in smart contracts can make them vulnerable to hackers, which is why most legitimate projects are subject to rigorous audits before they can be launched.The core pillar of DeFi is stablecoins, which can be compared to "fiat currency" or traditional currencies in tokens. There are two types of stablecoins: one is an algorithmic stablecoin, which does not need to be backed (or mortgaged) by traditional fiat currency at a ratio of 1:1, while the centralized stablecoin needs to be linked to a fiat currency. For example, DAI belongs to the former, while Tether (USDT) and USDC belong to the latter. Since users don’t have to worry about price fluctuations, stablecoins account for the majority of transactions in DeFi.Tokenomics (Token Model/Token Economics)
Tokenomics is somewhat similar to the prospectus for investors of listed companies in the stock market, which describes the key functions of new tokens and their vision for the future. This may include how many tokens will be issued, how the tokens will be distributed and what effects the tokens will have. This is the key thing to know before buying tokens, especially during the pre-sale.Coins (aka tokens) are often confused with cryptocurrencies like bitcoin and ether. Tokens are more like company shares on the stock market, which can be traded for profit, but "stocks" are not dollars and euros after all. Also, not all tokens have value. The most common tokens are ERC-20 tokens, which run on the Ethereum blockchain and make up the bulk of DeFi. Some tokens grant holders the right to vote on how the issuing DAO, DEX or dApp is run, also known as “governance tokens”.TVL/TLV (Total Locked Volume)
TVL stands for Total Locked Value, which in the DeFi world means the amount of funds held by a single DEX, dApp, or the entire ecosystem, also known as Total Locked Value (TLV). Although the early version of DeFi has appeared in 2017, the year of DeFi's real harvest is 2020. The value of TVL has risen from $662 million in January to more than $11 billion in November. TVL is often used as a metric to measure the success of DeFi, but it doesn’t tell the whole story.
