DeFi Terms You Need To Know
Sometimes when people speak about DeFi it can sound like they’re speaking a different language. Staking? Gas? As DeFi has grown, there’s been a need to create new terms for novel products that didn’t exist in traditional financial markets. It can be difficult to keep up for people new to crypto (and difficult for seasoned crypto investors, too).
Let’s go over some of the most common DeFi terms, which will allow you to navigate Crypto Twitter and DeFi like a pro.
Depositing your crypto assets into a DeFi protocol is called staking. Stakers receive yield for staking their assets. Staking comes in a multitude of different forms – directly by running your own validator node, liquid staking through a protocol such as Lido, staking through a centralized exchange and many more.
Annual Percentage Yield (APY) is the percentage return on investments over the course of a year. In crypto, APY is almost always a variable rate and can fluctuate a lot.
Centralized Finance (CeFi) are centralized organizations that operate in the DeFi space. Some of the most well known CeFi organizations are Celsius, BlockFi & Nexo, all of whom failed in 2022 in one way or another. The difference between CeFi and DeFi is that with CeFi the organization manages and has access to the user’s money. DeFi users can operate independently of organizations and remain in control of their own tokens.
Named similarly to DeFi and CeFi, TradFi refers to Traditional Finance organizations such as banks and traditional hedge funds. TradFi is sometimes used as an insult on Crypto Twitter.
Decentralized Autonomous Organizations (DAOs) have become incredibly popular in the past few years. In a DAO there is no centralized figure like a CEO making decisions. Instead decision making is distributed to members of the DAO or token holders. Some of the best known DAOs are MakerDAO, BitDAO & The ApeCoin DAO.
A gas fee is a blockchain transaction fee, paid to network validators for their services to the blockchain. Without these fees, there would be no incentive for anyone to stake their ETH and help secure the network.
KYC stands for Know Your Customer and is an anti-money laundering verification. KYC verification is a confirmation of identity documents to prove you are who you say you are and that you aren’t likely to be using a protocol for money laundering.
Liquidity in DeFi refers to how easily users can exchange tokens for another on an exchange and correlates with how many tokens are locked in a liquidity pool. Adequate liquidity is important to ensure low slippage on transactions which can cost users money.
Following on from liquidity is slippage. Slippage is the price difference between the price of a transaction from when you submit it to when it’s finalized. Slippage occurs on decentralized exchanges as there’s a lag between submitting a transaction and having it confirmed on the blockchain. During the delay the price can change, meaning you end up with more or less tokens than originally quoted when submitting the transaction.
Stablecoins are crypto tokens designed to have a stable price, most commonly pegged to the US Dollar. Stablecoins are essential to DeFi as they overcome the instability of other crypto tokens which vary in price. The best known stablecoins are USDT, USDC & DAI.
Tokenomics is a combination of “token economics”. Tokenomics refer to the framework of a crypto token. Tokenomics encompasses all details of a token including the supply, how it’s distributed and what utility it provides to holders.
What’s Next In DeFi?
Time will tell what the next DeFi innovation will be. The industry moves at a record pace, we’re sure to see new DeFi jargon pop up in the near future. Keep up to date on DeFi by following us on Twitter or joining our community Telegram group.
Disclaimer: This is not financial advice. All advice in this blog is general in nature and does not take into account your individual situation. . You should consult with a professional or do your own research before investing in cryptocurrency.