25 Important DeFi Terms You Should Know To Be Successful

These simplified explanations should help you better grasp the DeFi terms and concepts.

Introduction to DeFi Basics

DeFi (Decentralized Finance): DeFi is like traditional finance but on the blockchain. It’s about using cryptocurrencies to create financial services without banks or middlemen.
Smart Contracts: These are digital contracts with code that automatically follows the rules. When the conditions are met, the contract executes itself.
Liquidity Pool: Think of it as a shared pot of money locked in a digital safe. It’s used for trading on decentralized exchanges.
DEX (Decentralized Exchange): It’s like an online marketplace where you can trade cryptocurrencies directly with other users, without a central authority.

Yield Farming: This is like planting seeds in the DeFi world. You provide your crypto to earn rewards, like interest or new tokens.
Impermanent Loss: It’s a temporary loss that can happen when you provide liquidity to a pool due to changes in the value of the assets.
Staking: You lock up your crypto to support a network and get rewards in return, kind of like earning interest.
NFT (Non-Fungible Token): NFTs are unique digital assets. They can represent things like digital art, collectibles, or real estate.

APY (Annual Percentage Yield): This is how much you can earn from staking or saving your crypto in a year, taking into account any compounding interest.
Gas Fee: It’s like a fee you pay in cryptocurrency to make things happen on a blockchain, like sending money or running a smart contract.

DAO (Decentralized Autonomous Organization): Imagine an organization run by code and community votes, not a central authority.
Oracles: These are like messengers that bring real-world information to smart contracts, helping them make decisions.

DeFi Token: A special crypto token designed for use in the DeFi world. It can be for voting or as collateral.
Flash Loan: You can think of this as a quick, no-collateral loan that you have to pay back all at once in a single transaction.
Collateral: This is like putting something valuable as security to get a loan in DeFi. It ensures you pay back what you borrow.
Rebase: Some DeFi tokens change their supply and value based on certain rules they follow.
Leverage: It’s like using borrowed money to make a big investment. It can increase profits, but it also increases the risk.
DEX Aggregator: This is a platform that combines prices from different decentralized exchanges to give you the best deal when trading.
Rug Pull: It’s a sneaky move where people suddenly take all the money out of a project, causing others to lose their investments.

Yield Optimization: This involves strategies and tools to make sure you earn as much as possible from your DeFi investments.

Immutability: Once something is on the blockchain, it’s like it’s written in stone. It can’t be changed or erased.
Flash Swap: It’s like a quick loan, where you borrow assets without collateral and pay them back all at once in a single step.
AMM (Automated Market Maker): These are systems on decentralized exchanges that automatically set prices and help with trading.
Wrapped Tokens: They represent other cryptocurrencies and are made to work on the Ethereum blockchain, so you can use them in DeFi.
KYC (Know Your Customer): Some DeFi platforms check who you are to follow legal rules or for security.

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