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What is the meaning of defi in cryptocurrency

what is the meaning of defi in cryptocurrency

This coronavirus pandemic has indeed played a massive role in the current rise of NFT markets. The absolute value of NFT transactions quadrupled and went up to $250 million in the previous year, according to the research from NonFungible and the BNP Paribas-affiliated research center and firm L’Atelier.

Due to the social distancing and lockdown restrictions, people are now spending significantly more time surfing the internet. And, this is one of the reasons for the growth of online trading.

Artists, in particular, are more drawn towards the NFT marketplace to make money from online auctions, as physical selling is almost shut across the globe. On the other hand, fans too want to connect with their favorite artists; hence the rise of NFTs allows fans to own an original and unique piece created by the artist. It is a win-win situation for both buyers and sellers.

What are the main elements of DeFi?

There are certain DeFi “building blocks” that create a software stack, with every layer building upon another. These layers work together to create DeFi and its related applications that serve users in a variety of different ways. If one layer is off, so are the other layers.

The five layers that make up DeFi include:

  1. The settlement layer, which is the foundational layer of the blockchain and its specific native asset. For example, Ethereum is the network on the blockchain and ether is the native currency on that blockchain. This layer provides security and a set of rules to follow.
  2. The asset layer, which refers to all the tokens and digital assets that are native to the particular blockchain.
  3. The protocol layer, which sets the protocols or guidelines for smart contracts.
  4. The application layer, which brings the protocols to life with a user interface that is consumer-facing.
  5. The aggregation layer, which consists of aggregators that connect the various dApps and protocols which make up the foundation for borrowing, lending on and other financial services.

What is a Decentralized Money Market?

Money markets are markets for borrowing and lending assets. The decentralized element means that users can borrow and lend cryptocurrencies without the control of a central figure. The lack of central authority is fixed using smart contracts and algorithms to determine the markets function. Decentralized money markets put interest earning potential in the hands of anyone with an internet connection in the world. Popular examples of decentralized money markets include Aave, Compound, MakerDao and Balancer. This area of DeFi has gained the most traction in recent times, especially with the bearish crypto market. This is because there are lots of profits to be made, with “Yield Farmers” churning in large sums from interest earned.

Where Can You Use DeFi Services?

DeFi services are typically found on the Ethereum blockchain, the world’s second-largest crypto platform. This public blockchain is known for its wide array of DApps, or decentralized applications, many of which involve the storage, trade, or management of funds. These are known as decentralized finance apps.

You’ll find the majority of decentralized finance apps on the Ethereum blockchain because it’s generally much easier to use than other major blockchains in terms of developing applications for the network. Some major DApps, such as Maker and Aave, exist on the Ethereum blockchain.

Related: Learn How to Create Your Own DApps on Ethereum

These two applications provide different services. Maker allows digital asset holders to borrow and lend crypto against collateral, while Aave allows users to act as either liquidity lenders or loan borrowers. There’s really no end to the different decentralized financial products you can find on the Ethereum blockchain.

However, not all decentralized finance apps exist on the Ethereum blockchain. Consider Colony Labs, for example. This community-driven fund supports up-and-coming blockchain projects and exists on the Avalanche blockchain. There are also several great decentralized finance apps on the Binance Smart Chain, or BSC, such as PancakeSwap, a trading liquidity provider.

On top of all this, decentralized exchanges, or DEXs, are also decentralized finance applications. Additionally, DeFi incorporates a number of other services, such as yield-farming and liquidity mining.

Final thoughts: Is Liquidity Mining Worth It?

Liquidity mining is becoming increasingly popular amongst crypto investors for a good reason.

  • It offers a great avenue to earn passive income;
  • It contributes towards the decentralization of the blockchain market;
  • It provides investors with an option on what to do with their reserve coins.

The blockchain space is still growing and whether liquidity mining will prove to be a worthwhile long-term crypto investment strategy remains to be seen.

Why Is Crypto Mining Such a Big Deal?

If you’re interested in crypto, you should know that mining is an integral part of the process. You can earn cryptocurrency without having to put money down. This means there could potentially be a big long-term profit if you play your cards right.

There’s a reason why huge mining farms exist that work continuously without breaks to mine as much crypto as possible. As crypto is such a valuable commodity today, getting your hands on this appreciating currency is a good thing, through whatever method you choose.

Mining crypto also means you get to be a part of growing the blockchain and supporting the blockchain system. Without miners, the blockchain wouldn’t work.

How to invest in DeFi

If you’re interested in investing in DeFi, there are a number of ways to do it.

“To start in DeFi you need native currencies — like ETH, AVAX, BNB, FTM, MATIC and others — as every transaction will require gas. You can purchase those through various exchanges, wallets, and crypto services,” explains Mozgovoy.

You can start with a decentralized exchange (DEX) such as Uniswap. According to their site, you can “Swap, earn, and build on the leading decentralized crypto trading protocol.”

It’s important to keep in mind that since everything is relatively new with DeFi and there is no governing body, be careful about what you invest in.

“In DeFi anyone can launch their own project, token, contract — that is why you should be aware of scams and low quality projects,” notes Mozgovoy. Aside from being aware of scams, in practicality, Mozgovoy states that with DeFi users can save, lend, or take part in derivatives and exchanges.

Quick tip: Read about Proof of Stake, which is used as a way to confirm crypto transactions, and what it means here.

What is a Decentralized Exchange?

Exchanges are the heartbeat of the cryptocurrency traders. Most of you will have an idea of the more famous centralized exchanges like Binance and Coinbase, but decentralized exchanges (DEX’s) may be less so. The main difference between the two is that there is no central authority over decentralized exchanges, rather governance is determined in various ways, like through earning native tokens.

Focusing on namely cryptocurrencies, the decentralized exchanges offer a range of benefits. The first is security as you are not trusting a centralized exchange which could be susceptible to hacks with your funds. Instead trades are done through a peer to peer (P2P) trading network and a range of methods are used to facilitate this. Some DEX’s use proxy tokens, others multi-signature escrow systems and some use shares. Popular DEX’s are dYdX, Uniswap and Kyber network.

Key Terms and Concepts (Explained)

To effectively participate in a DeFi protocol as a liquidity provider, there are terms and concepts with contextual meaning that you will need to be aware of and understand. Some of these include:

  • DEX – this is a short form for decentralized exchange, which is a platform that runs autonomously without direct intervention from a centralized party such as a company. Dexes are trading platforms to which liquidity providers contribute their digital assets.
  • Yield – this is the reward offered to liquidity providers in the form of trading fees or LP tokens. In other DeFi platforms, yield is the interest rate accrued to participants for providing liquidity or holding stakes in these projects.
  • CeFi – stands for centralized finance, and it refers to the institutions within the cryptocurrency market that offer financial services. It is the opposite of DeFi.
  • TradFi – in full, this term stands for traditional finance, and it refers to the conventional financial institutions such as banks, stocks exchanges and hedge funds.TradFi is different from CeFi even though both terms refer to centralized financial structures, the contexts vary because CeFi is used in reference to blockchain and TradFi is used in reference to conventional financial markets.
  • AMM (Automated market maker) – AMMs are smart contracts designed to hold the liquidity reserves within a pool. It is the AMMs to which the LPs deposit their assets and traders interact to exchange their crypto.

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