Common terms in DeFi, why is it important to know them well? It is important to understand the terms used in decentralized finance (DeFi) as this can have a significant impact on how you use and understand the various financial products and services associated with it. DeFi is a rapidly evolving field, and the terms used can vary from project to project.
Understanding the terms commonly used in DeFi can help you better understand the risks and opportunities associated with these products and services. For example, understanding what a smart contract or stablecoin is can help you understand how they can be used to make money, or how they can be used to minimize the risks associated with crypto-currency volatility.
Here are some common terms in the field of decentralized finance (DeFi) that can help you understand the important concepts.
Common terms in decentralized finance (DeFi)
Smart Contract: A smart contract is a computer program that can automatically perform actions based on predefined criteria. In DeFi, smart contracts are often used to create automated protocols that manage the use of funds, lending and borrowing, among other things.
Non-fungible tokens (NFTs): These are tokens that are unique and cannot be replaced by another token. NFTs can be used to represent a variety of things, such as digital art, video game components, virtual buildings, etc.
Stablecoin: These are tokens that have a stable value relative to a fiat currency or other crypto-currency. Stablecoins allow users to retain the value of their funds without being affected by the volatility of crypto-currency prices.
Variable Rate Loan (VRL): This is the total value of assets that are used to obtain loans on a decentralized lending platform. The higher the TVL a lending protocol has, the more popular and reliable it is considered to be.
Flash Lending: This is a type of decentralized lending where funds are borrowed and repaid in a single transaction, usually within minutes. This allows borrowers to obtain funds quickly to cover short-term liquidity needs.
Token: There are two main types of crypto tokens: utility tokens and security tokens. Utility tokens are designed to be used within a specific ecosystem, such as a decentralized application (dApp) or platform. They can be used to purchase goods or services within that ecosystem, or to gain access to certain features or functionality. Security tokens, on the other hand, are created as investments and are intended to provide the holder with a financial return, such as dividends or a share of the company’s profits.
Yield Farming: This is an investment technique in crypto-currencies that involves moving funds between different DeFi protocols to maximize returns. Investors can earn interest, token rewards and cash by lending or providing cash to decentralized lending protocols.
Non-fungible token (NFT): a unique token that cannot be replaced by another equivalent token.
Oracle: a data source that is used to provide information to a smart contract on the blockchain.
DAO: an autonomous decentralized organization that is managed by token owners.
There are of course many other common terms in the DeFi field, depending on the protocols used, these terms above are the most commonly used.