Blockchain technology is a big part of the future, and the cryptocurrency world is a complex and vast one. It can also be intimidating to newbies with its endless tokens and technical terms, and that’s not even mentioning blockchain.
Looking to understand the basics better? This comprehensive guide and breakdown of the most common terms should be useful. Let’s get straight into it!
First, we start with what you’ve probably heard before and know about.
DeFi stands for Decentralized Finance.
In traditional finance (TradFi), almost every financial transaction involves intermediaries like banks, acquirers etc. For example, when you pay with your credit card, these third parties oversee your transaction details and can decline or stop the transaction.
DeFi exists based on the idea that the financial system should be free from these third-party intermediaries and should be decentralized instead.
DeFi is a rather new phenomenon, and with such innovation comes new terms and jargon. If you walked into a room full of DeFi experts talking about “impermanent loss,” “state channels” and “nodes,” you would probably not remain comfortable in that room for long. But you don’t need to worry; we simplify most of them in this post.
DeFi runs on dApps (decentralized applications). Unlike centralized apps, data lives on a blockchain instead of servers controlled by companies, which makes it decentralized to some degree. A good example of a dApp is the Rebus platform.
Sometimes, dApps can take the form of financial marketplaces known as decentralized exchanges (DEX) for trading currency pairs. There are both centralized and decentralized exchanges; however, in Dexes, a decentralized ledger of ordered transactions is decided via blockchain and independent of any centralized authority.
Decentralized nodes decide the order of transactions via one of the different types of consensus mechanisms (e.g. proof of stake (PoS) for Cosmos, proof of work (PoW) for bitcoin). Blockchain also allows transactions to be customized via smart contracts, a built-in programming language that allows DeFi to function.
A great example of a Dex is Osmosis.
A blockchain is a continuously growing list of records, called blocks, linked and secured using cryptography. Each block typically contains a hash pointer as a link to the previous block, a timestamp, and transaction data.
By design, blockchains are inherently resistant to modification of the data (this makes it immutable).
Satoshi Nakamoto invented blockchain in 2008 to serve as the public transaction ledger for bitcoin. The idea was first implemented in 2009 and then released in January 2010 as a core component of the digital currency bitcoin, where it serves as the public ledger for all transactions on the network. A blockchain is essentially a database, where its entries cannot be erased or modified.
Examples of blockchains are Ethereum, Cosmos, Binance Smart Chain, Avalanche etc.
In the decentralized world, gas is required to process and conduct a transaction on a blockchain. The amount of gas you’ll need to process a transaction can vary.
Gas fee is the transaction fee that compensates validators for verifying transactions and the addition of blocks to the network.
Understanding these terms will help you to become a part of DeFi world.
APY stands for Annual Percentage Yield. APY is one of the important concepts in DeFi as it refers to your ROI (Return on Investment) from an asset in a year. An example of investment, in this case, is staking your tokens for rewards. In DeFi, APY fluctuates wildly, so it’s best to use them as estimates.
Blockchain explorer provides an easy way to check transactions on a particular blockchain. You can see wallet content, transaction statuses, and so much more. Mintscan for Cosmos, Etherscan for Ethereum.
Block is a bundle of transactions processed on a blockchain. New blocks are created and linked to the previous ones at regular intervals. This creates a ‘chain of blocks’ — a blockchain.
Short for Centralized Finance, a custodial business model where users don’t have total control over their assets. Commonly used to refer to centralized projects that operate in the DeFi space, such as Nexo, BlokFi, and Celcius.
They are uncollateralized and instant cryptocurrency loans that allow you to borrow any amount of crypto asset as long as it’s repaid within the same transaction block. This means that the loaned asset can only be used on-chain to trigger smart contract actions, and if not repaid in time (the time it takes for the loan block to confirm), the transaction will be rejected, and the user retains the funds.
Impermanent loss occurs when you lock up tokens in a liquidity pool to provide liquidity and earn interest from trading fees in the process, and then the price of one or both of the tokens changes drastically due to market volatility or any other factor.
Since Automatic Market Makers like Osmosis don’t use order books, the price is maintained through the ratio between the assets in the pool. So when the drastic change occurs, you might withdraw less of your deposited asset.
This is the ability of blockchains to communicate with other chains. Cosmos is one of the top interoperable chains presently.
Dexes depend on liquidity pools to make trades possible. In Centralized exchanges, that task is handled by order books. Dex replaces this by crowdsourcing liquidity and compensating liquidity providers with rewards (share of LP transaction fee}
Users who lock up their tokens in liquidity pools
The value of the circulating supply of a cryptocurrency, which can be calculated by multiplying the circulating supply by the current price.
PoS is a type of validation that requires nodes or validators to prove ownership over a number of tokens to guarantee rights to vote on the validation of transactions.
A consensus algorithm used to validate blockchain transactions that require solutions to complex puzzles to add new blocks to the network.
A mechanism built into blockchain protocols (especially PoS chains) to discourage validator misbehavior and incentivize availability, security, and participation.
Depositing your tokens in a DeFi protocol like the Rebus Staking Platform to generate yield rewards (measured in APY), secure the network, and gain the right to vote on governance proposals on the network.
The total amount of staked or deposited value on a DeFi platform.
Short for Traditional Finance institutions like banks, asset managers etc.
Known as a liquidity mining program, yield farms allow staking or depositing tokens on DeFi platforms offering rewards.
There you go. These are just some common terms you’ll hear from anyone in the crypto space. If you can’t wait to explore DeFi further, take this knowledge as a great starting point. We are constantly developing innovative products and ideas to take DeFi mainstream, far beyond the crypto space, into TradFi. For more details on our ecosystem and the products it hosts, see this guide.