DeFi, staking and yield farming explained in simple terms
Defi (Decentralized Finance) is a financial system that uses distributed ledger technology and blockchain networks to record, store and transfer of assets, as well as the management of assets); usually as opposed to traditional financial systems that are centralised and controlled by one centralised entity.
Defi has an emerging niche in the financial ecosystem since it combines elements of traditional finance, cryptocurrencies and DeFi with the use of blockchains.
Defi aims to increase accessibility to digital assets by breaking down barriers to participation and removing intermediaries through the use of distributed ledger technology.
The use of blockchain and distributed ledger technology as the backbone of decentralized finance is very promising, and it gives users the opportunity to be the owners of their assets instead of its custodian.
DeFi is also used to refer to the protocols that operate on the underlying blockchain, such as cryptocurrency exchanges, lending protocols, insurance products, or stablecoins.
The main purpose of blockchain is to create a transparent, censorship-resistant, and decentralized, distributed ledger technology.
Decentralized means it’s not controlled by a single organization, but by multiple groups of stakeholders.
The DeFi ecosystem is decentralised, meaning no single institution or individual owns or controls the protocol.
It is a distributed network of peers who utilize distributed ledger technology and its underlying blockchain networks to exchange digital assets.
The blockchain network will be used to store financial information for financial transactions, and the trading platform will use the blockchain to facilitate financial operations.
In the DeFi ecosystem, users can build their own blockchain and share their newly created cryptocurrency through an automated market maker (AMM) on a blockchain.
Automated Market Maker
AMM is a crypto version of a market maker, which is a system that uses price feeds from a crypto exchange and trading volume to compute market prices.
In the AMM, there is no human decision-making, and liquidity pools are managed by computer algorithms.
Users can deposit crypto-assets into the pool and exchange them for other crypto-assets in the pool, and the AMM automatically computes the price of the crypto-assets and provides liquidity to the pool.
What is staking in crypto?
The simplest definition is a process of getting more tokens n exchange for holding them.
Staking gives the staked tokens more liquidity. In other words, staking takes tokens away from their circulation, giving them extra liquidity in the market.
What is yield farming?
When a person invests in a token, the yield farming process involves swapping their cryptocurrency for a similar token in return for a fixed interest rate.
Some projects in the crypto market are not profitable because the tokens they issue are issued on a very high gas limit which is too high for the user and when a lot of investors are investing the projects run out of funds.
Yield farming can help these investors and companies solve this problem by earning the interest they pay for their cryptocurrencies.
Where to start with DeFi?
The most popular place currently to start with DeFi is Aave, which allows you to deposit and borrow crypto, earning interest along the way. You should also check:
for more interesting DeFi action!