Domenic Carosa and Dan Schatt, of firm Earnity, believe decentralized finance (DeFi) is the most exciting thing to happen to money in centuries. People can now use DeFi to invest, save, borrow, and lend between themselves using cryptocurrencies via fully automated, digital “smart contracts,” rather than handing over their money to bankers and investment managers.
Even better, you can do everything on DeFi via the blockchain: an incorruptible ledger that records every single transaction ever made. However, it does not mean DeFi is risk-free. If you want to know more about decentralized finance, here are some terms you must know:
dApp
Decentralized application (dApp) is the foundation of everything DeFi. A dApp, like a DAO, is an application that runs essentially on its own, with no managers or mediators, and allows users to transfer funds between themselves. The Ethereum blockchain serves as a dApp library for most DeFi dApps, with other blockchains such as Tron and EOS allowing developers to code applications.
DEX/CEX
A DEX is a decentralized exchange, while a CEX is a centralized exchange. Both allow you to buy and sell coins and tokens. Like the distinction between DeFi and CeFi, a DEX is autonomous and powered by algorithms and smart contracts, whereas a company manages a CEX. DEXs with well-known names include Uniswap and Kyber, while CEXs include Coinbase and Binance. CEXs may be less expensive than DEXs, but unlike some DEXs, users have no say in how they operate.
Gas Fees
Gas fees are the fees charged to Ethereum “miners” for processing transactions on the blockchain. The higher the gas fees, the more transactions that go through Ethereum, which may make smaller trades less cost-effective (more on this later in the series)
Yield Farming
Liquidity mining (or yield farming) is a crucial feature of DeFi that allows users to deposit on a DEX or dApp in exchange for rewards. For example, some platforms reward users with another ticket, which can be staked indefinitely on the same or another DEX or dApp. The allure is that each coin or token pays a yield (similar to savings interest), and you can chase (or “farm”) higher profits through the process of staking. It’s similar to putting cash on deposit with different banks, except you need tokens from each bank before you can deposit with the following bank for a higher yield.