DeFi, otherwise known as decentralised finance, is one of the most innovative sectors of the cryptocurrency industry. Although being so new, some terms used to describe the workings of DeFi can be confusing. In this article we will cover some important DeFi terminology to help you understand what DeFi is all about!
A DAO, or Distributed Autonomous Organisation, is an organisation that is based on the blockchain and is governed by a set of pre-coded rules. These rules are visible to all, and the choices made within these organisiations are voted upon by the community, instead of a central body. Voters are mainly token holders, the amount of tokens being held tends to align with the amount of voting power they possess. DAO’s aim to provide an alternative to traditional business models, by being transparent and allowing users to vote on business decisions. DAO’s are at the heart of the DeFi revolution.
If DAO’s are the heart of DeFi, then Dapps, or decentralised applications, are the backbone. Just like DAO’s there is no centralised body determining the direction of the application. Instead, these apps run almost independently without the need for a middleman, allowing individuals to transfer funds between one another. These applications are built upon blockchains, the Ethereum blockchain currently has the highest amount of decentralised applications built upon it, however BNB and Solana also have large amounts of Dapps built upon them.
Dex’s and Cex’s are terms referring to different kinds of cryptocurrency exchanges. A DEX is decentralised cryptocurrency exchange, while a Cex is a centralised exchange. Similar to DAO’s and Dapps, Dex’s are governed by their communities and are not controlled by a central body. As such transactions conducted on a Dex are done directly between individuals with no intervention from a middle man. Although this may sound like a positive, Dex’s do not have many of the benefits centralised exchanges do. Centralised exchanges normally have much higher quality customer service, and if something goes wrong, or if you have a question when using the exchange, a Cex will have answers most of the time, while many Dex’s may not.
Collateral is a central part of DeFi infrastructure. On many DeFi exchanges, individuals will need to offer a large portion of their crypto tokens as collateral in order to take out a loan via a Dex. This works in a similar way as putting your house up as collateral for a bank loan. On DeFi platforms, individuals will normally need to provide much more coins for collateral then the amount they wish to borrow, this ensures that the ecosystem continues to be stable. Although this is how crypto lending should work there have been examples of DeFi lending companies having issues repaying user loans.
The APY or Annual Percentage Yield is the rate of return a user will receive on an investment. The APY is the rate utilised to define rewards payable, and this term can be found on both centralised and decentalised exchanges, it describes the normalised rate defined by the compounding period of one year. The APY is normally shown alongside exchanges with earn programs or yield farming. CoinSpot hosts its own earn program, if you would like to know more you can find information about CoinSpot Earn via our help center here.
Some of these terms have multiple meanings, but when they are used in the context of DeFi they can begin to sound confusing. It is important to familierise yourself with the technology behind your investments, and by knowing the terminology used you can be confident when conducting your own research. If this article has piqued your interest regarding decentralised finance, you can find CoinSpot’s DeFi coin bundle here, and begin your journey today.