Defi is here. Should you care?

With 5 million users and $100 billion in total value locked, 2021 saw the explosion of Defi. But, what do you know about Defi?

Rise of Defi on Ethereum
Photo by Zoltan Tasi on Unsplash
  1. Automated Market Maker(AMM) - The presence of an automated market maker is essential for a Defi ecosystem to function. It is the underlying framework on top of which all Defi activities take place. Smart contracts are also embedded in this AMM and define every attribute of a liquidity pool just like the DNAs do for living beings.
  2. Liquidity Pool (LP) - A liquidity pool can be described as a virtual safe where all the liquid funds from the liquidity providers/lenders are parked for borrowers to borrow from. What’s worth noting is that all lending and borrowing activities are performed without human intervention.
  3. Lender/Liquidity Provider - Any entity that is willing to add liquidity to a liquidity pool in the form of its accepted trading pairs is a lender. This entity could be an individual, an institution, a decentralized autonomous organization, or even a bot! These lenders are heavily incentivized for being the liquidity providers which come as accrued interests on their deposits. The tiny interest collected from thousands of borrowers daily adds up to a significant amount which is then paid to the lenders in proportion to their share in the LP.
  4. Borrower - All entities that take a loan from one of these liquidity pools and in return are ready to pay a small interest along with the original loan amount are borrowers. In Defi, every loan is over-collateralized and bears the risk of auto-liquidation if the borrower’s position nears the minimum collateralization ratio primarily due to market volatility.



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