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Difference between revisions of "Decentralized Finance"
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A key concept for DeFi investors is to DYOR (Do Your Own Research) in order to ensure they understand what a DeFi protocol is, how it works, and the risks involved in using the protocol. | A key concept for DeFi investors is to DYOR (Do Your Own Research) in order to ensure they understand what a DeFi protocol is, how it works, and the risks involved in using the protocol. | ||
== Kinds of protocols == | |||
=== DEX === | |||
A [[DEX]] (short for Decentralized Exchange) is a Dapp used to allow exchanges (AKA swaps) between different cryptoassets. The most famous and best known DEX is [[Uniswap]] and it was the first to introduce the AMM model. | |||
Other DEX use the orderbook model, which makes them more similar to their centralized counterparty. | |||
A DEX is thought to be the central protocol in a DeFi ecosystem and all the other Dapps rely on one or multiple DEXs to attract liquidity and gain market share. | |||
=== Money Market === | |||
A money market is a place where users can lend out their assets, earn an interest and use them as collateral to take out loans in a decentralized, trustless and permissionless manner. The most famous money markets are [[Aave]] and [[Anchor]] and they are at the core of DeFi liquidity. | |||
Money markets are also essential in a DeFi ecosystem since they allow to unlock liquidity and let users partecipate in all the different DeFi protocols with borrowed funds. | |||
=== Yield Farms === | |||
Yield farm is a general term which indicates any protocol that provides interest earning to its users. The mechanisms thorugh which these interests are paid vary widely among different protocols but yield farms are the main reason why DeFi has gained such traction: they offer much higher interest compared to traditional finance. | |||
An honorable mention is made to [[Compound Finance]] which, in the summer of 2020, kick started yield farming through its COMP incentives liquidity mining program. This later caused dozens of other protocols to do the same and the subsequent period is known as DeFi summer 2020. | |||