Worth recollecting an old news which reinstated on how people are participating without understanding the risks.  Cryptocurrency based DeFi is not a game for everyone. Even billionaires are not safe from the volatility risk of DeFi.

In the past Mark Cuban expressed, “I got hit like everyone else. Crazy part is I got out; thought they were increasing their TVL enough. Than Bam.”

Rolling up sleeves in the DeFi space can get anyone battle scars.

Many things happen in the cryptocurrency space like rug pull, scams, panic selling, bank run and more.  However, it is completely rare for tokens to tank.

Decentralized finance is the popular digital financial infrastructure, where lending and borrowing take place without having to take approval from a central bank or government agency. DeFi is also known as open finance.  In traditional finance, the bank or credit card issuer will be the intermediary between the lending merchant and the purchaser. However, with DeFi anyone with an internet will be able to lend, borrow, and bank without having to go through a middleman.

DeFi is gaining widespread recognition because you do not need an intermediary between you and a merchant when you lend or borrow. DeFi happens using a group of financial tools on the blockchain. In other words, DeFi, functions by a set of Smart Contracts running independently on blockchains.

DeFi is already a secure, transparent, and efficient alternative to traditional financial services.  While on the blockchain, DeFi is expected to reduce the risks of fraud, corruption and mismanagement of assets.

Yield farming is an investment strategy in decentralized finance or DeFi that is well known to be a method of passive income. The process of yield farming in DeFi involves lending and staking cryptocurrency coins or tokens to get rewards in the form of transaction fees or interest.

The simplest approach to make money in DeFi is to deposit the cryptocurrency in a platform which will pay you can APY (Annual Percentage Yield).

DeFi as a lending protocol enables creation of money markets.  The liquidity for the money markets comes from different users who are willing to make passive income from the cryptocurrency they hold through APY.

“APY:  Annual Percentage Yield, a time-based measurement of the Return On Investment (ROI) on an asset. For example, $100 invested at 2% APY would yield $102 after one year, if there is no compounding of any interest earned on that $100 through the year. Assuming a static APY rate, the Monthly ROI would be 0.16%, in this case.”

Some important terminologies used in the DeFi space, which beginners need to know are:  Arbitrage, Automated Market Maker (AMM), collateralization, composability, compound interest, delegation, dApp, slippage, liquidity providers, impermanent loss, delegation, derivative, flash loan, gas fee, impermanent loss, liquidity mining, liquidity pool, liquidity, liquidity providers, liquidity token, margin, margin loan, margin call, mining pool, Multisig Wallet, retail investor, spread, stable coin, stake, staking, yield farming, YIP and many more.

Users deposit their cryptocurrencies to the DeFi platform to a particular liquidity pool.  The Liquidity pool is where different users deposit their coins or tokens.  The LP (Liquidity Pool) is a smart contract based Dapp, which will have all the money deposited by users pooled together for lending, therefore Liquidity Pool. The lending is absolutely managed and controlled by the underlying smart contract. Anyone can lend or borrow tokens to and from the liquidity pool.

Those who deposit their tokens or coins are known as liquidity providers.  Those who use these market places pay a fee and these fees are used to pay liquidity providers the APY applicable for their investment.

The high yield farming is where lenders are mostly speculators who are looking for arbitrage opportunities to cashing in on the token’s fluctuations in the market.