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What is DeFi?

DeFi stands for Decentralised Finance and is a broad overarching term used to describe various financial tools within the blockchain ecosystem. I essentially leverage decentralized networks to transform old financial products into trustless protocols that run without intermediaries.

Several DeFi tools have existed for a while, such as decentralized exchanges or dexes, lending platforms, stable coins, and prediction markets.

New DeFi tools offer a more complex, potentially more rewarding, but riskier way to earn cryptocurrency platforms. Two widely know tools are Yield Farming and Liquidity pools; Yield Farming is essentially the process of making returns or yields on your capital by putting it to more productive use. Money markets offer some of the simplest ways to new yields on your cryptocurrency, and this setup is optimal for financial adherents who want to retain leverage on their capital.

Liquidity pools might offer better yields than money markets. Still, there’s additional market risk, platforms such as Uniswap offer liquidity providers or LPs with fees as a reward for adding on their assets to a pool. Liquidity pools are generally configured between two assets in a 50 50 ratio. LPs are fees to facilitate the market; however, there is a risk of impermanent loss, which is the loss created by providing liquidity for an asset that could rapidly change in value.