#1 — The Building Blocks A Beginner Should Understand When Learning DeFi
The Ethereum chain has over $34 Billion TVL in their DeFi platforms.
Sounds crazy right? But this is only one chain of many. With the rise of DeFi, crypto, and non-crypto, investors should learn the fundamentals of the technology.
Let’s be honest, there is a lot to learn.
So we need to break it down into smaller pieces.
When you break DeFi down into pieces, you are able to learn the building blocks of the technology. This allows you to:
- Learn something
- Find a project
- Take $15
- Do an experiment
- Learn more
The first building block will be: Liquidity
What is Liquidity?
Liquidity is a term that is not only used in the Blockchain space, but the finance space in general.
The term refers to how easy one asset can be converted to another asset without having a significant impact on the price. In the legacy TradFi world, liquidity relied on an off-chain traditional orderbook. A traditional order book brings together buyers and sellers by saving prices they are both willing to execute.
In DeFi, this is done programmatically and decentralized.
Liquidity Pools are the order books of DeFi.
Most of the time, Automated Market Makers (more about those in a future lesson) collect funds into a liquidity pool on their protocol. These LPs will have at least 2 assets you are required to deposit. These LPs are ran by a smart contract with facilitates other protocol functions.
Liquidity Pool providers are incentivized to provide liquidity by being offered rewards from trading fees.
Being a Liquidity Provider is true passive income.
You allow your assets to help out the protocol, buyers, and sellers. All while getting paid a great yield.
This is article #01 of an ongoing series: