Understanding DeFi protocols
In this section, we will help you understand popular DeFi constructs and concepts and show you how different DeFi applications work, including decentralized lending and borrowing, exchange, derivative, and insurance. We will also dive deep into leading DeFi protocols in those categories.
Basic DeFi constructs
Let’s start by looking at the key DeFi building blocks and basic constructs:
- Liquidity pool: Liquidity and liquidity pools play a critical role in the DeFi ecosystem. Liquidity, in the form of crypto assets, is the lifeline of any liquidity-based DeFi application. It is used to bootstrap, govern, and secure the DeFi protocol. It is used to facilitate the trading of crypto assets through the protocol rules. A liquidity pool is a mechanism where liquidity is locked into the smart contract; the process of locking liquidity is also called staking. The liquidity provider may get the governance token – that is, LP tokens –...
