Podcast
Questions and Answers
What does slippage refer to in trading?
What does slippage refer to in trading?
- The fees charged for executing a trade
- The volatility of the market
- The difference between expected and executed trade price (correct)
- The time delay in executing trades
Which entities primarily benefit from trading fees on DEXs?
Which entities primarily benefit from trading fees on DEXs?
- Only liquidity providers
- Centralized exchanges
- Investors in fiat currency
- Liquidity providers, protocol token stakers, and governance (correct)
What is impermanent loss?
What is impermanent loss?
- Loss incurred from investing in liquidity pools only
- The profit earned from trading above the average cost
- The loss from holding an asset compared to staking in a liquidity pool (correct)
- Realized loss from selling assets at a lower price
What primary role does a central bank serve in a country's economy?
What primary role does a central bank serve in a country's economy?
What primary purpose does staking serve in DeFi?
What primary purpose does staking serve in DeFi?
What is one method a central bank uses to influence lending and borrowing activities?
What is one method a central bank uses to influence lending and borrowing activities?
Which of the following best describes a decentralized exchange (DEX)?
Which of the following best describes a decentralized exchange (DEX)?
Which of the following is a major risk associated with staking?
Which of the following is a major risk associated with staking?
What is a significant risk that lenders face in crypto lending?
What is a significant risk that lenders face in crypto lending?
What tool is essential for accessing DeFi platforms?
What tool is essential for accessing DeFi platforms?
How does DeFi primarily transform the financial sector?
How does DeFi primarily transform the financial sector?
Which service is NOT typically offered by DeFi platforms?
Which service is NOT typically offered by DeFi platforms?
What is over-collateralization in the context of crypto borrowing?
What is over-collateralization in the context of crypto borrowing?
Which factors can lead to slippage in trading?
Which factors can lead to slippage in trading?
What mechanism do Automated Market Makers (AMMs) utilize?
What mechanism do Automated Market Makers (AMMs) utilize?
What incentive is typically provided to users of decentralized exchanges?
What incentive is typically provided to users of decentralized exchanges?
What is a primary goal of Decentralized Finance (DeFi)?
What is a primary goal of Decentralized Finance (DeFi)?
Which of the following is NOT a main feature of DeFi?
Which of the following is NOT a main feature of DeFi?
What is a disadvantage of traditional finance (TradFi)?
What is a disadvantage of traditional finance (TradFi)?
In the context of DeFi, what does 'trustlessness' refer to?
In the context of DeFi, what does 'trustlessness' refer to?
Which of the following best describes Centralized Finance (CeFi)?
Which of the following best describes Centralized Finance (CeFi)?
Which factor distinguishes DeFi from CeFi and TradFi?
Which factor distinguishes DeFi from CeFi and TradFi?
Which of the following represents a potential risk in DeFi?
Which of the following represents a potential risk in DeFi?
Which statement best describes the nature of DeFi in comparison to TradFi?
Which statement best describes the nature of DeFi in comparison to TradFi?
Flashcards
Central Bank
Central Bank
A public institution that manages a country's currency and controls the money supply.
Interest Rate
Interest Rate
The rate at which commercial banks can borrow money from the central bank.
Currency Intervention
Currency Intervention
A central bank's action of buying or selling its own currency in the foreign exchange market to influence its value.
Open Market Operation
Open Market Operation
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Crypto Lending
Crypto Lending
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Over-collateralization
Over-collateralization
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Decentralized Exchange (DEX)
Decentralized Exchange (DEX)
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Automated Market Maker (AMM)
Automated Market Maker (AMM)
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Decentralized Finance (DeFi)
Decentralized Finance (DeFi)
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Smart Contracts
Smart Contracts
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What are the main features of DeFi?
What are the main features of DeFi?
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Traditional Finance (TradFi)
Traditional Finance (TradFi)
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Centralized Finance (CeFi)
Centralized Finance (CeFi)
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Pros of TradFi
Pros of TradFi
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Pros of DeFi
Pros of DeFi
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Cons of TradFi
Cons of TradFi
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Slippage
Slippage
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Liquidity Provider (LP)
Liquidity Provider (LP)
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Impermanent Loss
Impermanent Loss
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Staking in DeFi
Staking in DeFi
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Proof-of-Stake (PoS)
Proof-of-Stake (PoS)
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Validator Risk
Validator Risk
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Accessing DeFi Platforms
Accessing DeFi Platforms
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Study Notes
Decentralized Finance (DeFi)
- DeFi is an emerging financial technology using secure distributed ledgers
- It's similar to cryptocurrency systems
- Aims to improve and recreate traditional financial systems
DeFi Features
- Decentralization
- Open access
- Transparency
- Programmability
- Trustlessness
- Interoperability
- Immutability
- Uses blockchain and smart contracts
Traditional Finance (TradFi)
- The existing financial system (banks, governments, etc.)
- Centralized institutions
- Regulation
- Intermediaries
- Physical infrastructure
- High fees
- Limited access
DeFi vs TradFi
- Custody: DeFi = Self-custody, TradFi = Third-party custody
- Execution: DeFi = Self-execution, TradFi = Intermediaries
- Cross-service interaction: DeFi = Interoperable, TradFi = Limited
- Collateral: DeFi = Over-collateralization, TradFi = Little or no collateral
- Clearing & Settlements: DeFi = Blockchain-based, TradFi = Clearing houses
- Governance: DeFi = Developers/holders, TradFi = Specific rules
TradFi Pros & Cons
- Pros: Established infrastructure, easy to use, existing legal framework, deposit insurance, professional advice
- Cons: High fees, slow transactions, limited control, documentation requirements
DeFi Pros & Cons
- Pros: Accessible to all, low fees, full control, high interest rates (high risk)
- Cons: Complex to use, user responsibility, no client support, not fully regulated, risks of hacks, smart contract issues
Centralized Finance (CeFi)
- A financial activity where individuals earn interest or obtain loans on crypto via centralized exchanges
- Traditional finance is considered centralized finance
- CeFi and TradFi are often used interchangeably
What are CBDCs?
- Central Bank Digital Currencies (CBDCs)
- Public institutions managing a country's currency and money supply
Mechanisms Used by Central Banks
- Interest rates: Influence lending/borrowing.
- Currency intervention: Adjust currency values.
- Open market operations: Buy/sell government bonds
- Money printing: Issue coins/banknotes.
DeFi Services
- Lending/borrowing
- Automated Market Makers (AMMs)
- Yield farming
- Decentralized exchanges (DEXs)
- Derivative trading
- Synthetic assets
- Staking
- Insurance
Lending and Borrowing in DeFi
- Crypto lending: Depositing crypto for interest payments
- Payments made in the same crypto
- Borrowers require over-collateralization due to price volatility
Risks in Lending and Borrowing
- Lenders: Borrower default, collateral volatility, liquidity risks
- Borrowers: Over-collateralization, collateral liquidation, interest rate increases
Decentralized Exchanges (DEXs)
- Peer-to-peer marketplaces for crypto trading
- No intermediaries
- Incentives: Trading fees, liquidity rewards
Automated Market Makers (AMMs)
- Decentralized exchanges using algorithms to provide liquidity and price assets
- Aim to balance asset ratios and eliminate pricing discrepancies
Slippage
- Difference between expected and executed trade prices
- Caused by price volatility and low liquidity in crypto markets
DEX Business Models
- Trading fees accrue to liquidity providers (LPs) who stake protocol tokens.
Impermanent Loss
- Loss faced when holding crypto in a liquidity pool
- Occurs when crypto prices change
- Rebalancing of pools corrects the initial ratio
Staking in DeFi
- Earning rewards by holding onto certain cryptocurrencies
- Cryptocurrency used to validate blocks
- A portion of earned fees distributed to stakeholders
Accessing DeFi Platforms
- Utilizing Web3 wallets (MetaMask, Trust Wallet, Ledger Live)
Conclusion
- DeFi transforming financial services by providing decentralized, accessible, and trustless systems.
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Description
Explore the fundamentals of Decentralized Finance (DeFi) and how it compares to traditional finance (TradFi). This quiz covers key features of DeFi, its benefits, and the transformative potential it holds for financial systems. Test your knowledge on the principles that differentiate DeFi from the existing financial landscape.
