DeFi in Seven Minutes: Tezos DeFi Terms Explained
DeFi projects tend to scare newbies away by terms like APY or LP. Here, we explain all those weird words you may encounter in articles about DeFi in the Tezos ecosystem.
All about assets, decentralised exchanges, and yield farming. No big words.
tez or XTZ: Tezos’s native token. It is the unit of transaction fees for users and rewards for validators.
Fiat (fiat money): regular everyday money like euros or dollars.
Wrapped Asset: a token representing a certain asset on a blockchain that is not native to the said asset. For example, a user can send LINK to a special Ethereum address and get wLINK on the Tezos wallet with the same price. Find out more in our WRAP review.
DAO tokens: tokens giving one a vote in project governance
Market Cap: market value of tokens calculated as “number of issued tokens times price of one token.”
DEX means “decentralised exchange.” It allows one to exchange tokens via liquidity pools or profit from liquidity provision. Find out more about that from the interview with the Quipuswap developer.
Swap: exchange of tokens at a DEX. You can find a good example here.
Slippage: admissible exchange rate fluctuation while exchanging them at a DEX. For instance, with a 1% slippage, a user may get 1% fewer tokens than expected.
Liquidity: funds available for user operations. DeFi projects have to attract as much liquidity as possible. Thus, if a lending platform is out of funds, it will be unable to extend new loans and profit from them.
Liquidity pool: a smart contract of a decentralised exchange storing two token types at the same time. For example, the kUSD/XTZ stores kUSD and tez. When the DEX’s user exchanges kUSD for tez, the exchange adds kUSD to the kUSD/tez pool and returns tez from the pool to the user. The exchange rate depends on the token ratio in the pool: the less tez there is, the more kUSD it will take to pay for the exchange, and vice versa.
Liquidity providers: users who deposit funds into liquidity pools. Projects pay the providers with governance tokens or share service fees with them.
TVL means total value locked. It is the measure of how much money users have deposited in a particular smart contract, pool, or project.
LP tokens: representation of a funds share in a liquidity pool. For example, a user has deposited liquidity in a kUSD/XTZ pool and got LP-kUSD-XTZ for that. Then they can return LP tokens to the pool and take the deposited funds back. More on that in our liquidity baking review.
Staking and yield farming
Staking: blocking tokens in a specific smart contract for the sake of recurring rewards. DeFi projects use stakings to keep liquidity providers from withdrawing funds from pools. Thus, a user deposits PLENTY and tez into a PLENTY/XTZ pool and gets LP tokens. The project Plenty DeFi offers them to stake the tokens at 200% per annum with the reward paid out in PLENTY. The user agrees and gets additional income while the PLENTY/XTZ retains its liquidity.
Yield Farming: a set of strategies of depositing funds in liquidity pools, staking, and reinvesting profits to maximise income. Certain projects automatically invest their user funds according to the most profitable strategies. More on that in our feature on WRAP farming.
A farm is a smart contract or a project for yield farming.
APR stands for annual percentage rate. It shows the interest accrued over 12 months. Thus, “staking with a 100% APR” means that the investor will get 100% of the invested funds in a year.
APY stands for annual percentage yield. It shows the annual profitability with the consideration of recurring reinvestment of profits. Thus, an investor stakes funds at a 100% APR and reinvests the profits every day. In 12 months, they will get 171% of the invested funds, which means that APY in this case is 171%.
Calculating APR and APY
APR and APY show the reward in tokens, not fiat. You get your reward in the same tokens you had staked. Over a year, the token’s price may drop, so the eventual profit may be lower than advertised.
The values of APR and APY often depend on TVL (total value locked). Say, a staking contract sends 50 tokens every minute. Alice staked tokens worth $100 and gets 50 tokens a minute. The more TVL of the staking contract, the more investors share the common reward. Therefore, as TVL grows, the values of APR and APY go down.
Subscribe and never miss a thing: