DeFi Questions
DeFi stands for Decentralized Finance. It is a term designating a set of applications (like Bao Finance) in the cryptosphere universe that try to disrupt traditional finance models.
DeFi or decentralized finance is a movement that aims at making a new financial system that is open to everyone and doesn't require trusting intermediaries like banks. To achieve that, DeFi relies heavily on cryptography, blockchain and smart contracts.
Before learning about liquidity pools you should understand AMMs. Please read this article that describes everything you need to know about AMM and how they work.
A liquidity pool is basically assets thrown together in a big digital pile. They are then used by decentralized exchanges to provide liquidity for traders. The balance of each asset within the pool determines its price. For example, a 50/50 pool with 1m Bao and 1 ETH, 1 BAO would cost 1 millionth of an ETH. In a 50/50 pool with 10 BAO and 1 ETH, 1 BAO would cost 0.1ETH. Please read this article to have a better comprehension of how they work.
Impermanent loss is the loss of value between holding assets you pool separately or as part of a pool. If an asset increases in price relative to the other, you are selling on the way up so make less money. If an asset decreases in price relative to the other, you are buying it on the way down, so lose more. Learn more by reading this article.
Last modified 6mo ago