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Terminologies

APR(APY)

APR stands for Annual Percentage Rate, which is a common way to express the interest rate on a loan or investment over the course of a year. It is calculated by taking the periodic interest rate and multiplying it by the number of periods in a year. For example, if a loan has a monthly interest rate of 1%, its APR would be 12% (1% x 12 months).
APY stands for Annual Percentage Yield, which is a similar concept to APR, but it takes compounding into account. APY represents the actual rate of return earned on an investment over a year, including the effect of compounding interest. It is calculated using the formula:
APY = (1 + r/n)^n - 1
where r is the annual interest rate and n is the number of compounding periods in a year.
For example, if a savings account has an interest rate of 1% per month and compounds monthly, its APY would be 12.68% [(1 + 0.12/12)^12 - 1]. The APY is higher than the APR in this case because the interest earned is compounded monthly.
Overall, both APR and APY are important measures of the return on an investment or the cost of borrowing, but APY takes compounding into account and may provide a more accurate representation of the actual return on an investment.

Impermanent Loss

Impermanent loss is a potential loss that liquidity providers may experience in an automated market maker (AMM) system, which is a type of decentralized exchange (DEX). It occurs when the relative prices of the tokens in a liquidity pool change compared to the market price of those tokens.
In an AMM system, liquidity providers deposit equal values of two different tokens into a liquidity pool, which is used to facilitate trades between those tokens. The amount of each token held in the pool determines its price relative to the other token. When traders swap one token for another, the price of the tokens in the pool changes based on the ratio of the tokens held in the pool.
If the price of one token in the pool increases relative to the other, traders will buy more of the cheaper token, causing its price to rise, while selling the more expensive token, causing its price to fall. This shift in the price ratio of the tokens in the pool results in a temporary loss for liquidity providers, who will receive fewer tokens when they withdraw their liquidity than they would have if they simply held their original tokens.
The term "impermanent" is used because the loss is only temporary and can be mitigated by waiting for the prices to return to their original ratio. However, if the price of one token continues to diverge from the other token, the impermanent loss can become permanent.
Impermanent loss is a risk that liquidity providers take when providing liquidity to AMM systems, but they are compensated for this risk by earning fees on trades made in the pool.

Yield Farming

Yield farming, also known as liquidity mining, is a process of generating rewards with cryptocurrency holdings by providing liquidity to decentralized finance (DeFi) protocols.
In yield farming, users deposit their cryptocurrencies into a liquidity pool, which is used to facilitate transactions on a Dex. By providing liquidity to the pool, users earn fees and rewards based on the volume of transactions and the amount of liquidity they have contributed.
Yield farming typically involves using a platform's governance token, which represents ownership and voting rights in the protocol. Users can stake their tokens in the pool and earn additional governance tokens as a reward. The value of these governance tokens can appreciate over time, creating an additional source of profit for yield farmers.
it is important to note that yield farming is not risk-free and can be subject to market volatility, smart contract bugs, and liquidity issues. It is important for users to carefully research the DeFi platforms they are using and to understand the risks and potential rewards associated with yield farming.

TVL

TVL stands for Total Value Locked, which is a metric used to measure the total value of assets locked in a particular DeFi protocol or platform. TVL is an important metric used to assess the overall popularity and success of a DeFi platform, as well as to track the growth and adoption of the DeFi industry as a whole.
On Extra Finance, its TVL is a sum total of:
  • value of total LP tokens locked.
  • deposits that are not borrowed.
AMM
AMMs use liquidity pools, which are pools of tokens locked in smart contracts. These pools are funded by liquidity providers who deposit their assets into the pool in exchange for a share of the trading fees generated by the protocol. The prices of the tokens in the pool are determined by a pricing algorithm, which typically maintains a constant product (e.g., x * y = k) or a bonding curve. Some well-known examples of AMMs include Uniswap and Velodrome.
Last modified 6mo ago