DeFi Basics
Understand what DeFi actually is, and how your yield is earned
DeFi & Smart Contracts
Blockchain has made it possible to transfer value outside of the centralized finance with assets known as tokens. Smart contracts give the ability to execute agreements for these tokens, and trade them without a third party via a DEX (Decentralized Exchange). These capabilities have led to the creation of DeFi (Decentralized Finance).
Web3 and DApps
Web3 refers to applications built on top of blockchain technology. A dApp (Decentralized App) is a Web3 application which can run independently of any organization, including its creators. This is possible because the dApp connects directly to smart contracts which are controlled by the token owners, not the app creators.
Wallets & Gas
Wallets refer to the applications or browser extensions where you hold your crypto, like the social wallets we make for you with Web3Auth, or MetaMask. For social wallet users, Contrax covers the gas for you, so you don’t have to worry about it at all.
Arbitrum & Layer 2s
Gas costs a few dollars on the Ethereum mainnet, but only a few cents on Arbitrum and other layer 2s. Transactions also settle quicker. For these reasons, many DeFi projects are on a layer other than the main Ethereum that most people know. These layer 2s always save their transactions back to the main layer. It basically is a way to batch many transactions together to save time and gas.
Liquidity Pools & LP Tokens
A DEX allows the exchange of two tokens, but it needs a pre-existing pool with both tokens to provide liquidity for the exchange. If you provide these tokens for the pool, you get an LP token as a receipt to claim your tokens back at any time. Note that on Contrax, you don’t have to worry about getting LP tokens as our vaults auto-converts your USDC or ETH into and out of vault LP tokens.
Farms & Zaps
The LP token is a receipt to show you provided liquidity, but to earn rewards on it, you need to stake it in a vault. Contrax uses a technology called Zapping which allows you to deposit your USDC or ETH and have it auto-convert into the vault’s LP token tokens. You will not have to worry about dealing with any token except your USDC or ETH.
Yield and APY
Yield refers to the estimated rewards you receive from providing liquidity. In a vault, you are earning rewards from trading fees and from the platform rewarding you for using their pool. Contrax uses the numbers the platform provides to calculate your APY, or annual percentage yield. So a 1,200 by the end of the year if the APY and token price don’t change.
Auto-compounding
Each vault pays rewards in various tokens, leaving you with a hard-to-manage portfolio of reward tokens you know little about. Contrax uses auto-compounding vaults to convert all rewards tokens into the same LP token being earned which then increases your share of the pool, and therefore your rewards. With zaps and auto-compounding working together, Contrax lets you earn with a single token.
If you think you are ready to start your DeFi journey, learn how to set up MetaMask with our set-up guide.