With so many new terms, concepts, and protocols appearing all the time, you might feel like you're navigating a complicated maze. Not to worry, this glossary will serve as your guide through the DeFi space.
A
Aave — A decentralized finance (DeFi) protocol built on the Ethereum blockchain. It allows users to lend, borrow, and earn interest on cryptocurrencies.
Agent — A smart contract or an automated program that acts on behalf of a user to execute specific financial transactions or operations within the DeFi ecosystem. Agents are crucial in automating various tasks and interactions with DeFi protocols.
Aggregators — Platforms or protocols designed to aggregate liquidity from multiple sources, such as different decentralized exchanges (DEXs) or lending platforms, to offer users the best possible rates or terms for their transactions.
APY — Annual Percentage Yield represents the potential return on an investment over a year, considering compounding interest. APY is widely used to illustrate the potential gains from yield farming, liquidity provision, and other DeFi activities.
Arbitrage — Arbitrage in DeFi (Decentralized Finance) refers to the practice of exploiting price differences of a specific asset across different decentralized exchanges (DEXs) or platforms within the decentralized finance ecosystem.
This strategy takes advantage of inefficiencies in the market, allowing clever traders to buy an asset at a lower price on one platform and sell it at a higher price on another.
Automated Market Maker (AMM) — The core principle of an AMM is to provide liquidity pools for specific pairs of assets, like ETH/USDC or DAI/USDT. Liquidity providers deposit an equal value of both assets into the pool, which allows users to swap between them.
The price of each asset is determined by a mathematical formula based on the ratio of assets in the pool. One of the most popular AMM models is the Constant Product Market Maker, pioneered by Uniswap.
B
Bear Market — A prolonged period during which the overall value of cryptocurrencies and DeFi assets experiences a sustained decline. This term is derived from the idea of a bear, which attacks by swiping its paws downward.
Blockchain — A blockchain is a distributed ledger that records all transactions across a network of computers. It's characterized by its immutability and transparency.
Bull market — A period characterized by rising asset prices. In a DeFi bull market, traders and investors are typically more confident about the potential for returns on their investments. This can lead to increased trading activity, higher trading volumes, and general excitement and positivity within the DeFi community.
C
CeFi — In CeFi, financial activities are facilitated by centralized entities like banks, financial institutions, and regulated intermediaries. These entities play a pivotal role in processes like lending, borrowing, trading, and custody of assets. They're subject to regulatory frameworks and typically require users to trust them with their funds.
CEX — a Centralized Exchange with a physical address and a corporate structure and is subject to the laws, codes of conduct, and regulations of the jurisdictions in which it operates.
Coin — a unit of digital currency. Encryption algorithms protect coins. Coins can be divided, and ownership can represent a portion of a coin, token, protocol, company, or project's ownership or governance.
Collateral — digital assets or cryptocurrency users lock up as security when participating in various financial activities, such as borrowing, lending, or trading. This collateral provides a guarantee for lenders or platforms in case the borrower defaults on their loan or incurs losses in a trade.
Collateralized Debt Position (CDP) — A mechanism used in DeFi lending platforms where users lock up a certain amount of cryptocurrency as collateral to borrow other assets.
Composability — the seamless integration of various decentralized finance protocols and applications. It allows different DeFi platforms and smart contracts to work together, creating a flexible and modular financial ecosystem.
Compound — a prominent platform in decentralized finance (DeFi) that facilitates lending and borrowing of cryptocurrencies. It operates on the Ethereum blockchain and allows users to earn interest on their crypto holdings or borrow assets using them as collateral.
Cross-Chain — The ability to interact and transact between different blockchain networks, enabling assets to move seamlessly between them.
Cryptocurrency — Digital or virtual currencies secured by cryptography, often used as a medium of exchange within decentralized financial systems.
Curve — a decentralized stablecoin Automated Market Maker (AMM) on the Ethereum blockchain that offers trades between stablecoins and other synthetic assets.
D
DAO — DAO stands for Decentralized Autonomous Organization. A DAO is essentially a smart contract or a set of smart contracts that encode the rules and decision-making processes of an organization. These rules are written in code and executed automatically by the blockchain, removing the need for traditional intermediaries or centralized control.
DApp (Decentralized Application) — An application that runs on a blockchain network, typically using smart contracts to automate certain functions.
Decentralized Finance (DeFi) — A movement that aims to create an open and inclusive financial system by leveraging blockchain technology to provide various financial services without the need for traditional intermediaries like banks.
Delegated Fund DAO — a decentralized autonomous organization that manages a pool of funds through a delegated governance system.
DEX — a Distributed Exchange is a type of cryptocurrency exchange in DeFi that enables direct peer-to-peer cryptocurrency transactions without an intermediary.
E
Ethereum — a blockchain platform that allows developers to build and deploy smart contracts and decentralized applications.
ERC-20 — a technical standard used for creating and issuing tokens on the Ethereum blockchain. It stands for "Ethereum Request for Comment 20" and was proposed by Fabian Vogelsteller and Vitalik Buterin in late 2015.
F
Fiat money — traditional, government-issued currencies like the US Dollar (USD), Euro (EUR), or Japanese Yen (JPY). In DeFi, fiat money can be represented on blockchain platforms through stablecoins.
Flash Loan — a type of loan that is instantly borrowed and repaid within a single transaction on a blockchain platform. What differentiates flash loans from traditional loans is that they don't require collateral upfront.
FOMO — stands for "Fear of Missing Out." it is the feeling of anxiety or urgency that arises when users see others profiting or participating in a particular DeFi project, and they worry about missing out on potential gains.
G
Gas fees — a fee users pay to compensate miners (or validators, depending on the consensus mechanism) for the computational work required to process and validate transactions.
Gas units — Gas fees are calculated in "gas units." Each operation in a transaction consumes a specific amount of gas. The total fee is the product of gas used and the current gas price.
Governance — the process by which decisions are made regarding a decentralized platform or protocol's rules, protocols, and operations. This could include parameter changes like interest rates, collateral types, or other key features.
Governance Tokens — digital assets issued by DeFi platforms that grant holders the right to participate in decision-making. These tokens are typically distributed to users who participate in the platform by providing liquidity, staking, or other forms of engagement.
Gwei — a unit of measurement of gas fees for transactions on the Ethereum network or ERC-20 coin networks.
H
HODL — the practice of holding onto your cryptocurrency assets rather than actively trading or selling them. The term originated from a misspelled post on a Bitcoin forum in 2013, where a user expressed their intention to "HODL" their Bitcoins during a market downturn rather than selling them in panic.
HODLer — someone who HODLs.
I
Impermanent loss — a temporary loss of funds that liquidity providers may experience when providing liquidity to a liquidity pool, especially in automated market maker (AMM) protocols.
L
Leverage — the practice of borrowing funds to increase the potential return on investment. It allows users to amplify their exposure to an asset or a trading position, using borrowed capital alongside their own.
Legos or Money Legos — the modular and composable nature of decentralized finance protocols. It's a metaphor that highlights how different DeFi protocols can be stacked, combined, and interoperate with one another like Lego blocks.
Liquidity — the ease with which an asset can be bought or sold without causing significant price fluctuations. In DeFi, liquidity is often provided by users who lock up their cryptocurrency assets in smart contracts.
Liquidity mining — often referred to as yield farming. It's a mechanism that incentivizes users to provide liquidity for a particular cryptocurrency pair on a DeFi platform, like a decentralized exchange (DEX).
Liquidity pool — a smart contract that contains a pool of tokens, typically two different types, used to facilitate decentralized trading.
M
MakerDAO, Maker — a crucial DAO in the DeFi ecosystem running on the Ethereum blockchain. Maker facilitates the creation of a stablecoin called Dai, which is pegged to the value of the US Dollar.
Margin Call — It's a process triggered when a borrower's collateral falls below a certain threshold, indicating that their position is at risk of becoming undercollateralized.
Market Cap — the total value of a particular cryptocurrency or token in circulation. It's calculated by multiplying the current price of the cryptocurrency by the total number of coins or tokens in circulation.
MetaMask — a popular mobile or desktop cryptocurrency wallet that can store, send, and receive Ethereum and ERC-20 compatible coins or tokens.
Mining pool — a collaborative effort by miners to increase their chances of successfully validating a block and receiving the associated rewards. Instead of individual miners competing against each other, they combine their computational power.
Multisig Wallet — A Multisignature Wallet is a crypto wallet requiring multiple authorized signatures or approvals to validate and execute a transaction. It's a security-enhancing measure to mitigate risks associated with single points of failure or unauthorized access.
N
Non-Fungible Token (NFT) — Unique digital assets representing ownership of a specific item or piece of content, often used in digital art and collectibles.
O
Oracle — a critical component that serves as a bridge between the blockchain and the real world. It provides smart contracts with external information or data that is not native to the blockchain but is essential for executing certain conditions or actions.
P
Pools — a collection of funds or assets provided by multiple users for a specific purpose, such as lending, borrowing, or providing liquidity for trading. These pools operate on blockchain-based platforms, allowing users to interact with smart contracts that manage the distribution and use of these funds.
Primitive — a basic financial building block or instrument that forms the foundation for more complex financial products and services. Primitives are often smart contracts or protocols facilitating specific financial activities, such as lending, borrowing, trading, or derivatives.
Protocol — rules and procedures governing the decentralized financial system's interactions and transactions.
R
ROI, Return On Investment — the measure of the profitability or performance of an investment in the DeFi ecosystem. ROI can be calculated by assessing the gains or losses from an investment relative to the initial capital invested.
Rug Pull — A fraudulent practice in which the creators of a DeFi project suddenly drain the liquidity or funds from the platform, leaving users with worthless tokens.
S
Slippage — the difference between the expected price of a trade and the actual price at which the trade is executed. This can occur due to market volatility or low liquidity.
Smart Contract — Self-executing contracts with the terms written directly into code. They automatically execute actions when specific conditions are met, providing the backbone of many DeFi applications.
Spread — the difference in interest rates or yields between different platforms or assets within the DeFi ecosystem. For example, you might find that lending DAI on one platform offers a slightly higher interest rate than another platform. The difference in these interest rates is called the "spread."
Stablecoin — a type of cryptocurrency that is designed to have a stable value, typically pegged to a specific reserve asset like a fiat currency (such as USD, EUR, or others) or a commodity like gold.
Staking — a process by which cryptocurrency holders lock up their tokens in a blockchain-based network to support its operations and earn rewards. This practice helps secure the network, validate transactions, and maintain decentralization.
T
Testnet — a separate blockchain network designed specifically for testing and experimentation purposes. It's a parallel environment to the mainnet, but tokens used on the testnet have no real-world value.
Token — A digital asset that represents ownership or access rights and is often built on a blockchain. Tokens are used in DeFi for various purposes, such as governance, staking, or as collateral.
TVL (Total Value Locked) is a metric that quantifies the total worth of assets (in terms of cryptocurrency) being used within a specific DeFi protocol or platform at a specific time.
U
Uniswap — a decentralized finance (DeFi) protocol and decentralized exchange (DEX) built on the Ethereum blockchain. It enables users to swap various Ethereum-based tokens directly from their wallets without an intermediary or a traditional exchange.
V
Validator — a participant in a Proof of Stake (PoS) or Delegated Proof of Stake (DPoS) consensus mechanism. They are responsible for validating and processing transactions and receiving rewards as cryptocurrency tokens.
Volatility — the degree of variation or fluctuation in the price of a cryptocurrency or a DeFi asset over a specific period. It measures how much the price of an asset tends to deviate from its average value.
W
Wallet — a software application or a physical device that allows users to store, manage, and interact with their cryptocurrencies and other digital assets.
WalletConnect — an open-source protocol that enables secure connections between DApps and mobile wallets. It allows users to interact with DApps directly from their mobile wallets, providing a seamless and secure experience.
Whale — an individual or entity that holds a substantial amount of cryptocurrency or tokens within a particular DeFi protocol or platform.
Wrapped Tokens — Tokens on one blockchain (e.g., Ethereum) that represent a corresponding asset on another blockchain (e.g., Bitcoin). They enable assets to be used on multiple blockchains.
Y
Yield Farming — A practice where users provide liquidity to DeFi platforms in exchange for rewards, often in the form of additional tokens.
Yield Farming Pools: Yield farmers use DeFi platforms to maximize their returns. They often involve interacting with different pools to earn rewards or tokens by providing liquidity or participating in specific DeFi protocols.
This glossary provides a foundation for understanding key terms in DeFi. Remember that the DeFi space is dynamic and evolving, so new terms and concepts may emerge.