DeFi Glossary
Quick reference for essential DeFi terms. Search or browse by category.
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APY
Annual Percentage Yield. The rate of return earned on an investment over one year, accounting for compound interest. In DeFi, APY shows the actual yield you'll earn when profits are automatically reinvested.
APR
Annual Percentage Rate. The yearly interest rate without accounting for compounding. APR is lower than APY when interest compounds, as it doesn't include reinvested earnings.
Slippage
The difference between the expected price of a trade and the actual execution price. High slippage occurs in volatile markets or low liquidity pools, resulting in worse prices than anticipated.
Liquidation
The forced closure of a leveraged position when collateral value falls below the required maintenance margin. In DeFi lending, liquidation occurs when borrowed assets exceed the safe collateral ratio.
Leverage
Borrowing funds to increase position size beyond your capital. For example, 10x leverage means trading with 10 times your actual funds, amplifying both potential profits and losses.
Market Order
An order to buy or sell immediately at the current market price. Market orders execute quickly but may suffer from slippage in volatile conditions.
Limit Order
An order to buy or sell at a specific price or better. Limit orders don't execute immediately but ensure you get your desired price or don't trade at all.
AMM
Automated Market Maker. A protocol that uses mathematical formulas to price assets instead of order books. AMMs enable decentralized trading by allowing users to trade against liquidity pools.
DEX
Decentralized Exchange. A cryptocurrency exchange that operates without a central authority, allowing peer-to-peer trading directly from your wallet. Examples include Uniswap, SushiSwap, and PancakeSwap.
CEX
Centralized Exchange. A traditional cryptocurrency exchange operated by a company that holds custody of users' funds. Examples include Binance, Coinbase, and Kraken.
Liquidity Pool
A smart contract containing pairs of tokens that users can trade against. Liquidity providers deposit token pairs to earn trading fees, while traders swap tokens from these pools.
Liquidity Provider
A user who deposits tokens into a liquidity pool to enable trading. LPs earn a share of trading fees but face risks like impermanent loss.
LP Token
Liquidity Provider Token. A receipt token representing your share of a liquidity pool. LP tokens can be redeemed for your deposited assets plus earned fees.
Smart Contract
Self-executing code on a blockchain that automatically enforces agreements when conditions are met. Smart contracts power DeFi protocols, eliminating the need for intermediaries.
DApp
Decentralized Application. An application built on blockchain technology using smart contracts. DApps operate without central servers and can't be shut down by any single entity.
Protocol
A set of rules and smart contracts that define how a DeFi application works. Examples include Aave (lending), Uniswap (trading), and Compound (borrowing).
Yield Farming
The practice of moving crypto assets between different DeFi protocols to maximize returns. Yield farmers chase the highest APY by providing liquidity, staking, or lending across multiple platforms.
Staking
Locking crypto tokens in a protocol to earn rewards. In Proof of Stake networks, staking helps secure the blockchain. In DeFi, staking often earns protocol tokens or fee shares.
Impermanent Loss
The temporary loss in value when providing liquidity compared to simply holding tokens. IL occurs when token prices diverge from their deposit ratio, and disappears if prices return to original levels.
Farming
Short for yield farming. The process of earning cryptocurrency rewards by providing liquidity or staking tokens in DeFi protocols.
Rewards
Tokens earned for participating in DeFi protocols through staking, liquidity provision, or other activities. Rewards can be native protocol tokens, trading fees, or governance tokens.
Collateral
Assets deposited as security for a loan. In DeFi lending, you must deposit collateral worth more than your loan to protect against price volatility and defaults.
Over-collateralization
Providing collateral worth more than the borrowed amount. Most DeFi protocols require 150%-200% collateralization to account for price volatility and ensure loans remain secure.
LTV
Loan-to-Value ratio. The percentage of collateral value you can borrow. An LTV of 75% means you can borrow up to $75 for every $100 of collateral deposited.
Risk Management
Strategies to minimize losses in crypto trading and DeFi. Includes diversification, position sizing, stop losses, and understanding protocol risks before investing.
Rug Pull
A scam where developers abandon a project and steal investors' funds. Common in new DeFi tokens where liquidity is removed or smart contracts have hidden backdoors.
Audit
A security review of smart contract code by experts to identify vulnerabilities. Audited protocols are generally safer, but audits don't guarantee complete security.
Gas
The fee required to execute transactions on blockchain networks. Gas prices vary with network congestion—higher demand means higher fees to prioritize your transaction.
Gwei
A unit of measurement for gas fees on Ethereum. 1 Gwei = 0.000000001 ETH. Gas prices are typically quoted in Gwei to make small numbers easier to read.
TVL
Total Value Locked. The sum of all crypto assets deposited in a DeFi protocol. TVL indicates protocol size and popularity, though higher TVL doesn't guarantee safety or good returns.
Oracle
A service that provides external data to blockchain smart contracts. Oracles feed real-world information like prices, weather, or sports scores to enable smart contracts to interact with off-chain data.
Bridge
A protocol that transfers tokens between different blockchains. Bridges enable you to move assets from Ethereum to Polygon, BSC, or other chains to access different DeFi ecosystems.
Layer 2
Scaling solutions built on top of Layer 1 blockchains to increase transaction speed and reduce fees. Examples include Arbitrum, Optimism, and Polygon for Ethereum.
Mempool
Memory Pool. The waiting area for unconfirmed transactions on a blockchain. Transactions with higher gas fees are prioritized and confirmed faster.
MEV
Maximal Extractable Value. Profit that miners or validators can make by reordering, including, or excluding transactions in blocks. MEV can lead to front-running and sandwich attacks.
Front-running
Seeing pending transactions and submitting your own with higher gas to execute first. Bots use front-running to profit from your trades by buying before you and selling after.
ERC-20
The standard for fungible tokens on Ethereum. Most tokens follow ERC-20 rules for compatibility with wallets, exchanges, and DeFi protocols.
ERC-721
The standard for non-fungible tokens (NFTs) on Ethereum. Each ERC-721 token is unique and can't be exchanged 1:1 like ERC-20 tokens.
Governance Token
A token that gives holders voting rights in a DeFi protocol's decisions. Governance token holders can propose and vote on changes to fees, features, or treasury management.
DAO
Decentralized Autonomous Organization. An organization governed by smart contracts and token holder votes instead of traditional management. Members propose and vote on all decisions.
Wrapped Token
A token representing another cryptocurrency on a different blockchain. WBTC (Wrapped Bitcoin) is Bitcoin on Ethereum, enabling BTC holders to use DeFi protocols.
Stablecoin
A cryptocurrency pegged to a stable asset like USD. Examples include USDC, USDT, and DAI. Stablecoins reduce volatility and are widely used in DeFi for lending and liquidity.
Peg
The target value that a stablecoin aims to maintain. USDC is pegged 1:1 to USD, meaning 1 USDC should always equal $1. Depegging occurs when this ratio breaks.
Wallet
A software or hardware tool that stores your private keys and allows you to interact with blockchains. Non-custodial wallets like MetaMask give you full control over your funds.
Private Key
A secret code that proves ownership of cryptocurrency. Never share your private key—anyone with it can access and steal your funds. 'Not your keys, not your crypto.'
Seed Phrase
A 12-24 word backup phrase that can restore your wallet. Write it down and store it securely offline. Anyone with your seed phrase can access all your funds.
DCA
Dollar Cost Averaging. An investment strategy of buying fixed amounts at regular intervals regardless of price. DCA reduces the impact of volatility and eliminates timing risk.
HODL
Hold On for Dear Life (originally a misspelling of 'hold'). A strategy of buying and holding cryptocurrency long-term despite market volatility, rather than trading actively.
FOMO
Fear Of Missing Out. The anxiety-driven urge to buy when prices are rising rapidly. FOMO often leads to buying at peaks and poor investment decisions.
FUD
Fear, Uncertainty, and Doubt. Negative information or rumors spread to manipulate market sentiment and prices. Always verify information before making decisions based on FUD.
Whale
An individual or entity holding massive amounts of cryptocurrency. Whale movements can significantly impact market prices and liquidity.
Long
A bet that an asset's price will increase. Going long means buying an asset expecting to sell it later at a higher price for profit.
Short
A bet that an asset's price will decrease. Shorting involves borrowing and selling an asset, then buying it back cheaper to profit from the price drop.
Perpetual
Perpetual Futures. A derivative contract with no expiration date that tracks the spot price of an asset. Perps use funding rates to keep prices aligned with the underlying asset.
Funding Rate
A periodic payment between long and short traders in perpetual contracts. When positive, longs pay shorts. When negative, shorts pay longs. This keeps the perp price aligned with spot.
Arbitrage
Profiting from price differences of the same asset across different exchanges or markets. Arbitrage traders buy low on one platform and sell high on another simultaneously.
Volume
The total amount of an asset traded over a period. High volume indicates active trading and better liquidity, while low volume can mean wider spreads and higher slippage.
Flash Loan
An uncollateralized loan that must be borrowed and repaid within the same transaction. Flash loans enable arbitrage, collateral swapping, and other advanced DeFi strategies without upfront capital.
Aggregator
A protocol that sources liquidity from multiple DEXs to find the best prices. Aggregators like 1inch split trades across platforms to minimize slippage and maximize returns.
Router
A smart contract that finds optimal trading paths across liquidity pools. Routers automatically split trades and route through multiple pools to get better prices.
Vault
A smart contract that automatically manages deposits to optimize yields. Vaults compound rewards, rebalance positions, and execute strategies on behalf of depositors.
Airdrop
Free distribution of tokens to wallet addresses, often as a marketing strategy or to reward early users. Airdrops can be claimable or sent directly to eligible wallets.
Vesting
A schedule that gradually releases locked tokens over time. Vesting prevents team members or investors from dumping all tokens immediately, protecting token price.
Tokenomics
The economic model of a cryptocurrency including supply, distribution, inflation, and utility. Good tokenomics align incentives between holders, users, and the protocol.
Market Cap
Market Capitalization. The total value of a cryptocurrency calculated as price × circulating supply. Market cap indicates project size and is used to compare different cryptocurrencies.
Circulating Supply
The number of tokens currently available and tradable in the market. Excludes locked, burned, or unvested tokens. Used with price to calculate market cap.
Total Supply
The total number of tokens that exist, including locked and unvested tokens. Different from circulating supply which only counts tradable tokens.
Burn
Permanently removing tokens from circulation by sending them to an unrecoverable address. Burning reduces supply, potentially increasing the value of remaining tokens.
Mint
Creating new tokens and adding them to circulation. Minting increases supply and can be inflationary if not balanced with demand or burning mechanisms.
Multisig
Multi-Signature Wallet. A wallet requiring multiple private keys to authorize transactions. Multisigs improve security by preventing any single person from moving funds alone.
Cold Wallet
A cryptocurrency wallet kept completely offline. Cold wallets (hardware wallets, paper wallets) are the most secure storage method as they can't be hacked remotely.
Hot Wallet
A cryptocurrency wallet connected to the internet. Hot wallets like MetaMask are convenient for trading but less secure than cold storage.
Snapshot
A record of blockchain state at a specific block. Snapshots determine eligibility for airdrops, governance voting, or rewards distribution based on holdings at that moment.
Block
A batch of transactions bundled together and added to the blockchain. Each block contains a timestamp, transaction data, and a reference to the previous block.
Confirmation
Verification that a transaction has been included in a block and added to the blockchain. More confirmations mean greater transaction security and finality.
Smart Contract Risk
The danger of bugs, exploits, or vulnerabilities in smart contract code. Even audited contracts can have undiscovered flaws that may lead to loss of funds.
Diversification
Spreading investments across different assets to reduce risk. Diversification in crypto means holding multiple tokens, using various protocols, and not over-investing in any single asset.
KYC
Know Your Customer. Identity verification required by some exchanges and platforms. KYC involves submitting personal documents to comply with regulations but sacrifices privacy.
Liquidity Mining
Earning token rewards by providing liquidity to a DeFi protocol. Similar to yield farming but specifically refers to earning protocol tokens as incentives for supplying liquidity.
Rebase
A mechanism that automatically adjusts token supply to maintain a target price. Rebase tokens expand or contract supply, changing the number of tokens in your wallet without changing your percentage ownership.
ATH
All-Time High. The highest price an asset has ever reached. Buying at ATH is risky as it's the most expensive the asset has ever been.
ATL
All-Time Low. The lowest price an asset has ever reached. ATLs can present buying opportunities but may also indicate fundamental problems with the asset.
Bull Market
A market condition where prices are rising or expected to rise. Bull markets are characterized by optimism, investor confidence, and buying pressure.
Bear Market
A market condition where prices are falling or expected to fall. Bear markets feature pessimism, declining prices, and selling pressure. Typically defined as 20%+ decline from recent highs.
Mainnet
The main, live blockchain network where real transactions occur with actual value. Opposite of testnet which uses fake coins for testing.
Testnet
A test blockchain network for developers to experiment without risking real funds. Testnet coins have no value and are used purely for testing smart contracts and features.
RPC
Remote Procedure Call. An endpoint that allows applications to communicate with a blockchain node. RPCs enable wallets and dapps to read blockchain data and submit transactions.
Node
A computer that maintains a copy of the blockchain and validates transactions. Nodes ensure network security and decentralization by independently verifying all blockchain data.
Validator
A node operator in Proof of Stake networks who validates transactions and creates new blocks. Validators stake tokens as collateral and earn rewards for honest behavior.
Slashing
Penalty for validators who act maliciously or fail to maintain uptime in Proof of Stake networks. Slashing destroys a portion of the validator's staked tokens as punishment.
Composability
The ability of DeFi protocols to integrate and build on top of each other like Lego blocks. Composability enables complex strategies by combining multiple protocols seamlessly.
Permissionless
No approval needed to use a protocol or network. Permissionless systems allow anyone to participate without KYC, accounts, or authorization from a central authority.
Trustless
Systems that function without requiring trust in any party. Smart contracts execute automatically based on code, eliminating the need to trust exchanges, banks, or intermediaries.
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