DeFi Glossary

Decentralized Finance (DeFi) is a rapidly emerging field that is forcing the norms of digital finance to change, by creating entirely new types of assets, markets, and service providers.

Yet it’s still not that easy to get a handle on what DeFi is, or how it works in concrete terms.


With this DeFi glossary, we hope to bridge the gap between broader concepts that people working in DeFi use every day, and more specific details and conversations we have internally. As a bonus, this glossary aims to be useful for newcomers as well as more experienced practitioners.



AMM: Automated Market Makers (AMMs) disrupt the traditional way that buyers and sellers come together. So, instead of two parties coming to an agreement, traders can instead interact directly with a smart contract.

APR: Annual Percentage Rate

APY: Annual Percentage Yield Arbitrageurs: Arbitrageurs provide liquidity as they seek to profit off the market inefficiencies between exchanges.

Auditing: Some of the biggest “fails” in DeFi occur via smart contract hacks or bugs. Thus, audits done by professional security teams can help put investors’ minds more at ease. (See Trail of Bits). Automated Market Maker (AMM): A decentralized asset trading pool that enables market participants to buy or sell cryptocurrencies. Uniswap is the most well-known AMM. Bitcoin: The first cryptocurrency, for which Blockchain was conceived and the first blockchain platform created.

Blockchain: A distributed, immutable permanent record or ledger of all transactions since the beginning of a cryptocurrency coin or token.

Bitcoin Maximalist: Aka “Bitcoin Maxis.” These are tribalists who believe with religious fervor that Bitcoin is the one true cryptocurrency. They can’t see the potential for DeFi because they’ve been tainted by the earlier ICO “pump and dump” schemes.

Black Swan: Black swan events are unpredictable occurrences that can carry severe consequences. In DeFi, the MakerDAO Black Thursday is an example of such an event.

Bonding Curves: Bonding curves allow token prices to increase when new tokens are purchased. And they allow prices to decrease when existing tokens are redeemed.

Borrowing Rate: This is the rate a borrower will pay to borrow tokens. The Borrowing rate will always be higher than the Lending rate.

Censorship Resistant: A protocol is censorship resistant when a central party cannot invalidate transactions. DeFi offers immutable transactions on the Ethereum blockchain. Whereas, FinTech giants like PayPal can and do censor politically unpopular individuals.

CEX: Centralized Exchange. Binance and Coinbase are examples of CEXs. Acting as centralized authorities, they take custody of a user’s funds on deposit.

Coins: Tokens can have a wider functionality than being a means of payment like a coin. However, most people use the terms “tokens” and “coins” interchangeably. (See Tokens.)

Collateral: This is an asset used to secure a loan. In the traditional world of finance, one might put up their home as collateral to secure a cash loan. In DeFi, one puts up cryptocurrency tokens as collateral to borrow other tokens.

Collateralization Ratio: To borrow tokens from a DeFi lending protocol, one must put up more collateral than the loan is worth. Typically this amount runs between 125% to 150% of the loan amount. However, protocols can use different collateralization ratios. Users must maintain the designated ratio to prevent liquidation. (See Liquidation Ratio).

Cryptocurrency: This is the digital currency used to lend, borrow, and trade on DeFi platforms. Also referred to as “crypto,” “tokens,” or “coins.” (See Tokens.)

Crypto Wallet: These wallets store public and private keys allowing users to send, receive, and store tokens. The tokens reside on the blockchain and the wallet accesses them. (See Web 3.0 Wallets).

cTokens: These are Compound’s native tokens. When a user supplies assets to the Compound protocol, they receive cTokens. These in turn represent claims on the asset pool.

DAO: Distributed Autonomous Organization. Can be defined as an ‘organization’ on a blockchain, represented by a set of rules encoded as a computer program (on a blockchain) that is transparent, controlled by the organization members, and not influenced by a central government.

Decentralized Exchange (DEX): A DEX, or decentralized exchange, is a type of cryptocurrency exchange. It operates like a stock exchange, except it is run by smart contracts. These smart contracts enforce rules and execute trades. Unlike a Centralized Exchange (CEX), a DEX does not take custody of a user’s funds.

DeFi: DeFi is short for Decentralized Finance – and refers to the whole of the decentralized financial ecosystem currently under development.

Deflationary Token: Tokens are “deflationary” if a percentage is permanently removed from the marketplace over time. Buy-backs and burns are a popular way of destroying tokens. This causes scarcity which hopefully makes the price rise.

dApps: Decentralized applications. These are digital apps that run on a blockchain outside the control of a central authority.

Derivatives: A derivative is a security that derives its value from an underlying asset (or group of assets). Futures, swaps, and options are all examples of derivatives. The derivative holds no value in and of itself. The value is based on its underlying asset(s).

Flash Loan: Flash Loans are futuristic and next-generation DeFi and native to the crypto space. A borrower can take out a flash loan with no collateral. However, it must be repaid within the same block or the entire transaction is canceled.

Flash Swaps: Similar to Flash Loans. A user can withdraw a token and use it before paying for it.

FOMO: Fear of Missing Out. If you’re new, you’ll hear this term used all over the crypto space not just in DeFi.

Game Theory: DeFi protocols can utilize game theory mechanics to incentivize users to perform certain actions like provide liquidity.

Governance Tokens: They allow the hodler to vote on changes to the protocol.

Hodl (Hodling, Hodler): This term is frequently used in the crypto space, and is a play on the term holding. Notice the “d” and “l” are switched around. “Hodling” refers to one who holds tokens as in a “buy-and-hold” strategy.

ICO: Initial Coin Offering. It is crypto’s version of an IPO in the stock market.

KYC: Know Your Customer. KYC guidelines fit into the broader scope of Anti-Money Laundering (AML) policies in traditional finance. There is no KYC or AML in DeFi.

Lending Rate (Supply Rate): Users can lend tokens and earn an annualized return. Rates vary depending on the DEX, the liquidity pool, and the token.

Liquidation: In DeFi, liquidation applies to borrowers. They can have their collateral liquidated if they don’t maintain the set collateralization ratio. (See Collateralization Ratio).

Liquidation Ratio: This is the level at which the collateralization ratio dips that can trigger a liquidation. These ratios vary between DeFi protocols.

Liquidity: Liquidity is the availability of liquid assets. It is mega-important for DeFi protocols since fees, slippage, and overall UX improves with greater liquidity.

Liquidity Pools: These are pools of tokens available to be exchanged amongst traders.

Liquidity Provider: These users supply liquidity to liquidity pools in the form of tokens.

LP: Liquidity Provider. Mainnet: The mainnet is the main network on which a blockchain protocol runs. When smart contracts get deployed onto Ethereum mainnet, they are live and immutable, meaning they cannot be changed. Mainnet is the opposite of the testnet, the area of the network where transactions are verified and recorded on the blockchain.

Market cap: The market cap, or market capitalization, of a cryptocurrency is the project’s total worth. It’s determined by the market price of the project’s token, multiplied by the total circulating supply.

Market Maker: Market makers provide trading services for traders to keep markets liquid. In DeFi, you’re likely to read about Automated Market Makers. NFTs: NFT stands for “non-fungible token”.

Off-Chain: Off-chain transactions occur “off” the blockchain network. Since these are not broadcast across the blockchain, they are low/zero-cost transactions.

Oracle: A trusted feed of data, such as the current market prices of an asset or assets, that provides confidence to users that the data are timely, accurate, and untampered.

Over-CollateralizationOver-collateralization means that borrowers must put up more collateral than they borrow. This ensures that lenders don’t lose their funds should a borrower default. (See Collateralization Ratio).

P2C: Short for Peer-to-Contract.

P2P: Short for Peer-to-Peer.

Permissionless: Permissionless means that anyone can create and use dApps. No central authority can grant or revoke permission to an individual.

Price Oracles: These are feeds that provide necessary price data to DeFi protocols. Hackers do try and manipulate asset prices, however. Private Key: In crypto terms, a private key is a form of cryptography that gives access to digital assets. It can be used to allow an owner to unlock a crypto address. For this reason, your private key should never be shared with anyone.

Pump and Dump: This term became synonymous with the ICO boom. Hucksters would launch a new “futility” token and pump money into it initially. After the price pumped, they would dump it—selling it for quick profits. DeFi tokens have the advantage of being utility tokens rather than futility tokens. Proof-of-Stake: Proof-of-Stake is a consensus mechanism for achieving consensus on a blockchain.

REN: Ren is known in the DeFi space for its interoperability. This protocol can port assets across blockchains. This is very important for those who wish to move Bitcoin tokens to the Ethereum blockchain.

Slippage: The difference between the expected price of trading two assets and the actual price. Slippage is most frequent during times of high volatility or in illiquid pools.

Smart Contracts: These are automated, self-executing agreements between two parties. Smart Contracts allow two parties to directly communicate with each other without a third-party intermediary.

Stablecoins: Cryptocurrency volatility can be frightening to the mainstream. That’s why stablecoins are the building blocks of the DeFi ecosystem. Their job is to remove volatility and ensure stability. By pegging to something like the U.S. dollar, this is accomplished. Stake/Staking: The act of depositing a cryptocurrency coin or token into a yield farming project and/or protocol, whether the access to the project is either through CeFi or DeFi methods. Testnet: A testing network for a new coin, project, or product, or for potential improvements to an existing product or offering. A testnet can also be used by newcomers to ‘practice’ activities like staking and trading.

Tokens: These are assets on the blockchain. Tokens can have a wider functionality than being a means of payment like a coin. However, you’ll hear people use these terms interchangeably.

Token Burns: Refers to the permanent removal of tokens from circulation. Token buy-backs and burns are popular ways of destroying tokens. This causes scarcity. (See Deflationary Token.)

Token Rewards: Token rewards can be used as incentives to LPs. These are typically offered in the form of governance tokens.

Tokenomics: This combines the two words “token” and “economics.” It refers to the quality of a token.

Trading Fees: Platforms charge trading fees that vary between the various pools.

Transparent: Transparent transactions are public so anyone can audit them. While transactions on the Ethereum blockchains are public, users can remain pseudonymous.

Trustless: Trustless refers to transactions that can be securely validated without the need for trusting a central party.

TVL Total Value Locked.

Wallet: A software application or hardware cryptocurrency wallet that can hold a variety of coins. Whale: A person who HODLs a large amount of cryptocurrency or cryptocurrencies.

Yield: The earnings that are generated on an investment.

Yield Farming: Yield Farming is the process of putting tokens to productive use in a DeFi market. This is done to earn passive interest income. It requires manually searching protocols for the best interest rates. Or one can utilize a Yield Aggregator.


 

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