In this glossary, we define every term we could think of associated with decentralized finance (DeFi).
Written by: Mike Martin | Updated September 5, 2024
Reviewed by: Ryan Grace
Fact checked by: Laurence Willows
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Aave is a decentralized finance (DeFi) protocol built on the Ethereum blockchain network. This decentralized app (dApp) allows users to lend, borrow, and earn interest on cryptocurrency assets. Like all dApps, Aave accomplishes this without the use of intermediaries.
The native token of the Aave network is AAVE.
Ankr is a Web3 platform that makes running a node (which validates transactions) for a proof-of-stake (PoS) blockchain more accessible.
This protocol has eliminated the need for significant hardware investments and technical proficiency, which has simplified the process greatly.
The native token for this network is ANKR.
APR stands for annual percentage rate. APR communicates to borrowers the amount of interest they must pay for loans taken out on a yearly basis.
Arbitrage in DeFi refers to the process of buying a token/coin at a lower price on one decentralized crypto exchange (DEX) and then selling that same asset quickly for a higher price on another DEX to turn a profit.
The ability for traders to profit from price discrepancies on DEXs also helps to stabilize crypto prices, which helps to build trust and liquidity. Arbitrage is the reason that most crypto prices are relatively the same on all exchanges, give or take a little.
Automated market makers (AMMs) are smart contracts powering all decentralized crypto exchanges (DEXs) and other decentralized finance (DeFi) protocols.
Becoming a market maker on an AMM requires you to simply add two or more cryptocurrencies into a liquidity pool. You earn the fees that traders pay a DEX when they trade from your pool.
Bitcoin was the first successful blockchain network to launch. Since Bitcoin is not able to store smart contracts, its DeFi presence is limited.
Nevertheless, Bitcoin’s presence in DeFi has been increasing since late 2023 thanks to layer 2 solutions like Stacks and Merlin, as well as protocols like Ordinals and Runes.
Blockchain is a digital ledger that is distributed across all participants in a network. Blockchain has many advantages over traditional ledgers, such as being immutable, public, decentralized, and secure. Every transaction on a blockchain is public, and they have to be confirmed by a network of computers called miners, which are rewarded with cryptocurrency for their work.
Ethereum is the most popular blockchain network for DeFi.
A bonding curve is a mathematical curve that determines the price of a digital asset on a (DeFi) platform. These curves are used to create and manage a liquidity pool for a specific cryptocurrency pair.
Bridges facilitate the transfer of crypto assets from one chain to another, ensuring interoperability within the DeFi sector.
CeFi is short for centralized finance. CeFi companies operate through traditional central intermediaries, like banks and stock exchanges.
CeFi is in contrast to DeFi, which does not employ intermediaries.
Read: CeFi vs TradFi vs DeFI
The native token for Convex is CVX.
Ctokens are associated with the Compound protocol. These tokens represent a deposited position and can be used as collateral in various liquidity pools or traded for other digital assets.
A cold wallet is a type of self-custody wallet that is not connected to the internet. Cold wallets include:
• Paper Wallets
• USB Wallets, also called hardware wallets (Ledger)
To borrow in DeFi, users must deposit collateral in the form of crypto. Most often the value of the collateral is worth more than the value of the loan itself.
A crypto wallet, also known as a digital wallet, is a software program, hardware device, or a simple sheet of paper that stores a user’s private keys.
Crypto wallets enable users to securely store, manage, and transact with digital assets, DeFi, and non-fungible tokens (NFTs).
Crypto wallets can be either custodial wallets or self-custody wallets.
Compound Finance is a decentralized finance (DeFi) lending protocol that enables users to lend or borrow cryptocurrencies without the need for a centralized intermediary.
The native token for Compound is COMP.
Curve Finance is a decentralized crypto exchange (DEX) that operates as an automated market maker (AMM), similar to Uniswap.
The native token for Curve Finance is CRV.
A custodial crypto wallet is a type of crypto wallet where a centralized entity, such as Coinbase, maintains control over users’ private keys.
For the most part, custodial wallets offer less security than self-custody wallets, which give users direct access to and control over their private keys.
A DAO, or decentralized autonomous organization, is an organization that operates without any intermediaries through smart contracts.
In a DAO, decisions are made through a decentralized voting system, where very member has voting power proportional to their stake in the organization.
In crypto, digital signatures are a cryptographic tool used for message authentication that binds a crypto user to digital data.
Digital signatures are created by hashing data, encrypting this data with a private key, and verifying the data using the corresponding public key.
A dApp (decentralized application) is an autonomous application comprised of smart contacts that operates under a decentralized blockchain (distributed ledger).
DeFi, short for decentralized finance, is a blockchain-based financial system that allows users to become stakeholders, lenders, borrowers, traders, and even market makers without the need for intermediaries.
DeFi protocols rely on smart contracts to operate.
Live stock quotes are an example of the value that an oracle adds.
DeFiLlama is a website that provides free real-time data and analytics around all things DeFI. I use it everyday!
A derivative is a financial instrument that derives its value from a different underlying asset. The value of a derivative is contingent upon the future value of the underlying to which it is attached.
A DEX (decentralized exchange) is a cryptocurrency exchange that operates on a peer-to-peer system and therefore does not require any intermediaries.
All users of self-custody wallets need to connect to DEXs in order to swap crypto. Uniswap is the most popular DEX.
EigenLayer is a restaking protocol that allows users to boost their staking rewards by repurposing their staked ETH to secure other services besides the mainnet.
ERC-20 tokens are fungible tokens associated with the Ethereum blockchain network. All ERC-20 tokens are interoperable, which means they can be traded freely for one another.
The Ethereum blockchain is the most robust and popular blockchain for DeFi. Unlike Bitcoin, Ethereum allows for the storage of smart contracts, which represent the backbones of Web3.
Even Layer 2 solutions like Polygon and Arbitrum rely upon the Ethereum ecosystem.
Fair launch refers to a transparent way of issuing a new cryptocurrency (ICO) so that all market participants have an equal opportunity to participate.
Fiat currency refers to any type of currency that is issued by a government. The US Dollar, for example, is a fiat currency. Fiat currencies are typically backed only by the good faith of a government.
Primitives are the building blocks and lifeblood of DeFi. Primitives generally perform one specific function, such as hashing. They are implemented by a smart contract.
In DeFi, flash loans refer to a multi-step transaction: a user takes out an uncollateralized loan and repays the same loan immediately. Flash loans are usually used to exploit arbitrage opportunities.
Read: What Are Flash Loans?
In crypto, a flash swap is a type of transaction that allows traders to borrow any crypto for a short duration. Flash swaps are growing in popularity because they do not require any collateral.
Like flash loans, flash swaps are executed in the same transaction. These swaps help to increase liquidity in the cryptocurrency ecosystem.
Read: Flash Swaps Explained
In DeFI, forced liquidations occur when a loan or any transaction type goes undercollateralized.
These liquidations are performed by ‘keepers’, and are common in highly leveraged transactions.
In DeFi, game theory refers to the study of crypto market participants in order to increase returns.
Two categories that game theory followers pay close attention to are incentives and market coordination.
On the Ethereum network, ‘gas’ refers to the fees that users must pay validators in order to validate their transactions and add them to the blockchain. Gas fees are denominated in “gwei’.
Read: What are ETH gas fees and how do they work?
In crypto, a governance token refers to a cryptocurrency that gives its owners the right to ‘govern’ a crypto project. Voting rights allow these token holders to play a role in a protocol’s future and present, kind of like how stock owners can vote on changes to board members.
GWEI represents a denomination of ether (ETH) – one-billionth of one ETH.
Ethereum gas fees (network fees) are denominated in GWEI.
Hierarchical-deterministic (HD) wallets simplify self-custody by allowing wallet owners to generate multiple addresses from one seed phrase.
A hot wallet is a type of self-custody cryptocurrency wallet that is always connected to the internet (and therefore always at risk of being hacked!).
Software wallets, such as mobile wallets and desktop wallets, are hot wallets.
HODL stands for ‘hold on for dear life’. Hodlers are long-term crypto investors that weather any storm.
In blockchain and DeFi, immutability means that once a transaction enters a blockchain, it can never be altered or changed. Immutable is another way of saying set in stone.
In DeFI, impermanent loss is a risk that liquidity pool participants face.
The value of the cryptocurrency staked by liquidity pool providers in a pool fluctuates as traders buy and sell from the pool.
Impermanent loss can be thought of as opportunity cost – how much would that liquidity provider have made if they simply owned the crypto outright and didn’t participate in the pool at all?
Impermanent loss insurance is a service offered to liquidity pool providers (LPs) to hedge risk. Like any insurance, LPs have to pay a premium for impermanent loss insurance.
Keepers are programs that ensure protocols run properly. For example, if a loan goes undercollateralized on a lending dApp, a keeper may trigger its automatic liquidation.
KYC refers to ‘know your customer’. KYC is popular in traditional finance but has yet to be implemented in DeFi and self-custody products.
In DeFi, lending aggregators are protocols that pool together the lending and borrowing rates of many lending dApps into a single interface.
Layer 2 networks rely upon preexisting blockchains (mostly Ethereum) for validation.
Layer