DeFi Glossary
Key terms and concepts in decentralized finance, explained simply.
- Airdrop
- Free tokens distributed to wallet addresses, usually as a reward for early usage of a protocol or meeting certain on-chain criteria.
- AMM
- Automated Market Maker. A protocol that uses mathematical formulas to price assets instead of an order book. Uniswap and Curve are popular AMMs.
- APR
- Annual Percentage Rate. The yearly interest rate earned on an investment, not accounting for compounding.
- APY
- Annual Percentage Yield. The yearly return on an investment including compound interest.
- Bridge
- A protocol that allows transferring assets between different blockchains.
- Cold Wallet
- A cryptocurrency wallet that is not connected to the internet, such as a hardware wallet. Considered the most secure way to store crypto.
- Concentrated Liquidity
- A liquidity provision model where LPs choose a specific price range to allocate their capital, increasing capital efficiency. Introduced by Uniswap v3.
- DEX
- Decentralized Exchange. A platform for trading cryptocurrencies without a central intermediary, using smart contracts instead.
- DEX Aggregator
- A tool that searches across multiple DEXes to find the best swap rate for a given trade. Examples include Jupiter and 1inch.
- Funding Rate
- A periodic payment between long and short traders on perpetual futures contracts that keeps the contract price anchored to the spot price.
- Gas
- The fee paid to validators for processing transactions on a blockchain network.
- Hot Wallet
- A cryptocurrency wallet connected to the internet, such as MetaMask or Phantom. Convenient for daily use but more vulnerable to attacks.
- Impermanent Loss
- The temporary loss of value experienced by liquidity providers when the price ratio of pooled tokens changes compared to simply holding them.
- Layer 2
- A secondary blockchain built on top of a Layer 1 (like Ethereum) to improve speed and reduce fees. Arbitrum, Base, and Optimism are popular L2s.
- Leverage
- Borrowing funds to increase the size of a trading position beyond your actual capital. Expressed as a multiplier like 2x, 5x, or 10x.
- Liquidation
- The forced closing of a leveraged position when losses approach the deposited collateral. Happens automatically via smart contracts in DeFi.
- Liquid Staking
- Staking tokens while receiving a liquid derivative token in return that can be used elsewhere in DeFi. Lido (stETH) is the largest liquid staking protocol.
- Liquidity Pool
- A collection of funds locked in a smart contract, used to facilitate decentralized trading, lending, and other DeFi functions.
- MEV
- Maximal Extractable Value. Profit that block producers or searchers can extract by reordering, inserting, or censoring transactions. Sandwich attacks are a common form of MEV.
- Perpetuals
- Perpetual futures contracts. Derivative contracts with no expiration date that let traders speculate on asset prices with leverage.
- Points
- Off-chain loyalty credits issued by protocols to reward usage before a token launch. Points often convert to airdropped tokens.
- Restaking
- Reusing already-staked assets (like stETH) to secure additional protocols, earning extra yield. EigenLayer pioneered this model.
- Seed Phrase
- A 12 or 24-word recovery phrase that controls access to a crypto wallet. Anyone with your seed phrase has full access to your funds.
- Slippage
- The difference between the expected price of a trade and the actual execution price. Higher slippage occurs with low liquidity or large trade sizes.
- Smart Contract
- Self-executing code deployed on a blockchain that automatically enforces the terms of an agreement.
- Staking
- Locking up tokens to help secure a proof-of-stake blockchain and earning rewards in return.
- Sybil
- Creating multiple fake identities or wallets to game a system. Protocols use sybil detection to filter airdrop farmers who use many wallets.
- Token Approval
- Permission granted to a smart contract to spend tokens from your wallet. Unlimited approvals can be a security risk if the contract is compromised.
- TVL
- Total Value Locked. The total amount of assets deposited in a DeFi protocol, used as a measure of its size and adoption.
- Yield Farming
- The practice of moving assets between DeFi protocols to maximize returns through token rewards, interest, and fees.