Glossary

A

Aave – Aave is one of the largest DeFi lending and borrowing protocols. It allows you to deposit crypto and earn interest, or borrow assets using collateral. Aave is famous for introducing flash loans, which are loans that last only one blockchain transaction. Because of its wide support for tokens and reliability, it’s considered one of the “blue chips” of DeFi.

Airdrop – An airdrop is when a project distributes free tokens to users. This is often done as a reward for early adopters or to attract new users. For example, when Uniswap launched UNI in 2020, all past users received free tokens. It works like a loyalty bonus or marketing campaign.

AMM (Automated Market Maker) – An AMM is a system that enables decentralized trading without traditional order books. Instead of matching buyers and sellers, trades are executed against liquidity pools using mathematical formulas (like x*y=k). This allows 24/7, automated markets with no central authority.

Annual Percentage Rate (APR) – APR is the percentage return you get over a year, not counting compounding. For example, if you lend at 10% APR, $100 will earn you $10 after a year. It’s a flat calculation, making it easier to compare across opportunities.

Annual Percentage Yield (APY) – APY is similar to APR but includes compounding — meaning that profits are reinvested to generate additional earnings. For example, 10% APR compounded monthly gives slightly more than 10% APY. It shows the “real” growth of an investment over time.

Arbitrage – Arbitrage means making risk-free (or low-risk) profit by exploiting price differences across markets. In DeFi, it could mean buying ETH cheaper on one DEX and selling it higher on another. Arbitrage bots constantly scan DeFi markets to keep prices aligned.

Assets Under Management (AUM) – AUM measures the total value of assets controlled by a fund, protocol, or portfolio. In DeFi, protocols with high AUM are often considered more trustworthy, since many people lock funds there.

Atomic Swap – A direct exchange of crypto between two parties, across different blockchains, without a trusted third party. It uses smart contracts to guarantee that either both trades happen or none.

B

Balancer – Balancer is a decentralized exchange similar to Uniswap but with flexible pools. Instead of 50/50 pools, it allows up to 8 tokens with different weights (e.g., 80% ETH, 20% DAI). It functions like an automated index fund while also generating trading fees for liquidity providers.

Basis Trade – A basis trade is an arbitrage strategy between futures and spot markets. If futures trade above spot, you can buy spot and short futures, earning the difference when they converge. This is considered a low-risk, “delta-neutral” strategy in crypto.

Blue Chip DeFi – Refers to the most reliable and established DeFi projects, such as Aave, MakerDAO, Uniswap, and Curve. These are “blue chips” because they have survived longer, are battle-tested, and have large communities. They are safer compared to experimental protocols.

Borrowing – Borrowing in DeFi means taking a crypto loan from a protocol like Aave or Compound. Loans are usually overcollateralized, meaning you must deposit more value than you borrow. If your collateral falls in value, the system may liquidate it.

Bribe – In DeFi governance, a bribe is when projects pay token holders to vote in their favor. For example, in Curve Wars, projects bribe veCRV holders to direct rewards toward their liquidity pools. It’s a controversial but accepted part of token governance.

Bridgeless DeFi – Refers to cross-chain trading or asset movement without using traditional bridges. These systems use cryptographic proofs or shared security to reduce risks. This avoids one of DeFi’s biggest attack vectors: bridge hacks.

Bridging Risk – Bridges connect blockchains but are often targeted by hackers. Bridging risk is the chance of losing funds when using a bridge. Since bridges hold large amounts of locked tokens, hacks can cause massive losses.

C

CDP (Collateralized Debt Position) – A CDP is a loan created by locking crypto as collateral. For example, MakerDAO lets you lock ETH to mint DAI. If the value of your collateral drops below a threshold, it gets liquidated. This keeps the system stable and prevents undercollateralized loans.

CEX (Centralized Exchange) – Platforms like Binance or Coinbase that let you trade crypto in a centralized way. You deposit funds, and the company manages custody. They are user-friendly but require trust, since you don’t control your private keys.

Chainlink – The largest oracle provider in DeFi. Oracles bring real-world data (like ETH/USD prices) to blockchains. Without oracles, smart contracts couldn’t know outside information. Chainlink powers many major protocols.

Cold Wallet – A wallet stored offline, usually on a hardware device like Ledger. Since it’s not connected to the internet, it’s very secure from hacks. Cold wallets are ideal for long-term storage.

Collateral – Assets you lock in to secure a loan. For example, you might deposit ETH as collateral to borrow USDC. If the value of your collateral drops too low, it may be liquidated.

Collateral Ratio – The ratio between your collateral and your borrowed amount. For instance, if you deposit $150 in ETH to borrow $100 USDC, the ratio is 150%. Protocols require a minimum ratio to reduce risk.

Composability – DeFi protocols are like “money Legos” — they can be stacked together. For example, you can deposit into Yearn, which puts funds into Aave and Curve automatically. This composability makes DeFi powerful but also interconnected (if one protocol fails, others can be affected).

Compound – A major lending and borrowing protocol. Users can deposit assets to earn interest or borrow against collateral. Compound popularized “liquidity mining” by rewarding users with COMP tokens for using the platform.

Convex Finance – A protocol built on top of Curve that simplifies yield farming and maximizes CRV rewards. Convex aggregates voting power in Curve governance, leading to the famous “Curve Wars.” It became one of the largest DeFi platforms by TVL.

Cross-chain Bridge – A tool that lets you move tokens between different blockchains. For example, WBTC is created by locking BTC on Bitcoin and minting a wrapped token on Ethereum. Bridges are useful but risky due to frequent exploits.

Crypto Wallet – A tool that stores your crypto keys. There are two main types: custodial (someone else controls your keys) and non-custodial (you control them yourself, like MetaMask). Wallets are essential for interacting with DeFi.

Curve Finance – A decentralized exchange optimized for stablecoin swaps. It allows very low slippage trading of assets like USDT, USDC, and DAI. Curve is a cornerstone of DeFi liquidity and inspired the Curve Wars competition.

Curve Wars – The battle between protocols to gain control of Curve’s governance power. Controlling Curve means directing liquidity rewards, which affects the entire DeFi ecosystem. It led to bribing, alliances, and complex strategies.

Custodial Wallet – A wallet managed by an exchange or third party, where you don’t control your private keys. Convenient for beginners, but risky because you must trust the custodian. The crypto saying is: “Not your keys, not your coins.”

D

DAO (Decentralized Autonomous Organization) – A community-run organization governed by smart contracts and token holders. Instead of a company board, DAOs rely on token voting. They manage treasuries, make decisions, and evolve without central leadership.

DAI – A decentralized stablecoin created by MakerDAO. Unlike USDT or USDC (which are centralized), DAI is minted by locking collateral like ETH. Its peg is maintained by market mechanisms and governance.

DeFi (Decentralized Finance) – A financial system built on blockchain, without banks. Anyone can trade, lend, borrow, or earn yield using smart contracts. DeFi is permissionless, global, and transparent compared to traditional finance.

Depeg – When a stablecoin loses its 1:1 peg to the asset it’s supposed to track (like USD). For example, if USDC trades at $0.97 instead of $1. Depegs can cause panic and instability in DeFi systems.

DEX (Decentralized Exchange) – A trading platform that doesn’t rely on intermediaries. Users trade directly through smart contracts, often using AMMs. Popular DEXs include Uniswap, Curve, and SushiSwap.

Dual Farming – A yield farming strategy where liquidity providers earn two different tokens as rewards. For example, depositing into a pool might give both trading fees and protocol reward tokens.

E

ETH (Ethereum) – The second-largest cryptocurrency and the most used blockchain for DeFi. Ethereum introduced smart contracts, which made decentralized apps possible. ETH is both currency and collateral in DeFi.

Ethereum Layer 2 (L2) – Scaling solutions built on top of Ethereum to make transactions faster and cheaper. Examples include Arbitrum, Optimism, and zkSync. They reduce congestion on Ethereum mainnet.

Exit Scam – A scam where project developers suddenly disappear with user funds. In DeFi, this often happens with rug pulls, where liquidity pools are drained by insiders.

F

Flash Loan – A loan that must be borrowed and repaid within the same transaction. If repayment fails, the transaction is canceled. Flash loans can be used for arbitrage or exploits.

Flash Loan Attack – When attackers use flash loans to manipulate prices or exploit weak protocols. They can borrow huge sums instantly, manipulate a market, then repay — keeping profits from the chaos.

Front-running – A trading attack where someone sees your transaction and submits their own with a higher gas fee to get executed first. This is common in DeFi because all pending transactions are public.

Funding Rate – A payment between long and short traders in perpetual futures. If funding is positive, longs pay shorts; if negative, shorts pay longs. It keeps futures prices aligned with spot.

Funding Rate Arbitrage – A strategy where traders hold spot and futures positions in opposite directions to collect funding payments. For example, long spot ETH and short perpetual futures ETH.

G

Gas Fee – A gas fee is the cost you pay to execute a transaction on a blockchain like Ethereum. Fees depend on network congestion: the busier the network, the higher the fee. Gas is measured in “gwei,” and even simple actions like swapping tokens or sending crypto require gas.

Gas War – When many users compete to have their transactions included quickly, they raise gas fees. For example, during a hyped NFT mint, users might bid higher gas fees to ensure success. This results in extremely expensive transactions for everyone.

Governance Token – A token that gives holders voting power in a protocol. Holders can propose and vote on changes like fee structures, reward allocations, or treasury spending. Examples include UNI (Uniswap) and AAVE (Aave). Governance tokens make protocols community-owned.

Governance Vote – The process where governance token holders vote on protocol decisions. Votes might decide technical upgrades, incentive distribution, or partnerships. Some systems require tokens to be locked (“staked”) for voting, giving more power to long-term holders.

H

Health Factor – A measure of how safe your loan is in lending protocols. A health factor above 1 means your collateral is safe; below 1 means liquidation risk. For example, if your health factor is 1.5, your collateral must drop 33% in value before liquidation happens.

HODL – A popular crypto slang meaning “hold on for dear life.” Originally a typo of “hold,” it became a meme encouraging investors not to panic sell during market crashes. In DeFi, HODLing means keeping tokens long-term instead of actively trading.

Hot Wallet – A wallet connected to the internet, such as MetaMask or an exchange account. Hot wallets are convenient for daily use but more vulnerable to hacks compared to cold wallets. They’re best for active trading, not long-term storage.

I

Impermanent Loss – A risk liquidity providers face when token prices in a pool move apart. For example, if you deposit ETH and USDC into a pool, and ETH price rises, you may end up with less ETH than if you had just held it. It’s called “impermanent” because if prices return to their original ratio, the loss disappears.

Inflationary Token – A token that increases in supply over time, often by minting new tokens as rewards. This can dilute existing holders if demand doesn’t grow equally. Many reward tokens in yield farming are inflationary.

Interest Rate Model – Lending protocols like Aave or Compound use models to adjust interest rates based on supply and demand. If many people borrow an asset, interest rates rise to attract more lenders. If there’s excess supply, rates fall.

K

KYC (Know Your Customer) – A legal process requiring users to verify their identity with government-issued documents. While many centralized exchanges require KYC, most DeFi protocols don’t. KYC is controversial in DeFi since it conflicts with the idea of permissionless finance.

L

Layer 1 (L1) – A base blockchain like Ethereum, Solana, or Avalanche. These blockchains handle transactions, smart contracts, and security. All DeFi protocols ultimately rely on an L1.

Layer 2 (L2) – A scaling solution built on top of Layer 1 blockchains to make them faster and cheaper. Examples include Optimism and Arbitrum (optimistic rollups) and zkSync (ZK-rollup). L2s batch transactions together and submit them to L1 for security.

Lending – In DeFi, lending means depositing tokens into a protocol to earn interest. Unlike banks, lending protocols are open to anyone and rates adjust dynamically. Your tokens are pooled and borrowed by others who provide collateral.

Leveraged Liquid Staking – A strategy where users stake ETH (or another asset), receive a liquid staking token (like stETH), then borrow ETH against it to stake even more. This loop increases staking rewards but also increases liquidation risk if ETH price drops.

Leveraged Staking – Similar to leveraged liquid staking but without liquid staking tokens. You borrow more of an asset to stake a larger amount. It can multiply rewards but also magnify losses.

Liquid Staking – A form of staking where you receive a liquid token representing your stake (e.g., stETH from Lido). This token can be traded or used in DeFi while your original stake keeps earning rewards. It makes staking more flexible.

Liquidation – When a borrower’s collateral falls below the required safety level, it is sold off automatically to repay the loan. For example, if you borrow $100 USDC with $150 ETH and ETH price drops, the system may liquidate your ETH to protect lenders.

Liquidity – How easily an asset can be traded without affecting its price. High-liquidity tokens like USDC trade with very small spreads, while low-liquidity tokens can be hard to buy or sell without big price moves.

Liquidity Mining – The practice of rewarding liquidity providers with extra tokens, usually governance tokens. For example, Uniswap V2 launched UNI rewards for LPs, sparking the DeFi summer of 2020. It combines trading fees and token incentives.

Liquidity Pool – A smart contract holding pairs (or baskets) of tokens that traders use for swaps. For example, a USDC/ETH pool allows people to trade between these assets automatically. Liquidity providers earn fees for contributing to these pools.

Liquidity Provider (LP) – Someone who deposits assets into a liquidity pool. LPs earn a share of trading fees (and sometimes extra token rewards). However, they take on risks like impermanent loss.

Lock-up Period – Some protocols require tokens to be locked for a fixed time to earn rewards. During this period, you cannot withdraw. Lock-ups can increase protocol stability but reduce flexibility for users.

Long Position – In trading, a “long” means you benefit if the asset price goes up. In DeFi, you can go long using perpetual futures, options, or by simply holding tokens.

M

MakerDAO – MakerDAO is one of the oldest and most important DeFi protocols. It issues the decentralized stablecoin DAI, which is created when users lock collateral (like ETH or USDC). MakerDAO is governed by MKR token holders, who vote on risk parameters such as collateral types and stability fees.

Maximal Extractable Value (MEV) – MEV is the extra profit miners or validators can make by reordering or inserting transactions into a block. For example, a validator might front-run a large trade to earn money. MEV creates risks for regular users, since their trades can be manipulated.

Money Lego – A nickname for how DeFi protocols can be combined. For instance, you can take DAI from MakerDAO, deposit it into Aave to earn interest, then use the interest-bearing token in Curve. Each piece works together like Lego bricks.

Multi-Signature Wallet (Multi-sig) – A wallet that requires multiple people (or devices) to sign off on transactions. For example, a 3-of-5 wallet requires three approvals out of five possible signers. This improves security, especially for DAOs and treasuries.

N

NFT (Non-Fungible Token) – A unique digital asset stored on blockchain. Unlike fungible tokens (like ETH, where every token is identical), NFTs are unique and can represent art, collectibles, or in-game items. In DeFi, NFTs are sometimes used as collateral.

NFT Fractionalization – Splitting one NFT into smaller fungible tokens so multiple people can own a share. For example, dividing a rare NFT into 1,000 pieces so smaller investors can buy in. This increases liquidity and accessibility.

NFT Lending – Using NFTs as collateral to borrow tokens. Protocols like BendDAO allow you to lock NFTs and borrow ETH. However, the NFT market is less liquid than tokens, so liquidation can be more risky.

O

On-chain – Actions that happen directly on the blockchain and are recorded permanently. For example, swapping ETH for DAI on Uniswap is on-chain. On-chain actions are transparent and verifiable by anyone.

Off-chain – Actions or data that happen outside of the blockchain. For example, centralized exchanges manage trades off-chain. Off-chain is usually faster and cheaper, but less transparent.

Oracle – A service that brings real-world data into blockchains. Since blockchains can’t access external information on their own, oracles like Chainlink provide price feeds (e.g., ETH/USD). They are crucial for lending, trading, and derivatives protocols.

Order Book – A traditional exchange model listing buy and sell orders. Most centralized exchanges use order books, while many DeFi DEXs use AMMs. Some hybrid DEXs (like dYdX) still use order books.

Overcollateralization – A system where you borrow less than the value of your collateral to reduce risk. For example, depositing $200 worth of ETH to borrow $100 in stablecoins. This ensures lenders are protected even if prices drop.

P

Peg Stability Module (PSM) – A mechanism used by MakerDAO to keep DAI close to $1. It allows users to swap stablecoins like USDC for DAI at nearly 1:1. This stabilizes the peg and reduces volatility.

Perpetual Futures (Perps) – A type of futures contract with no expiry date. They trade close to the spot price thanks to the funding rate mechanism. Perps are popular in crypto because traders can hold positions indefinitely.

Price Feed – The data oracles provide to DeFi protocols, usually asset prices. For example, Aave needs ETH/USD prices to know when to liquidate loans. Accurate feeds are essential to protocol safety.

Privacy Coin – A cryptocurrency designed to hide transaction details. Examples include Monero (XMR) and Zcash (ZEC). They use advanced cryptography to protect sender, receiver, and amounts.

Private Key – A secret code that proves ownership of your crypto. Whoever controls the private key controls the funds. Losing it usually means losing access forever.

Public Key – The address you share with others to receive crypto. It’s mathematically linked to your private key, but cannot reveal it. It’s like your bank account number, while the private key is your PIN.

R

Real-World Assets (RWA) – Tokenized versions of physical or financial assets, such as real estate, bonds, or invoices. DeFi protocols increasingly use RWAs to back stablecoins or generate yield. They connect blockchain finance to traditional markets.

Rebase Token – A token that automatically adjusts its supply to target a specific price. For example, if the target price is $1 and the token is worth $1.20, supply expands. If it’s worth $0.80, supply contracts. Holders’ balances change dynamically.

Rehypothecation – Using deposited collateral for multiple purposes. For example, if you deposit ETH into a protocol, it might lend it out again while still issuing you a receipt token. This can multiply risks but also improve capital efficiency.

Rug Pull – A scam where project creators drain liquidity pools or treasury funds and disappear. For example, a new token might attract investors, only for the developers to sell all tokens suddenly. Rug pulls are one of the biggest risks in DeFi.

S

Sandwich Attack – A type of MEV (Maximal Extractable Value) attack. An attacker sees a pending trade on a DEX and places two transactions around it: one before (to push the price up or down) and one after (to capture profit). The victim ends up with worse execution while the attacker profits.

Shitcoin – A slang term for tokens with little or no real value. Often created as hype or scams, shitcoins usually lack utility, development, or long-term plans. They can pump in price temporarily but often crash.

Slippage – The difference between the expected price of a trade and the actual price executed. Slippage is worse in low-liquidity pools or with large orders. For example, if you expect 1 ETH = 2000 USDC but receive only 1980 USDC, that’s slippage.

Smart Contract – A piece of code on the blockchain that executes automatically when conditions are met. For example, “If Alice deposits ETH, send her DAI.” Smart contracts are the backbone of DeFi, replacing banks and intermediaries.

Soft Peg – A token that aims to stay close to a certain value (like $1), but doesn’t guarantee it fully. DAI is an example: it targets $1 but can temporarily deviate.

Spot Market – A market where assets are traded for immediate delivery. For example, buying ETH with USDC directly on Uniswap. This contrasts with futures or options markets, where settlement is delayed.

Stablecoin – A cryptocurrency pegged to a stable asset, usually the US dollar. Stablecoins like USDT, USDC, and DAI allow people to hold crypto without price volatility. They are essential in DeFi as the main trading pair and collateral type.

Stable Swap – A special AMM design optimized for stablecoins or assets with similar values. It minimizes slippage when trading between tokens like USDC, USDT, and DAI. Curve pioneered this design.

Staking – Locking tokens to secure a blockchain (like Ethereum proof-of-stake) and earn rewards. Stakers support the network and are rewarded with new tokens. Unlike lending, staking secures the protocol itself.

Staking Pool – A group of users combining their tokens to stake together. This makes it easier for smaller holders to earn rewards. For example, Lido pools ETH from many users to stake in Ethereum.

Synthetic Asset – A token that mimics the price of another asset, like gold, stocks, or foreign currencies. For example, sUSD tracks the US dollar. Protocols like Synthetix let users mint and trade synthetics.

Synthetix – A DeFi protocol specializing in synthetic assets. It lets users lock collateral (SNX tokens) and mint synthetic versions of assets. It expands DeFi to track prices beyond crypto.

T

Token Burn – The process of permanently removing tokens from circulation. This can be done by sending them to an address with no private key. Burning reduces supply, which can increase scarcity and price.

Tokenomics – The study of how a token works: supply, distribution, inflation, utility, and incentives. Good tokenomics align user and protocol interests; poor tokenomics often lead to crashes.

Total Value Locked (TVL) – The total amount of assets locked in a DeFi protocol. TVL is a common metric to measure protocol size and adoption. For example, Aave’s TVL shows how much crypto people trust in its lending pools.

Treasury – The pool of funds owned by a DAO. Treasuries are managed through governance votes and may fund development, partnerships, or rewards. A healthy treasury shows protocol sustainability.

U

Uniswap – The first major AMM DEX on Ethereum. It popularized liquidity pools and permissionless token swaps. Uniswap remains one of the largest DEXs and a cornerstone of DeFi, inspiring many forks like SushiSwap.

USDC – A centralized stablecoin backed by USD reserves. Issued by Circle, it’s considered one of the most transparent stablecoins. USDC is widely used in DeFi due to its trustworthiness.

USDT (Tether) – The oldest and most used stablecoin, pegged to the dollar. It has been controversial because of questions about its reserves, but it remains heavily used in trading and DeFi.

V

Vault – A smart contract that automates yield strategies for users. Instead of managing your tokens actively, you can deposit into a vault, which optimizes rewards by moving assets between protocols. Yearn Finance made vaults popular.

veTokenomics (Vote-Escrow Tokenomics) – A system where governance tokens must be locked (escrowed) to gain voting power and rewards. For example, Curve’s CRV tokens can be locked into veCRV for up to 4 years. The longer the lock, the more power you get.

W

Whale – A term for someone holding a large amount of a token. Whales can move markets with their trades. In DeFi, whales often dominate governance votes and liquidity pools.

Wrapped Token – A tokenized version of another crypto that can exist on a different blockchain. For example, Wrapped Bitcoin (WBTC) allows BTC to be used on Ethereum. Wrapping expands liquidity and cross-chain use.

Z

ZK-Rollup – A Layer 2 scaling solution that uses zero-knowledge proofs to bundle transactions. ZK-rollups are faster and more secure than optimistic rollups because they provide mathematical proof of correctness.

zkSNARK – A cryptographic proof that lets someone prove they know information without revealing it. Used in privacy protocols and ZK-rollups.

zkSTARK – A newer version of zkSNARKs, offering faster verification and no need for a trusted setup. They are gaining popularity for scalability solutions.