DeFi Metrics >> Learn DeFi >> DeFi Glossary
DeFi Glossary
DeFi (Decentralized Finance): A movement that aims to recreate traditional financial systems (like banks, exchanges, and lending services) using blockchain technology, without the need for intermediaries (e.g., banks or brokers).
Blockchain: A decentralized, digital ledger that records transactions across multiple computers in a way that prevents altering or tampering with the data.
Smart Contracts: Self-executing contracts with the terms of the agreement directly written into code. They automatically enforce and execute contract terms when certain conditions are met.
Ethereum: The second-largest cryptocurrency and blockchain platform, widely used for DeFi applications due to its ability to execute smart contracts.
Tokens: Digital assets that exist on a blockchain. These can represent anything from currencies to real-world assets like real estate or stocks.
Cryptocurrency: Digital or virtual currencies that use cryptography for security. They are decentralized and typically operate on blockchain networks.
Decentralized Exchange (DEX): A platform that allows users to trade cryptocurrencies directly with one another without an intermediary, offering more privacy and control over funds.
Centralized Exchange (CEX): A platform like Coinbase or Binance where users can trade cryptocurrencies, but the exchange itself acts as an intermediary holding users' funds.
Yield Farming: The process of earning rewards by lending or staking cryptocurrency on DeFi protocols, often involving complex strategies to maximize returns.
Staking: The act of locking up a certain amount of cryptocurrency to support a blockchain network, often in exchange for rewards or interest.
Liquidity Pool: A collection of funds provided by users to a DeFi protocol, which is used to facilitate trades or lending. Liquidity providers earn a share of transaction fees in return.
APY (Annual Percentage Yield): A percentage that shows how much a user can earn from their investment over a year, factoring in compounding interest.
Collateral: An asset pledged as security for a loan. If the borrower defaults, the lender can claim the collateral.
Flash Loans: Instant loans that are borrowed and repaid within the same transaction, often used in DeFi for arbitrage or trading opportunities. Flash loans typically don’t require collateral but come with high risks.
Impermanent Loss: The loss incurred by liquidity providers when the value of their deposited assets changes compared to when they first provided liquidity, often due to price fluctuations.
Governance Token: A token that grants holders voting power on decisions regarding the future direction of a DeFi protocol, such as updates or changes in policy.
Oracle: A service that provides real-world data (like asset prices or weather data) to a blockchain or smart contract. Oracles are crucial for DeFi applications that need external data.
Gas Fees: Transaction fees paid to miners (or validators) for processing and validating transactions on a blockchain. On Ethereum, gas fees can fluctuate depending on network congestion.
Wallet: A digital tool (either software or hardware) that allows users to store, send, and receive cryptocurrencies. Examples include MetaMask (software) and Ledger (hardware).
Token Swap: The process of exchanging one cryptocurrency or token for another, usually facilitated by a decentralized exchange (DEX).
Liquidity Mining: A process where users provide liquidity to a DeFi protocol and are rewarded with tokens as compensation for their contribution.
Stablecoin: A type of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency like the U.S. dollar. Examples include USDT (Tether) and DAI.
Debt Ceiling: The maximum amount of borrowing allowed within a DeFi protocol. Exceeding this limit can trigger changes in the interest rates or borrowing conditions.
Vault: A smart contract-based storage facility in DeFi where users can deposit tokens in exchange for a return. These can include lending, yield farming, and other investment strategies.
Permissionless: Refers to systems or platforms that are open to anyone without requiring permission from a centralized authority. Most DeFi platforms are permissionless, meaning anyone can participate.
Slippage: The difference between the expected price of a trade and the actual price when the trade is executed. This can occur due to market volatility or insufficient liquidity in the pool.
Tokenomics: The study of the economic system of a cryptocurrency or token, including its supply, demand, distribution, and incentives.
Fork: A split in the blockchain, which can create two separate chains. Forks can be soft (backward compatible) or hard (not backward compatible) and can lead to the creation of new cryptocurrencies or protocols.
Rug Pull: A type of scam where the developers of a DeFi project or token withdraw all of their liquidity or funds, leaving investors with worthless assets.
KYC (Know Your Customer): A process where users must verify their identity, often used in centralized exchanges to comply with anti-money laundering (AML) laws. DeFi platforms typically don't require KYC.
AML (Anti-Money Laundering): A set of regulations and practices aimed at preventing money laundering. DeFi platforms are generally less regulated in terms of AML, but centralized platforms often implement it.
Cross-Chain: Refers to the ability of different blockchain networks to interact with each other, allowing users to move assets or data between blockchains without needing intermediaries.
Decentralized Autonomous Organization (DAO): A fully autonomous, decentralized organization governed by smart contracts and token holders, often used to make decisions about DeFi protocol governance.
Mempool: A pool of unconfirmed transactions waiting to be processed and added to the blockchain by miners or validators.
Wallet Connect: A protocol that allows users to connect their mobile wallets to decentralized applications (dApps) without needing to manually input private keys.
DeFi Glossary
Advanced DeFi Glossary
Layer 2: A secondary framework or protocol built on top of an existing blockchain (usually Ethereum) to improve scalability and reduce transaction fees. Examples include Optimistic Rollups and zk-Rollups.
Zero-Knowledge Proof (ZKP): A cryptographic method that allows one party to prove to another that they know a piece of information without revealing the information itself. Used to enhance privacy and security in DeFi applications.
Arbitrage: The practice of taking advantage of price discrepancies of the same asset across different exchanges or markets. DeFi traders use arbitrage opportunities to make profits by buying low on one platform and selling high on another.
Synthetic Assets (Synths): Tokenized representations of real-world assets (like stocks, commodities, or fiat currencies) on the blockchain. Synths allow users to gain exposure to traditional assets without directly owning them.
Composable Finance: Refers to the ability to combine different DeFi protocols and services to create custom financial products. This modularity allows for endless possibilities and integrations between protocols.
Impermanent Loss Protection: A feature offered by some DeFi protocols that compensates liquidity providers for losses incurred due to price changes between the assets they’ve provided to liquidity pools.
Interoperability: The ability of different blockchains and DeFi platforms to work together and share data, assets, and functionality. Cross-chain bridges and protocols like Polkadot and Cosmos are key players in enhancing interoperability.
Zeroth Party Data: Data collected directly from users, such as information shared through decentralized identity (DID) systems. This type of data is considered more privacy-respecting than traditional data (first, second, or third party).
Flash Loan Attack: A specific type of exploit that uses a flash loan to borrow a large amount of capital, manipulate the price of an asset, and profit from a vulnerability in a DeFi protocol or smart contract.
Tokenized Debt: Debt instruments represented as tokens on the blockchain. These tokens allow users to trade, sell, or borrow against their debt positions, creating new markets for debt in DeFi.
Slashing: A penalty mechanism used in proof-of-stake (PoS) consensus mechanisms where validators lose a portion of their staked funds as punishment for malicious behavior or failing to properly validate transactions.
Gnosis Safe: A multi-signature wallet and decentralized app (dApp) for managing digital assets. It provides enhanced security by requiring multiple signatures to authorize transactions, commonly used in DeFi governance and treasury management.
Token Burning: The process of removing tokens from circulation, typically to reduce supply and increase scarcity. This is often done to manage token inflation or as part of deflationary monetary policy in DeFi projects.
Tightening Mechanism: A mechanism used in algorithmic stablecoins or decentralized lending platforms to adjust the interest rates or collateral requirements based on the state of the system. It helps stabilize the system during market volatility.
Permissioned DeFi: A subset of DeFi protocols that implement some degree of centralization or permissioning, typically for regulatory or governance reasons. These platforms may require KYC or compliance with certain rules.
Debt Pool: A collective pool where users can contribute collateral to back decentralized lending services. Debt pools aggregate multiple loans and enable more efficient capital allocation in DeFi lending platforms.
Multi-Asset Pools: Liquidity pools in DeFi that support multiple types of tokens or assets. These pools allow liquidity providers to offer a diverse range of tokens, reducing risk and increasing the flexibility of DeFi protocols.
Layer 2 Rollups: Scalable solutions that aggregate transactions off-chain and submit them in batches to the main Ethereum chain, significantly reducing costs and congestion on Ethereum while maintaining security and decentralization.
Vampire Attack: A strategy used in DeFi where one platform uses a token incentive to lure liquidity away from a competitor’s protocol, often by offering higher rewards or better terms.
Governance Attack: A scenario where a malicious actor gains control over a significant portion of a protocol’s governance tokens, allowing them to manipulate protocol upgrades, voting outcomes, or other key decisions in their favor.
Algorithmic Stablecoin: A type of stablecoin that maintains its peg to a fiat currency using algorithms and smart contracts rather than being backed by collateral or reserves. It adjusts supply or demand to maintain price stability.
Decentralized Insurance: Insurance services offered through smart contracts, allowing users to pool funds for mutual protection without a traditional insurance company acting as the intermediary.
Liquidity Traps: A situation where liquidity providers become stuck in a protocol due to the high transaction costs of withdrawing their assets, often caused by a mismatch between the liquidity pool and market conditions.
Flash Minting: A process that allows a user to mint an unlimited amount of a token in a single transaction and use that newly minted token for operations like lending or governance before paying it back.
Debt-to-Equity Swap: A financial arrangement in DeFi where debt holders can convert their liabilities into equity (or ownership) in the protocol, often used as a restructuring mechanism.