Crypto & DeFi Glossary

The real rate of return earned on a deposit over one year, including the effect of compound interest. APY accounts for interest earned on previously earned interest, making it higher than the equivalent APR when compounding occurs.

The simple annual interest rate without compounding. APR does not factor in the reinvestment of earned interest. In DeFi, APR is typically shown when rewards must be manually claimed and restaked. APR is always lower than or equal to APY for the same rate.

A decentralized exchange mechanism that uses mathematical formulas to price assets instead of an order book. AMMs allow anyone to provide liquidity to trading pools and earn fees. Uniswap, Balancer, and Curve are leading AMM protocols.

A trading mechanism where orders are collected over a time window and settled simultaneously in a single transaction. All trades for the same pair receive a uniform clearing price. CowSwap uses batch auctions to provide MEV protection.

The process of transferring tokens from one blockchain to another. Bridges lock tokens on the source chain and mint equivalent tokens on the destination chain. Cross-chain bridges enable users to access DeFi opportunities across multiple networks.

Assets deposited as security when borrowing in DeFi. Borrowers must over-collateralize their loans (deposit more value than they borrow) to protect lenders. If the collateral value drops below a threshold, it gets liquidated to repay the loan.

Interest calculated on both the initial principal and the accumulated interest from previous periods. In DeFi, auto-compounding vaults claim and reinvest rewards automatically, increasing effective APY. The formula is: A = P(1 + r/n)^(nt).

An organization governed by smart contracts and token holder votes rather than a central authority. DAOs manage protocol treasuries, vote on upgrades, and set parameters. Examples include MakerDAO, Aave DAO, and CowDAO.

A cryptocurrency exchange that operates without a central intermediary. DEXs use smart contracts to facilitate peer-to-peer trading directly from user wallets. Users retain custody of their assets throughout the trade process.

Financial services built on blockchain networks using smart contracts, without traditional intermediaries like banks. DeFi includes lending, borrowing, trading, insurance, and asset management. It operates 24/7 and is accessible to anyone with a crypto wallet.

The most common token standard on Ethereum. ERC-20 defines a set of rules that all fungible tokens on Ethereum follow, including transfer, approval, and balance-checking functions. USDC, USDT, DAI, AAVE, and most DeFi tokens are ERC-20.

Transaction fees paid to validators for processing operations on a blockchain. On Ethereum, gas is priced in Gwei (a fraction of ETH) and varies based on network congestion. Layer 2 networks like Arbitrum and Base offer significantly lower gas fees.

A cryptocurrency that grants holders voting rights over a protocol's decisions. Governance tokens allow communities to vote on upgrades, fee structures, treasury spending, and protocol parameters. Examples: AAVE, BAL, COW, COMP, MKR.

The temporary loss of value that liquidity providers experience when the price ratio of their deposited tokens changes compared to when they deposited. The loss becomes permanent only when you withdraw. Stablecoin-only pools have minimal impermanent loss.

The base blockchain network that processes and finalizes transactions. Ethereum, Bitcoin, Solana, and Kaspa are Layer 1 blockchains. L1s provide the security foundation that Layer 2 solutions build upon.

A scaling solution built on top of a Layer 1 blockchain to increase transaction speed and reduce costs. L2s process transactions off the main chain while inheriting its security. Arbitrum, Optimism, and Base are popular Ethereum L2s.

A DeFi application that allows users to lend and borrow crypto assets. Lenders deposit tokens into pools and earn interest (APY). Borrowers provide collateral and pay interest. Aave, Compound, and Morpho are leading lending protocols.

The forced sale of a borrower's collateral when its value falls below the required collateralization ratio. Liquidations protect lenders from losses. On Aave, liquidation occurs when the health factor drops below 1.0. Borrowers lose part of their collateral plus a liquidation penalty.

A smart contract containing paired token reserves that enable decentralized trading. Users (liquidity providers) deposit tokens into pools and earn a share of trading fees. The pool uses a pricing algorithm (e.g., constant product formula) to determine exchange rates.

A user who deposits tokens into a liquidity pool on a DEX. LPs earn trading fees proportional to their share of the pool. In return, they receive LP tokens representing their position. Providing liquidity carries impermanent loss risk for volatile pairs.

The profit that block producers or searchers can extract by reordering, inserting, or censoring transactions within a block. Common MEV strategies include frontrunning and sandwich attacks. CowSwap provides structural MEV protection through batch auctions.

A service that provides external real-world data to smart contracts on the blockchain. Oracles supply price feeds, weather data, and other off-chain information. Chainlink is the most widely used oracle network in DeFi. Oracle failures can cause incorrect liquidations.

A consensus mechanism where validators stake cryptocurrency as collateral to verify transactions and produce blocks. Validators are selected based on the amount staked and other factors. PoS is more energy-efficient than Proof of Work. Ethereum transitioned to PoS in September 2022.

A consensus mechanism where miners compete to solve cryptographic puzzles to validate transactions and create new blocks. PoW requires significant computational power and energy. Bitcoin and Kaspa use Proof of Work.

The difference between the expected price of a trade and the actual execution price. Slippage occurs when market conditions change between order submission and execution, or when a trade is large relative to available liquidity. Higher slippage tolerance allows trades to execute in volatile conditions but may result in worse prices.

Self-executing code deployed on a blockchain that automatically enforces the terms of an agreement. Smart contracts power all DeFi applications — from lending pools to DEXs. They are immutable once deployed, which is why audits are critical for security.

A cryptocurrency designed to maintain a stable value, typically pegged to $1 USD. Stablecoins can be fiat-backed (USDC, USDT), crypto-backed (DAI), or algorithmic. They are the foundation of DeFi yields because they remove price volatility from earnings calculations.

Locking up cryptocurrency to support a blockchain network and earn rewards. On Proof-of-Stake networks, staking involves delegating tokens to validators. Staking rewards typically range from 3-15% APY depending on the network and token.

The total value of crypto assets deposited in a DeFi protocol's smart contracts. TVL is a key metric for measuring a protocol's adoption and trust. Higher TVL generally indicates greater confidence in the protocol's security. Track TVL at defillama.com.

The percentage of deposited assets in a lending pool that are currently borrowed. Higher utilization means higher interest rates for both lenders and borrowers. Most protocols target 80-90% utilization through dynamic interest rate curves.

A smart contract that implements an automated yield strategy on behalf of depositors. Users deposit tokens, and the vault executes complex DeFi strategies (lending, LP, compounding) automatically. Beefy, Yearn, and Morpho vaults are popular examples.

Software or hardware that stores your private keys and lets you interact with blockchains. Hot wallets (MetaMask, Rabby) run in your browser. Cold wallets (Ledger, Trezor) store keys offline for maximum security. You need a wallet to use DeFi.

A DeFi protocol that automatically finds and allocates funds to the highest-yielding strategies across multiple protocols. Yield aggregators auto-compound rewards and shift capital between opportunities. Beefy Finance, Yearn, and Coinstancy are yield aggregators.

The practice of strategically depositing crypto assets across multiple DeFi protocols to maximize returns. Yield farmers move capital between lending pools, liquidity pools, and staking positions to chase the highest APY. It requires active management and understanding of multiple protocols.