Essential DeFi Glossary of 80 Important Terms
A Comprehensive DeFi Glossary to help you navigate Decentralized Finance with confidence
- All-Time High (ATH): The highest price level ever reached by a cryptocurrency or asset.
- AMM (Automated Market Maker): A decentralized exchange mechanism that uses mathematical formulas to set token prices and execute trades.
- AMO (Automated Market Order): A type of order executed automatically at the best available price on a decentralized exchange.
- APY (Annual Percentage Yield): The rate of return on an investment expressed as a percentage over a year, accounting for the effect of compounding interest.
- Airdrop: The distribution of free tokens to wallets, often used by projects to promote awareness or reward existing token holders.
- Arbitrage: The practice of exploiting price differences of the same asset on different markets to make a profit.
- BEP-20: The technical standard for creating tokens on the Binance Smart Chain, similar to Ethereum’s ERC-20 standard.
- Black Swan Event: An extremely rare and unexpected event that has a severe and widespread impact on the financial markets.
- Block Reward: The reward given to miners for successfully mining a new block on a blockchain network.
- Bridging: The process of connecting two different blockchain networks to enable interoperability and asset transfers between them.
- Bull Market: A financial market where prices are rising or expected to rise, encouraging buying.
- Burn: The deliberate and permanent removal of tokens from circulation, often done to reduce the total supply and increase the value of remaining tokens.
- Circulating Supply: The total number of coins or tokens of a cryptocurrency that are publicly available and circulating in the market.
- Consensus: The process by which participants in a decentralized network agree on the state of the blockchain.
- Cryptocurrency: Digital or virtual currency secured by cryptography and often used as a medium of exchange within a blockchain network.
- DAO (Decentralized Autonomous Organization): An organization governed by smart contracts and run by its members, who hold voting power over decision-making processes.
- DApp (Decentralized Application): Applications that run on a decentralized network, typically on a blockchain, using smart contracts.
- DEX (Decentralized Exchange) / CEX (Centralized Exchange): DEX refers to a decentralized platform for trading cryptocurrencies, while CEX is a centralized exchange controlled by a central authority.
- DEX Aggregator: Platforms that aggregate liquidity from multiple decentralized exchanges to offer users better prices and lower slippage when trading.
- EIP (Ethereum Improvement Proposal): A design document proposing improvements to the Ethereum blockchain.
- Emission Rate: The rate at which new coins or tokens are created and released into circulation.
- Escrow: A financial arrangement where a third party holds and regulates payment of funds until the completion of a transaction.
- Fair Launch: A launch process for a project or token without pre-mining, pre-sales, or unfair advantages for certain participants.
- Flash Loan: A type of uncollateralized loan obtained within a single transaction and repaid within the same transaction block.
- FOMO (Fear of Missing Out): The fear that an investor may miss out on an opportunity for profit and takes action solely based on this fear.
- Fork: A split or divergence in a blockchain’s transaction history that results in a new separate version of the blockchain.
- Gas Fees: The cost required to execute transactions or smart contracts on the Ethereum blockchain.
- Gas Limit: The maximum amount of gas units a user is willing to spend on a transaction on the Ethereum network.
- Gas Price: The price denoted in Gwei that users are willing to pay per unit of gas to execute a transaction on the Ethereum network.
- Genesis Block: The first block in a blockchain, also known as Block 0, from which all subsequent blocks are linked.
- Governance: The process and mechanisms by which decisions are made within a decentralized ecosystem.
- Gwei: A denomination of the cryptocurrency Ethereum, used to measure the cost of gas fees for transactions on the network.
- Halving: An event in some cryptocurrencies, like Bitcoin, where the block reward for miners is halved, reducing the rate at which new coins are created.
- Hard Fork: A significant change to a blockchain’s protocol that is not backward compatible.
- Hash Function: A cryptographic function that takes an input (or ‘message’) and returns a fixed-size string of bytes.
- Hash Rate: The speed at which a mining machine operates in a blockchain network, measuring its processing power.
- HODL: A misspelling of “hold,” often used in the crypto community to encourage holding onto investments instead of selling.
- ICO (Initial Coin Offering): A fundraising method where new cryptocurrencies or tokens are sold to early investors before being listed on exchanges.
- IDO (Initial DEX Offering): A fundraising method where new tokens are issued and distributed via a decentralized exchange.
- Impermanent Loss: Losses incurred by liquidity providers in automated market maker pools due to fluctuations in token prices.
- Immutable: In the context of blockchain, it refers to data that cannot be changed or altered once it’s been added to the blockchain.
- Initial Liquidity Offering (ILO): A fundraising method where liquidity is provided to a decentralized exchange to launch a new token.
- KYC (Know Your Customer): A regulatory process to verify the identity of customers to prevent fraud, often required by financial institutions.
- Layer 1: The primary blockchain layer where the core network and native token operate.
- Layer 2 Scaling Solutions: Technologies built on top of a blockchain to improve its scalability and transaction throughput.
- Liquidity Providers: Individuals or entities that contribute funds to liquidity pools on decentralized exchanges to facilitate trading and earn rewards.
- LIQUIDITY: The availability of assets to be bought or sold in a market without causing significant price changes.
- Market Cap: The total value of all coins or tokens in circulation.
- Market Order: An order to buy or sell an asset at the best available price in the market at the time the order is placed.
- Mining Pool: A group of miners who combine their computational resources to increase the chances of successfully mining blocks and sharing the rewards.
- Multichain: The interoperability between multiple blockchain networks, allowing assets and data to move seamlessly across different chains.
- Node: A device that maintains a copy of the blockchain’s network and participates in the consensus process.
- Nonce: A number used only once in cryptographic communication, often used in transaction validation.
- Off-Chain: Transactions or data that occur outside the blockchain network.
- Open Finance: Refers to the use of decentralized technologies to create open and interoperable financial ecosystems.
- Oracles: External data sources that provide off-chain information to smart contracts, enabling them to interact with real-world data.
- Orphan Block: A valid block that is not part of the main blockchain due to a time lag in the network.
- P2P (Peer-to-Peer): A network where participants interact directly with each other without intermediaries.
- Paper Hand: An investor who quickly sells their holdings during market downturns due to fear or panic.
- Private Key: A cryptographic key that allows access to a user’s cryptocurrency holdings and the ability to authorize transactions.
- Proof of Stake (PoS): A consensus mechanism where validators are chosen to create and validate new blocks based on the number of tokens they hold and “stake” in the network.
- Quantitative Easing (QE): A monetary policy in which a central bank purchases securities to increase the money supply and stimulate the economy.
- Rebase: An operation that adjusts the total supply of a cryptocurrency to stabilize its price or meet certain criteria.
- Rug Pull: A fraudulent practice in DeFi where developers abandon a project after raising funds or liquidity, causing investors to lose their money.
- Satoshi: The smallest unit of Bitcoin, named after its pseudonymous creator, Satoshi Nakamoto.
- Sharding: A technique used to increase blockchain scalability by splitting the network into smaller partitions called shards.
- Smart Contracts: Self-executing contracts with the terms of the agreement directly written into code. They automatically enforce and execute agreements without intermediaries.
- Staking: Locking up cryptocurrencies to support the operations of a blockchain network. Stakers are often rewarded with additional tokens for their participation.
- Token: A digital asset representing a unit of value or utility on a blockchain. Tokens can represent various assets or rights within a decentralized ecosystem.
- Token Burn: The process of permanently removing a certain number of tokens from circulation.
- Tokenomics: The economic model and principles behind the design and distribution of tokens within a blockchain ecosystem.
- Uniswap: A popular decentralized exchange protocol on Ethereum known for its automated liquidity provision and swapping functionality.
- Utility Token: A type of cryptocurrency that provides access to a specific product or service within a project’s ecosystem.
- Volatile Asset: An asset whose price experiences significant fluctuations within a short period.
- Volatility: The degree of variation of a trading price series over time, used to assess the risk associated with an asset.
- Wallet: A software application or hardware device used to store, send, and receive cryptocurrencies.
- Whale: A term used to describe individuals or entities that hold a large amount of cryptocurrency.
- Yield: The income generated from an investment, often expressed as a percentage of the investment’s value.
- Yield Farming: A strategy where individuals provide liquidity to DeFi protocols in exchange for rewards, typically in the form of additional tokens or interest.
- Zero-Knowledge Proof (ZKP): A cryptographic method that allows one party to prove possession of specific information without revealing the information itself.