DeFi Glossary

Some definitions have been sourced from websites including: Investopedia, Cryptopedia, and Coinmarketcap.

Annual Percentage Rate (APR)

APR equals the annual return you will receive on an investment. APR is different from APY in that APR does not include the effects of compounding.

Annual Percentage Yield (APY)

APY equals the annual return you will receive on an investment when the returns from that investment are compounded. APY is different from APR in that APY includes the effects of compounding.

Arbitrage

Arbitrage is the buying and selling of assets between two different markets for the purpose of making a profit. This is done by taking advantage of differing prices of the same asset. (Example: if the price of AVAX on exchange 1 is $60 and the price of AVAX on exchange 2 is $61, then the arbitrager can buy AVAX on exchange 1 and sell it to exchange 2 for a profit)

Automated Market Maker (AMM)

Automated market makers are part of the decentralized finance (DeFi) ecosystem. They allow digital assets to be traded in a permissionless and automatic way by using liquidity pools rather than a traditional market of buyers and sellers. AMM users supply liquidity pools with tokens, whose prices are then determined by a constant mathematical formula.

Compounding

Compounding is the process in which an asset's earnings are reinvested to generate additional earnings over time. This growth is exponential and occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods.

Decentralized Autonomous Organization (DAO)

A decentralized autonomous organization (DAO) is an organization that runs on a blockchain protocol fully and autonomously in accordance with rules encoded via smart contracts. By circumventing the need for human intervention or centralized coordination, DAOs are often referred to as “trustless” systems.

Decentralized Exchange (DEX)

A decentralized exchange (DEX) is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. In contrast to centralized exchanges (CEXs), decentralized platforms are non-custodial, meaning a user remains in control of their private keys when transacting on a DEX platform. In the absence of a central authority, DEXs employ smart contracts that self-execute under set conditions and record each transaction to the blockchain.

Decentralized Finance (DeFi)

Decentralized finance (DeFi) is a major growth sector in blockchain that offers peer-to-peer financial services and technologies built on various blockchains, including Avalanche. DeFi exchanges, loans, investments, and tokens are significantly more transparent, permissionless, trustless, and interoperable than traditional financial services, and trend towards decentralized governance organizational methods that foster equitable stakeholder ownership.

Folding

Folding refers to a strategy of borrowing an asset from a lending platform in order to reinvest it in the same platform. This can be profitable under certain conditions, especially when platform-specific incentives for borrowing are large enough. This can be repeated multiple times with diminishing returns, since you need to remain overcollateralized at all times.

Gas

Gas refers to the fee required to successfully conduct a transaction or execute a contract on a blockchain.

Liquid Staking

Liquid staking refers to a form of staking/depositing where funds aren't entirely locked. By depositing funds, a user receives another asset of equivalent value and functionality to their original stake. This increases the ecosystem's velocity of money, since value is not locked to any particular contract.

Liquidity

Liquidity refers to the ease with which an asset can be converted into cash or traded into another asset. When you supply liquidity on a Decentralized Exchange (DEX), you are making it easier for people to trade the assets you supply.

Liquidity Pool

Liquidity pools are pools of tokens locked in smart contracts that provide liquidity for decentralized exchanges.

Multisig

Multi-signature (multisig) wallets are wallets that require signatures from multiple entities before executing any transaction. This makes them safer to control and/or hold large amounts of funds due to the inability of 1 person to misuse them, and also distributes the security risk of key exposure among all signers.

Pegged Tokens

A digital currency created with the intent of holding a stable value to some other asset. (Example: wrapped Bitcoin is pegged 1:1 with Bitcoin)

Slippage

Slippage is the difference between the expected price of a trade relative to the actual price at which the trade is executed. Slippage generally occurs when an investor buys or sells an asset on a platform with poor liquidity and low trading volume. If there is a large gap between the bid-ask price on an exchange's order book, the asset purchaser may end up paying more for an asset or receive less of the asset than expected once the trade has been executed.

Smart Contract

A smart contract is a self-executing code or protocol that carries out a set of instructions that is verified on the blockchain. These contracts are trustless, autonomous, decentralized, and transparent; they are irreversible and unmodifiable once deployed.

Stablecoin

A stablecoin is a digital currency created with the intent of holding a stable value. The value of most existing stablecoins is tied directly to a predetermined fiat currency or tangible commodity. However, stablecoins can also achieve price-stability through collateralization against other cryptocurrencies or algorithmic token supply management.