The complete beginner resources to DeFi glossary

If you are a beginner to Decentralized Finance (“DeFi”), you may find that the space came up with a bunch of its own vocabularies and terms that sound really complex and difficult to comprehend. If these intimidate you, you have come to the right place as we will flesh out the meaning of these terms for you:

• (3,3): You may see a lot of people putting (3,3) at the back of their Twitter handle and you might wonder what could this be referring to? (3,3) is no other than the matrix of an outcome of Prisoner’s Dilemma, a standard example of a game analyzed in game theory. The Prisoner’s Dilemma is quite grim — it explains why two very rational individual are most likely going to be betray each other as those are the most optimum course of action regardless of what the other person might do. However, in the context of DeFi, the (3,3) strategy is actually a meme perpetrated by the OlympusDAO community to promote staking. Out of the three strategies that you can adopt, staking is the most beneficial to the protocol and also to the holders of $OHM (OlympusDAO’s native token) because it preserves the token value, and as such it is being given a +3 value. Bonding is the second strategy that is the most beneficial i.e. swapping liquidity providing tokens such as $DAI for discounted $OHM — it’s only second most beneficial because $OHMs are being emissioned at a discount, but it still adds value to the protocol hence it is being given +1 score. Meanwhile, selling as the third strategy is the most destructive to the protocol and to the $OHM holders, so its value is -1. The (3,3) meme suggests that given everyone wants the best outcome for themselves and for the protocol, they should adopt the (3,3) strategy, which is stake and never sell. This is of course an opposite of what we learn from Prisoner’s Dilemma, in which betraying or selling is the most optimum strategy. Nevertheless, the (3,3) meme campaign worked to an extent with more than 90% of $OHM being staked in the middle of 2021.
• Alpha & Beta version: Alpha version of any protocol is usually the early prototype that is meant for an early testing phase, and is tested by someone inside the organization. Beta version is similar to Alpha version, the only difference being that it is tested by the end users instead of just people inside the organization
• Automated Market Maker (“AMM”): If you come from TradFi, you may be familiar with orderbook-based centralized exchanges when it comes to trading equities and other capital market products. In the crypto world, we have both the centralized model with orderbook (Binance, FTX, etc), as well as the decentralized models like the trading pools (Uniswap, Sushiswap, Pancakeswap), which is usually referred to as the AMM. The AMM is a trading pool in which an asset, say Ethereum ($ETH), is being sold against its trading pair, say the Wrapped Ethereum ($WETH). These decentralized asset trading pool has no orderbook — its initial liquidity is provided by people called the Liquidity Providers (“LP”), which can be project owners, investors, or those who participated in an event called Initial Liquidity Offering (“ILO”). In any case, the trading pool enables market participants to buy or sell cryptocurrencies from it without any intermediaries like brokers and banks, as it is being ran by smart contracts. Note that assets inside the trading pool are being priced in relation to one another as they exist in isolation — this means the real market price of the asset may not be perfectly reflected by its price inside the trading pool (in a highly efficient market the price will converge due to arbitrageurs). Each AMM pool may have different model / formula, the most common one being the constant product model formula applied by Uniswap v2.0 (we talk about this briefly in Slippage 101)
• Annual Percentage Yield (“APY”): a time-based measurement of the Return On Investment (“ROI”) on an asset. For example, $100 invested at the rate of 20% compounding 4x a year will give us $206.4 by the end of the year. As such the APY of this investment is 107% i.e. (1+20%)⁴-1. As compounding rate looks large, it is often being advertised by staking pools & yield farms to attract investors
• Annual Percentage Rate (“APR”): Different from APY in a way that APY takes into account compounding while APR does not (in TradFi terms, this is called the simple interest). In the above example, the APR of the investment will simply be 4*20%=80%. As you can see, 107% and 80% is quite a lot of difference — this is because the more often an investment compounds, the larger would the difference between APY and APR be. As APR tend to underestimate the rate of increase of an investment or a loan, lenders tend to advertise their products in APR terms as it seems lower and cheaper to potential borrowers. We have to double-check before entering into any loans in DeFi whether a rate advertised is an APY or an APR
• Arbitrage: This term is not exclusive in DeFi as you might have heard of this many times in TradFi as well. Arbitrage refers to the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset. In the AMM example above, the asset might be trading at higher prices in centralized exchanges compared to its price inside a trading pool or AMM. In this case, an arbitrageur will purchase the asset from the AMM and sell it in the centralized exchange for some profits. This action will also ensure that prices tend to trade at equilibrium
• Bag: Refers to someone’s investments. A huge bag in something means you have a lot of concentrated investment in a particular token / product
• Balancer: Balancer usually refers to the Balancer protocol, which is a highly flexible optimizer for trading pools built on top of the Ethereum chain (it also support other EVM-compatible blockchains). Balancer protocol recognize that a trading pool with many assets inside resemble an index, and that these assets would need to be rebalanced to mirror its market prices outside of the pool. Arbitrageurs and traders are being paid to rebalance these assets while the Balancer pool collects trading fees and redistribute these to their token holders. The main difference between Balancer and other DEXes is that Balancer is very flexible in allowing LP to set the parameters of the trading pool, for example you can put 3–4 assets inside a pool and you can also apply customized pricing options for your assets, set your own trading fees and many others. Another example is that while protocols like Uniswap v2.0 only allows constant product formula for the AMM, Balancer allows you to apply other pricing formula to your liking
• Bonding curve: A mathematical formula that is used to describe the relationship between an asset price and its supply. For example, AMMs like Uniswap v2.0 utilize the Constant Product Model to define its bonding curve. This simply means given two assets in a trading pool i.e. Asset x and Asset y, their supply is defined by the q(x)*q(y)=K, in which q(x) and q(y) refers to the supply of respective Assets x and y, and K refers to a constant that only changes when liquidity is being added or withdrawn from the pool by the LPs. Meanwhile, their prices is defined in terms of one another. There are other bonding curves other than Constant Product Model, such as Constant Sum Model and Constant Mean Model that are applied by other protocols
• Bonding an asset: Some protocols use fancy terms such as ‘bonding’ when they actually just mean “I’ll sell you my native token for some of your liquidity providing token”. For example, in Wonderland Finance, you can bond Magic Internet Money ($MIM), an Avalanche-native stablecoin, for their native token, $TIME. When you bond $MIM for $TIME, you are getting $TIME that is trading at a discount to its market price, albeit with a catch i.e. the $TIME is vesting over 5 days period. This term is originally popularized by OlympusDAO, who also allows you to bond your $DAI (another ERC-20 stablecoin native to MakerDAO) for some discounted $OHM in OlympusDAO. OlympusDAO further introduce the term inverse bonding, which describes the opposite of this transaction i.e. buying back the discounted $OHM from you in return of liquidity providing tokens. Bonding an asset is a strategy that is used by many protocols to ‘purchase’ liquidity (using their currency i.e. native token), as opposed to protocols such as Uniswap and Sushiswap that merely ‘rents’ liquidity
• Bridges: Interoperability is another important concept in DeFi. As we know, we have many blockchains and many different d’apps built on top of those blockchains. Interoperability is something that is appreciated by investors, and at the moment, the ability to transfer an asset safely over to another blockchain in order to farm yields or for other purposes is facilitated by bridges such as Multichain (Anyswap), Synapse, and others. Note that bridges can help to take asset to another blockchain (usually EVM-compatible chains) which include both Layer 1 and Layer 2 chains. Meanwhile, bridging assets from an EVM-compatible chain to a non-EVM compatible can be done by some protocols only, for example Router protocol
• Burning: Burning simply means taking tokens out of the circulation, effectively reducing circulating supply of the tokens. In TradFi, this is analogous to stock buybacks, in which stocks that have been repurchased are being put back into the treasury and those stocks can be placed / sold back to the market at a later date. The difference between crypto burning and TradFi buybacks is that with the former, when a token is burnt, it is taken out of the circulation forever. Burning is usually conducted manually by sending tokens to a 0x….dead address. The proof of burning would then usually be presented back to the community as evidence that burning has occurred. Burning typically has positive impact on market prices
• CeFi: A short for Centralized Finance. Sometimes interchangeable with TradFi
• CEX: A short for Centralized Exchanges. Binance, Bitfinex, FTX, Coinbase and Gemini are examples of CEX. In CEX, people do not hold their own private key as they use the sub-wallet of a CEX’s wallet to hold their asset (thereby entrusting the CEX to custodize the assets for them). CEX is also not permissionless as it usually require KYC and has the ability to refuse to service certain individuals / deny access to certain services
• Collateralization: In situations when you are taking out a loan to enter into transactions such as leveraged yield farming, you will be asked to provide a collateral to back up your loan. Collateralization refers to the advancing of loan assets to borrowers, secured by an existing crypto asset to protect lenders against non-payment. Collaterals will also be used to take up your position in margin trading. Collaterals can be provided in form of a token or stablecoin during leveraged trading, with collateral in token considered to be more risky as it declines together with the value of the position, whilst stablecoin preserves its value and is thus, a better collateral in bear market
• Composability: A very important concept in the crypto world — composability refers to the measure of the usability and ability of the product to be used as a building block or foundation for other domains or products. It means, the other products or domains are able to easily build on top of your product. A protocol that is simple, powerful, and that functions well with other protocols would be considered to have high composability. For example, EVM-compatible protocols are considered to have higher composability compared to non-EVM compatible protocols. Composability is also an important concept in NFT and gaming world, in which a highly composable game protocol is able to integrate many NFT projects and items into its ecosystem, allowing many projects to come together into one single metaverse
• Curve: Curve refers to the Curve protocol, a multichain AMM that specializes in stablecoins characterized with very low slippage and very low fees. Curve also has their own native token called $CRV, which is a composite of four different USD-based stablecoins. $CRV tokens are rewarded to the protocol’s users to share in the protocol fees and it must be staked in order obtain voting escrow tokens ($veCRV). Holders of $veCRV are able to vote on governance items concerning trading pools such as which pools will receive boosted rewards, etc. Curve is a playground for big whales who aim to outvote each other in the governance through their $veCRV holdings, which leads to another term called the Curve Wars
• D’apps: a short for Decentralized Application i.e. applications running on a blockchain and built on top of web3 — typically censorship resistant, decentralized, permissionless and non-custodial
• Decentralized Autonomous Organization (“DAO”): internet-native organizations collectively owned and managed by their member, with no centralized leader
• Degen: Short for degenerates — subculture associated with traders who enter a trade without any sound analysis and consideration and sometimes knowingly or unknowingly become a participant in pump and dump schemes
• DEX: A short for Decentralized Exchanges. dYdX & Uniswap are examples of decentralized exchanges. DEX’s main characteristics is that it is non-custodial (they do not custodize or hold on to your assets), and permissionless/ censorship resistant
• Epochs: Referring to a length of a particular staking period / cycle which is used to specify when specific events in a blockchain network will occur, such as when rewards will be distributed. Not to be confused with batches
• ERC-20: Token standard for assets in Ethereum blockchain, and other EVM compatible chain
• EVM: Short for Ethereum Virtual Machine. Blockchains that are forks of the Ethereum blockchain are called EVM-compatible blockchains as they are fully compliant with the Ethereum Yellowpaper, and this includes chains such as BSC, Avalanche C-Chain, Fantom, Polygon, RSK and many others. This means these blockchains are created based on an ERC-20 template and have higher degree of composability with others that are also EVM-compliant. Meanwhile, non-EVM chains include Solana, Harmony One, Terra and many others. EVM-compatible chains are written in Solidity language while non-EVM chains are typically written in other programming languages. For example, Solana uses Rust C, C++language to deploy d’apps onchain instead of Solidity, and Harmony One uses Go, Phyton, and Typescript
• Fair launch: Fair launch refer to an initial token launch in which there is only one available price for all parties including founders, team and public. No one gets in earlier at a lower price than anyone else, and as such it is referred to as fair launch
• Financial primitives: You may hear this term being thrown around in tweets from developers like Andre Cronje. This simply means the most basic form of financial activities. The two largest financial primitives in the world are lending and borrowing, which serve as the base on top of which other financial activities can be built on
• Flash loan: A type of loan that is only possible in the world of cryptocurrencies. As per namesake the loan is ‘flash’ i.e. very fast and taken out for the very short period of time it is required to complete a transaction, and furthermore it is unsecured and uncollateralized. Flash loan builds a smart contract on the blockchain that acts as a request to borrow funds which also contain all the terms for the loan, and it executes the contract from borrowing to purchasing an asset to selling and to eventually repaying back the loan. Note that due to its lending mechanics & usage of smart contracts, it’s almost impossible to actually default on the loan. Specifically, a smart contract will consider the transaction complete when the borrower has repaid the lender, a borrower defaulting on a flash loan means that the smart contract cancels the transaction. In effect, the transaction reverses itself, and the money would go back to the lender
• Flash loan attack: Referring back to the smart contract executing flash loan above — flash loan attack is an act that manipulates the lending mechanics by borrowing funds in a specific currency / token, and driving the value of the borrowed token to the ground, allowing the attacker to buy the borrowed token at deflated prices to repay the flash loan. The surplus borrowed token is kept by the attacker and sold in other markets for a profit. Note that this is possible because as we discussed earlier, there can be multiple markets that exist for a token. A token can be mispriced in one trading pool but trading normally in other pools and exchanges
• FOMO: Short for Fear Of Missing Out, which describes a feeling that everyone is getting rich without you with their bag / investments, which often compels you to chase their investments as not to be left behind
• Forced liquidation: No one likes this word, and it simply means what you think it means i.e. situation when a trader is unable to fulfill the margin requirements for a leveraged position in relation to their collateral. The concept of liquidation applies to both futures and margin trading. In crypto, you can participate in leverage trading through both CEX and DEX. To avoid forced liquidation, you may consider buying a tokenized leveraged position with no liquidation area, however this is typically not suggested as you won’t have the liberty to set your own leverage ratios
• Gas fees: The rewards paid out to miners / validators in blockchain to incentivize them to write the transaction into the blockchain. All onchain activities will incur gas fees. All network will also incur gas fees, regardless of their consensus mechanism. High / low gas fees are determined by the traffic in the specific blockchain — the higher the traffic, the higher the gas fees would be. The reverse is also true
• GM: Short for Good Morning
• GN: Short for Good Night
• Governance: Refers to the measures applied by a protocol to grow and maximize gains for the ecosystem or product. Governance is managed / controlled through a governance token, typically through a staking and voting mechanism
• Gwei: the unit of gas in the Ethereum blockchain (ERC-20)
• HODL: Short and misspelled version of ‘holding’, used by early adopters of cryptocurrency in its nascent days
• Impermanent loss: We discussed this in much greater detail in this article. In short, this refers to the difference in dollar value of assets when they are provided as liquidity in a trading pool vs the dollar value if they were just being held. This dollar value shortfall is known as impermanent loss. The loss is said to be impermanent because if asset prices return to the level during withdrawal the loss is eliminated
• Insurance primitive: Tokenized version of an insurance. Again, this term is coined by Andre Cronje
• Leveraged yield farming: You know what leverage means and you know what yield farming means from this article. Leveraged yield farming means using borrowed funds to participate in yield farming activities in a hope to boost your APYs. Typically in DeFi, you can put up your rewards as collateral to withdraw more stablecoins in order to leverage, and you are able to keep looping as much as you like. Do be very cautious with leveraged yield farming as decline in the value of collateral can very quickly lead to cascading liquidations
• Liquidation value: The value at which your leveraged position will get liquidated at. Liquidation value is the function of the price at which the leverage position is entered to, the funding fee and the leverage multiple. A short position will have liquidation value above the price at which you enter the position i.e. your average cost, while a long position will have liquidation value below your average cost
• Liquidity mining: Simply another word for bonding an asset (see above entry). Both liquidity mining and bonding refer to a strategy that is applied to purchase liquidity from traders, which allows the protocol to earn the fees from providing liquidity to their trading pools. In times when liquidity is drying up, this strategy preserves the liquidity of the protocol vis a vis a protocol that rents liquidity (Uniswap, Sushiswap etc)
• Liquidity Provider (“LP”): Simply refers to traders who provide liquidity to a particular trading pool by providing an appropriate ratio of two or more tokens to the pool, in exchange of collecting transaction fees for every transaction that happens in the pool. In protocols like Uniswap, the LPs are traders such as you and me, while in protocols such as OlympusDAO, the liquidity is purchased from us through the bonding / liquidity mining process. LPs are often rewarded with LP token which act as a proof of ownership of the trading pool, which is calculated as the share of liquidity provided over the total liquidity in the trading pool. The LP token can often be further staked for more benefits, such as sharing in the the protocol fees, transaction fee booster, or governance rights
• Metamask: MetaMask is a hot wallet that can hold, transmit or receive Ethereum and ERC-20 compatible coins or tokens. Metamask can only support EVM-compatible chains and can be downloaded as extension to your browser. Metamask stores private keys in the user’s browser and as such, considered not as secure as a hardware or paper wallet
• Maker: Maker is a DeFi protocol which is based on a stablecoin called $DAI. $DAI is algorithmically pegged to US$1.0, with no volatility (we discuss more about stablecoins in this article)
• Mining pool: A pool of cryptocurrency miners that provides mining services to a cryptocurrency network. Mining Pool operators and contributors are incentivized by a coin or token’s programmed mining rewards to support transactions and provide liquidity on a coin’s network
• Multisignature wallet: A multiple signature wallet is a cryptocurrency wallet that controls access and changes to one or more smart contracts, and is often applied to eliminate the need to trust one person completely for all actions from the wallet. Community governed projects like a DAO often require multiple signers to approve a transaction before it will be executed. For community-based efforts, Multisig wallets for DAOs and DeFi projects are often implemented as 6 of 9 wallets, where 6 of 9 community wallet signers must agree to sign a transaction before a smart contract can be implemented
• Onchain / offchain: The term onchain refers to activities which happens in form of transactions that happen on the blockchain, and are therefore validated or mined and recorded on the blockchain. Offchain refers to activities or transactions that happen outside of the blockchain and are therefore not recorded by the blockchain. All onchain activities required to be powered by gas fees as miners need to be incentivized to verify and record the transaction. Offchain transactions, on the other hand, can occur without incurring gas fees
• Oracle: Oracles are onchain APIs you can query to get information into your smart contracts. They act as a bridge that feeds smart contracts that live onchain, with live data from the real world (offchain). In the context of DeFi, price oracles that feed offchain prices of particular asset prices to the smart contract is particularly useful to reduce the risk of flash loan attack, as asset prices outside of the trading pool are not susceptible to manipulation by flash loan attackers. Chainlink ($LINK) is a major provider of oracle infrastructure that helps to facilitate the transfer of tamper-proof data from off-chain sources to on-chain smart contracts
• Rebase tokens: This refers to tokens with dynamic circulating supply — it can either increase (more coins being minted) or decrease (more coins get destroyed or ‘burnt’). The increase or decrease of the circulating supply is spread proportionally across token holders. Rebase tokens typically target a specific market cap and when price falls or increase, its algorithm adjust the circulating supply to achieve the target market cap. Example of rebase token is $gOHM from OlympusDAO and $TIME from Wonderland Money. Rebases do not actually need any actions from the part of holders and they do not get distributed through approved ‘sending’ or ‘receiving’ on the blockchain. It just happens algorithmically and is part of the token mechanics. As such, one day you may open your wallet and realize that you have more or less tokens than you remember, and when you navigate to history, you will not be able to trace the history of tokens rebasement. Rebases happens at each particular epoch decided by the particular protocol, for example an epoch can last for 8 hours which means your tokens will be rebased every 8 hours. If the market price of a token keeps falling, a protocol may issue more and more tokens during rebasement, and this may get reflected in extremely juicy APY % displayed on the front page. This is why it is very important to be very vigilant when investing in rebase tokens due to potential misleading APY %. Furthermore, due to its nature, rebase tokens cannot typically be sold in a decentralized trading pool or become a constituent of an index. In order for index tokens to be composable with other protocols, you would normally need to wrap the tokens first before transferring them out
• Reflections: This simply means rewards, usually in form of tokens that are paid to tokenholders without them having to move any money, sign up to any staking pool, or even having to check their crypto wallet. Reflections are usually financed by a percentage tax on any transaction in the native token. The tax is redistributed instantly to coin holders, most often according to the size of their holding.
• Slippage: We discuss slippage in great detail in this article
• Smart contract: Digital contract that is programmed in a language that is considered Turing complete, meaning that with enough processing power and time, a properly programmed Smart Contract should be able to use its code base and logical algorithms to perform almost any digital task or process. Ethereum’s programming languages, such as Solidity and Vyper, are Turing complete
• Spread: When an order is made on an exchange or market, the disagreement of the difference in price between potential buy and sell offers of an asset is called the spread. A wide spread in price can lead to higher slippage
• Stablecoins: Digital asset pegged with real-life fiat currency with no volatility at all, is sometimes seen as a hedge or safety measure in times of high volatility or during bear markets. The pegging mechanism differs based on the type of the stablecoins — we discuss stablecoins in great details in this article
• Testnet: A testing network for a new coin, project, or even blockchain, or for potential improvements to an existing product or offering. Testnets are used to test the viability and vulnerability of new ideas, concepts, code, and processes prior to moving on to a production network or networks of some sort. For Ethereum, we actually have four testnet networks i.e. Ropsten, Kovan, Rinkeby and Goerli. Any transactions that happen on the testnet do not translate to mainnet i.e. you cannot cash out on investments made in testnet, nor can you lose money from anything you spend on testnet. For testing purposes, faucets for testnet coins are typically available and are free for you to mint
• Tokenized anything: Refers to any pool of resources that are being distributed using tokenization method. This could be anything from treasury returns, fees from facilitating transactions, a pool of NFTs, and many others. Tokenizing these pool of resources or rewards enable a protocol or user to distribute these to the desired target. This is analogous to creating a company and selling the company’s shares to a group of investors
• Total Value Locked (“TVL”): The TVL tells us the value that is locked into a Smart Contract or set of Smart Contracts that may be deployed or stored at one or more exchanges or markets. This is used as a measurement of investor deposits. It is the dollar value of all the coins or tokens locked into a platform, protocol, lending program, yield farming program, or insurance liquidity pool. To check the value of TVL, we can obtain the address of the smart contract and plug this address on dashboard such as Zapper.Fi
• Whale: Rich person who holds significant amount of cryptocurrency asset
• Wrapped: A wrapped token is a cryptocurrency token pegged to the value of another crypto. It’s called a wrapped token because the original asset is put in a wrapper, a kind of digital vault that allows the wrapped version to be created on another blockchain. Wrapped tokens are pegged to the value of the asset it represents and typically can be redeemed for it (unwrapped) at any point. It usually represents an asset that doesn’t natively live on the blockchain that it’s issued on. For example, you cannot $BTC in Ethereum network, however instead, you can use its wrapped version i.e. $WBTC. $WBTC is an ERC-20 token that’s supposed to hold a one-to-one peg to the value of Bitcoin, allowing you to effectively use BTC on the Ethereum network. The custodian of $WBTC holds 1 $BTC for every $WBTC that is minted to ensure that you can redeem each wrapped Bitcoin for an actual Bitcoin in Bitcoin network at any time

Do you think we missed some critical DeFi-related lingos and jargons? Let us know in the comments :)