Krypto & DeFi Woordelys

The rate of return on a deposit over one year, including compound interest. APY counts the interest earned on interest already paid, so for the same nominal rate it is higher than the APR whenever compounding occurs. The more often interest is compounded, the wider the gap.

The simple annual interest rate, without compounding. APR ignores the reinvestment of interest already earned. In DeFi, protocols often quote an APR when rewards must be claimed and reinvested by hand. For the same nominal rate, APR is always lower than or equal to APY.

A type of decentralized exchange that prices assets with a mathematical formula instead of an order book. Anyone can deposit tokens into a liquidity pool and earn a share of the trading fees. Uniswap, Balancer and Curve are well-known AMM protocols.

A trading mechanism where orders are collected over a short window and settled together in a single transaction. All trades of the same token pair in a batch receive the same clearing price. CoW Swap uses batch auctions, which keeps orders out of the public mempool and limits MEV.

Moving tokens from one blockchain to another. Most bridges lock tokens on the source chain and mint a matching amount of a wrapped version on the destination chain; others use liquidity pools on both sides. A bridge adds its own smart contract and custody risk on top of the chains it connects.

Assets a borrower deposits as security for a loan. DeFi lending protocols require over-collateralization: the deposit must be worth more than the loan. If the collateral value falls below the protocol's threshold, part of it is sold to repay the debt (see Liquidation).

Interest calculated on both the original deposit and the interest already earned. In DeFi, auto-compounding vaults claim rewards and reinvest them automatically, which raises the effective APY. The standard formula is A = P(1 + r/n)^(nt), where n is the number of compounding periods per year and t the number of years.

An organization run through smart contracts and votes by token holders rather than by a central management team. A DAO typically controls a protocol treasury, approves upgrades and sets parameters such as fees. MakerDAO (rebranded Sky in 2024), Aave DAO and CoW DAO are examples.

An exchange that runs on smart contracts instead of a central operator. Trades settle directly from users' wallets, so users keep custody of their assets until the trade executes. Most DEXs are AMMs; others, such as CoW Swap, use batch auctions and route orders across several liquidity sources.

Financial services (lending, borrowing, trading, asset management) built on public blockchains with smart contracts instead of banks or brokers. DeFi protocols run around the clock and can be used by anyone with a crypto wallet. They carry smart contract, oracle and market risks that a bank deposit does not.

The most common token standard on Ethereum. ERC-20 defines the functions every fungible token must implement, including transfer, approve and balanceOf, so that wallets and protocols can handle any token in the same way. USDC, USDT, DAI and AAVE on Ethereum are ERC-20 tokens.

The fee paid to a blockchain network to process a transaction. On Ethereum, gas is priced in gwei (one billionth of an ETH) and rises when the network is busy. Layer 2 networks such as Arbitrum and Base charge much lower gas fees than Ethereum mainnet because they bundle many transactions into one.

A token that gives its holders voting rights over a protocol's decisions, such as upgrades, fee levels, treasury spending and risk parameters. Examples include AAVE, BAL, COW, COMP and MKR. Holding a governance token does not by itself entitle you to a share of protocol revenue.

The loss a liquidity provider faces when the relative price of the deposited tokens changes after the deposit, compared with simply holding those tokens. The loss only becomes permanent when the position is withdrawn. Pools of tokens that track the same price, such as two US dollar stablecoins, have very little impermanent loss.

A base blockchain that processes and finalizes its own transactions with its own consensus mechanism. Bitcoin, Ethereum, Solana and Kaspa are Layer 1 networks. Layer 2 networks rely on a Layer 1 for security and final settlement.

A network built on top of a Layer 1 blockchain to process transactions faster and at lower cost. An L2 executes transactions off the main chain and posts the results back to it, inheriting much of its security. Arbitrum, Optimism and Base are widely used Ethereum L2s.

A DeFi application where users lend and borrow crypto. Lenders deposit tokens into a pool and earn interest; borrowers post collateral and pay interest. Rates move with supply and demand in each pool. Aave, Compound and Morpho are major lending protocols.

The forced sale of a borrower's collateral when its value falls below the protocol's required ratio. Liquidation protects lenders from bad debt. On Aave, a position can be liquidated once its health factor drops below 1. The borrower loses part of the collateral plus a liquidation penalty paid to the liquidator.

A smart contract that holds reserves of two or more tokens so that traders can swap between them. Liquidity providers deposit tokens into the pool and earn a share of the trading fees. A pricing formula, such as the constant product formula used by Uniswap v2, sets the exchange rate from the reserves.

A user who deposits tokens into a liquidity pool on a DEX. LPs earn trading fees in proportion to their share of the pool and receive LP tokens (or a position NFT on Uniswap v3) as proof of their deposit. Providing liquidity for volatile pairs exposes LPs to impermanent loss.

The extra profit that block producers or specialized bots (searchers) can capture by reordering, inserting or excluding transactions in a block. Common forms are front-running and sandwich attacks on DEX trades. CoW Swap limits MEV by settling orders in batch auctions instead of the public mempool.

A service that feeds external data, such as asset prices, into smart contracts. Lending protocols rely on price oracles to value collateral. Chainlink and Pyth are widely used oracle networks. A wrong or delayed price can trigger incorrect liquidations, so oracle design is a key risk factor.

A consensus mechanism in which validators lock up (stake) the network's token as collateral for the right to propose and confirm blocks. Validators who break the rules can lose part of their stake (see Slashing). PoS uses far less energy than Proof of Work. Ethereum switched to PoS in September 2022.

A consensus mechanism in which miners compete to solve a computational puzzle; the winner adds the next block and earns the block reward. PoW requires large amounts of computing power and electricity, which is what makes rewriting the chain expensive. Bitcoin and Kaspa use Proof of Work.

A penalty on a Proof of Stake network that destroys part of a validator's stake when it breaks the rules, for example by signing two conflicting blocks. On Ethereum, a slashed validator is also forced to exit the network. Slashing is how PoS networks make misbehaviour costly; delegators usually share the loss.

The difference between the price you expect when you submit a trade and the price you actually get. It happens when the market moves before execution or when the trade is large relative to the pool's liquidity. A higher slippage tolerance lets a trade go through in fast markets, but at a worse price.

A program stored on a blockchain that runs automatically when its conditions are met. Smart contracts power every DeFi application, from lending pools to DEXs. Their code is usually immutable once deployed, so bugs cannot be patched easily. This is why independent audits matter.

A cryptocurrency designed to hold a fixed value, usually one US dollar. Stablecoins can be backed by fiat reserves (USDC, USDT), by crypto collateral (DAI, GHO) or by an algorithm. They are the base asset of most DeFi yields because they remove price volatility from the return. A stablecoin can lose its peg if its reserves or collateral fail.

Locking tokens to help secure a Proof of Stake network in exchange for rewards. Most holders delegate to a validator rather than running one. Rewards differ by network and move with the share of supply staked, token inflation and validator commission; each network publishes its live rate. Staked tokens are often subject to an unbonding period before they can be sold.

The total value of the assets deposited in a DeFi protocol's smart contracts, usually expressed in US dollars. TVL is a common measure of a protocol's size and adoption. It moves with token prices as well as with deposits and withdrawals, so compare it over time rather than at one point. DefiLlama publishes live TVL for most protocols.

The share of a lending pool's deposits that is currently borrowed. Interest rates rise with utilization, and steeply above an optimal level set per asset by governance, so that lenders keep enough free liquidity to withdraw. On Aave, that optimal level is typically set between 80% and 90% depending on the asset.

A participant in a Proof of Stake network that proposes and confirms blocks after locking up a stake as collateral. On Ethereum, a validator needs 32 ETH; on most other networks, token holders delegate to validators, who take a commission on rewards. Validators earn rewards for correct work and are penalized or slashed for downtime or misbehaviour.

A smart contract that runs an automated yield strategy for depositors. Users deposit tokens and the vault lends them, provides liquidity or compounds rewards according to its strategy. Beefy, Yearn and Morpho vaults are examples. A vault adds its own smart contract and strategy risk on top of the protocols it uses.

Software or a hardware device that holds your private keys and lets you sign blockchain transactions. Hot wallets such as MetaMask and Rabby run in a browser or on a phone. Hardware wallets such as Ledger and Trezor keep keys offline, which lowers the risk of theft by malware. You need a wallet to use DeFi directly.

A DeFi protocol that deposits user funds into yield strategies across several protocols and reinvests the rewards automatically. Aggregators save users gas and manual work, but add another layer of smart contract risk. Beefy Finance and Yearn are yield aggregators.

Moving crypto between lending pools, liquidity pools and staking positions to earn the highest available return, often including protocol token rewards. Yield farming needs active management and an understanding of each protocol's risks. Advertised rates can fall quickly as more capital enters a pool.