DeFi Glossary

Welcome to the dynamic and revolutionary world of Decentralized Finance (DeFi). DeFi is redefining financial services paradigms by building them on blockchain technology, offering an open, transparent and accessible ecosystem that operates without the need for traditional intermediaries. From loans and exchanges to insurance and derivatives, DeFi empowers individuals by giving them unprecedented control over their assets through smart contracts and decentralized applications (dApps).

However, the rapid evolution of this sector and the specificity of its language can pose a barrier to entry. This glossary has been carefully developed to demystify the terminology of the DeFi universe. Here you will find everything from the fundamental concepts that lay the foundations of this ecosystem, to the trends and advanced concepts that are shaping its future. The goal is to provide you with a clear and concise reference that allows you not only to understand the conversations, but also to participate actively and with confidence in the growing space of decentralized finance. Get ready to dive into the terms that are building the future of finance.

Deep Research on DeFi (Decentralized Finance)

Decentralized Finance, known as DeFi, represents an ecosystem of financial services built on blockchain technology, eliminating traditional intermediaries such as banks and allowing anyone to access loans, exchanges, insurance and more through smart contracts and decentralized applications (dApps). The DeFi sector has experienced exponential growth and continues to evolve with new trends, products and specific terminology.

DeFi Vocabulary and Terminology Guide

Below is an exhaustive glossary of essential terms and concepts in DeFi, designed to serve as a quick reference and study guide.

A

• Aave: Decentralized lending protocol on Ethereum that allows you to lend and borrow cryptoassets without intermediaries.
• Address: Unique identifier for sending or receiving cryptocurrency on the blockchain.
• Airdrop: Free distribution of tokens to promote a project or reward users.
• AMM (Automated Market Maker): Algorithm that manages liquidity pools and allows the exchange of assets without a traditional order book.
• APY (Annual Percentage Yield): Estimated annual return, including compound interest, relevant to yield farming and staking.
• Arbitrage: Strategy for taking advantage of differences in the price of an asset between different DeFi platforms.

B

• Blockchain: Decentralized and immutable digital ledger that supports all DeFi operations.
• Borrowing (Loan): Action of borrowing assets, leaving collateral, managed by smart contracts.

C

• CeFi (Centralized Finance): Finances managed by centralized entities such as banks or traditional exchanges.
• CEX (Centralized Exchange): Centralized exchange platform, such as Binance or Coinbase.
• Collateral: Asset locked as collateral for loans or the issuance of stablecoins.
• CDP (Collateralized Debt Position): Smart contract where collateral is locked to generate stablecoins or other assets.
• Composability: Ability to integrate and combine different DeFi protocols like Legos.
• Compound: DeFi protocol for lending and borrowing assets, generating interest.
• Cross-Chain: Interoperability between different blockchains, allowing transfers and operations between them.
• Curve Finance: DEX specialized in swaps between stablecoins with low commissions and slippage.
• Cryptocurrency: Cryptographically protected digital currency, the basis of all DeFi services.

D

• DAO (Decentralized Autonomous Organization): Organization managed by rules codified in smart contracts, without central control.
• DApp (Decentralized Application): Application that operates on a blockchain using smart contracts.
• Debt: Financial obligation acquired when taking out a loan in DeFi.
• Decentralization: Distribution of control and decision-making among multiple network participants.
• DEX (Decentralized Exchange): Exchange platform without intermediaries, operated by smart contracts.
• Delegation: Allow others to use your collateral to obtain loans or participate in governance.
• Double Spending: Attempt to spend the same digital currency more than once, prevented by blockchain.

AND

• Ethereum: Blockchain, the leader in DeFi, supports smart contracts and dApps.
• ERC-20: Technical standard for Ethereum tokens.

F

• Fiat Money: Traditional currency issued by governments (USD, EUR, etc.), represented in DeFi by stablecoins.
• Flash Loan: Instant loan without collateral that must be returned in the same transaction.
• FOMO (Fear of Missing Out): Fear of missing out on investment opportunities, common in the DeFi ecosystem.

G

• Governance Token: Token that grants voting rights on changes to a DeFi protocol.

H

• HODL: Holding an asset for the long term, regardless of volatility

I

• Impermanent Loss: Temporary loss suffered by liquidity providers due to changes in the relative price of assets in a pool.

L

• Leverage: Use of borrowed funds to increase exposure to an asset
• Liquidity: Ease of buying or selling an asset without affecting its price.
• Liquidity Mining: Incentive to provide liquidity to a protocol, receiving rewards in tokens.
• Liquidity Pool: Common token fund managed by smart contracts to facilitate exchanges and loans.

M

• MakerDAO: DAO that manages the DAI stablecoin, backed by collateral on Ethereum.
• Multisig Wallet: Wallet that requires multiple signatures to authorize transactions, increasing security.

N

• NFT (Non-Fungible Token): A unique token that represents digital property, also used as collateral in DeFi.

O

• Oracle: External data source that feeds smart contracts with real-world information (prices, events, etc.).

P

• Pool: Set of funds provided by users for loans, exchanges or interest generation.
• Primitive: Basic financial element on which more complex products (e.g. loans, swaps) are built.
• Protocol: A set of rules and smart contracts that define the operation of a DeFi service.

R

• ROI (Return On Investment): A measure of return on an investment in DeFi.

S

• Smart Contract: Self-executing blockchain program that automates agreements and transactions.
• Stablecoin: Cryptocurrency designed to maintain a stable value, generally linked to a fiat currency.
• Staking: Blocking assets to secure a network and receive rewards.

T

• Tokens: Digital asset that represents ownership, rights, or access within a DeFi protocol.
• Tokenomics: Study of the economics, distribution and incentives of a token.
• TVL (Total Value Locked): Total value of assets locked in a DeFi protocol, a key indicator of trust and usage.

U

• Uniswap: Ethereum-based DEX that allows you to exchange tokens directly from the user's wallet.

V

• Validator: Participant who verifies and validates transactions on proof-of-stake (PoS) blockchains.
• Volatility: Degree of variation in the price of a DeFi asset.

W

• Wallet: Digital tool for storing, managing and interacting with cryptoassets.
• Whale: Individual or entity with large amounts of an asset, capable of influencing the market.
• Whitepaper: Technical document that describes the purpose, technology, and roadmap of a crypto project.
• Wrapped Token: Token that represents another asset on a different blockchain, allowing for interoperability (e.g. WBTC).

AND

• Yield Farming: Strategy for maximizing returns by moving assets between different DeFi protocols.
• Yield Farming Pools: Specific pools where users deposit assets to participate in yield farming and receive rewards.

Z

• Zero-Knowledge Proof: Cryptographic test that allows verifying information without revealing the underlying data, useful for privacy in DeFi.

Trends and Advanced Concepts

• Real-World Asset Tokenization (RWA): Conversion of physical assets (real estate, commodities) into tradable tokens in DeFi, allowing fractional ownership and global access.
• NFTs in DeFi: Use of NFTs as collateral, for loans, or to represent unique assets within DeFi protocols.
• Cross-Chain and Layer 2: Solutions that allow interoperability and scalability between different blockchains and layers, facilitating faster and cheaper transfers and operations.
• DAOs and Decentralized Governance: Organizations that operate without a central hierarchy, where token holders decide the direction of the protocol.
• Oracles and External Data: Systems that connect smart contracts with real-world information, such as asset prices or event results.

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