DeFi Terms

Crypto, DeFi, and Web3 are filled with terms and concepts that can be confusing to newcomers and even those experienced in the crypto space. Below is a list of common terms with definitions for the blockchain space.

I update this list regularly, and I’m always happy to go into more detail on any of these items. Please feel free to reach out if you have a question or if there’s a term you think I should add.

Crypto, DeFi, and Web3 Terminology

Airdrop: A marketing strategy where a blockchain project distributes free tokens or coins to a large number of wallet addresses to promote awareness and adoption.

Algorithmic Stablecoin: A type of stablecoin that uses algorithms and smart contracts to maintain a stable value without being fully collateralized by fiat currency or other assets.

Altcoin: Any cryptocurrency other than Bitcoin (mostly used by Bitcoin Maximalists).

Annual Percentage Rate (APR): The yearly interest rate charged on borrowed funds or earned on an investment, not considering compound interest. 

Annual Percentage Yield (APY): The yearly interest rate earned on an investment, taking into account the effect of compound interest. 

Automated Market Maker (AMM): A decentralized trading protocol that uses algorithms to price assets, allowing users to trade without the need for traditional order books. 

Bitcoin Decentralized Finance (BTCFi): A Bitcoin-specific DeFi system that enables yield generation using decentralized financial tools and layer-2 solutions. This term is specific to BTC as DeFi was originally created on Ethereum when it was not possible on Bitcoin. DeFi applications later became available on BTC after additional development to the network.

Bitcoin Maximalist: An individual who believes that Bitcoin is the only legitimate cryptocurrency and that all other cryptocurrencies are inferior or unnecessary, often advocating for a focus on Bitcoin's adoption and development rather than diversifying into other projects.

Block: A unit of data in a blockchain that contains a batch of validated transactions and other relevant information.

Blockchain: A decentralized, immutable ledger that records transactions across a network of computers without the need for a central authority. 

Borrowing: In DeFi, the act of taking out a loan from a lending platform using cryptocurrency as collateral.

ChainLink: An oracle that allows data from outside of blockchain networks (price of the S&P500) to be imported into blockchain networks.

Cold Storage: The practice of keeping cryptocurrency offline in a hardware wallet or other secure storage device to protect it from hacking attempts.

Collateral: An asset pledged as security for repayment of a loan, which can be seized if the borrower defaults.

Composability: The ability of different DeFi protocols and applications to seamlessly interact and build upon each other, creating new financial products and services.

Consensus Mechanism: A method used by blockchain networks to reach an agreement on the state of the ledger and validate transactions, such as Proof-of-Work (PoW) or Proof-of-Stake (PoS).

Cryptonative: Projects, platforms, or applications that are built from the ground up using blockchain technology and decentralized principles.

Decentralization: The distribution of power and control away from a central authority to a network of participants.

Decentralized Application (DApp): An application that runs on a decentralized network, such as a blockchain, and is not controlled by a single entity. 

Decentralized Asset Management (DAM): A DeFi service that allows users to invest in professionally managed cryptocurrency portfolios without the need for a traditional fund manager.

Decentralized Autonomous Organization (DAO): An organization represented by rules encoded as a computer program, controlled by its members, and not influenced by a central authority. 

Decentralized Derivatives: Financial contracts in DeFi whose value is derived from an underlying asset, allowing users to trade and speculate on the price movements of various assets without owning them directly.

Decentralized Exchange (DEX): A cryptocurrency exchange that operates on a decentralized network, allowing users to trade directly from their wallets without the need for a central authority. 

Decentralized Finance (DeFi): A financial system built on blockchain technology that provides financial services and products without relying on traditional intermediaries like banks. 

Decentralized Governance: A system of governance where decision-making power is distributed among a network of participants rather than concentrated in a central authority.

Decentralized Identity (DID): A self-sovereign identity system that allows individuals to control their personal data and identity without relying on centralized authorities.

Decentralized Insurance: A peer-to-peer insurance model built on blockchain technology, where participants pool their funds to provide coverage for specific events or risks.

Decentralized Physical Infrastructure Network (DePIN): A concept that envisions the use of decentralized technologies to manage and maintain physical infrastructure, such as energy grids, transportation systems, and communication networks, to improve efficiency, resilience, and accessibility.

Decentralized Science (DeSci): An emerging field that aims to apply decentralized technologies, such as blockchain and Web3, to improve the funding, incentives, and accessibility of scientific research and collaboration.

Decentralized Society (DeSoc): A vision of a future society where social, political, and economic interactions are primarily conducted through decentralized, peer-to-peer networks, minimizing the role of centralized authorities and intermediaries.

Digital Assets: Any digital representation of value that can be traded or transferred electronically, including cryptocurrencies, tokens, and digital collectibles.

Digital Twins: A virtual representation of a physical object, process, or system that can be used for simulation, monitoring, and optimization purposes.

Flash Loan: A type of uncollateralized loan in DeFi that is borrowed and repaid within a single transaction, often used for arbitrage or leverage.

FOMO (Fear of Missing Out): The feeling of anxiety or urgency to invest in a particular cryptocurrency or project due to the fear of missing out on potential gains.

Fork: A change in a blockchain's protocol that results in the creation of a new, separate version of the blockchain. There can be Hard Forks and Soft Forks.

FUD (Fear, Uncertainty, and Doubt): A strategy used to spread negative information about a cryptocurrency or project to influence market sentiment.

Futarchy: A governance model that uses prediction markets to make decisions based on the outcome that is most likely to be favored by the market.

Gas (Ethereum transaction fee): A fee paid in Ether (ETH) to compensate for the computational resources required to execute a transaction or smart contract on the Ethereum network.

Gas Fees: The cost associated with executing transactions or smart contracts on the Ethereum blockchain, denominated in Gwei (a fraction of ETH).

Governance Token: A token that grants holders the right to participate in the decision-making process of a decentralized organization or protocol.

Halving: A pre-programmed event in certain cryptocurrency networks, such as Bitcoin, where the block reward for miners is reduced by half at specific intervals.

Hardware Wallet: A physical device designed to securely store cryptocurrency private keys offline, providing an additional layer of protection against hacking attempts.

Hash: A fixed-size, unique cryptographic output generated by passing data through a hash function, often used to secure and verify data integrity.

HODL: A misspelling of "hold" that has become a popular term in the cryptocurrency community, referring to the strategy of holding onto cryptocurrency for long-term gains instead of selling. 

Impermanent Loss: The temporary loss of funds experienced by liquidity providers in a liquidity pool when the price of the assets in the pool changes compared to when they were deposited. 

Initial Coin Offering (ICO): A fundraising method used by blockchain projects, where a new cryptocurrency is sold to investors in exchange for established cryptocurrencies like Bitcoin or Ethereum.

Interoperability: The ability of different blockchain networks to communicate, share data, and interact with each other seamlessly.

InterPlanetary File System (IPFS): A decentralized, peer-to-peer protocol for storing and sharing files across a distributed network of computers.

Layer 2 Solution: A secondary framework or protocol built on top of an existing blockchain to improve scalability, speed, and cost-effectiveness without compromising security.

Lending: In DeFi, the act of providing cryptocurrency to a borrower in exchange for interest payments.

Liquidity Mining: A DeFi incentive mechanism where users are rewarded with tokens for providing liquidity to a specific pool or platform.

Liquidity Pool: A pool of digital assets locked in a smart contract to facilitate trading on decentralized exchanges and earn rewards for liquidity providers.

Liquid Restaking Tokens (LRTs): A group of stake assets, locked in a staking protocol, that can be used in other DeFi activities, thereby enhancing capital efficiency and yield potential. They operate on platforms like EigenLayer, which facilitates the repurposing of staked Ethereum to secure various decentralized networks and applications, multiplying the staked assets utility and earnings.

Market Capitalization: The total value of a cryptocurrency, calculated by multiplying the current price by the total number of coins or tokens in circulation.

Mining: The process of validating transactions and adding new blocks to a blockchain, typically involving solving complex mathematical problems to earn rewards in the form of cryptocurrency.

Multi-Party Computation (MPC): A cryptographic protocol that allows multiple parties to jointly compute a function over their inputs while keeping those inputs private.

Network States: A concept that describes a new form of social and political organization, characterized by a decentralized, digital-first community that shares a common purpose and operates across traditional geographic boundaries.

Non-Fungible Token (NFT): A unique digital asset that represents ownership of a specific item, such as artwork, music, or virtual real estate, and is stored on a blockchain.

Oracle: A service that provides secure, reliable, and tamper-proof data from the real world to blockchain smart contracts.

Over-Collateralization: The practice of providing more collateral than the loan amount to mitigate the risk of default in DeFi lending and borrowing.

Private Key: A secret string of characters used to access and manage a cryptocurrency wallet, allowing the owner to sign transactions and prove ownership of the associated public key. 

Proof of History (PoH): A cryptographic clock that enables blockchains to agree on the order and timing of events without the need for constant communication between nodes. 

Proof of Stake (PoS): A consensus mechanism where validators are chosen to create new blocks based on the amount of cryptocurrency they have staked, reducing energy consumption compared to Proof-of-Work. 

Proof of Work (PoW): A consensus mechanism used by cryptocurrencies like Bitcoin, where miners compete to solve complex mathematical problems to validate transactions and create new blocks, earning rewards in return. 

Public Key: A string of characters derived from a private key that can be shared publicly and acts as an address for receiving cryptocurrency transactions. 

Real World Assets (RWA): Traditional assets like real estate, commodities, or stocks that are tokenized and represented on a blockchain, enabling fractional ownership and increased liquidity. 

Rekt: A slang term in the cryptocurrency community that refers to significant financial losses due to poor investment decisions, market volatility, or hacks.

Restaking: The process of automatically reinvesting staking rewards earned from holding a Proof-of-Stake (PoS) cryptocurrency to compound returns over time. 

Rollups: A Layer 2 scaling solution for Ethereum that bundles multiple transactions into a single transaction, reducing gas fees and increasing throughput.

Rug Pull: A type of scam in the cryptocurrency space where a project's developers abandon the project and disappear with investors' funds.

Satoshi (smallest unit of Bitcoin): The smallest unit of Bitcoin, named after its creator Satoshi Nakamoto, equal to 0.00000001 BTC.

Seed Phrase: A series of words generated by a cryptocurrency wallet that can be used to restore access to the wallet and its associated private keys in case of loss or damage.

Seigniorage: The difference between the face value of a currency and its production cost, which can be used to generate revenue for the issuing authority or to incentivize certain behaviors in algorithmic stablecoins.

Sidechain: A separate blockchain network that is attached to a main blockchain, allowing for the transfer of assets between the two chains and enabling experimentation with new features or use cases.

Slippage: The difference between the expected price of a trade and the actual price at which the trade is executed, often occurring in markets with high volatility or low liquidity.

Smart Contract: A self-executing contract with the terms of the agreement directly written into code, automatically enforcing the terms without the need for intermediaries. 

Smart Contract Audit: A thorough review of a smart contract's code to identify potential security vulnerabilities, ensure proper functionality, and mitigate risks.

Software Wallet: A digital wallet that stores cryptocurrency private keys on a computer or mobile device, allowing users to manage their funds through a software interface.

Stablecoin: A type of cryptocurrency designed to maintain a stable value relative to a reference asset, such as the US dollar, through various mechanisms like collateralization or algorithmic control.

Staking: The act of locking up cryptocurrency holdings to support the operations of a Proof-of-Stake (PoS) blockchain network and earn rewards in return. See also Restaking.

Synthetic Asset: A financial instrument that simulates the value of an underlying asset, such as stocks, commodities, or cryptocurrencies, without requiring direct ownership of the asset itself.

Token: A digital asset built on top of an existing blockchain, often representing a specific utility or asset within a particular ecosystem or application.

Token Curated Registry (TCR): A decentralized list of high-quality content, products, or services maintained by token holders who vote to include or exclude entries based on their merits.

Total Value Locked (TVL): The overall value of cryptocurrencies locked in a DeFi protocol or the entire DeFi ecosystem, serving as a measure of the platform's or sector's adoption and growth. 

Verifiable Credentials: Tamper-evident and cryptographically secure digital credentials that can be verified by third parties without the need for intermediaries, enhancing trust and privacy in digital interactions.

Volatility: The degree of fluctuation in an asset's price over a given period, with high volatility indicating significant price swings and potential risk.

WAGMI: An acronym for "We're All Gonna Make It," expressing a positive and optimistic sentiment within the cryptocurrency community. 

Wallet: A digital or physical device that stores the private and public keys needed to send, receive, and manage cryptocurrencies.

Web3: The next generation of the internet, characterized by decentralization, trustlessness, and the use of blockchain technology to enable new forms of interaction and value exchange. 

Wrapped Token: A token that represents another cryptocurrency, allowing it to be used on a different blockchain or within a specific DeFi ecosystem while maintaining its original value.

Yield Farming: The practice of actively seeking the highest returns by moving cryptocurrencies between various DeFi protocols and liquidity pools to maximize earnings from interest, fees, and token rewards. 

Zero-Knowledge Proofs (ZKP): A cryptographic method that allows one party to prove to another that a statement is true without revealing any additional information beyond the validity of the statement itself, enhancing privacy and security in blockchain transactions.