📖DeFi Glossary

If you own or have traded cryptocurrency before, but never used a decentralized exchange, staked in a pool, yield farmed, or tried any of the other services DeFi has to offer, this guide is for you. These are some of the most important concepts to understand to take advantage of the financial opportunities in DeFi.

Key Terms

• DeFi - Short for "decentralized finance", a catch-all term for financial services that are provided on public blockchains by leveraging smart contracts, including swapping tokens, adding liquidity, staking in pools, yield farming, and more.

• Decentralized Exchange (DEX) - A protocol that uses smart contracts to allow users to swap between crypto tokens without a centralized intermediary.

• Automated Market Maker (AMM) - An automated market maker is a type of DEX that uses a mathematical formula to price assets, rather than using an order book model of bids (buyers) and asks (sellers) typical in traditional finance on centralized exchanges.

• Concentrated Liquidity Market Maker (CLMM) - A concentrated liquidity market maker is a type of DEX that uses a mathematical formula to price assets, rather than using an order book model of bids (buyers) and asks (sellers) typical in traditional finance on centralized exchanges. The difference to a normal AMM is here, that liquidity providers can concentrated their liquidity within specific price ranges and increase therefore the efficiency to earn fees.

• Swap - To trade some amount of one token for an equivalent amount of another token.

• Liquidity - The extent to which an asset is available to be bought or sold. In the context of a DEX, the amount of crypto tokens that can be traded for one another.

• Liquidity Pool - A combination of two crypto assets in a smart contract that allows a decentralized exchange to facilitate trading between the two tokens.

• Liquidity Provider (LP) - Someone who adds liquidity to a protocol by supplying (generally equal) amounts of two crypto tokens to a liquidity pool.

• LP Token - Short for "liquidity provider token," a new token that is created and granted to a liquidity provider as a "receipt" of the liquidity that they added to a liquidity pool.

• Staking - The act of depositing crypto tokens that you own into a protocol or smart contract to earn rewards.

• Yield Farming - The act of staking LP tokens to earn tokens as a reward. Yield Farms incentivize users to add liquidity to a DEX so that the DEX can continue to facilitate token swaps between the two tokens in the liquidity pool.

• APR (Annual Percentage Rate) - The rate of return on staked assets per year (exclusive of the effects of compounding). These are subject to change based on a number of different factors.

• MPR (Monthly Percentage Rate) - The rate of return on staked assets per month (exclusive of the effects of compounding). These are subject to change based on a number of different factors.

• APY (Annual Percentage Yield) - The rate of return on staked assets including the effects of compounding.

• Impermanent Loss (IL) - A financial risk that can occur when an investor provides liquidity, which is caused by price changes in the crypto market and the way automated market makers (AMMs) are designed.