DeFi glossary

APY (Annual Percentage Yield)

The yield an investment is projected to return over a year, including compounding. APY makes returns from different pools and protocols directly comparable. In DeFi, the displayed APY is usually a forward-looking projection extrapolated from the most recent reward rate; it changes constantly as TVL, token emissions, and underlying interest rates move.

APR (Annual Percentage Rate)

The yield over a year without compounding. APR is the rate at which rewards are earned; APY is what you actually end up with after rewards are reinvested. For a pool earning 10% APR, the APY at daily compounding is about 10.52%; at hourly compounding it's about 10.51%. Most DeFi UIs display APY because it's the more realistic number for a passive depositor.

TVL (Total Value Locked)

The USD value of all assets currently deposited in a pool, protocol, or chain. TVL is the standard size metric in DeFi - higher TVL usually means more liquidity, more on-chain activity, and stronger incentives for security audits. A pool with $1M TVL behaves very differently from a pool with $1B TVL even at the same APY, both because of slippage characteristics and because outliers in the APY formula are smoothed over more depositors.

Real Yield

Yield generated from actual protocol revenue (trading fees, lending interest, MEV capture) and paid out in established assets like ETH, stablecoins, or BTC - not in the protocol's own inflationary governance token. Real yield is sustainable; emission-based yield depends on token price holding up.

Token Emission / Reward Token

A protocol's native token paid out as part of pool rewards. Emissions can drive headline APY very high in the short term, but the dollar value of the reward depends entirely on the token's market price, which is itself diluted by the same emissions. Sustainable yield evaluation requires separating base APY (from real protocol revenue) from reward APY (emission-driven).

Liquidity Pool (LP)

A smart contract holding two or more assets that traders swap against. Depositors (liquidity providers) supply the assets and receive LP tokens representing their share. The pool earns fees on every swap; LP token holders are entitled to a pro-rata share of those fees, distributed as the pool's value grows.

AMM (Automated Market Maker)

A pricing algorithm used by liquidity pools to set exchange rates between deposited assets, without an order book. The canonical AMM formula is x*y=k (constant product) used by Uniswap v2 and Curve's stable swap variant. Different AMM curves trade off slippage, capital efficiency, and impermanent loss exposure.

Concentrated Liquidity

An AMM design (Uniswap v3, Trader Joe, Aerodrome) where providers choose a specific price range to supply liquidity within. Capital efficiency is much higher than v2-style full-range LPs, but the position earns nothing when the price moves out of range and impermanent loss is concentrated as well. Active management or auto-rebalancing vaults are typically required.

Impermanent Loss (IL)

The opportunity cost of holding assets in a liquidity pool versus holding them outright when their prices diverge. If you supply ETH and USDC to a 50/50 pool and ETH doubles in price, the pool rebalances and you end up with less ETH and more USDC than your starting deposit - the difference versus just holding both assets is the impermanent loss. It's "impermanent" only if prices revert; if you withdraw at the divergent point, the loss is realized.

LP Token

An ERC-20 token (or equivalent on non-EVM chains) representing a depositor's share of a liquidity pool. Burning the LP token redeems the underlying assets at their current pool ratio plus accumulated fees. LP tokens can themselves be deposited into yield aggregators, lent on money markets, or used as collateral in some protocols.

Lending Protocol

A protocol where lenders deposit assets to earn interest from borrowers. Examples: Aave, Compound, Morpho, Sky (formerly MakerDAO). Lenders earn the supply APY, borrowers pay the borrow APY, and the protocol takes a small spread. Lending APY is generally lower variance than LP yield because rates respond directly to utilization rather than to volatile token emissions.

Supply APY vs Borrow APY

On lending protocols, supply APY is what depositors earn; borrow APY is what borrowers pay. The borrow rate is always higher than the supply rate - the difference funds the protocol's reserves and any insurance fund. As utilization (borrowed / supplied) rises, both rates rise nonlinearly.

Collateral

Assets deposited to back a borrowed position. Most DeFi lending is overcollateralized: to borrow $100 of stablecoin you might lock $150 of ETH as collateral. If the collateral value drops too far, the position is liquidated automatically.

LTV (Loan-to-Value)

The ratio of borrowed value to collateral value. A 50% LTV means you've borrowed half of what your collateral is worth. Each protocol sets a maximum LTV per collateral asset (typically 50-83%); when your position's LTV exceeds the liquidation threshold, your collateral can be sold to repay the debt.

Liquidation

The automatic sale of a borrower's collateral when their position becomes undercollateralized. A third party (the liquidator) repays the bad debt and receives the collateral at a discount as a reward. Liquidations are the protocol's defense against bad debt; from a borrower's perspective, they're a forced exit at the worst possible price.

Health Factor

A single number summarizing how safe a borrow position is. Aave defines it as (collateral × liquidation threshold) / debt. Health factor above 1 means safe; below 1 means liquidatable. Monitoring health factor is the basic operational task of any leveraged DeFi position.

Stablecoin

A crypto asset pegged to a fiat currency (usually USD). Three main mechanisms: fiat-backed (USDC, USDT - backed by bank deposits and treasuries), crypto-backed (DAI - backed by overcollateralized crypto), and algorithmic (mostly extinct after UST collapsed in 2022). Stablecoins are the dominant medium of exchange in DeFi yields.

Depeg

When a stablecoin trades persistently below its peg. Can be temporary (USDC briefly hit $0.87 during the March 2023 Silicon Valley Bank crisis, then recovered) or terminal (UST collapsed to near zero in May 2022). Depeg risk is the dominant systemic risk for stablecoin-only pools.

Wrapped Token

A representation of one asset on another chain or in another form. WBTC is Bitcoin wrapped as an ERC-20 on Ethereum; WETH is ETH packaged as an ERC-20 so it interoperates with standard token contracts. The wrapper introduces additional smart-contract and custodial risk on top of the underlying asset.

Liquid Staking Token (LST)

A token representing staked ETH (or another proof-of-stake asset) that remains transferable and composable. stETH (Lido), rETH (Rocket Pool), and cbETH (Coinbase) are the largest. Holders earn the underlying staking yield while still being able to use the token as collateral, in LPs, or in yield aggregators.

Restaking

Using an already-staked asset (typically an LST) to secure additional protocols, earning a second layer of yield. EigenLayer pioneered the model; LRTs (liquid restaking tokens) like eETH from Ether.fi tokenize the position. Adds the slashing risk of the restaked protocol on top of base staking risk.

Rebase Token

A token whose balance in your wallet changes over time without transfers - the yield is paid by increasing the number of tokens you hold. stETH from Lido is the canonical example. Rebase mechanics interact awkwardly with most DeFi protocols, which is why wrapped versions (wstETH) exist for use in LPs and as collateral.

Smart Contract

A program deployed on a blockchain that executes deterministically when called. Every DeFi protocol is a set of smart contracts; depositing funds means transferring custody to that code. Smart contracts can have bugs, can be paused or upgraded by their owners, and can be exploited - these are collectively "smart contract risk".

Audit

A formal security review of smart contracts by a third party (Trail of Bits, OpenZeppelin, Spearbit, Code4rena). Audits reduce the probability of common vulnerabilities but don't eliminate risk - many of the largest exploits in DeFi history have been against audited code.

DEX (Decentralized Exchange)

A protocol enabling on-chain token swaps without a central operator. The two main models are AMM-based (Uniswap, Curve, Balancer) and order-book based (dYdX, Hyperliquid). DEX trading is non-custodial - the user retains control of funds until the moment of the swap.

Slippage

The difference between the expected price of a trade and the price at execution. On AMM-based DEXes, large trades against a small pool cause significant slippage because each swap moves the pool's price along its bonding curve. Slippage tolerance is the maximum percentage difference a user accepts before the trade reverts.

MEV (Maximal Extractable Value)

Value that can be extracted from a block by deciding which transactions to include, exclude, or reorder. Searchers and validators capture MEV through arbitrage, liquidations, and sandwich attacks against ordinary swaps. MEV-aware DEXes (CowSwap, 1inch Fusion) bundle trades to reduce extraction.

Flash Loan

A loan that must be repaid within the same transaction it's borrowed in. Because the entire transaction reverts if the loan isn't returned, flash loans are uncollateralized - yet they enable sophisticated arbitrage, collateral swaps, and self-liquidations. They've also been used in many DeFi exploits as the financing layer that makes price-manipulation attacks affordable.

Vault

A smart contract that takes deposits and executes a predefined yield strategy automatically: looping a lending position, auto-compounding LP rewards, rotating between protocols, etc. Yearn, Beefy, and Sommelier are major vault platforms. Adds an additional smart-contract layer between depositor and the underlying protocol.

Yield Aggregator

A protocol that automatically allocates user deposits across multiple yield-bearing positions to maximize return, rebalance for risk, or auto-compound rewards. Yearn was the original; Convex, Aura, and Pendle play similar aggregation roles around specific underlying protocols (Curve, Balancer, fixed-rate markets respectively).

Composability

The property of DeFi protocols that they can be combined and built upon without permission. Output of one protocol (e.g. an LP token) becomes input to another (a vault that auto-stakes the LP token in a third protocol). Composability is the source of most innovation in DeFi yields - and also the source of cascading failures when one protocol exploits another's assumptions.

Governance Token

A token granting voting rights over a protocol's parameters: fee rates, supported assets, treasury spending, contract upgrades. Holders can typically vote directly or delegate to others. The value of a governance token reflects market expectations about future cash flows the governance can direct toward holders (fee switches, buybacks).

DAO (Decentralized Autonomous Organization)

An on-chain entity whose decisions are made by token-weighted votes rather than by appointed leadership. Most large DeFi protocols (Uniswap, Aave, MakerDAO) are governed by DAOs in name; in practice, voting participation rates and delegate concentration vary widely.

Tokenomics

The supply schedule, emission rate, vesting cliffs, and allocation breakdown of a protocol's token. Inflationary tokenomics dilute holders over time; vesting cliffs create periodic sell pressure; concentrated team and investor allocations transfer value away from public holders. Reading tokenomics is essential before evaluating any APY paid in the native token.

Smart Contract Risk

The risk that a bug, exploit, or malicious upgrade in a protocol's code causes loss of deposited funds. Mitigated but not eliminated by audits, bug bounties, formal verification, and time in production. The single largest source of permanent capital loss in DeFi history.

Oracle Risk

The risk that a price feed (Chainlink, Pyth, internal TWAP) feeding a protocol returns wrong values - through manipulation, downtime, or upstream errors. Oracle failures have caused multiple eight- and nine-figure exploits, particularly on lending protocols where oracle prices drive liquidation logic.

Bridge Risk

The risk associated with moving assets across chains via a cross-chain bridge. Bridges custody assets on one chain while minting a representation on another; that custody is the highest-value attack surface in crypto. The Ronin, Wormhole, Nomad, and Multichain exploits each lost $100M+.

Layer 2 (L2)

A blockchain that derives its security from Ethereum (or another L1) while executing transactions off the main chain. Most popular L2s today are rollups: Arbitrum and Optimism (optimistic rollups), Base (Coinbase's optimistic rollup), zkSync and StarkNet (ZK rollups). L2s offer dramatically lower gas fees for DeFi activity.

Rollup

An L2 design that batches transactions off-chain, computes the resulting state, and posts a compressed proof to the L1. Optimistic rollups assume transactions are valid by default and allow a challenge period; ZK rollups submit a cryptographic proof that transactions were valid. ZK rollups have shorter withdrawal times; optimistic rollups have broader EVM compatibility today.

Gas Fees

The cost of executing a transaction on a blockchain, paid in the chain's native token (ETH on Ethereum, MATIC on Polygon, etc.). Gas prices fluctuate with network congestion. On Ethereum mainnet, a single DeFi action (swap, deposit, claim) can cost $5-50 depending on conditions; on L2s the same action is usually well under $1.

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