DeFi has evolved over the past three years, and with it comes a range of new terms and concepts. It's crucial to stay updated to navigate this sector confidently especially before the next bull market hits. At Sushi, we've updated our DeFi Glossary for 2023 to provide you with clear and concise definitions.
Check out the Sushi DeFi Glossary 2023 below!
Aggregators: Aggregators are platforms or tools that gather and display information from various sources within the crypto ecosystem. They serve to provide users with a consolidated view of data related to trading, liquidity, yield farming, and more, helping users make informed decisions and find the best prices. Sushi's own aggregator is built into the swap and will automatically search for competitive prices.
AMM (Automated Market Maker): An Automated Market Maker (AMM) is a key infrastructure in decentralized finance (DeFi), replacing traditional exchanges with a system where individual users provide liquidity. This setup includes:
Decentralized Liquidity: Users, known as liquidity providers, deposit their tokens into liquidity pools, which are essential for enabling trades on the platform.
"x*y=k" Formula: AMMs use this formula to determine trading prices. Here, 'x' and 'y' represent the quantities of two tokens in a pool, and 'k' is a constant. This ensures prices adjust automatically based on supply and demand.
Liquidity Providers: They contribute tokens to pools, receiving transaction fees and special tokens in return.
Traders: They use the pools to swap tokens, with prices set by the AMM formula, enabling efficient and straightforward trading.
Overall, AMMs facilitate decentralized trading by automating market making and pricing, allowing users to trade digital assets without an intermediary.
ALM (Automated Liquidity Management): A set of strategies and protocols used in DeFi (Decentralized Finance) to automatically manage and optimize liquidity in decentralized exchanges (DEXs) and liquidity pools. ALM systems are designed to minimize active management and increase capital efficiency to DeFi platforms. Sushi’s ALM partners include Steer,Gamma and DeFiEdge, with Steer natively integrated into Sushi’s UI.
APR (Annual Percentage Rate): APR represents the annualized rate of interest or return on an investment without factoring in compounding. It is often used to describe the potential returns on investments in DeFi protocols.
APY (Annual Percentage Yield): APY represents the annualized rate of interest or return on an investment, accounting for compounding. It provides a more accurate picture of the potential returns on assets in DeFi, including yield farming and liquidity provision.
Arbitrage: Arbitrage is the practice of exploiting price differences for the same asset on different exchanges to make a profit. It is a common trading strategy used in the cryptocurrency markets to take advantage of price disparities. Many arbitrage bots trade on decentralized exchanges (DEXes), automating this process to take advantage of these price disparities efficiently.
Bridging: Bridging is the process of transferring assets from one blockchain to another to access DeFi protocols and services on multiple networks. It enables users to move assets seamlessly between different blockchain ecosystems.
Blockchain Explorer: A blockchain explorer is an online tool that provides detailed insights into blockchain transactions, balances, and blocks, enhancing transparency and auditability.
Concentrated Liquidity: Concentrated Liquidity refers to a feature or approach in some AMM protocols that allows liquidity providers to concentrate their assets within a specific price range rather than providing liquidity across the entire price spectrum of an asset pair. Traditional AMMs evenly distribute liquidity over the entire price range, which can be inefficient for assets with wide price fluctuations.
Capital Efficiency: Capital efficiency is a crucial concept in DeFi, particularly for liquidity providers who contribute assets to automated market maker (AMM) platforms and liquidity pools. It involves the implementation of strategies and mechanisms to make the most effective use of capital while minimizing the opportunity cost and impermanent loss associated with providing liquidity.
Cross-Chain: Cross-chain refers to the interoperability between different blockchain networks, allowing assets and data to be transferred or used across multiple blockchains. It enables users to move assets seamlessly between separate blockchain ecosystems. SushiXSwap, Sushi’s cross chain swap, allows users to swap across 7 blockchains including Ethereum, Arbitrum, Optimism, Polygon, Avalanche, BNB Chain, and Base.
DAO (Decentralized Autonomous Organization): DAOs are organizations governed by code and operated by their members, often through blockchain-based voting mechanisms. They enable decentralized decision-making and governance. DAO members often use Discourse, Snapshot, Tally for discussion/ voting.
DAPP (Decentralized Application): DApps are software applications that run on blockchain networks. They are typically open source, decentralized, and enable various functionalities, including financial services, gaming, and more.
Decentralized Exchange (DEX): DEXs are exchanges that operate without a central authority, allowing users to trade cryptocurrencies directly from their wallets. They use liquidity pools and AMM algorithms to facilitate trading.
DeFi (Decentralized Finance): DeFi represents a decentralized ecosystem of financial applications and services built on blockchain technology. It includes lending, borrowing, trading, yield farming, and more, all without traditional intermediaries.
Ethereum: Ethereum is a prominent blockchain platform used for building DeFi protocols and smart contracts. It provides the infrastructure for many DeFi projects, including decentralized exchanges like Sushi.
Flash Loan: Flash loans are a type of loan in DeFi that allows borrowers to borrow assets without providing collateral. They must repay the loan within the same transaction, and these loans are often used for arbitrage and other trading strategies.
Furo: Sushi Pay stands as an innovative solution for direct token streaming. Whether you're an organization handling payroll or managing structured vesting plans, FURO allows you to seamlessly stream any ERC20 token directly to any wallet. This breakthrough ensures real-time, continuous, and smooth transactions tailored for long-term distributions. It takes only 10 minutes to set up.
Gas Fees: Gas fees on Ethereum and other blockchains are paid for transaction processing and smart contract execution, compensating miners or validators to maintain network integrity.
GM/GN:"GM" is a commonly used abbreviation for "Good Morning”/ "GN" is a commonly used abbreviation for "Good Night”.
Halving: Halving events are programmed reductions in the rate at which new cryptocurrency tokens are created. They typically occur at regular intervals in a blockchain's protocol, reducing inflation and potentially impacting supply dynamics.
Hard Fork: A hard fork is a significant and usually irreversible change to a blockchain's protocol rules, resulting in a new blockchain with different properties. This is in contrast to a "soft fork," which is a backward-compatible upgrade.
HODL: HODL is a misspelling of "hold" that has become slang in the cryptocurrency community,or is often humorously interpreted as an acronym for "Hold On for Dear Life. It encourages users to hold onto their assets rather than selling, often in anticipation of future price increases.
Impermanent Loss: Impermanent loss refers to the potential loss experienced by liquidity providers due to fluctuations in the price of assets in a liquidity pool. It occurs when the liquidity pool automatically sells the better-performing token for the worse-performing token within a token pair, resulting in a potential loss when the liquidity provider withdraws their funds. Impermanent loss is a risk associated with providing liquidity in DeFi protocols.
Interchain Token: Interchain Tokens, powered by Axelar, facilitate interoperability by allowing for seamless transfer of digital assets between different blockchains. I.e. The same token can be used on different blockchains without bridging.
KYC (Know Your Customer): KYC processes are verification procedures required by some exchanges and DeFi services to identify and verify the identity of users, complying with regulatory requirements.
Kek: "Kek" is an internet slang term that originated from online gaming communities, particularly in World of Warcraft. It's an alternative way of expressing "lol," "haha," or amusement.
Layer 1: Layer 1 refers to the base layer of a blockchain network, where the main consensus and validation of transactions occur.
Layer 2: Layer 2 is a secondary layer built on top of a Layer 1 blockchain to improve scalability and reduce transaction costs. It often includes technologies like sidechains and state channels.
Liquidity Mining: Liquidity mining is the process of earning rewards by providing liquidity to decentralized exchanges or lending platforms. Users contribute their assets to liquidity pools and receive rewards, often in the form of tokens.
Liquidity Pool: A liquidity pool is a pool of tokens provided by liquidity providers, used for trading and generating yield in DeFi protocols.
Messaging Layer:"Messaging Layer" typically refers to a layer of technology or infrastructure that facilitates communication and data exchange between different blockchains or blockchain networks, allowing applications on different blockchains to interact together to facilitate cross chain interoperability. It sits beneath various blockchains, capable of seamlessly transporting messages across chains.
Multi-Chain: Multi-chain refers to the use of multiple blockchains within a single ecosystem or network. Sushi is a multi-chain DEX, which means within the Sushi UI, you can access multiple blockchains. In fact, Sushi is live on more than 30 chains, allowing users to engage in DeFi activities like swaps and liquidity provisioning on 30 different blockchains, all under one app.
MEV Protection (Miner/Maximal Extractable Value Protection): In the context of SushiSwap, MEV protection refers to measures taken to mitigate the risks associated with Miner Extractable Value (MEV) for users of the protocol. MEV is the profit that miners can make by reordering and including transactions in blocks, often at the expense of traders and liquidity providers. SushiSwap and other DeFi protocols implement MEV protection mechanisms to reduce the negative impact of MEV on traders and LPs, ensuring fairer and more secure trading experiences.
Non-Fungible Token (NFT): NFTs are unique digital tokens that represent ownership of a specific item or asset. They are often used for digital art, collectibles, and unique digital assets.
Oracles: Oracles are services or mechanisms that provide external data to smart contracts. They enable smart contracts to interact with real-world data, such as price feeds and weather information.
Price Impact:Price impact refers to the price change directly caused by the transaction executed on the asset.
Pool Token: Pool tokens represent a user's share of a liquidity pool. Users receive pool tokens when providing liquidity, and these tokens can be redeemed for their proportional share of the pool's assets.
Private Keys: Private keys are secret cryptographic keys that allow users to access and control their cryptocurrency holdings. Similar to a password for a digital wallet, crucial for accessing and safeguarding cryptocurrency holdings. They must be kept secure and secret to protect the associated assets.
Quorum: Quorum is the minimum number of votes required for a proposal to pass in a decentralized governance system, such as a DAO or a DeFi protocol's governance mechanism.
Rug Pull: A rug pull is a fraudulent action in DeFi where liquidity is removed from a pool, causing a significant loss for liquidity providers. It is a form of scam in the DeFi space.
Slippage: Slippage is the difference between the expected price of a trade and the actual executed price. It often occurs due to market volatility and can affect the outcome of trades.
Smart Contracts: Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They enable automated and trustless execution of agreements.
Smart Pools:Smart Pools, powered by Steer Protocol, represent an Automated Liquidity Management (ALM) solution. If you've been actively managing your liquidity on v3, you're likely familiar with the continuous monitoring and adjustments required to maximize returns. For those who miss the simpler times of v2 (despite its lower APR), Smart Pools offer a solution.
Sandwich Attack: A sandwich attack is a specific type of front-running attack. It involves an attacker strategically placing two large transactions around a target transaction. The goal is to manipulate the target transaction's execution price to the attacker's advantage, typically causing the victim to incur losses or receive unfavorable terms. Sandwich attacks are often used to exploit arbitrage opportunities, and they highlight the importance of transaction sequencing and security measures in DeFi protocols. DeFi platforms employ safeguards to protect users from falling victim to sandwich attacks by reducing the potential for front-running and price manipulation.
Tax Tokens: Tax tokens are cryptocurrencies that have a built-in transaction fee, or "tax," for each buy, sell order or transfer. The tax usually serves specific functions such as providing liquidity, rewarding holders, or funding a project's development. Tax tokens are mostly found on EVM (Ethereum Virtual Machine) compatible chains. Trading these tokens can be a bit different than what you're accustomed to, primarily because of the embedded tax.
Total Value Locked (TVL): TVL represents the total amount of assets locked or staked in a DeFi protocol. It is often used as a key metric to measure the popularity and success of a DeFi platform. TVL includes assets that users have contributed as liquidity in decentralized exchanges, provided as collateral in lending platforms, or staked in yield farming programs.
v2 AMM:"v2 AMM" typically refers to the second version of an Automated Market Maker (AMM) protocol. AMMs are a fundamental component of decentralized exchanges (DEXs) and liquidity pools in the DeFi ecosystem. These protocols use mathematical algorithms and pools of tokens to facilitate the trading of digital assets without relying on traditional order books.
V3 AMM: "v3 AMM" typically refers to the third version of an Automated Market Maker (AMM) protocol, such as Uniswap, which introduces features like "Concentrated Liquidity.
Vampire Attack: A vampire attack is a strategy in DeFi where one protocol attempts to attract liquidity and users away from another protocol. This is typically done by offering more attractive incentives, such as higher yield rewards or lower fees, to entice users to migrate their assets. Vampire attacks are often used as a competitive tactic in the DeFi ecosystem.
Wallet: A wallet is software or hardware tools that allow users to store, manage, and transact with their cryptocurrencies. Wallets store the user's private keys, which are required to access and control their cryptocurrency holdings. There are various types of wallets, including software wallets (online, mobile, desktop), hardware wallets (physical devices), and paper wallets (physical printouts of private keys).
Wallet Address: A wallet address is a unique identifier associated with a cryptocurrency wallet. It is used for receiving funds from others. When someone wants to send cryptocurrency to another person, they provide the recipient's wallet address. Each wallet address is a cryptographic representation of the public key associated with the wallet and serves as a destination for receiving transactions.
Wrapped Tokens: Wrapped tokens are tokens representing assets from one blockchain on another blockchain. For example, Wrapped Bitcoin (WBTC) represents Bitcoin (BTC) on the Ethereum blockchain. These wrapped tokens are created through a process where the underlying asset is locked on its native blockchain, and an equivalent amount of tokens is issued on the target blockchain. Wrapped tokens enable assets from different blockchains to be used in DeFi and other applications on different networks.
Zero-Knowledge Proofs: Zero-Knowledge Proofs are cryptographic techniques that allow one party to prove knowledge of a secret without revealing the secret itself. In the context of blockchain and cryptocurrency, zero-knowledge proofs can be used to provide privacy and security while verifying information. They enable efficient and secure transactions without disclosing sensitive data, such as transaction amounts or private keys, to the public ledger, enhancing user privacy and confidentiality. Sushi has deployed on Polygon zkEVM Layer 2 Blockchain.