Investing & Digital AssetsInvesting & Digital Assets GlossaryPart 10 of 13
Decentralized Finance Glossary
31 terms from the Investing & Digital Assets book's Decentralized Finance part, each defined in a line and linked to the chapter that explains it.
- Aggregator (DEX): a service that reads many pools and liquidity sources, splits a trade across routes and returns one transaction with an expected and minimum output, such as 0x or LI.FI (DEXs & AMMs).
- Allowance target: the contract an aggregator's quote says the user must approve to spend the sell token, pinned per provider and chain because a wrong one is a drain (DEXs & AMMs).
- Automated market maker (AMM): a contract that holds two tokens and prices trades against them by formula, with no order book or operator (DEXs & AMMs).
- Bad debt (DeFi): loan value in a lending pool that no collateral covers, left when a price gaps or collateral can't be sold before liquidation (DeFi Lending & Liquidations).
- Close factor: the share of a borrower's debt a liquidator may repay in one call; 50% in Aave V3 above a health factor of 0.95, 100% at or below it (DeFi Lending & Liquidations).
- Concentrated liquidity: liquidity provided on a chosen price range, active and earning fees only while the price is inside it, as in Uniswap v3 (DEXs & AMMs).
- Constant product formula: the AMM rule x × y = k, under which the product of a pool's reserves can't fall, so each unit bought costs more than the last (DEXs & AMMs).
- DeFi broker rule: T.D. 10021 (December 2024), which would have made trading front-end service providers report gross proceeds; disapproved by Public Law 119-5 on April 10, 2025 and removed from the CFR (DeFi from a Regulated Platform).
- Flash loan: a loan borrowed and repaid inside one transaction, so it needs no collateral; used by liquidators and in governance and oracle attacks (DeFi Lending & Liquidations).
- Formal verification: machine-checked proof that contract code satisfies written properties for every execution, limited by which properties were written (Smart Contract Risk & Exploits).
- Health factor: a borrower's collateral value weighted by liquidation thresholds, divided by debt; below 1.0 the position can be liquidated (DeFi Lending & Liquidations).
- Hook (Uniswap v4): a contract a v4 pool names at creation that runs custom code around swaps and liquidity changes, with its permissions encoded in its address's low bits (DEXs & AMMs).
- Impermanent loss: what an AMM liquidity provider loses against simply holding the deposited tokens when the price moves; 2√r / (1 + r) − 1 for a price ratio r, 5.72% at a 2x move (DEXs & AMMs).
- Intent: a signed order stating what a user wants, settled later by competing fillers or solvers instead of submitted as a transaction, as in UniswapX and CoW Protocol (DEXs & AMMs).
- Liquidation bonus: the extra collateral, as a percentage of the debt repaid, a liquidator receives for repaying an unhealthy loan; part may go to the protocol as a fee (DeFi Lending & Liquidations).
- Liquidation threshold: the share of a collateral asset's value counted toward the health factor, set above the borrowing limit (LTV) to leave a buffer (DeFi Lending & Liquidations).
- Liquidity provider (LP): someone who deposits tokens into a pool to earn its trading fees, carrying impermanent loss (DEXs & AMMs).
- Loan-to-value (LTV, DeFi): the share of a collateral asset's value an account may borrow against it (DeFi Lending & Liquidations).
- Maximal extractable value (MEV): the value that can be extracted from block production by including, excluding or reordering transactions (Oracles & MEV).
- MEV-Boost: validator middleware that sources blocks from external builders through relays, an out-of-protocol form of proposer-builder separation (Oracles & MEV).
- Oracle: a contract that publishes off-chain data, usually prices, on chain for other contracts to read (Oracles & MEV).
- Oracle manipulation: moving the price an oracle reports, for long enough that a protocol lends, liquidates or settles against it (Oracles & MEV).
- Price impact: how much a trade moves a pool's price by its own size, computed from the pool's state at quote time (DEXs & AMMs).
- Private order flow: transactions sent to builders through private channels instead of the public mempool, to avoid sandwiches and sometimes earn refunds (Oracles & MEV).
- Proposer-builder separation (PBS): splitting block building from block proposing, today through MEV-Boost and proposed in-protocol by EIP-7732 (Oracles & MEV).
- Safe Harbor (SEAL): an on-chain agreement under which a protocol pre-authorizes white hats to rescue funds during an exploit for a bounty of 10% capped at $1 million (Smart Contract Risk & Exploits).
- Sandwich attack: buying just before a victim's swap and selling just after, so the victim trades at a price the attacker moved, up to its slippage limit (Oracles & MEV).
- Slippage: the difference between a swap's quoted output and what it actually gets when it lands; the slippage tolerance is the minimum output the transaction enforces (DEXs & AMMs).
- Timelock: a contract that delays execution of a governance decision, giving users notice before code or parameters change (Smart Contract Risk & Exploits).
- TWAP (time-weighted average price): a price averaged over a window from a pool's accumulator; in Uniswap v3 a geometric mean of the tick (Oracles & MEV).
- Utilization: the share of a lending pool's supplied funds that is borrowed, which sets its interest rates along a kinked curve (DeFi Lending & Liquidations).