# 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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#aggregators-and-routers)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#aggregators-and-routers)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#the-constant-product-formula)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/defi-lending#bad-debt)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/defi-lending#the-rules-in-aave-v3)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#concentrated-liquidity)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#the-constant-product-formula)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/defi-from-a-regulated-platform#the-defi-broker-rule-and-its-repeal)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/defi-lending#bots-and-the-race)).
- **Formal verification:** machine-checked proof that contract code satisfies written properties for every execution, limited by which properties were written ([Smart Contract Risk & Exploits](https://www.syntaqx.com/books/investing-and-digital-assets/smart-contract-risk#formal-verification)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/defi-lending#the-health-factor)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#hooks-and-the-v4-singleton)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#impermanent-loss)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#intents-and-batch-auctions)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/defi-lending#worked-numbers-a-liquidation-with-bonus)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/defi-lending#two-thresholds)).
- **Liquidity provider (LP):** someone who deposits tokens into a pool to earn its trading fees, carrying impermanent loss ([DEXs & AMMs](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#impermanent-loss)).
- **Loan-to-value (LTV, DeFi):** the share of a collateral asset's value an account may borrow against it ([DeFi Lending & Liquidations](https://www.syntaqx.com/books/investing-and-digital-assets/defi-lending#two-thresholds)).
- **Maximal extractable value (MEV):** the value that can be extracted from block production by including, excluding or reordering transactions ([Oracles & MEV](https://www.syntaqx.com/books/investing-and-digital-assets/oracles-and-mev#what-it-is)).
- **MEV-Boost:** validator middleware that sources blocks from external builders through relays, an out-of-protocol form of proposer-builder separation ([Oracles & MEV](https://www.syntaqx.com/books/investing-and-digital-assets/oracles-and-mev#flashbots-mev-boost-and-pbs)).
- **Oracle:** a contract that publishes off-chain data, usually prices, on chain for other contracts to read ([Oracles & MEV](https://www.syntaqx.com/books/investing-and-digital-assets/oracles-and-mev#price-oracles)).
- **Oracle manipulation:** moving the price an oracle reports, for long enough that a protocol lends, liquidates or settles against it ([Oracles & MEV](https://www.syntaqx.com/books/investing-and-digital-assets/oracles-and-mev#oracle-manipulation)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#price-impact-and-slippage)).
- **Private order flow:** transactions sent to builders through private channels instead of the public mempool, to avoid sandwiches and sometimes earn refunds ([Oracles & MEV](https://www.syntaqx.com/books/investing-and-digital-assets/oracles-and-mev#private-order-flow)).
- **Proposer-builder separation (PBS):** splitting block building from block proposing, today through MEV-Boost and proposed in-protocol by EIP-7732 ([Oracles & MEV](https://www.syntaqx.com/books/investing-and-digital-assets/oracles-and-mev#flashbots-mev-boost-and-pbs)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/smart-contract-risk#incident-response-and-white-hat-recoveries)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/oracles-and-mev#sandwiches)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/dexs-and-amms#price-impact-and-slippage)).
- **Timelock:** a contract that delays execution of a governance decision, giving users notice before code or parameters change ([Smart Contract Risk & Exploits](https://www.syntaqx.com/books/investing-and-digital-assets/smart-contract-risk#governance-and-timelocks)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/oracles-and-mev#time-weighted-prices-from-pools)).
- **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](https://www.syntaqx.com/books/investing-and-digital-assets/defi-lending#interest-rate-curves)).

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