DeFi (Decentralized Finance)
An ecosystem of financial services built on blockchain networks that operate without traditional intermediaries like banks, brokerages, or insurance companies. DeFi uses smart contracts to provide lending, borrowing, trading, insurance, derivatives, and yield generation in a permissionless, transparent, and composable manner. Anyone with a wallet can participate.
“Using Aave, you can lend your USDC to earn interest or borrow against your ETH collateral — all without a bank, credit check, or KYC. Rates adjust algorithmically based on supply and demand.”
Smart Contract
Self-executing programs stored on a blockchain that automatically enforce the terms of an agreement when predetermined conditions are met. Smart contracts enable trustless transactions without intermediaries because the code, once deployed, executes exactly as written and cannot be altered (unless specifically designed to be upgradeable). They form the foundation of DeFi, NFTs, DAOs, and virtually all dApps.
Liquidity Pool
A collection of funds locked in a smart contract that enables decentralized trading on AMM-based exchanges. Liquidity providers (LPs) deposit paired tokens in equal value ratios and earn a share of the trading fees generated by swaps in that pool. Pools replace traditional order books in DEX architecture.
Yield Farming
The practice of strategically deploying crypto assets across DeFi protocols to maximize returns through a combination of trading fees, token rewards, lending interest, and liquidity incentives. Yield farmers actively move capital between protocols to chase the highest yields, often compounding returns by reinvesting rewards. Higher yields typically come with higher risks, including impermanent loss, smart contract exploits, and token devaluation.
Composability
The ability of DeFi protocols and smart contracts to seamlessly interact with and build upon each other, often called 'money legos.' Composability allows developers to combine existing protocols to create more complex financial products without needing permission, because all smart contracts on the same blockchain can call each other.