The Stacked Crypto Glossary
Cutting through the DeFi jargon
The world of decentralized finance (DeFi) can sometimes feel intimidating, even to the initiated. At times, there’s so much jargon flying around that it can feel like crypto insiders are speaking another language.
We get it. That’s why we’ve created this compilation of terms that you’re likely to run across in your journey to crypto mastery. If you happen to come across any other words or concepts that are unfamiliar, please let us know — we’ll periodically be adding new entries to this glossary.
Arbitrage isn’t just a crypto thing — it’s what occurs when any asset is purchased in one market and sold in another for a higher price. For example, if you bought an apple at a fruit market for $0.50 and sold it at another for $0.55, you’d technically be engaging in arbitrage.
Crypto traders often take advantage of arbitrage opportunities on multiple exchanges, where they may purchase crypto on one exchange and sell it for a higher amount on another.
Blockchain technology is the basis for all things crypto and DeFi. It’s frequently described as a digital ledger that immutably records transactions. In that way, blockchains are similar to the ledgers kept by centralized digital payment companies like Visa and PayPal.
However, unlike the ledgers that centralized payment companies keep, blockchain ledgers cannot be altered by any one entity. No single person, company, or organization has the authority to alter a blockchain. Instead, making changes to a blockchain network requires consensus — the majority of the network’s supporters must agree to these changes.
Centralized vs. Decentralized
When it comes to blockchain technology, the concept of centralized vs. decentralized software has to do with who has control over a network or piece of software. The ownership and control of decentralized networks or applications are distributed across many different entities — often referred to as “nodes” — while centralized networks are managed by a single authority.
Public cryptocurrency networks like Bitcoin and Ethereum are designed to be decentralized. While blockchain networks usually have small groups of developers who create software upgrades and changes, modifications will not be implemented without the approval and support of their users.
Collateral refers to assets used to secure a loan. In traditional finance, people will often put down their houses as collateral in exchange for a cash loan from a bank. On DeFi lending platforms, people will put down collateral in the form of one digital asset in order to take out a loan in another. For instance, a user may deposit Bitcoin (BTC) in order to take out a loan in Ether (ETH).
Level Up: DeFi loans are commonly over-collateralized, meaning that you will have to deposit collateral worth more than the loan you’re requesting. For example, you might put down $1,500 ETH to secure a $1,000 USDT loan. Lending platforms do this to prevent profit losses in the event of extreme market volatility.
Cryptocurrencies — also referred to as tokens or digital assets — are fungible digital units of exchange that exist on blockchain networks. They’re secured by a type of math called cryptography, which makes counterfeiting them virtually impossible. The most common types of cryptocurrencies include Bitcoin (BTC) and Ether (ETH).
Decentralized apps, or dApps, are applications built on blockchain networks using smart contracts. Like regular applications, dApps can be made for any use case. Currently, many are designed for financial purposes: lending, trading, generating yield, and more.
Decentralized Finance (or DeFi)
Decentralized finance — or DeFi, as it’s commonly known — is a new kind of financial system enabled by blockchain technology. You may also hear the crypto community refer to its predecessor — centralized finance — by the similar-sounding abbreviation CeFi.
DeFi platforms comprise software that automatically executes certain actions based on the inputs they receive. They are also open-source — meaning that anyone can view their code at any time — and cannot be easily changed or manipulated by third parties.
CeFi platforms, by contrast, are run by private organizations, such as banks and brokerages. Unlike DeFi, these platforms are closed-source “walled gardens,” and can be easily altered depending on the operating organization’s internal decisions.
In DeFi, DEX is shorthand for decentralized exchange, while CEX is a shortened version of “centralized exchange.” Both CEXs and DEXs allow you to buy and sell cryptocurrencies and other kinds of digital assets. The difference is that decentralized exchanges are governed by consensus among their participants, while CEXs are designed to be managed by central organizations.
Level Up: Fees on DEXs tend to be higher than fees on CEXs. However, some people prefer to use DEXs because they are open-source and do not require identity verification.
Ethereum is one of the largest blockchain networks in the world, second only to Bitcoin in terms of its market capitalization and the size of its community of users. The network is often described as the “backbone” of the DeFi world because most decentralized applications, or dApps, run on top of it. Developers tend to prefer to build on Ethereum because of its ability to run smart contracts. These are agreements between two parties in which the terms are written directly into lines of code.
Level Up: Ethereum is not the same thing as Ether (ETH), its native cryptocurrency. ETH is used on the Ethereum network to transfer value and pay for transaction (or “gas”) fees.
Gas Fee is a term used to describe transaction costs on the Ethereum network. These costs can vary greatly depending on how busy Ethereum is at any given time.
Gas Fees are calculated in units consisting of small amounts of ETH called gwei, where 1 gwei = 0.000000001 ETH. The minimum amount needed for a simple, wallet-to-wallet ETH transaction on Ethereum is 21,000 units of gas. More complex transactions, such as buying ERC-20 tokens or NFTs, staking ETH, and other tasks that involve smart contracts, require higher levels of Gas.
Gas costs also depend a lot on the amount of traffic going through the network. For instance, a unit of Gas could cost just a few dozen gwei on a slow day — but on a busy day, the same unit can cost thousands of gwei. This is why Ethereum transaction costs have historically been so volatile.
Level Up: Because Gas Fees on Ethereum can vary so greatly, developers have created free services like ETH Gas Station that can help you determine at what time of day a transaction is the least expensive.
Non-Fungible Token (NFT)
Non-fungible tokens, or NFTs, are tokens that represent unique assets and are not mutually interchangeable with one another. They have gained popularity in the form of art and other collectibles, but can represent any type of asset. Each consists of mathematically distinct code, so that even if two NFTs are tied to identical images, they are still distinct entities.
By contrast, most currencies, digital or not, consist of mutually interchangeable units — in other words, any dollar bill or Bitcoin is just as good as any other.
Level Up: There are many blockchains capable of producing NFTs. However, most NFTs are based on the Ethereum network, where they are generated using the ERC 721 and ERC 1155 token standards.
When software is open-source, anyone can look at its code at any time. This means that its original source code can be audited, used, and re-purposed by anyone online. Open-source software isn’t just a DeFi thing — open source games, word processors, operating systems, and much more have been around for years.
Because blockchain technology is inherently open-source, so too are DeFi platforms, smart contracts, dApps, and basically all things crypto.
Smart contracts are the small pieces of code that the DeFi world runs on. Smart contracts will only run once certain, predetermined conditions are met. For example, a smart contract could be written to pay royalties to a musical artist each time her song plays on the radio, or unlock a rental car after its user has paid for it.
Unlike traditional contracts, smart contracts can’t be rewritten without the consent of all parties involved. They’re open-source, meaning that they can be viewed by anyone at any time.
Level Up: Not all blockchains support smart contracts. Bitcoin, for example, is not a smart-contract enabled blockchain. Some of the most popular smart contract-enabled blockchains include Ethereum, Solana, Polka Dot, and Alogrand.
Many of the world’s biggest cryptocurrencies are famous for their volatility. Stablecoins, by contrast, are designed to hold consistent value. For example, 1 stablecoin = 1 USD or 1 EUR. Because of their steady values, stablecoins are commonly used as a more reliable way to store and exchange value.
Level Up: There are several different types of stablecoins on the market. The most common are fiat-backed, meaning that each token is tied 1:1 with a single unit of fiat currency held by the coin’s issuer. Algorithmic stablecoins, by contrast, are commonly tied to small amounts of cryptocurrencies like Ether (ETH) or Bitcoin (BTC), and are constantly rebalancing the amount of pegged crypto to maintain a stable value.
Total value locked, or TVL, is a metric that indicates the total amount of money contained in a single platform, be it a dApp or DEX, or the entire DeFi ecosystem.
When DeFi first emerged in 2017, TVL was just a few thousand dollars. As of early 2022, DeFi’s TVL was more than $79 billion. You can check TVL on sites like DeFi Pulse.