Decentralized finance (DeFi) has significantly changed how we approach financial services, offering worldwide access to lending and borrowing without traditional intermediaries. At the same time, a whole new world has opened up, inventing words like “oracle” or “health factor.” Understanding these fundamental terms is essential for making informed decisions.
Our glossary will break down the meaning of these industry-specific terms, serving as your guide to the key concepts that define the crypto lending ecosystem. By mastering these terms, you'll be better equipped to maximize the potential of lending and borrowing protocols while minimizing risks, furthering your journey to financial independence.
Term | Definition |
Lending | The act of depositing/supplying assets into a lending protocol to earn interest, providing liquidity to borrowers. |
Borrowing | The process of taking out a loan by providing collateral on a lending protocol. |
Supply Cap | The maximum amount of a specific asset that can be supplied to the lending protocol. |
Borrow Cap | The maximum amount of a specific asset that can be borrowed from the protocol This helps manage exposure and risk associated with each asset. |
Collateral | Assets pledged by borrowers to secure a loan and reduce the risk of default. |
LTV (Loan-to-Value) | Usually represents the maximum borrowing power of a specific collateral in the lending protocol. |
APY (Annual Percentage Yield) | Represents the total interest earned on an investment over a year, including compounding interest. |
APR (Annual Percentage Rate) | Represents the annualized cost of borrowing or interest earned, excluding compounding. |
Net Supply | The total value of assets a user has supplied to the protocol. |
Net Borrow | The total value of assets borrowed by a user, adjusted for any repayments or liquidations, reflecting their outstanding debt. |
Net Asset Value (NAV) | The total value of a user’s supplied assets minus their outstanding borrowings. It reflects the user's overall position in the protocol. |
Over-collateralization | A mechanism where borrowers must deposit more collateral value than the loan value to secure the loan. |
Liquidation | The process of selling a borrower's collateral when the loan's value exceeds a predetermined threshold. |
Interest Rate Model (IRM) | Algorithm or formula determining borrowing and lending rates, often based on pool utilization. |
Interest Rate Curve | A graph that shows how borrowing interest rates change based on pool utilization rates or market conditions. |
Oracle | A service that provides off-chain data, such as asset prices, to smart contracts. |
Fixed Interest Rate | A borrowing rate that remains constant, regardless of market conditions. |
Variable Interest Rate | A borrowing rate that fluctuates with market conditions, typically tied to pool utilization. |
Flash Loan | An uncollateralized loan that allows users to borrow crypto assets instantly without needing to provide any collateral if the loan is being repaid within the same blockchain transaction. |
LLTV (Liquidation Loan-to-Value) | The ratio at which a borrower's loan value relative to their collateral triggers liquidation. It defines the maximum allowable borrowing against collateral before liquidation occurs. |
Liquidation Penalty | A fee charged when a user's collateral is liquidated due to insufficient health factor or over-collateralization. |
Reserve Factor | A percentage of interest payments retained by the lending protocol for safety or operational purposes. |
Utilization Rate | The percentage of the total supplied assets that are currently borrowed in a lending pool. |
Health Factor | A metric indicating the safety of a borrower's position, based on collateral and debt ratios. |
Isolated Lending Pool | A lending pool where assets are segregated to limit systemic risk from one asset impacting the entire protocol. |
TVL (Total Value Locked) | The total amount of assets locked in a DeFi protocol, indicating its size and adoption. |
Stablecoins | Cryptocurrencies designed to maintain a stable value, often pegged to fiat currencies like USD. For example, USDT, USDC. |
Arbitrage | The practice of exploiting price differences in markets, such as borrowing at low interest to lend at higher rates. |
E-Mode | A feature in some protocols that optimizes collateral factors for closely correlated assets (e.g., stablecoins), allowing higher borrowing power and reduced risk of liquidation. |
Yield Farming | The strategy of earning rewards by providing liquidity or staking assets in DeFi protocols. |
Smart Contract | Self-executing code on the blockchain that automatically enforces agreements and transactions. |
Protocol Risk | Risks associated with the functionality or security of the lending protocol, such as smart contract bugs. |
Slippage | The difference between expected and actual execution prices due to market liquidity or volatility. |
Impermanent Loss | A temporary loss experienced by liquidity providers when the price of deposited assets changes relative to each other. |
Transaction Fees | Transaction costs required to execute operations on a blockchain. |
About Pike
Pike is a next-generation lending protocol offering the most competitive cross-chain yield opportunities. Pike’s modular design improves security and capital efficiency, offering highly competitive rates through cross-chain interest rate arbitrage and above industry standard liquidity utilization rates.
Learn more: https://www.pike.finance/
Join the Discord: https://discord.gg/pikefinance
Community Dashboard: https://community.pike.finance
*Disclaimer: This educational content prepared by community members is for educational purposes only and not financial advice. DeFi evolves quickly, so always DYOR. If you spot any inaccuracies, let us know!