DeFi (Decentralized Finance)
Financial applications on blockchain
Plain English
Imagine a community pot of money where people put in different types of coins, and anyone can trade between those coins instantly. Contributors earn fees from trades. It’s like a exchange bureau that runs automatically without employees.
Technical
Smart contract-based reserves of token pairs that enable decentralized trading through Automated Market Makers (AMMs). Liquidity providers deposit equal values of two tokens, receiving LP tokens representing their share. Trading fees and price impact are determined by mathematical formulas (constant product x*y=k for most AMMs). Solana DEXs like Orca and Raydium implement efficient liquidity pools.
Plain English
A way to earn rewards by putting your cryptocurrency to work in different DeFi apps. Like moving money between different high-interest savings accounts to get the best return, yield farmers move assets to wherever they can earn the most rewards.
Technical
Liquidity mining strategy where users optimize returns by providing assets to DeFi protocols in exchange for yield. Farmers may stake LP tokens from AMMs, lend on money markets, or participate in protocol incentives. Returns come from trading fees, lending interest, and protocol token emissions. Strategies often involve compounding returns and moving capital to highest-yielding opportunities, balanced against smart contract risk and impermanent loss.
Plain English
A organization run by rules written in code instead of managed by CEOs or boards. Members vote on decisions using tokens, and the votes automatically trigger actions. It’s like a company owned and controlled by its community rather than executives.
Technical
A governance structure coordinated through smart contracts and token-based voting rather than traditional hierarchical management. DAO members hold governance tokens proportional to voting power, proposing and voting on protocol changes, treasury allocation, and operational decisions. Proposals are executed on-chain after reaching quorum. Solana DAOs use programs like SPL Governance to implement on-chain voting and execution.
Plain English
The difference between the price you expect when trading and the price you actually get. Like when you see an item for $100 but by the time you checkout it’s $105 because others bought it first. In crypto trading, slippage happens when the price moves while your transaction is being processed.
Technical
Price deviation between expected and executed trade price in AMM-based DEXs, caused by market movement during transaction processing or insufficient liquidity. Calculated as percentage difference from quoted price. Large trades relative to pool size cause higher slippage due to constant product formula. Users set maximum slippage tolerance - transactions revert if actual slippage exceeds this threshold.
Plain English
A system that automatically sets prices based on a mathematical formula, using pools of tokens instead of buyers/sellers matching orders. You trade against a pool, not another person. The most common formula keeps the product of two token amounts constant (x × y = k).
Technical
Decentralized exchange protocol using algorithmic price determination rather than order books. Constant product formula (x*y=k) maintains invariant across trades. Liquidity providers deposit token pairs, earning proportional trading fees. Price determined by pool ratio; trades shift ratio, moving price along bonding curve. Advantages: permissionless liquidity, no order matching needed. Solana AMMs: Orca, Raydium, Meteora.
Plain English
The total dollar value of all assets deposited in a DeFi protocol. Like measuring bank deposits. Higher TVL generally means more trust and liquidity. If a DEX has $1B TVL, users have deposited $1B worth of crypto into its pools and contracts.
Technical
Aggregate value of assets deposited in DeFi protocol smart contracts. Key metric for protocol adoption, liquidity depth, and security (more at stake). Calculated by: (token quantity × price) summed across all pools/vaults. Limitations: doesn’t account for leveraged positions, can be manipulated via recursive depositing, fluctuates with price movements independent of user action.
Plain English
A token that represents another cryptocurrency from a different blockchain. For example, wrapped Bitcoin (WBTC) is Bitcoin on Ethereum, or Portal wBTC on Solana. The original asset is locked up and you get an equivalent token you can use on the new chain.
Technical
Tokenized representation of assets from another blockchain, enabling cross-chain interoperability. Bridge protocols lock native asset on origin chain and mint equivalent wrapped token on destination chain with 1:1 backing. Examples: wETH (Wrapped Ether), wBTC (Wrapped Bitcoin), Portal wrapped assets on Solana. Introduces bridge risk - wrapped token security depends on bridge security.
Plain English
A loan that must be borrowed and repaid within the same transaction (fractions of a second). If you can’t repay it in that same transaction, the whole thing cancels like it never happened. Used for arbitrage, refinancing debt, or sometimes exploiting vulnerable protocols.
Technical
Uncollateralized loans borrowed and repaid within a single atomic transaction. Enabled by smart contract atomicity - if any step fails, entire transaction reverts including loan. Used for: arbitrage across DEXs, collateral swapping, liquidation execution, exploiting protocol vulnerabilities. Popular on Aave, dYdX. Solana limitations: transaction size constraints make complex flash loan operations challenging.
Plain English
A futures contract with no expiration date, letting you bet on price movements with leverage. You can go "long" (betting price goes up) or "short" (betting price goes down) without actually owning the asset. Funding rates keep the contract price close to actual market price.
Technical
Derivative contracts enabling leveraged exposure to assets without expiration. No delivery/settlement - positions held indefinitely via funding rate mechanism (longs pay shorts when mark > index price, vice versa) keeping perpetual price anchored to spot. Popular venues: Drift, Mango, Zeta Markets on Solana. Offers leverage (5-20x typical), long/short positions, and efficient capital usage.
Plain English
Extra profit that block producers can make by reordering, including, or excluding transactions in a block. Like a cashier who can see pending orders and places their own order first to get better prices. Can be unfair to regular users but also provides some network benefits.
Technical
Economic value extracted from blockchain block production beyond standard fees and block rewards. MEV strategies include: arbitrage between DEXs, liquidation opportunities, sandwich attacks on large trades, and front-running. While MEV can improve market efficiency, it can also create negative externalities for users. Solana’s design aims to minimize harmful MEV through parallel processing.
Plain English
A MEV strategy where attackers place trades before and after your transaction to profit from the price impact you create. Like someone cutting in line before you to buy something cheap, then selling it back at the higher price your purchase created.
Technical
MEV extraction technique where attackers front-run a victim’s trade with a buy order and back-run with a sell order, profiting from the victim’s price impact in AMM pools. The attack "sandwiches" the victim’s transaction between attacker trades, effectively taxing the victim’s slippage. Defense mechanisms include private mempools and MEV-resistant ordering.
Plain English
When borrowed positions are automatically closed because collateral value dropped too low. Like a margin call in traditional trading - if your collateral is worth $1000 and you borrowed $800, if collateral drops to $900, you might get liquidated to protect the lender.
Technical
Automated process of closing undercollateralized positions to protect protocol solvency. When collateral value falls below required thresholds, liquidators can repay portions of debt in exchange for discounted collateral. Liquidation incentives (liquidation bonuses) attract third-party liquidators who maintain system health while profiting from price discrepancies.
Plain English
Platforms where you can lend and borrow cryptocurrency. Lenders earn interest, borrowers pay interest. Interest rates change based on supply and demand. Popular ones on Solana include Solend and MarginFi. Think of them as banks without the banks.
Technical
Decentralized protocols enabling permissionless lending and borrowing through algorithmic interest rate models. Users deposit assets into shared pools earning variable interest, while borrowers can take collateralized loans. Interest rates adjust dynamically based on utilization ratios. Risk management includes liquidation mechanisms, collateralization requirements, and reserve factors.
Plain English
DeFi services that provide coverage against smart contract failures, hacks, or other risks. Users pay premiums to get protection, similar to car insurance. If something goes wrong with a covered protocol, users can file claims and get compensation.
Technical
Decentralized coverage mechanisms protecting against smart contract risks, protocol failures, and other DeFi-specific hazards. Users stake capital in coverage pools and earn premiums in exchange for assuming risk. Claims are processed through governance mechanisms or parametric triggers. Examples include Nexus Mutual and specialized protocol-specific insurance offerings.