DeFi Glossary
A comprehensive A-Z glossary of DeFi and Aave-specific terminology. Click on any letter to jump to that section.
APR (Annual Percentage Rate)
The yearly interest rate charged on borrowed funds or earned on supplied funds, without accounting for compounding. APR represents simple interest over a year.
APY (Annual Percentage Yield)
The actual yearly return on an investment, accounting for compound interest. APY is typically higher than APR because it includes the effect of reinvesting interest earnings.
aTokens Aave
Interest-bearing tokens received when you supply assets to Aave. aTokens represent your deposit plus accrued interest and can be redeemed 1:1 for the underlying asset at any time. Your aToken balance automatically increases as interest accrues.
Aave
A decentralized, non-custodial liquidity protocol where users can supply and borrow crypto assets. The name comes from the Finnish word for "ghost," reflecting the protocol's transparent and open nature.
Borrow Rate
The interest rate charged to borrowers for taking out a loan. This rate can be variable (changing based on market conditions) or stable (fixed at the time of borrowing).
Borrowing Power
The maximum amount a user can borrow based on their supplied collateral and the loan-to-value ratios of those assets. Borrowing power decreases as you borrow more or if collateral values decline.
Collateral
Assets deposited to secure a loan. In DeFi lending, you must provide collateral worth more than your loan amount. If collateral value falls too low, it may be liquidated to repay the debt.
Collateralization Ratio
The ratio between the value of your collateral and your borrowed amount. A higher ratio means your position is safer. For example, a 150% ratio means you have $150 in collateral for every $100 borrowed.
Credit Delegation Aave
A feature allowing depositors to delegate their borrowing power to other addresses, enabling uncollateralized loans based on off-chain agreements.
DeFi (Decentralized Finance)
Financial services built on blockchain technology that operate without traditional intermediaries like banks. DeFi protocols use smart contracts to automate lending, borrowing, trading, and other financial activities.
Debt Token
Tokens representing a user's borrowed position in Aave. Variable debt tokens represent variable-rate loans, while stable debt tokens represent stable-rate loans.
E-Mode (Efficiency Mode) Aave v3
A feature that allows higher borrowing power when supplying and borrowing correlated assets (like stablecoins against stablecoins). E-Mode can provide up to 97% loan-to-value ratios for qualifying asset pairs.
ERC-20
A technical standard for tokens on the Ethereum blockchain. Most DeFi tokens, including AAVE and aTokens, follow this standard, enabling compatibility across different protocols and wallets.
Flash Loan Aave
An uncollateralized loan that must be borrowed and repaid within the same blockchain transaction. Flash loans enable arbitrage, collateral swaps, and liquidations without requiring upfront capital.
Frozen Asset
An asset that has been temporarily disabled for new deposits and borrowing by governance, usually due to market conditions or security concerns. Existing positions can still be managed.
Gas
The fee paid to process transactions on a blockchain. Gas fees compensate network validators and vary based on network congestion. Higher complexity transactions require more gas.
GHO Aave
Aave's native decentralized stablecoin, pegged to the US dollar. GHO is minted by borrowers against their Aave collateral and offers unique features like facilitator-based minting and stkAAVE discounts.
Governance
The decentralized decision-making process for protocol changes. AAVE token holders can vote on proposals affecting risk parameters, new assets, protocol upgrades, and treasury allocation.
Health Factor Aave
A numeric indicator of your position's safety in Aave. Health Factor above 1 means your position is safe; below 1 triggers liquidation. It's calculated based on your collateral value, borrowed amount, and liquidation thresholds.
Impermanent Loss
The temporary loss of value experienced by liquidity providers when the price ratio of pooled assets changes compared to simply holding them. The loss becomes permanent only if you withdraw during the price divergence.
Isolation Mode Aave v3
A risk management feature that limits exposure to new or volatile assets. Isolated assets can only be used as collateral for borrowing specific stablecoins up to a debt ceiling.
Liquidation
The process of selling a borrower's collateral to repay their loan when the Health Factor falls below 1. Liquidators receive a bonus for performing liquidations, incentivizing prompt debt repayment.
Liquidation Bonus
A discount given to liquidators when purchasing collateral during liquidation. This bonus incentivizes quick liquidations to protect the protocol from bad debt.
Liquidation Threshold
The loan-to-value ratio at which a position becomes eligible for liquidation. For example, a 80% threshold means liquidation can occur when debt reaches 80% of collateral value.
LTV (Loan-to-Value)
The maximum percentage of collateral value that can be borrowed. A 75% LTV means you can borrow up to $75 for every $100 of collateral supplied.
Oracle
A service that provides external data (like asset prices) to smart contracts. Aave uses Chainlink oracles to get accurate, manipulation-resistant price feeds for calculating collateral values and health factors.
Overcollateralization
The requirement to deposit more collateral than the value being borrowed. This protects lenders from losses if collateral values decline and is fundamental to DeFi lending.
Pool
A smart contract holding liquidity from multiple suppliers. In Aave, each market has pools for different assets from which borrowers can take loans.
Portal Aave v3
A cross-chain feature allowing assets to be seamlessly moved between Aave deployments on different blockchains while maintaining supply positions.
Protocol
A set of rules and smart contracts that define how a decentralized application operates. Aave Protocol refers to all the smart contracts that enable lending and borrowing functionality.
Siloed Borrowing Aave v3
A risk parameter that restricts an asset to only be borrowed in isolation. When borrowing a siloed asset, you cannot borrow any other assets with the same collateral.
Slippage
The difference between expected and actual trade prices, usually due to market movement or low liquidity. In DeFi, users set slippage tolerance to control maximum acceptable price deviation.
Smart Contract
Self-executing code stored on a blockchain that automatically enforces agreement terms when conditions are met. Aave's lending functionality is powered entirely by audited smart contracts.
Stablecoin
A cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency like USD. Examples include USDC, USDT, DAI, and GHO.
Supply Rate
The interest rate earned by liquidity providers (suppliers) in Aave. This rate varies based on utilization—higher borrowing demand means higher supply rates.
stkAAVE (Staked AAVE) Aave
The token received when staking AAVE in the Safety Module. stkAAVE earns staking rewards and provides GHO borrowing discounts while helping secure the protocol.
TVL (Total Value Locked)
The total value of assets deposited in a DeFi protocol. TVL is a key metric for measuring protocol adoption and security, as higher TVL indicates more user trust and liquidity.
Utilization Rate
The percentage of deposited assets currently being borrowed. Higher utilization means more assets are borrowed, leading to higher interest rates for both suppliers and borrowers.
Umbrella Aave
Aave's native protocol coverage system that provides automated on-chain protection against bad debt through staking mechanisms.
Variable Rate
An interest rate that fluctuates based on supply and demand in the lending pool. Variable rates can change from block to block as market conditions evolve.
Wallet
Software or hardware that stores your private keys and allows you to interact with blockchain networks. Popular wallets for DeFi include MetaMask, Coinbase Wallet, and hardware wallets like Ledger.
Wrapped Token
A token representing another asset on a different blockchain or in a different format. WETH (Wrapped ETH) is an ERC-20 version of ETH used for DeFi compatibility.
Yield
The return earned on deposited assets over time. In Aave, yield comes from interest paid by borrowers and is automatically accrued to suppliers through their aToken balances.
Yield Farming
The practice of moving assets between DeFi protocols to maximize returns. This may involve supplying to lending protocols, providing liquidity, or staking tokens for rewards.