DeFi Glossary

Question 1

"What is the difference between APR and APY?"

Accepted Answer

"APR shows simple interest while APY includes compounding effects. APY is typically higher and more accurate for DeFi yields."

Question 2

"How can I minimize impermanent loss?"

Accepted Answer

"Choose stable pairs, use concentrated liquidity ranges carefully, or consider single-sided staking instead of providing liquidity to volatile pairs."

Question 3

"Is yield farming profitable?"

Accepted Answer

"Yield farming can be profitable but involves significant risks including smart contract vulnerabilities, impermanent loss, and high gas fees. Success requires careful research and risk management."

Question 4

"How long do liquidity mining programs last?"

Accepted Answer

"Programs vary widely, from weeks to years. Many protocols adjust rewards based on protocol needs and governance decisions."

Question 5

"How does an AMM determine prices?"

Accepted Answer

"AMMs use algorithms like x*y=k (constant product) to automatically adjust prices based on supply and demand in liquidity pools."

Question 6

"How do I participate in DAO governance?"

Accepted Answer

"Hold governance tokens, stay informed about proposals, and vote on decisions that affect the protocol's future."

Question 7

"Can smart contracts be changed after deployment?"

Accepted Answer

"Most smart contracts are immutable once deployed, though some include upgrade mechanisms controlled by governance or admin keys."

Question 8

"What are the main advantages of DeFi over traditional finance?"

Accepted Answer

"24/7 accessibility, permissionless access, transparency, programmability, and typically better yields for users."

Question 9

"What's the difference between centralized and decentralized stablecoins?"

Accepted Answer

"Centralized stablecoins like USDC are backed by fiat reserves, while decentralized ones like DAI use crypto collateral and algorithms."

Question 10

"How do liquidity providers earn money?"

Accepted Answer

"LPs earn trading fees (typically 0.3%) from every swap, plus potential reward tokens from liquidity mining programs."

Question 11

"How can I minimize slippage?"

Accepted Answer

"Trade smaller amounts, use liquid pairs, set appropriate slippage tolerance, or use aggregators that find the best routes."

Question 12

"Do governance tokens have monetary value?"

Accepted Answer

"Yes, they trade on markets and derive value from the protocol's success and potential future cash flows or benefits."

Question 13

"What happens if I can't repay a flash loan?"

Accepted Answer

"The entire transaction reverts, meaning you get your original funds back but pay gas fees for the failed transaction."

Question 14

"Why is Ethereum so important for DeFi?"

Accepted Answer

"Ethereum's programmable smart contracts enable complex financial applications, and it has the largest DeFi ecosystem and liquidity."

Question 15

"Are Layer 2 solutions as secure as Ethereum?"

Accepted Answer

"They inherit Ethereum's security but may have additional risks depending on their specific implementation and centralization level."

Question 16

"Are bridges safe to use?"

Accepted Answer

"Bridges carry risks as they're complex smart contracts. Use well-audited, established bridges and never invest more than you can afford to lose."

Question 17

"Why can't smart contracts get price data directly?"

Accepted Answer

"Blockchains can't access external data by design. Oracles act as bridges to bring real-world information on-chain securely."

Question 18

"How can I protect myself from MEV?"

Accepted Answer

"Use private mempools, set appropriate slippage tolerance, or use MEV-protected trading interfaces."

Question 19

"Do aggregators always give better prices?"

Accepted Answer

"Usually yes, but consider gas costs. For small trades, the gas cost of complex routing might outweigh savings."

Question 20

"What happens if multisig signers are unavailable?"

Accepted Answer

"If you can't reach the minimum threshold, funds become inaccessible. This is why backup plans and trusted signers are crucial."

Question 21

"Why are gas fees so high sometimes?"

Accepted Answer

"Gas fees increase with network demand. During busy periods, users compete by paying higher fees to get their transactions processed faster."

Question 22

"Can I use ERC-20 tokens on other blockchains?"

Accepted Answer

"Not directly, but you can bridge them to other chains or use wrapped versions that follow other standards."

Question 23

"Is a wrapped token the same as the original?"

Accepted Answer

"Functionally similar but technically different. They should maintain 1:1 value but carry additional risks from the wrapping mechanism."

Question 24

"Why is my transaction stuck in the mempool?"

Accepted Answer

"Usually due to low gas fees. Miners prioritize higher-fee transactions, so yours waits until network congestion decreases or you increase the fee."

Question 25

"What is slashing in staking?"

Accepted Answer

"Slashing is a penalty where validators lose part of their staked tokens for malicious behavior or prolonged downtime."

Question 26

"Why did Ethereum switch from Proof of Work to Proof of Stake?"

Accepted Answer

"For better energy efficiency, improved security, and to enable features like sharding for better scalability."

Question 27

"How many confirmations do I need?"

Accepted Answer

"For high-value transactions, wait for 6+ confirmations on Ethereum. For smaller amounts, 1-3 confirmations are usually sufficient."

DeFi Glossary

DeFi Glossary

Why This Glossary?

Categories

Yields & Returns

Risks & Security

Strategies

Protocols & Platforms

Tokens & Assets

Technical Concepts

Trading & AMMs

Governance & DAOs

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