Crypto Lending Glossary

Regulatory requirements that crypto platforms must follow to prevent money laundering and terrorist financing. AML compliance includes transaction monitoring, suspicious activity reporting, and customer due diligence.

The annual cost of borrowing without accounting for compounding. APR is typically lower than APY for the same rate because it doesn't include the compound effect.

The effective annual return on deposits, including the effect of compounding. An APY of 5% on a lending platform means your deposit grows by 5% per year if rates remain constant.

The process of representing ownership of real-world assets (real estate, bonds, art, commodities) as digital tokens on a blockchain. Tokenization enables fractional ownership, 24/7 trading, and programmable compliance.

An algorithm that automatically sets prices and facilitates trades in a liquidity pool without order books. AMMs like Uniswap and Curve enable the liquidity that DeFi lending depends on.

A distributed, immutable ledger that records transactions across a network of computers. All crypto lending — whether DeFi or CeFi — ultimately relies on blockchain technology for settlement and transparency.

The maximum amount of an asset that can be borrowed from a lending protocol. Borrow caps are set by governance to limit risk exposure to any single asset.

A protocol that allows assets to be transferred between different blockchains. Bridges enable users to move collateral from Ethereum to cheaper L2 networks for lending.

Profit from selling an asset for more than its purchase price. In crypto lending, capital gains can be triggered by liquidation events, collateral swaps, or converting earned interest.

Centralized Finance — crypto financial services operated by a company that holds custody of user funds. CeFi lending platforms like Nexo and Ledn offer interest accounts and crypto-backed loans.

The percentage of an asset's value that can be used as borrowing power. If ETH has a collateral factor of 75%, depositing $10,000 of ETH allows borrowing up to $7,500.

A smart contract where a user locks collateral to generate a loan (typically a stablecoin like DAI). CDPs were pioneered by MakerDAO and form the basis of decentralized stablecoin issuance.

The ability of DeFi protocols to interact with each other like building blocks. Composability allows lending positions to be used as collateral in other protocols, creating complex financial strategies.

The risk that the other party in a financial transaction will fail to meet their obligations. In CeFi lending, counterparty risk means the platform could become insolvent and you lose your deposited funds.

A lending model where a centralized platform holds and manages your crypto assets. The platform handles all lending operations — you trust them with your funds in exchange for simplicity and guaranteed rates.

Decentralized Application — a software application that runs on a blockchain network rather than centralized servers. Aave, Compound, and MakerDAO are DApps that provide lending services.

Decentralized Finance — financial services built on blockchain smart contracts that operate without intermediaries. DeFi lending allows users to lend and borrow directly through protocols rather than banks.

The process of tracking and reporting income, gains, and losses from DeFi lending activities. Requires tracking every deposit, withdrawal, interest accrual, and liquidation across all protocols and wallets.

A blockchain-based governance structure where token holders vote on protocol decisions without centralized leadership. Major lending protocols like Aave and MakerDAO are governed by DAOs.

Financial securities issued and traded as blockchain tokens under regulatory frameworks. Digital securities combine the compliance of traditional finance with the efficiency of blockchain settlement.

An accounting method that assumes the oldest assets are sold first when calculating capital gains. FIFO is the default method used by most tax authorities for crypto transactions.

The Federal Trade Commission requirement to clearly and conspicuously disclose material connections (like affiliate relationships) when recommending financial products. Violations can result in $50,000+ fines per occurrence.

A predetermined interest rate that remains constant for the loan duration. Rare in DeFi but offered by some protocols like Notional Finance and Element Finance.

An uncollateralized loan that must be borrowed and repaid within a single blockchain transaction. Used for arbitrage, collateral swaps, and liquidation protection — if not repaid, the entire transaction reverts.

Dividing an asset into smaller tradeable units using tokens, allowing investors to own a percentage of high-value assets. Tokenization enables fractional ownership of real estate, art, and fund shares.

Transaction fees paid to blockchain validators for processing transactions. Gas fees on Ethereum can make small lending positions uneconomical — Layer 2 networks like Arbitrum and Base offer lower fees.

A token that gives holders voting rights over protocol decisions like interest rates, collateral parameters, and treasury spending. Examples include AAVE, COMP, and MKR.

Home Equity Line of Credit — a revolving credit line secured by the equity in your home. Figure Technologies has disrupted the HELOC market by originating loans on the Provenance Blockchain in as few as 10 days.

A numeric indicator of how safe a borrowing position is relative to liquidation. A health factor above 1 means the position is safe; below 1 means it can be liquidated. Used by Aave and similar protocols.

The temporary loss of value that liquidity providers experience when the price ratio of paired tokens in a liquidity pool changes. Relevant to lending protocols that use LP tokens as collateral.

DeFi protocols that provide coverage against smart contract failures and hacks. Nexus Mutual and InsurAce allow users to purchase cover for their lending positions.

Earnings from lending crypto on a platform, taxed as ordinary income in most jurisdictions. Whether you receive interest in crypto or stablecoins, you owe taxes on the fair market value at receipt.

The algorithm that determines borrowing and lending rates based on supply and demand. Most DeFi protocols use a kinked model where rates increase sharply above a target utilization rate.

A crypto account that earns interest on deposited assets, similar to a traditional savings account. CeFi platforms lend out deposited crypto to borrowers and share the interest with depositors.

Identity verification required by regulated crypto platforms before allowing users to lend, borrow, or trade. KYC typically requires government ID, proof of address, and sometimes a selfie.

A blockchain built on top of a base chain (like Ethereum) to provide faster and cheaper transactions. Major L2s for lending include Arbitrum, Optimism, Base, and Polygon.

A smart contract that aggregates deposits from multiple lenders and makes them available to borrowers. Each asset typically has its own lending pool with independent interest rates.

The forced sale of collateral when a borrower's loan-to-value ratio exceeds the protocol's maximum threshold. Liquidations protect lenders by ensuring loans remain overcollateralized.

An additional fee charged to borrowers when their collateral is liquidated, typically 5-15%. This penalty incentivizes borrowers to maintain healthy collateral ratios and compensates liquidators.

The LTV ratio at which a lending protocol will begin liquidating a borrower's collateral. For example, if the liquidation threshold is 80%, your collateral will be sold if your debt reaches 80% of its value.

A smart contract holding paired tokens that enables decentralized trading and lending. Liquidity providers deposit assets and earn fees or interest from borrowers.

The ratio of a loan amount to the value of the collateral backing it. An LTV of 50% means you can borrow $50,000 against $100,000 in collateral. Lower LTV = safer loan.

A notification from a lending platform that your collateral has dropped below the required level. In crypto, margin calls typically come as on-chain alerts or email warnings before liquidation.

The European Union's comprehensive regulatory framework for crypto assets, covering lending, borrowing, staking, and DeFi. Full enforcement begins July 2026.

The risk that the price feeds a lending protocol relies on provide inaccurate data, potentially triggering incorrect liquidations or enabling manipulation. Chainlink is the most widely used oracle provider.

Requiring borrowers to deposit more collateral than the loan amount. Most DeFi loans require 150-200% collateralization — you must deposit $150-$200 in crypto to borrow $100.

A system that allows anyone to participate without requiring approval from a central authority. DeFi lending protocols are permissionless — anyone with a wallet can lend or borrow.

Loans made by non-bank lenders to businesses, typically offering higher yields than public debt markets. On-chain private credit protocols like Maple, Centrifuge, and Goldfinch tokenize these loans for DeFi investors.

An independent audit verifying that a CeFi platform holds sufficient assets to cover all customer deposits. Introduced after the Celsius and FTX collapses to restore trust in centralized platforms.

Income generated by a DeFi protocol from interest rate spreads, fees, or liquidation penalties. Protocol revenue flows to the treasury, token holders, or is used to buy back governance tokens.

A purpose-built blockchain for financial services, primarily used by Figure Technologies for HELOC origination. Over $21 billion in loans have been originated on Provenance.

Physical or traditional financial assets that have been tokenized and brought on-chain. RWAs include tokenized Treasury bills, real estate, private credit, and trade receivables used as collateral in DeFi lending.

The practice of using deposited collateral for other purposes, such as lending it to additional borrowers. Common in CeFi — was a key factor in the 2022 crypto lending collapses.

A scam where project developers abandon a protocol and steal user funds. Common in unaudited DeFi projects. Always verify audit reports, team identity, and TVL history before depositing.

A professional review of a protocol's smart contract code to identify vulnerabilities. Leading audit firms include Trail of Bits, OpenZeppelin, Certik, and Consensys Diligence.

A digital token that represents ownership in a regulated security such as equity, debt, or a fund share. Security tokens must comply with securities laws and are typically issued through platforms like Securitize.

The difference between the expected price of a transaction and the actual execution price. High slippage during liquidations can increase losses for borrowers.

Self-executing code on a blockchain that automatically enforces the terms of an agreement. All DeFi lending protocols operate through smart contracts that handle deposits, loans, interest, and liquidations.

The risk that bugs, vulnerabilities, or exploits in a protocol's smart contract code could result in loss of funds. Over $6.5 billion has been lost to DeFi exploits since 2020.

A cryptocurrency designed to maintain a stable value, typically pegged 1:1 to the US dollar. Major stablecoins include USDC, USDT, and DAI. Stablecoins are the primary asset for crypto lending and borrowing.

The maximum amount of an asset that can be deposited into a lending protocol. Supply caps prevent concentration risk and limit the protocol's exposure to any single collateral type.

The total value of cryptocurrency deposited in a DeFi protocol or across all of DeFi. TVL is the standard metric for measuring protocol adoption — higher TVL generally indicates more trust and liquidity.

An action that triggers a tax obligation. In crypto lending, taxable events include earning interest (taxed as income), liquidation of collateral (capital gains), and converting between assets.

Property ownership represented as digital tokens on a blockchain. Tokenized real estate enables fractional investment, automated rent distribution, and global liquidity for traditionally illiquid property markets.

US Treasury bills or bonds represented as blockchain tokens, offering on-chain yield backed by the full faith and credit of the US government. BlackRock BUIDL and Ondo OUSG are leading examples.

The total amount of crypto assets deposited in a DeFi protocol. TVL is the primary metric for measuring the size and adoption of lending protocols like Aave and Compound.

A regulated entity that maintains records of securities ownership and handles transfers. Securitize serves as an SEC-registered transfer agent for tokenized securities.

Loans where borrowers provide less collateral than the loan amount, or none at all. Requires trust, credit assessment, or institutional guarantees. Maple Finance and TrueFi offer undercollateralized institutional loans.

The percentage of deposited assets currently being borrowed. High utilization means most deposits are lent out — good for lender yields but can limit withdrawals.

An interest rate that fluctuates based on real-time supply and demand in the lending pool. Most DeFi lending uses variable rates that change every block.

Software or hardware that stores your private keys and allows you to interact with blockchains. To use DeFi lending, you need a non-custodial wallet like MetaMask, Ledger, or Coinbase Wallet.

A token that represents another asset on a different blockchain. Wrapped Bitcoin (WBTC) allows Bitcoin to be used as collateral on Ethereum-based lending protocols.

The return earned on a crypto investment, typically expressed as APY. In crypto lending, yield comes from interest paid by borrowers, protocol incentives, and governance token rewards.

The practice of moving crypto assets between DeFi protocols to maximize returns through interest, governance token rewards, and liquidity incentives. Also called liquidity mining.