# DeFi Glossary

## A

### Adverse Selection

A situation that occurs when one party in a transaction has more information than the other, leading to an imbalance that can result in suboptimal outcomes. It often occurs in markets where buyers and sellers have different levels of information about the quality or value of a product or service.

### Algorithm Trading

Algorithmic trading uses algorithms to automatically execute trades based on predefined strategies. Traditional strategies include trend following, arbitrage, market making, and mean reversion. The main benefits are speed, precision, backtesting, and scalability. However, it also poses risks like system failures, market impact, and overfitting.

### Arbitrage

A type of algorithm trading where the purchase and sale of the same asset in different markets to profit from differences in the asset's price. Arbitrage can incentivize a healthy pricing environment if it does not increase toxic order flow.

### Automated Market Maker (AMM)

A decentralized exchange that maintains a pool of capital (a liquidity pool) with at least two assets, and a program governs the rules by which traders can purchase and sell assets from the liquidity pool. For context on Ethereum, Uniswap v1 introduced a class of AMM called a Constant Product Market Maker (CPMM), Uniswap v2 introduced the auto-route splitting trades across, while Uniswap v3 introduced a new feature called concentrated liquidity.

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## **B**

### Backrunning

When a transaction sender wishes to have their transaction ordered immediately after an unconfirmed target transaction.

### Blockhash

Solana's blockhash is a unique cryptographic identifier for a block that ensures data integrity and immutability. Solana uses the blockhash to timestamp transactions, ensuring they are processed in the correct order.

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## **C**

### Concentrated Liquidity Automated Market Maker (CLMM)

A system where liquidity providers can concentrate their funds within specific price ranges, improving capital efficiency and reducing trading slippage compared to traditional AMMs. This approach, used by platforms like Uniswap V3 and Orca, ensures tighter spreads and better trading conditions by focusing liquidity where it's most needed.

### **Collateralization Ratio**

The proportion of the borrowed amount relative to the value of the collateral, indicating the risk level for lenders.

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## **D**

### Dollar Cost Averaging (DCA)

A strategy to help against market volatility where the user agrees on set recurring swaps on a time interval.

### Dutch Auction

A Dutch auction is where the price starts high and gradually lowers until a bidder accepts the current price. It is often used for selling items quickly, such as in flower markets or for certain financial securities.

### Dynamic Liquidity Market Maker (DLMM)

Inspired by [**Trader Joe’s Liquidity Book**](https://docs.traderjoexyz.com/), DLMMs organize an asset pair’s liquidity into discrete price bins (concentrated liquidity), enhancing the efficiency and effectiveness of liquidity provision. In Solana, Meteora leads this approach.

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## E

### English Auction

An English auction is a type of auction where bidders openly bid higher than the previous bid until no more bids are made. The highest bid wins, and the winner pays their bid amount.

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## **F**

### **Flash Loan**

Uncollateralized loan that must be repaid within the same transaction block.

### Funding Rate Arbitrage

A mechanism used in perpetual swap contracts to keep the contract price aligned with the spot price of the underlying asset. It adjusts periodically, transferring funding from one side of the trade to the other based on whether the contract price is above or below the spot price. This system incentivizes traders to maintain the contract's price close to the spot price, reducing the risk of manipulation and ensuring the contract's attractiveness for traders.

### Frontrunning

The process by which an adversary observes transactions on the network layer and then acts upon this information by issuing a competing transaction.

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## **I**

### Intents

Intents are defined in the Urani Protocol as the user's desire to swap an amount of a sell token for a buy token. Intents can be used interchangeably with orders.

### Impermanent Loss

The rebalance of AMMs to maintain their ratios, due to asset prices change. Also, see Loss vs. Rebalancing.

### **Interest Rate**

A percentage charged on a borrowed asset, indicating the cost of borrowing or the return on lending.

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## **L**

### Leverage

The capacity to enhance potential gains or losses by borrowing money to increase exposure to an asset.

### Limit Orders

Execution of a trade at a specific price or better. Therefore, buy or sell orders are automatically placed once an asset hits a certain price.

### Liquidation

A crucial mechanism to maintain the health of the margin trading protocol and protect lenders from potential losses. It's the automatic process of selling off a trader's assets when their account balance falls below a required maintenance margin. This usually happens in leveraged trading, where borrowed funds are used to increase potential returns. If the market moves against the trader's position and their losses exceed the margin threshold, the exchange or platform forcibly closes the position to prevent further losses and repay the borrowed funds.

### Liquidity

Liquidity refers to the ease with which an asset can be bought or sold in the market without significantly affecting its price. It measures how quickly an asset can be converted into cash without causing a substantial change in its value. In the context of DeFi, low liquidity could lead to longer fill times and higher slippage.

### Liquidity Pool

A set of funds created by grouping two tokens that form a "pair" and leaving an amount of them in exchange. This setup allows users to buy and sell the tokens that comprise that set of funds.

### **Long Position**

A trader's bet on asset price increase.

### Loss vs. Rebalancing

LVR or "impermanent loss" is a phenomenon unique to decentralized exchanges and liquidity provision in AMM systems. It refers to the temporary loss of funds that liquidity providers experience when the value of one asset in the pool diverges significantly from the other. Arbitrageurs trading against passive liquidity providers often quote stale prices, leading to consistent losses.

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## M

### Market Makers

A financial intermediary that provides liquidity to markets by being willing to buy and sell securities at any time. They make profits from the difference between the buying price (bid) and the selling price (ask), known as the bid-ask spread.

### Market Orders

Immediate execution of a trade at the best available price. Buy or sell orders submitted as soon as possible at the current market rate. They are _fill or kill_ instead of partially fillable, so agents must find liquidity for the entire order to submit a solution.

### Mempool

The mempool in Ethereum is a temporary storage area where pending transactions are held before they are included in a block and confirmed on the blockchain. Solana does not have an in-protocol mempool, so its validators forward all transactions to up to four leaders on the leader schedule instead. This forces the transactions to hop from leader to leader until blockhash expiration, but it also reduces the overhead of gossip across the cluster.

### MEV-protected RPC endpoints

Endpoints that allow users to receive a portion of the proceeds from their order flow as rebates. Searchers compete to backrun transactions, offering a rebate that is paid back to the user. The operation of these endpoints generally depends on trusting the counterparty managing the endpoint to prevent frontrunning or sandwiching.

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## N

### Nakamoto Coefficient

Measures the minimum percentage of nodes an attacker would need to control to compromise the network's security. A higher Nakamoto coefficient indicates a more decentralized network, so an attack would require a larger portion of the nodes to be compromised.

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## O

### Oracle Extractable Value (OEV)

A subset of MEV, when applications rely on an oracle's update for arbitrageurs or liquidators to capitalize on this state inconsistency.

### Order Book

Much like conventional financial markets, borrowers and lenders provide their preferred borrowing or lending terms, including the interest rate and loan duration. The pairing of borrowers and lenders is facilitated based on these submitted terms, with interest rates established through the dynamics of supply and demand.

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## **P**

### Priority Fees

An additional fee on each transaction that prioritizes the execution over transactions with lower costs. During network congestion, priority fees can boost a transaction.

### Proof of History (PoH) <a href="#id-3a54" id="id-3a54"></a>

Solana’s Proof of History mechanism establishes a trustless and verifiable order of events (transactions) on the network. This makes it more challenging to insert, reorder, or delay transactions in a way that would be advantageous for extracting MEV.

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## **Q**

### Quote Deviation

The difference between the quote the user received and the price at which their order was settled.

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## **S**

### Sandwich Attack

On automated market makers, an adversary can create two transactions and insert before and after a victim transaction to profit from it (for instance, from slippage).

### Slippage

The price variation (or impact) from the moment a user initiates a trade to its execution. For example, higher slippage should be expected during token launches due to rapid price changes.

### **Short Position**

A trader's speculation on the decrease of an asset price.

### **Spot Price**

The market price of an asset, for immediate delivery.

### Snipers

Due to Solana's low fees, sniper bots are designed to increase the chance of landing a transaction during chain congestion.

### Surplus

The price improvement on a user's limit price, similar to the bid-ask spread, which refers to the gap between the bid (from buyers) and the ask (from sellers) prices of an asset.

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## T

### Time Bandit Attack

The manipulation blocks' timestamps in a blockchain to gain certain advantage. Attackers may alter the time settings to control block production, reorder transactions, or perform double-spending attacks. This can disrupt the consensus mechanism of the blockchain, allowing the attacker to potentially reverse transactions, steal funds, or destabilize the network.

### TWAMM

[**Time-weighted Average Market Maker**](https://www.paradigm.xyz/2021/07/twamm) breaks long-term orders into infinitely many small pieces, smoothly executing them against a CPAMM over time.

### TWAP

Time-Weighted Average Price orders are a type of algorithmic trade ideal for larger orders, as they allow them to be divided into smaller parts and avoid their price impact.

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## Y

### Yield-bearing Tokens (YBT)

Derivatives of another token that can generate yield are typically divided into two components: the main component and the yield component.
