Defactor's Lending Pools Glossary

As education is a key factor in the wider adoption of Defactor products and blockchain technology in general, this glossary has been created in order to provide a shared understanding of all terms used in this document

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The articles in this series are extracts from the E-book: Lending Pools Unpacked, Now available for download

Annual percentage yield (APY)

APY is a financial metric used to represent the annualised rate of return on an investment or savings account, including the effect of compounding. It reflects the actual earnings or costs over a year, taking into account interest or yield payments.

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Anti-money-laundering (AML) regulations

‍AML regulations are rules and procedures put in place to prevent the illegal process of disguising the origins of illegally obtained money. Financial institutions and businesses implement AML measures to detect and report suspicious transactions and activities.

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Blockchain

Blockchain is a distributed and decentralised digital ledger technology that records transactions across multiple computers in a way that ensures transparency, security, and immutability. It is commonly associated with cryptocurrencies like Bitcoin but has various applications beyond digital currencies.

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Collateral

A collateral is an asset or property offered as security to a lender in exchange for a loan. If the borrower fails to repay the loan, the lender can seize the collateral to recover the debt.

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Decentralised finance (DeFi)

DeFi refers to a blockchain-based financial system that operates without traditional intermediaries like banks. It aims to provide open and accessible financial services, including lending, borrowing, and trading, using smart contracts and decentralised platforms.

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Default

Default occurs when a borrower fails to fulfil the terms of a loan agreement, typically by not making scheduled payments. In lending pools, default can lead to various consequences, including the liquidation of collateral to recover funds for lenders.

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DeFi loan

A DeFi loan is a type of loan obtained or provided through decentralised finance platforms. These loans often rely on smart contracts to automate lending and borrowing processes, removing the need for traditional financial intermediaries.
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Fractionalisation

‍The act of dividing an asset into smaller parts, often represented as tokens, to make it available to a wider range of investors.

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Junior token

In DeFi and blockchain-based projects, a junior token typically represents a lower-priority or riskier investment compared to senior tokens. Junior token holders are usually the first to absorb losses in case of a financial downturn.

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Know-your-customer (KYC) regulations

‍KYC regulations are legal requirements that financial institutions and businesses must adhere to in order to verify and authenticate the identities of their customers. KYC procedures involve collecting personal information and documentation to prevent fraud, money laundering, and other illicit activities.

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Lending pool

A lending pool is a common resource in DeFi platforms where users deposit their assets (cryptocurrencies or tokens) to provide liquidity for loans. Borrowers can then access these pooled funds by collateralising their assets and paying interest.

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Liquidation

‍Liquidation refers to the process of converting assets, such as collateral or investments, into cash. This is often done to satisfy debts or obligations. In the context of lending pools, liquidation may occur when a borrower's collateral is sold to repay a loan in the event of default.

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Liquidity pool

A liquidity pool consists of funds locked in a smart contract on a decentralised exchange (DEX) or DeFi platform. These funds are used to facilitate trading and provide liquidity to users by allowing them to swap one cryptocurrency for another.

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Loan-to-value ratio (LTV)

LTV is a financial ratio that assesses the risk of a loan by comparing the amount borrowed to the appraised value of the collateral. It helps lenders determine the level of risk associated with a loan and set borrowing limits.

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Pools

Platform by Defactor which enables loan seekers to create their own lending pools. This gives loan seekers an opportunity to unlock their liquidity and lenders an opportunity to provide funds in return for rewards.

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Real-world assets

Real-world assets are physical or tangible assets, such as real estate, art, or commodities, that are tokenised and represented on blockchain platforms to enable fractional ownership and trading.

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Senior token

In DeFi projects with multiple token classes, senior tokens usually have higher priority and receive more favourable treatment in terms of payouts and protection against losses compared to junior tokens.

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Smart contract

A smart contract is a self-executing contract with the terms and conditions directly written into code. It automatically enforces and executes agreements when predefined conditions are met, often on a blockchain.

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Tokenisation

Tokenisation is the process of converting real-world assets or rights into digital tokens that can be traded, transferred, or recorded on a blockchain. This enables greater liquidity and accessibility to a wider range of assets.

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Utilisation rate

The utilisation rate is a metric used in DeFi lending platforms to measure the extent to which assets in a lending pool are being borrowed. It helps determine the efficiency of the lending protocol and can impact interest rates and rewards for liquidity providers.