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AMM: An automated market maker (AMM) is a type of Decentralized Exchange (DEX) protocol that allows users to buy and sell digital assets without an intermediary. AMMs automate the process of pricing and matching orders on the exchange. This means that users can purchase and sell crypto assets in a trustless, peer-to-peer method without relying on a custodian or other third party.
Swap: Trading one asset for another in a proportional amount on a DEX.
Slippage: Slippage is the difference between a trade's requested price and the price at which the trade is effectively executed.
Slippage Tolerance: Slippage Tolerance is the largest price change a user is willing to accept during the execution of a swap order.
Liquidity: Liquidity is the ability of an asset to be sold or exchanged quickly and without incurring high slippage.
Liquidity Mining: Liquidity mining is a process in which crypto holders lend assets to a DEX in return for rewards. These rewards commonly stem from trading fees that are accrued from traders swapping tokens.
Liquidity Pool: A Liquidity Pool is a collection of assets through which investors can buy or sell tokens.
Liquidity Provider (LP): Liquidity providers are investors who stake their tokens on DEXs to earn transaction fees as rewards. These transaction fees are often denominated in interest rates, and the interest varies based on the amount of liquidity available and the number of transactions in the liquidity pool.
Liquidity Provider Tokens (LP Tokens): Liquidity Provider Tokens or LP Tokens are tokens issued to liquidity providers on a decentralized exchange (DEX) that runs on an Automated Market Maker (AMM) protocol. Holding LP Tokens gives liquidity providers complete control over their locked liquidity.
Impermanent Loss (IL): Impermanent Loss (IL) happens when you provide liquidity to a liquidity pool and the price of your deposited assets changes compared to their price when you deposit them. However, this is the potential loss on paper that exits and it only becomes “real” when you remove your liquidity.
Swap Fees: The fees collected upon swapping, which eventually go to the liquidity providers and the protocol.
APR: APR stands for Annual Percentage Rate and refers to the interest you receive for locking up your tokens in a DeFi protocol. It is calculated as simple interest and represented as a percentage of the principal amount.
APY: APY stands for Annual Percentage Yield and It is a way to calculate interest earned on an investment that includes the effects of compound interest.