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Traditional digital markets, like the NASDAQ stock exchange (as well as centralized crypto exchanges) work with matching engines built for so-called Limit Order Books: buyers and sellers have to offer up their goods at a certain price in a certain quantity, and wait to be matched with someone else to conduct a trade. This may sound simple in principle, but these orderbooks are a very competitive landscape where professional market makers compete with each other at split second speeds — it has been practically impossible to replicate this model on today's decentralized blockchains such as Ethereum.

The loss produced by providing tokens as liquidity to an AMM instead of just holding them, if the tokens diverge in price. Divergence loss is the difference between the value of an LP position vs the same account holding fixed amounts of those same tokens

Layer 2s can make blockchain networks cheaper, faster, and therefore more useful for more people. Blockchain systems offer great technological benefits for money transfers and record-keeping in general; the main properties most often considered are decentralisation, trust– and permissionlessness, censorship resistance and immutability. These desired properties of decentralised networks come at the cost of limited throughput, however. Even the most prominent networks of today, Bitcoin and Ethereum are only able to handle a fairly limited amount of transactions in a given time period; an average BTC transfer takes about 10 minutes, and some interactions with Ethereum dApps can cost hundreds of dollars in gas fees during congested. times. Scaling solutions to blockchains are an advanced topic with much ongoing research and development. The technical descriptions and differences between each is beyond the scope of this explainer, but they are well worth researching for the curious. For Bitcoin, the most notable L2 solution is Lightning Network. Ethereum has numerous Layer 2 implementations, with the two main approaches being Optimistic Rollups and Zero-Knowledge Rollups.

The simple acts of Lending and Borrowing are prominent financial primitives that form the basis of many more complex financial products. Just as there are DEXes operated by Automated Market Makers that allow people to swap their coins seamlessly with each other, there are numerous lending platforms in DeFi.

Liquidity is basically the abundance of a coin in a market. DEXes typically rely on liquidity pools, managed by AMMs, as opposed to the Limit Order Book system prevalent in centralized digital exchanges where professional market makers sell and buy from people with proprietary algorithms.