Glossary

Centralized Exchange (CEX)

A company that custodies user funds and runs an internal order book.
Users see balances in an account, but the exchange controls the wallets and private keys.
Examples: the typical crypto apps where you deposit fiat/crypto and trade.

Decentralized Finance (DeFi)

A set of financial applications built on public blockchains.
Users typically keep control of their keys and interact with smart contracts instead of intermediaries like banks or centralized exchanges.

Self-custody / Self-custodial wallet

A way of holding crypto where the user (or a smart contract they control) owns the private keys that move the funds.
No company can freeze, lend, or repurpose the assets without the user’s authorization.

Private key

A secret cryptographic value that proves ownership of a blockchain address and allows you to sign transactions.
Whoever has the private key can move the funds.

Seed phrase (recovery phrase)

A list of 12–24 words that encodes one or more private keys.
If you lose it, you may lose access to your funds; if someone else gets it, they can take your funds.

Counterparty risk

The risk that the entity holding your funds (exchange, broker, bank) fails, gets hacked, or behaves dishonestly.
On a CEX, your crypto depends on the solvency and integrity of the exchange.

Rehypothecation

When a custodian (like an exchange or broker) reuses customer assets—lending them out, using them as collateral, or deploying them in strategies.
This can increase risk for customers, especially if it’s not fully disclosed.

Single point of failure

A component whose failure can break the whole system.
In crypto, a CEX that holds all user funds in a few wallets is a single point of failure: if it goes down, many users are affected at once.

Non-custodial / Non-custodial protocol

A setup where the protocol never takes possession of users’ private keys or funds in a discretionary way.
Funds are controlled by user-owned addresses or smart contracts with predetermined rules.

Smart contract

Program code deployed on a blockchain that runs automatically when conditions are met.
Used to implement decentralized exchanges, lending markets, index funds, and many other financial primitives.

On-chain transparency

The ability to verify balances, transactions, and protocol behavior directly on the blockchain.
Anyone can inspect how a protocol is using funds and how tokens are moving.

Index token

A token that represents exposure to a basket of underlying assets according to predefined rules (weights, rebalancing, etc.).
Instead of holding multiple tokens individually, a user holds one index token.

Management fee (protocol fee)

A fee charged by a fund or protocol for providing a strategy or index.
In non-custodial protocols, fee logic can be encoded directly in the smart contracts so it is transparent and predictable.

Account abstraction

A blockchain design pattern where user accounts are implemented as smart contracts instead of simple keypairs.
This allows features like social recovery, spending limits, and bundled transactions, making wallets feel more like normal apps.

Smart contract wallet

A wallet implemented as a smart contract.
It can support advanced features such as multiple owners, daily limits, recovery mechanisms, or gas abstraction, while still being self-custodial.

Using familiar providers (e.g., Google, Apple) to authenticate into a self-custodial account.
The user sees a “normal” login flow, while the underlying system still keeps funds in a self-custodial, on-chain structure.

Gas fees

Transaction fees paid to the network to process and include operations in a block.
They compensate validators/miners for securing the blockchain.

Rebalancing (of an index)

Periodically adjusting the weights of assets in an index back to target levels.
For an on-chain index token, this logic can be handled automatically by smart contracts.

Diversification

Spreading exposure across multiple assets instead of concentrating everything in one.
In DeFi, index tokens offer diversification in a single on-chain position.

Protocol vs. platform risk

Platform (CEX) risk: depends on one company staying solvent, secure, and honest.
Protocol (DeFi) risk: depends on the correctness of smart contracts, the blockchain, and the economic design, but not on a single custodial entity.

Audit report

A document produced at the end of a smart contract audit that summarizes what the auditors found. It typically lists issues by severity (critical, high, medium, low), explains potential impact, and notes whether each issue was fixed, acknowledged, or left unresolved by the protocol team.

Primary market

The mechanism where new index tokens are created or destroyed directly by the protocol.
Users interact with the primary market when they mint (buy) new index tokens or burn (sell) their tokens back for underlying assets, according to the rules encoded in the smart contracts.

NAV (Net asset value)

The total on-chain value of all the assets held by an index, minus any fees that have been accrued, divided by the number of index tokens in circulation.
In practice, NAV is the reference value the protocol uses to decide how many index tokens to mint or how much underlying to return when users buy or sell.