The Onchain Credit Glossary: An A-Z Guide

Onchain credit borrows half its vocabulary from crypto and half from traditional finance, which makes it hard to read anything on the subject without hitting a term from one world or the other. We've put together a (neutral) guide covering the terms you're likely to run into, whichever side you're coming from.

A

Attestation

Onchain credit often needs verifiable claims about who a borrower is, what they earn, or how creditworthy they are, without pulling a full identity file onto the chain itself. An attestation is a cryptographically signed statement, issued by a trusted party, that a wallet or entity meets some condition. Protocols use attestations to gate access to a lending pool, or to price a loan, without exposing the underlying personal data.

APY and APR

Two ways of expressing the cost or return of a loan. APR (Annual Percentage Rate) is the simple annualised rate; APY (Annual Percentage Yield) factors in compounding, so it's usually the higher figure for the same underlying rate. Most onchain lending interfaces quote APY, since interest often compounds continuously or block by block.

Amortisation

Paying down a loan through scheduled instalments that cover both interest and principal over time, rather than repaying the full principal in one go at maturity. Amortising structures are more common in tokenised real-world debt than in DeFi money markets, where borrowers typically repay principal in a single transaction whenever they choose to close a position.

Arrears

The state of being behind on scheduled payments. A loan in arrears hasn't necessarily defaulted, but it has missed at least one payment date, often the first formal trigger for a protocol or fund manager to review a borrower's position.

Audit

An independent review of a protocol's smart contracts, and sometimes its legal structure or financials, to check for vulnerabilities or misrepresentations before or after launch. An audit reduces risk but doesn't eliminate it, since it's a point-in-time check, not an ongoing guarantee.

B

Bad Debt

Bad debt is a loan that can't be recovered, whether because collateral was insufficient at the point of liquidation, a borrower defaulted outright, or a price feed failed. In overcollateralized DeFi lending, bad debt is rare and usually the result of extreme price moves outrunning liquidations. In undercollateralized or real-world-asset credit, it looks closer to the traditional kind: borrower repayment risk, with no automatic liquidation to fall back on.

Basis Point

One hundredth of one percent (0.01%), the standard unit for quoting interest rate moves in both traditional and onchain credit. A rate that moves from 5.00% to 5.25% has moved 25 basis points.

Borrower

The party drawing capital from a pool, protocol, or facility, and taking on the obligation to repay it with interest. Onchain, a borrower can be a wallet, a smart contract, or, in RWA credit, a legal entity operating through a wallet.

Bullet Loan

A loan structure where the full principal is repaid in a single instalment at maturity, with interest paid separately along the way, rather than amortising down over the loan's term. Common in onchain private credit facilities.

Bridge

Infrastructure that lets assets or data move between blockchains. Onchain credit increasingly relies on bridges when collateral sits on one chain and a loan is issued or serviced on another, which is also where cross-chain credit picks up additional settlement risk.

C

Clearing

One of the more overloaded words in finance, meaning different things depending on context. In payments, clearing is the exchange, reconciliation, and netting of payment instructions between institutions before any money actually moves. In securities and derivatives markets, it is what happens between a trade being agreed and settled: obligations are confirmed and netted, and in centrally cleared markets a central counterparty (CCP) steps in between buyer and seller, becoming the counterparty to each and managing the resulting counterparty credit risk through margin and a default fund. The common thread is the set of steps that turn an agreed trade or payment into a firm, netted obligation ready to settle. Onchain, clearing and settlement often collapse into a single atomic step, since a transaction either completes in full or reverts, which removes much of the interval where counterparty risk normally sits; where onchain credit still touches offchain assets or payments, the traditional separation, and its clearing risk, reappears.

Collateral

Any asset pledged by a borrower to secure a loan, which a lender can claim or liquidate if the borrower fails to repay. What counts as acceptable collateral, and how it's valued, is one of the first design decisions any credit protocol has to make.

Collateralization Ratio

The value of collateral posted against a loan, expressed as a percentage of the loan's value. A ratio above 100% means the loan is overcollateralized, the norm on protocols such as Aave and Compound, where borrowers post more value than they draw down as a buffer against price swings. Undercollateralized or uncollateralized credit inverts this, relying on reputation, cash flow, or a guarantor instead of excess collateral.

Credit Line

An agreed limit up to which a borrower can draw funds as needed, repaying and redrawing within that limit, rather than receiving a single fixed disbursement. Functionally similar to a Facility.

Credit Score

A single figure or rating meant to summarise a borrower's creditworthiness. Onchain, credit scoring is still early: some protocols build scores from wallet history and repayment behaviour, others rely on traditional, offchain credit data verified through an attestation.

Covenant

A condition written into a loan agreement that a borrower must keep to, separate from the repayment schedule itself, such as maintaining a minimum collateral ratio or not taking on additional debt elsewhere. Breaching a covenant can trigger default even if payments are up to date.

Counterparty Risk

The risk that the other side of a transaction, a borrower, a custodian, an oracle provider, doesn't do what it's supposed to. Overcollateralized DeFi lending was partly designed to minimise counterparty risk by replacing trust with collateral and code; onchain credit that deals in real-world borrowers reintroduces it.

Custodian

An entity that holds an asset on behalf of someone else. Most onchain credit involving real-world assets needs a custodian somewhere in the chain, whether that's a bank holding cash, or a licensed entity holding legal title to an asset that's been tokenised.

D

Default

When a borrower fails to repay according to the agreed terms. Onchain, a default can trigger automatic liquidation of posted collateral, or a manual change to a loan's status within an undercollateralized facility. How default is handled, whether through liquidation, legal recourse, a guarantor, or a first-loss tranche, is one of the clearest differences between over- and undercollateralized onchain lending.

DAO (Decentralised Autonomous Organisation)

An organisation governed by rules encoded in smart contracts and, usually, token-holder votes, rather than a conventional management hierarchy. Some credit protocols are structured as DAOs for parameter-setting, even when day-to-day underwriting is handled by a more traditional team.

DeFi (Decentralised Finance)

Financial services, such as lending, trading, and asset management, built on public blockchains and smart contracts rather than banks or brokers. Onchain credit is a subset of DeFi focused specifically on lending and borrowing.

Debt Ceiling

The maximum amount a protocol will allow to be borrowed, whether against a specific collateral type or by a specific borrower, set as a risk control rather than a market-driven limit.

Drawdown

The act of withdrawing funds from an agreed facility or credit line. Can also refer to a decline in the value of a portfolio or pool from its peak, a separate but related use of the same word.

Due Diligence

The research and verification a lender or protocol carries out on a prospective borrower before extending credit, covering things like financial history, legal standing, and the quality of any collateral or receivables involved.

E

Escrow

A mechanism where funds or collateral are held by a neutral party, in this case a smart contract, until agreed conditions are met. Escrow removes the need to trust a counterparty directly. In onchain credit, escrow contracts typically hold collateral for the life of a loan and release it automatically once repayment is confirmed.

Egress

The movement of capital or data out of a pool, protocol, or chain, for example when lenders withdraw funds or a facility unwinds and assets settle back offchain. The counterpart to funds flowing in.

Effective Interest Rate

The true annualised cost of a loan once fees, compounding, and timing are accounted for, as opposed to the headline or nominal rate quoted upfront.

Equity Tranche

The most junior slice of a tranched structure: the first-loss layer that absorbs losses before any other tranche and carries no fixed return, closer in behaviour to equity than to debt. In a two-tranche pool it is the same thing as the junior tranche; where mezzanine layers exist, the equity tranche sits beneath them and is the first capital to be written down. Also called first-loss capital.

Exposure

The total amount a lender, pool, or protocol stands to lose if a given borrower, asset, or counterparty fails. Managing exposure, spreading it, capping it, pricing it correctly, is close to the whole job of credit risk management.

F

Facility (Credit Facility)

A pre-agreed pool of capital a borrower can draw down against, rather than a single lump-sum loan. Facilities are common in onchain private credit, where a protocol such as Maple or Credix commits capital that a borrower draws over time, paying interest only on what's outstanding, similar to a revolving credit line offchain.

Flash Loan

A loan that's borrowed and repaid within a single blockchain transaction, with no collateral required, because the transaction simply reverts if repayment doesn't happen. A DeFi-native construct with no real offchain equivalent, and distinct from the credit products this guide otherwise covers, which extend over time.

First-Loss Capital

Capital explicitly positioned to absorb the first losses in a pool before any other investor is affected, similar in role to a Junior Tranche but sometimes structured separately, for example as a protocol's own reserve.

Fixed Rate

An interest rate agreed at the outset of a loan that doesn't change over its term, as opposed to a variable rate that moves with market conditions or pool utilisation.

Forbearance

A temporary agreement to ease a borrower's repayment terms, such as pausing or reducing payments, typically used when a borrower is in short-term difficulty but expected to recover, rather than heading toward default.

G

Governance Token

A token that grants holders voting rights over a protocol's parameters, such as which borrowers are approved, what collateral is accepted, or how risk parameters are set. In credit protocols, governance usually sits alongside a more centralised underwriting process, since assessing borrower risk needs judgement a token vote isn't well suited to on its own.

Guarantor

A third party who agrees to repay a loan if the original borrower can't. In undercollateralized onchain credit, a guarantor can substitute for collateral entirely, backing a facility with their own balance sheet or reputation.

Grace Period

A short window after a payment is due, during which a borrower can still pay without being treated as in default or arrears.

Gas Fee

The fee paid to a blockchain's network to process a transaction. Not a credit-specific term, but relevant to onchain credit because every draw, repayment, or liquidation incurs one, which matters for how small a loan can practically be.

H

Haircut

A discount applied to the stated value of collateral, to build in a buffer against price volatility or illiquidity before it counts toward a loan's backing. A stablecoin might get little to no haircut; a volatile or illiquid real-world asset token might be discounted by a large margin.

Hard Cap

The absolute upper limit on how much can be deposited into or borrowed from a pool or facility, set as a fixed number rather than a formula.

Health Factor

A single number, used by overcollateralised money markets such as Aave, that expresses how close a position is to liquidation. It is the value of the collateral, adjusted by its liquidation threshold, divided by the value of the debt: above 1 the position is safe, at or below 1 it becomes eligible for liquidation. It gives a borrower one figure to watch instead of tracking every price and ratio separately, and it falls as collateral loses value or as debt accrues interest.

I

Interest Rate Model

The formula a protocol uses to set borrowing and lending rates, often dynamically, based on how much of a pool's liquidity is currently borrowed (utilisation). Overcollateralized money markets like Aave typically use algorithmic, utilisation-based models. Onchain private credit deals more often set a fixed rate upfront, negotiated per facility, closer to how a traditional loan is priced.

Isolated Pool

A lending pool whose risk is contained to its own assets and participants, so a problem in one pool, a bad borrower or a collapsing collateral price, doesn't spread to others on the same protocol. The opposite of a shared or cross-collateralized pool.

Insolvency

The state of not having enough assets to cover liabilities, i.e. owing more than you can repay. Distinct from a missed payment or default on a single loan, insolvency describes the health of the whole borrower, fund, or protocol.

Insurance Fund

A pool of capital, often built from protocol fees, set aside specifically to cover losses from bad debt or shortfalls, so that ordinary depositors aren't the first to absorb them.

Issuance

The act of creating and distributing a new financial instrument, such as a tranche of debt or a new loan, onto the blockchain.

J

Junior Tranche

The general term for a tranche ranking below the senior tranche, absorbing losses ahead of it in exchange for a higher potential return. Structuring debt into tranches lets a single pool offer different risk and reward profiles to different investors, with junior capital acting as a buffer that protects senior investors if a borrower defaults. In a simple two-tranche pool the junior tranche is also the first-loss (equity) piece; larger structures place one or more mezzanine layers between senior and equity, and "junior" then refers to whichever layers sit below senior rather than to a single slice.

K

KYC (Know Your Customer)

The process of verifying a person's or entity's identity before letting them participate in a financial product. Fully permissionless DeFi lending generally skips it. Onchain credit dealing with real borrowers and real-world assets usually can't, since regulated capital and legal recourse both depend on knowing who is being lent to.

KYB (Know Your Business)

The equivalent of KYC for corporate borrowers or counterparties, verifying a company's legal registration, ownership structure, and standing before it can access a facility.

L

Liquidation

The forced sale or seizure of collateral when a loan breaches its agreed terms, typically because its collateralization ratio falls too low. In overcollateralized DeFi, liquidation is usually automated, executed by bots competing for a liquidation bonus. In undercollateralized credit there is often no collateral to seize at all, which is why underwriting and legal agreements carry more weight.

Liquidation Threshold

The collateralisation level at which a loan becomes eligible for liquidation, distinct from the maximum LTV a borrower can open a position at. A protocol typically lets a borrower draw up to one level, say 70% LTV, but only begins liquidating once the position deteriorates to a higher level, say 80%; the gap between the two is the borrower's room to move before enforcement begins. Keeping the opening limit and the liquidation level apart is what stops a loan from being liquidated the moment it is drawn, and the threshold is set so the remaining buffer survives the MPOR.

Liquidity Pool

A pool of assets locked in a smart contract that other users can borrow from, trade against, or supply to. In lending, a liquidity pool is the shared capital a protocol lends out to borrowers.

Loan-to-Value (LTV)

The size of a loan expressed as a percentage of the value of the collateral backing it. An LTV of 70% means a borrower can draw up to 70% of their collateral's value; it's the inverse framing of the Collateralization Ratio.

Legal Wrapper

A traditional legal entity, such as a trust or special purpose vehicle, used to give a tokenised loan or pool enforceability in the offchain legal system, since a smart contract alone typically can't be sued or hold real-world legal title.

Lien

A legal right over an asset, granted to a lender as security for a debt, that lets the lender seize or force the sale of that asset if the borrower fails to repay. A lien does not transfer ownership or require the lender to hold the asset itself; it is a claim attached to it, ranking ahead of unsecured creditors. Onchain, a lien is usually enforced directly by code: collateral locked in a smart contract that can be liquidated automatically on default. In tokenised real-world credit the lien has to be perfected in the offchain legal system, for example a registered security interest over the underlying asset, since seizing a real-world asset depends on legal process rather than a contract call. Whether a lien is genuinely first-ranking, and not already pledged elsewhere, is part of why rehypothecation and double-pledging matter.

Lockup Period

A set span of time during which deposited funds can't be withdrawn, often used in credit pools to match investor capital to the term of the underlying loans.

M

Margin

Collateral posted to cover potential losses on a position, and by extension the practice of adjusting that collateral as the position's value moves. Overcollateralised DeFi lending is a form of margining: the excess of collateral over the loan is the margin that absorbs adverse price moves before the lender is exposed. The term carries over from derivatives and prime brokerage, where margin is topped up or returned as exposure changes.

Margin Call

A demand for a borrower to post additional collateral when the value of their collateral falls, or their debt rises, toward the point where the position is no longer adequately covered. In most overcollateralised DeFi there is no explicit call and no time to respond: once a position crosses its liquidation threshold it is liquidated directly by bots. In onchain credit that deals with real-world borrowers, a margin call can look closer to its traditional form, a notice and a short window to cure, before enforcement follows.

Maturity

The date by which a loan must be fully repaid. Some onchain credit facilities are open-ended or revolving, with no fixed maturity, while others, particularly tokenised real-world debt, mirror the fixed terms of the underlying traditional instrument.

Mezzanine (Tranche)

The middle layer of a tranched structure, ranking below the senior tranche but above the equity or first-loss tranche. It absorbs losses only once the first-loss capital beneath it is exhausted, and in return earns more than the senior tranche but less than the equity. Not every structure has one: simpler onchain pools split into just senior and junior, while larger securitisations may stack one or more mezzanine layers between the two ends.

Money Market

A market for short-term borrowing and lending. In DeFi, "money market" usually refers to overcollateralized lending protocols like Aave and Compound, where rates float with supply and demand.

MPOR (Margin Period of Risk)

The window between the last moment a position is known to be adequately collateralised and the moment its collateral is actually liquidated and converted to cash. Over that gap the price can keep moving against the loan, so the buffer a protocol holds, through its liquidation threshold and haircut, has to cover the worst plausible move across the whole MPOR, not just the shortfall at the instant of default. In overcollateralised DeFi the MPOR is usually short, seconds to minutes, since bots act the moment a position crosses its threshold and the collateral is liquid. For gated, queued, or slow-to-settle real-world collateral it can stretch to days or weeks, because the asset cannot be sold the moment it is needed, and that longer window is what forces either a larger buffer or a lower LTV.

Multisig

A wallet or contract that requires more than one signature to authorise a transaction, commonly used to manage a protocol's treasury or approve major actions, spreading control across several parties rather than one.

Mint and Burn

Creating (minting) or destroying (burning) tokens. In credit contexts, this often refers to representations of a loan or a stablecoin being minted when a facility is drawn and burned when it's repaid.

N

Non-Custodial

Describes a system where users retain control of their assets throughout, rather than handing them to an intermediary. Most DeFi lending is non-custodial by design: funds sit in a smart contract, not a company's balance sheet. Onchain credit is often more hybrid, since real-world lending usually needs a licensed entity somewhere in the chain to hold or originate the underlying loan.

Notional Value

The total value a financial position represents, as opposed to the amount actually deposited or at risk. Relevant where a credit facility references a face value of debt larger than the collateral directly posted against it.

Net Asset Value (NAV)

The total value of a fund or pool's assets minus its liabilities, often expressed per token or per share. Used to price entry and exit into tokenised credit funds.

Netting

Offsetting mutual obligations so that only the net difference changes hands, rather than settling every gross amount separately. It reduces how much actually has to move, and with it the settlement and counterparty exposure that builds up in between. The term covers several distinct practices: bilateral netting is between two parties, while multilateral netting offsets obligations across many parties at once, usually through a central hub or clearing house. Payment netting collapses a set of scheduled flows into a single net transfer; close-out netting does the same on default, combining all outstanding obligations under a master agreement into one net amount owed in a single direction, which is much of why counterparty credit risk in derivatives is measured net rather than gross. Onchain, atomic settlement removes the need for some netting, but batching and rollups still net many operations into fewer settled transactions, for the same reason it has always been done: to move less and owe less.

Node

A computer running blockchain software that validates and relays transactions. Not credit-specific, but part of the underlying infrastructure that every onchain loan, repayment, and liquidation depends on.

O

Oracle

A service that feeds external data, most often asset prices, onto the blockchain, where smart contracts can't access it directly. Lending protocols depend on oracles, Chainlink being the most widely used example, to know when a loan needs liquidating. Oracle reliability is one of the more quietly important pieces of infrastructure in onchain credit: a bad price feed can cause healthy loans to be liquidated wrongly, or bad loans to go unliquidated.

Overcollateralization

Posting collateral worth more than the loan itself, the dominant model in early and most current DeFi lending. It protects lenders from price volatility without needing to know or trust the borrower, at the cost of capital efficiency for the borrower.

Origination

The process of creating a new loan, from a borrower's initial application through underwriting to funds being disbursed.

On-Ramp and Off-Ramp

The points where value moves between traditional finance and crypto, converting fiat currency into onchain assets (on-ramp) or back again (off-ramp). Onchain credit involving real-world borrowers usually needs both, since loan proceeds and repayments often need to exist in fiat at some point.

Open Term

A loan or facility with no fixed maturity date, remaining outstanding and accruing interest until either party chooses to close it, as opposed to a fixed-term loan.

P

Principal

The original amount borrowed, before interest. Every repayment splits between principal, the amount owed, and interest, the cost of borrowing it.

Permissioned and Permissionless

Permissionless systems let anyone participate without approval; permissioned systems restrict access to approved or verified participants. Most onchain credit involving real borrowers is permissioned to some degree, because of KYC and regulatory requirements.

Pool

A shared pot of capital, from multiple depositors, that's lent out collectively rather than as individually matched loans. Most onchain lending, from overcollateralized money markets to RWA credit funds, is pool-based.

Proof of Reserves

A public, verifiable demonstration that an entity holds the assets it claims to, used to give depositors confidence that a pool or custodian isn't over-extended relative to what it actually holds.

Q

Qualified Purchaser

A legal status, largely a US concept, describing an investor who meets certain wealth or asset thresholds and can access investment products not open to the general public. Because much onchain private credit is structured as a security, many pools restrict participation to accredited or qualified investors, verified through attestations or a KYC layer rather than assumed from wallet activity alone.

Quorum

The minimum level of participation needed for a governance vote to be considered valid, used in DAO-governed credit protocols to stop a small handful of token holders from making binding decisions.

R

RWA (Real-World Assets)

Assets that exist outside the blockchain, such as invoices, trade finance receivables, treasury bills, or property, represented onchain as tokens. RWA credit is the broad category that most onchain private credit protocols, including Centrifuge, Maple, and Goldfinch, sit within, since the loans they facilitate are typically backed by, or fund, real-world economic activity rather than crypto collateral alone.

Repayment Schedule

The agreed timetable for a borrower to pay back principal and interest, whether that's a single bullet payment at maturity, regular amortising instalments, or an open-ended revolving structure.

Recourse

The lender's legal right to pursue a borrower's other assets, or to pursue them personally, if collateral or repayment falls short of what's owed. Overcollateralized DeFi loans are typically non-recourse, since the collateral is the whole of the lender's protection; RWA credit agreements are often recourse, backed by an enforceable legal contract.

Rehypothecation

Using collateral that's already been pledged for one purpose as collateral for another, a practice that adds yield or capital efficiency but also compounds risk if the underlying asset is called on twice.

Roll-Over

Extending a loan's term at maturity instead of repaying it in full, usually by agreement between borrower and lender, sometimes on renegotiated terms.

S

Stablecoin

A token designed to hold a stable value, usually pegged to a fiat currency such as the US dollar. Stablecoins like USDC and USDT are the default unit of account for onchain credit, since few lenders or borrowers want repayment exposed to crypto price volatility on top of credit risk.

Senior Tranche

The portion of a pooled loan or credit fund repaid first and protected by the losses that junior tranches absorb ahead of it, in exchange for a lower potential return. The counterpart to a Junior Tranche.

Smart Contract

Self-executing code deployed on a blockchain that carries out agreed actions automatically once its conditions are met. Smart contracts are the infrastructure that makes automated liquidation, escrow, and repayment possible without a human intermediary.

Securitisation

Pooling multiple loans or receivables together and issuing tradeable instruments, often tranched by seniority, backed by the cash flows they generate. Tokenised RWA credit is, in effect, securitisation carried out on a blockchain.

Servicer (Servicing)

The party responsible for the day-to-day administration of a loan or pool after it is made: collecting repayments, chasing late payments, applying them to the right accounts, and reporting performance. In tokenised real-world credit the servicer is usually a licensed offchain entity, since collecting from a real borrower and enforcing terms happen in the legal system rather than onchain. A backup servicer is sometimes named in advance to take over if the primary one fails, so that repayments keep flowing to investors.

Solvency

Having enough assets to cover all liabilities, the overall financial health of a borrower, fund, or protocol, as distinct from default, which concerns a single missed obligation.

Spread

The difference between the rate a protocol or fund charges borrowers and the rate it pays depositors, representing the margin that covers costs, risk, and, where applicable, profit.

Settlement

The point at which a transaction is finally and irreversibly completed: funds move, collateral changes hands, a loan closes. Blockchains are often praised for near-instant settlement compared with the multi-day settlement cycles common in traditional finance.

T

Tokenisation

Representing an asset, or a claim on one, as a transferable token on a blockchain. What the token actually confers varies widely: direct ownership, a beneficial interest held through a legal wrapper, or only a contractual claim against an issuer, and those are very different things if the issuer fails. Tokenisation on its own moves a record onto the chain; whether it also makes the asset usable as onchain collateral depends on how enforceable the underlying claim is and how reliably it can be valued and redeemed.

Tranche

A slice of a pooled debt instrument, ranked by seniority. Senior tranches are repaid first and carry lower risk and lower yield; junior tranches absorb losses first and are compensated with a higher potential return. Tranching is a structured finance technique that onchain credit protocols have adopted largely unchanged, since it solves the same problem: letting investors choose their risk appetite within a single pool.

TVL (Total Value Locked)

The total value of assets deposited in a protocol or pool at a given time, a widely used, if imperfect, measure of scale and traction across DeFi, including credit protocols.

Term Loan

A loan with a fixed principal, fixed repayment schedule, and a defined maturity date, as opposed to an open-ended facility or revolving credit line.

Treasury

The pool of assets a protocol, DAO, or company holds and controls, often used to fund operations, back a facility, or absorb losses.

Trustless

Describes a system designed so that participants don't need to trust each other, or a middleman, because outcomes are enforced by code and cryptography instead. A goal DeFi lending pursues fully; onchain credit involving real-world borrowers can only approach, since legal agreements and human judgement remain part of the process.

U

Undercollateralized Lending

Lending where the value of posted collateral is less than the loan amount, or where there is no crypto collateral at all. It relies on some substitute for collateral, such as verified borrower identity, offchain cash flow data, a guarantor, or legal recourse, to manage default risk. This is where onchain credit diverges most clearly from the overcollateralized model that dominated earlier DeFi lending.

Underwriting

The process of assessing a borrower's risk and deciding the terms, or whether, to extend credit. Traditionally a human, judgement-heavy process; onchain credit is gradually building automated and hybrid versions of it.

Utilisation Rate

The proportion of a pool's total capital that's currently borrowed out, expressed as a percentage. Many interest rate models use utilisation as their main input, raising rates as a pool gets closer to fully lent out.

Unsecured Loan

A loan issued with no collateral at all, relying entirely on the borrower's creditworthiness and, where relevant, legal recourse. Closely related to Zero-Collateral Lending.

V

Vault

A smart contract that holds deposited assets and manages them according to a defined strategy, such as lending them out, collateralizing a loan, or generating yield. MakerDAO's Vaults, now under the Sky brand, are one of the earliest and best-known examples, letting users lock up collateral to mint a stablecoin against it.

Variable Rate

An interest rate that moves over the life of a loan, typically in response to pool utilisation or broader market conditions, as opposed to a fixed rate.

Vesting

The gradual release of tokens or rights over time, rather than all at once, often used for team or investor allocations in a protocol's governance token, though the underlying mechanic also appears in some structured credit rewards.

W

Waterfall

The order in which cash flows from a pool of loans are distributed to different stakeholders, typically paying senior tranches, then junior tranches, then any residual to equity or the pool originator. The waterfall is how a tranched credit structure actually enforces its seniority in practice, not just on paper.

Wallet

Software, or a device, that holds the private keys controlling a blockchain address, letting a user or entity hold assets and sign transactions. The basic unit of identity and custody in onchain credit, standing in for a bank account in most descriptions of how funds move.

Whitelist

A list of approved addresses or entities permitted to access a pool, facility, or feature, commonly used to enforce KYC or accreditation requirements in credit protocols that can't be fully permissionless.

Wind-Down

The orderly process of closing out a pool, fund, or facility, repaying investors and settling any outstanding loans, rather than an abrupt default or failure.

X

Crosschain Credit

"X" is often used in crypto shorthand for "cross", as in crosschain or cross-margin. Crosschain credit refers to lending or borrowing that spans more than one blockchain, whether that's collateral on one chain backing a loan issued on another, or a credit position that needs to move between chains as liquidity shifts. It adds bridging and settlement risk on top of the usual credit risk.

Y

Yield

The return earned on capital, usually expressed as an annualised percentage. In onchain credit, yield can come from genuine interest paid by real borrowers, which tends to be steadier and lower, or from token incentives layered on top by a protocol to attract liquidity, which tends to be higher and less durable. Telling the two apart is one of the more useful habits for anyone evaluating a pool.

Yield Curve

A representation of interest rates across different loan maturities at a given point in time. A useful concept from traditional finance that onchain credit protocols are only beginning to build proper equivalents of, since so much DeFi lending has historically been short-term or open-ended.

Z

Zero-Collateral Lending

Lending extended with no collateral posted at all, underwritten instead on identity, reputation, cash flow, or a legal claim against the borrower. It sits at the furthest point from the fully overcollateralized model that early DeFi lending relied on, and it is closest in spirit to how unsecured lending already works offchain.

Zero-Coupon

A debt instrument that pays no periodic interest at all, instead being sold at a discount to its face value and repaying that full face value at maturity, with the difference representing the lender's return.

This guide covers terms in general use across onchain credit as of 2026. Where named protocols are mentioned, it's for illustration only, not endorsement.