The cryptocurrency industry is infamous for its dense jargon and unique slang. Understanding the terminology is the first step to confidently navigating the space. This section covers essential terms from J to L.
KYC (Know Your Customer)
Anti-money laundering regulations requiring financial institutions (including centralised crypto exchanges) to verify the identity of their clients using government-issued IDs and proof of address before allowing them to use the service.
Layer 1 (L1)
The base-level blockchain architecture (e.g., Bitcoin, Ethereum, Solana). Layer 1 networks settle transactions directly on their own blockchain and secure their own network through consensus mechanisms.
Layer 2 (L2)
A secondary framework or protocol built on top of an existing Layer 1 blockchain to solve scaling difficulties. L2s process transactions faster and cheaper off-chain, then batch the final results back to the L1 for permanent security. Examples: Arbitrum, Optimism, Lightning Network.
Ledger
1. A record-keeping book or database. A blockchain is a distributed digital ledger. 2. A prominent brand of hardware wallets used for cold storage.
Leverage
Using borrowed capital to increase the potential return (and risk) of an investment. Crypto markets offer extremely high leverage (up to 100x), which frequently leads to massive liquidations and market volatility.
Liquidation
The forced closing of a trader's position by an exchange because their margin account has fallen below the required maintenance level. In DeFi, this happens automatically via smart contracts when collateral value drops too low.
Liquidity
A measure of how easily an asset can be bought or sold in the market without affecting its price. Bitcoin has high liquidity; small, obscure altcoins have low liquidity.
Liquidity Pool
A collection of funds locked in a smart contract used to facilitate trading on a decentralised exchange (DEX). They replace the traditional order book model used by centralised exchanges.
Liquidity Provider (LP)
A user who deposits their crypto assets into a liquidity pool to facilitate trading. In return, they earn a share of the transaction fees generated by that pool.