A
- Address: An address is like an identifier where a cryptocurrency transaction is sent. It’s derived from a user’s public key, which in turn comes from their private key using a special encryption method. In Ethereum, a public key is turned into a 64-character hexadecimal code, with the last 40 characters being the public address, usually starting with “0x.”
- Airdrop: An airdrop refers to the practice of giving away cryptocurrency tokens for free to the wallets of users. For example, Uniswap distributed 400 tokens to every Ethereum address that had used their platform as a way to reward or incentivize users.
- AML (Anti-Money Laundering): AML is a set of rules and regulations aimed at detecting and reporting suspicious financial activities that might involve hiding the source of illegally obtained money. It’s a measure to prevent money laundering.
- Audit: in the context of blockchain and DeFi (Decentralized Finance) projects refers to the process of having a third-party entity review and evaluate the project’s code, smart contracts, and overall security measures. This external review aims to ensure the project’s codebase is sound, secure, and free from vulnerabilities or weaknesses. Typically, DeFi protocols and projects undergo audits to identify potential risks and vulnerabilities before they are made available to the public. If any issues are found during the audit, they can be addressed and patched before the project is launched or deployed. This helps enhance the project’s trustworthiness and reduces the risk of security breaches or exploits.
- APY: which stands for Annual Percentage Yield, is a crucial concept in DeFi and finance in general. APY represents the potential return on investment (ROI) that an asset or investment can generate in a one-year period, expressed as a percentage. It takes into account compounding interest or rewards, making it a useful measure for comparing the potential returns of different assets or investments. In DeFi, APY rates can be highly variable due to the dynamic nature of yield farming and liquidity provision. Investors and users should be aware that these rates can fluctuate significantly, and they should use them as approximate measures rather than fixed guarantees.
- Aggregator: in the context of DeFi refers to decentralized platforms or services that search for the best available options when it comes to swapping tokens or seeking the highest yields in yield farming and liquidity provisioning. These aggregators, such as Balancer, 1inch Exchange, and Yearn Finance, use algorithms to scan various DeFi protocols and sources to find the most favorable rates and opportunities for users. This helps users optimize their token swaps and yield farming strategies by ensuring they get the best possible returns and rates available across multiple DeFi platforms.
- AMM (Automated Market Maker): An AMM is a type of smart contract used in decentralized exchanges. It holds a supply of assets and automatically calculates the buying and selling prices for those assets based on supply and demand. It simplifies the trading process by eliminating the need for traditional order books.
- Asymmetric Key Cryptography: It’s a method of securing communication and transactions using two keys: a public key (known to everyone) and a private key (kept secret by the owner). The public key is derived from the private key, but it’s virtually impossible to calculate the private key from the public key. This is why it’s called “asymmetric.”
- Atomic: Atomic refers to a feature in smart contracts where all the conditions of a contract must be met for any changes to take place. If any condition is not met, the contract reverts to its original state as if no changes had occurred. It ensures that contracts are executed completely or not at all.
- Automated Market Maker (AMM): An AMM is a type of smart contract used in decentralized exchanges. It automatically sets and adjusts prices for trading assets based on a mathematical formula. It holds a balance of assets and allows users to trade without the need for traditional buyers and sellers.
- Aave: Aave is an open-source and non-custodial lending protocol that operates on blockchain networks. It enables the creation of decentralized money markets where users can deposit their cryptocurrencies and earn interest on these deposits. Additionally, users can borrow assets from these money markets by providing collateral. Aave provides depositors with Liquidity Tokens that represent their deposits as equivalent derivative holdings. For instance, depositing DAI in Aave would yield aDAI, a token that not only represents the value of the underlying DAI but also includes the interest earned from lending out the deposited DAI. Users can use these derivative tokens for various financial strategies to potentially increase their returns.
- Alpha Code: Alpha code refers to early-stage prototype computer code, programs, and algorithms designed to address a particular problem or offer new digital goods or services. Alpha software is typically in a very preliminary stage of development and is intended for limited testing by a select group of users or developers. It often lacks many of the expected software features, and its security may be limited or even non-existent in certain aspects. Alpha code is an initial step in the software development process and serves as a foundation for further refinement and development before reaching a more stable beta or production stage.
B
- Barter: Barter is a direct exchange system where two parties swap goods or services without involving money. For example, person A gives two pigs to person B in exchange for a cow because they both have something the other person needs.
- Blockchain: A blockchain is a digital ledger that was invented in 1991 by Haber and Stornetta. Every participant in the network has a copy of this ledger. Transactions are added to the ledger through a consensus protocol, and once added, they cannot be changed (immutable). Additionally, the entire transaction history is visible to anyone.
- Bonding Curve: A bonding curve is a smart contract that uses a specific mathematical model to allow users to buy or sell tokens. For instance, it might follow a simple linear function where the price of a token increases with each purchase, encouraging early participation. Different bonding curves can be used for buying and selling tokens, and a common one is the logistic curve.
- Bricked Funds: Bricked funds refer to funds that are stuck or trapped in a smart contract due to a bug or error in the contract’s code. These funds cannot be accessed or withdrawn until the issue is resolved.
- Burn: Burning is the process of permanently removing a cryptocurrency token from circulation. This reduces the overall supply of the token. Burning is typically accomplished by sending the tokens to an Ethereum address that no one owns or to a contract that cannot spend or use the tokens. It’s often used in various smart contracts, such as those involving liquidity pools.
C
- Collateralized Currency: This refers to paper currency (or digital currency) that is backed by tangible assets like gold, silver, or other valuable holdings. The value of the currency is linked to the value of the collateral.
- Collateralized Debt Obligation: In traditional finance, this represents a debt instrument, often linked to mortgages. In the context of Decentralized Finance (DeFi), it can refer to a stablecoin backed by more cryptocurrency assets than the stablecoin’s value, providing extra security against price fluctuations.
- Consensus Protocol: It’s the method by which participants in a blockchain network agree on whether to add a new block of transactions to the existing blockchain. Bitcoin and Ethereum use proof of work, but there are various other mechanisms like proof of stake.
- Contract Account: This is an account type in the Ethereum blockchain that is controlled by a smart contract. It allows automated actions and decisions based on predefined rules.
- Credit Delegation: It’s a feature in which users can allocate their collateral to potential borrowers. These borrowers can then use the collateral as security to borrow other assets, creating a lending and borrowing system.
- Cryptocurrency: A digital token secured with cryptography and managed through blockchain technology. Examples include Bitcoin and Ethereum. There are various types of cryptocurrencies, including stablecoins (tied to stable assets) and tokens representing digital and physical assets.
- Cryptographic Hash: A one-way mathematical function that generates a unique fixed-size output (a digital fingerprint) for any input data, regardless of its size. It’s not encryption because it cannot reverse the process to retrieve the original data. An example is SHA-256, used in Bitcoin, and Keccak-256, used in Ethereum.
- Curve: Curve is a decentralized stablecoin Automated Market Maker (AMM) that operates on the Ethereum blockchain. It is designed to facilitate low-slippage trades among various stablecoins, such as DAI, USDC, USDT, TUSD, BUSD, and sUSD, as well as other synthetic assets like wrapped Bitcoin (wBTC).Curve’s primary objective is to provide efficient and low-cost swapping of stablecoins while minimizing price slippage. This is particularly valuable for users looking to exchange one stablecoin for another or engage in DeFi activities like yield farming or liquidity provision.One notable feature of Curve is its ability to mitigate Impermanent Loss (IL) for Liquidity Providers (LPs). LPs who provide liquidity to Curve by depositing stablecoins can earn rewards and fees for their participation while minimizing the potential loss in value compared to simply holding those stablecoins. Curve’s underlying smart contract utilizes a combination of stablecoins to create a composite token called CRV (Curve DAO Token), which plays a role in the platform’s governance and rewards system.Curve is a DeFi protocol that specializes in stablecoin and synthetic asset swaps with a focus on reducing slippage and providing an attractive option for liquidity providers looking to manage impermanent loss.
D
- DAO (Decentralized Autonomous Organization): An algorithm-based organization governed by rules encoded in a smart contract. These rules determine who can execute specific actions or upgrades within the organization. DAOs often include governance tokens for decision-making.
- dApp (Decentralized Application): A decentralized application that allows direct peer-to-peer interactions without the need for a central clearing authority. These applications are permissionless and resistant to censorship, meaning anyone can use them, and no central entity controls them.
- Decentralized Exchange (DEX): A platform that enables users to trade tokens in a noncustodial manner. DEXs use mechanisms like order book matching or automated market makers for liquidity provision, eliminating the need for a centralized exchange.
- Decentralized Finance (DeFi): A financial ecosystem that operates without reliance on centralized institutions such as banks. DeFi encompasses activities like exchanging, lending, borrowing, and trading, all conducted directly between peers using blockchain technology and smart contracts.
- DeFi Legos: The concept that different DeFi protocols can be combined to build new protocols, much like assembling building blocks. This idea of composability allows developers to create innovative financial products by stacking existing DeFi components.
- DEX (Decentralized Exchange): A shorthand for Decentralized Exchange, as explained above.
- Digest: A term used interchangeably with “cryptographic hash” or “message digest.” It refers to a unique, fixed-size output generated by a one-way mathematical function, often used for data integrity and security.
- Direct Incentive: A payment or fee tied to a specific user action, designed to reward positive behavior. For example, in the context of a collateralized debt obligation becoming undercollateralized, a reward (direct incentive) may be given to an externally owned account that triggers the liquidation process.
- Double Spend: A problem encountered in early digital currency systems, where perfect copies of digital assets could be made and spent multiple times. The introduction of blockchain technology and proof of work, as outlined in the Satoshi Nakamoto white paper in 2008, effectively resolved this issue by preventing duplicate spending.
E
- Equity Token: A type of cryptocurrency that represents ownership of an underlying asset or a pool of assets. Holding an equity token typically implies ownership rights, such as dividends or voting in decisions related to the assets.
- EOA (Externally Owned Account): An Ethereum account controlled by a specific user. EOAs are typically controlled by private keys and are used for transactions on the Ethereum blockchain.
- ERC-20: An abbreviation for “Ethereum Request for Comments 20,” which is a standard specification on the Ethereum blockchain for fungible tokens. Fungible tokens are identical in value and functionality, similar to physical currency where each unit is the same as the others (e.g., all $20 bills are equal).
- ERC-721: An abbreviation for “Ethereum Request for Comments 721,” which is a standard specification on the Ethereum blockchain for nonfungible tokens (NFTs). Nonfungible tokens are unique and distinct, often used for representing collectibles or specific assets like unique digital art.
- ERC-1155: An abbreviation for “Ethereum Request for Comments 1155,” which is a standard specification on the Ethereum blockchain defining a multi-token model. It allows a contract to hold balances of various tokens, whether they are fungible (like ERC-20) or non-fungible (like ERC-721).
- Ethereum: The second-largest cryptocurrency and blockchain platform that has been in existence since 2015. The native currency of the Ethereum blockchain is called ether (ETH). Ethereum enables the execution of computer programs known as smart contracts and is considered a distributed computational platform.
- Ethereum 2.0: A proposed upgrade to the Ethereum blockchain that aims to improve scalability and energy efficiency. Ethereum 2.0 introduces a shift from proof of work (PoW) consensus to proof of stake (PoS) consensus, among other enhancements.
F
- Fiat Currency: Uncollateralized paper currency issued by a government. Essentially, it’s a form of money that is not backed by physical assets like gold or silver but relies on trust in the government’s promise to pay. Examples include the US dollar, euro, and yen.
- Fintech (Financial Technology): A broad term referring to technological innovations and advancements in the financial industry. Fintech encompasses various technologies and solutions that improve financial services, including payments, trading, lending, borrowing, and often includes applications of big data and machine learning.
- Flash Loan: An uncollateralized loan with no counterparty risk and a very short duration. Flash loans are typically used for purposes like arbitrage or refinancing loans without needing to provide collateral. They involve creating a loan, executing transactions, and repaying the loan within a single transaction, all within a matter of seconds.
- Flash Swap: A feature in some DeFi (Decentralized Finance) protocols that allows a contract to send tokens to a user before the user pays for them with assets on the other side of the pair. This enables near-instantaneous arbitrage opportunities. Unlike flash loans, flash swaps offer the flexibility to repay with a different asset, and all trades occur within a single Ethereum transaction.
- Fork: In the context of open-source code and blockchain technology, a fork refers to an upgrade or enhancement to an existing protocol that maintains a connection to the protocol’s history. Users have the choice of continuing to use the old protocol or adopting the new one. If the new protocol is superior and attracts enough support (such as mining power), it becomes the dominant version. Forking is an important mechanism to ensure efficiency and improvements in DeFi and blockchain systems.
G
- Gas: Gas is a fee required to execute a transaction or run a smart contract on the Ethereum blockchain. It serves as a measure of computational work and resource usage. Users pay gas to incentivize miners to include their transactions in the blockchain. Gas is also a mechanism that helps Ethereum handle the halting problem, ensuring that complex computations don’t run indefinitely and consume excessive resources.
- Geoblock: Geoblock is a technology or system that restricts or blocks users from accessing certain online content or services based on their geographical location. This blocking is often imposed to comply with regulations or laws that prohibit the application or dissemination of specific content in particular countries.
- Governance Token: A governance token is a type of cryptocurrency that grants its owner the right to participate in the decision-making process regarding changes or upgrades to a blockchain protocol or platform. Holders of governance tokens can typically vote on proposals or changes. Examples include the MakerDAO MKR token and the Compound COMP token, which allow token holders to influence the governance of the respective protocols.
H
- Halting Problem: The halting problem refers to the challenge of determining whether a computer program will eventually stop (halt) or continue running indefinitely. It’s a fundamental problem in computer science because it’s not always possible to predict if a program will finish its execution or enter into an infinite loop. Ethereum addresses this issue by requiring users to pay a fee (gas) for computational resources, and if the gas is exhausted, the program stops executing.
- Hash: Please see the explanation provided earlier for “Cryptographic Hash.”
- Hexadecimal: Hexadecimal is a counting system that uses base-16, consisting of the first 10 numbers (0 through 9) and the first six letters of the alphabet (a through f). In hexadecimal notation, each character represents 4 bits of data, making it a convenient way to represent binary information in a more human-readable form. For example, 0 is equivalent to 0000 in binary, and the 16th character “f” is equivalent to 1111 in binary.
- Horizontal Scaling: Horizontal scaling is an approach that involves dividing the workload of a system into multiple parts or components, with the aim of increasing the system’s capacity and throughput. It is a way to retain decentralization while improving performance through parallelization. In the context of Ethereum 2.0, horizontal scaling, also known as sharding, is used in combination with a proof-of-stake consensus algorithm to enhance the scalability and efficiency of the network.
I
- IDO (Initial DeFi Offering): An Initial DeFi Offering is a method of setting the initial exchange rate for a new cryptocurrency token. In an IDO, a user can become the first liquidity provider on a trading pair, typically involving the new token and a stablecoin like USDC. By doing so, the user establishes an initial price floor for the new token, helping determine its value in the market.
- Impermanent Loss: This concept applies to automated market makers (AMMs) like those in DeFi. When an AMM holds assets on both sides of a trading pair, and both assets increase in market value, users may withdraw one asset, leaving the contract with only the other asset. The impermanent loss is the difference between the value of both tokens if no exchanges had occurred (the initial value) and the value of the remaining asset after users have withdrawn (the final value).
- Incentive: An incentive is a broad term used to reward productive behavior. In the context of DeFi and crypto, incentives can take various forms, such as direct rewards or staked incentives. Incentives are used to encourage users to participate in various activities, like providing liquidity, staking tokens, or taking specific actions within a blockchain network.
- Invariant: The invariant is a result of a constant product rule often used in automated market makers (AMMs). For example, if you have two assets, A and B, the invariant is calculated as SA (supply of asset A) multiplied by SB (supply of asset B). The invariant remains constant throughout trades. When users deposit or withdraw assets from an AMM, the invariant ensures that the product of the supply of both assets remains the same. This means that as the supply of one asset changes, the exchange rate between the two assets adjusts accordingly, while the total value (invariant) remains constant.
K
- Keeper: In the context of DeFi (Decentralized Finance) protocols or dApps, a keeper is a type of externally owned account that is incentivized to perform specific actions within the protocol. Keepers play a crucial role in maintaining the protocol’s health and efficiency. They are rewarded for carrying out actions like liquidating undercollateralized debt obligations (CDOs) or other tasks. These rewards can be in the form of a flat fee or a percentage of the incentivized action’s value.
- KYC (Know Your Customer): KYC is a provision found in U.S. financial services regulations and is also common in regulations worldwide. It requires that users or customers of financial services must provide proper identification and information about themselves to the service provider. KYC is intended to prevent fraud, money laundering, and other illicit activities. In the context of DeFi, KYC regulations can lead to geoblocking, where certain functionalities of decentralized exchanges may be restricted for users in specific regions, such as the United States, due to regulatory compliance requirements.
L
- Layer 2: Layer 2 refers to a scaling solution built on top of a blockchain network. It uses a combination of cryptographic techniques and economic incentives to maintain a high level of security while increasing the efficiency and capacity of the blockchain. An example of a Layer 2 solution is a multi-signature payment channel, which allows small transactions to occur off-chain, reducing congestion on the main blockchain. The main blockchain is typically used only when funds are added to or withdrawn from the payment channel.
- Liquidity Provider (LP): A liquidity provider is a user who participates in a decentralized finance (DeFi) ecosystem by depositing their assets into a pool or a smart contract. LPs contribute to the liquidity of the ecosystem, allowing other users to trade or perform various financial activities. In return for providing liquidity, LPs often earn a return on their assets, which can come in the form of trading fees or other incentives.
- Lending Aggregator: A lending aggregator is a program or a set of smart contracts that automatically seek the best lending rates for individuals or entities depositing their cryptocurrencies in lending platforms. These aggregators help users maximize their returns on investment (ROI) by finding the most favorable lending opportunities in the decentralized finance (DeFi) space.
- Lending Provider: A lending provider refers to an individual or a group that supplies cryptocurrency capital to lending platforms in exchange for a share of the rewards and fees generated by lending out these assets. Lending providers offer their funds to traders, investors, exchanges, cryptocurrency networks, decentralized autonomous organizations (DAOs), and other entities to leverage arbitrage opportunities and business prospects within both centralized finance (CeFi) and DeFi environments.
- Leverage: Leverage involves the use of multipliers on exchanges or trading platforms, allowing traders and investors to control a larger position than they could with their initial capital alone. For instance, with 10x leverage, a trader can control a position size ten times greater than their deposit. Leverage can amplify both gains and losses; while it can lead to significant profits, it also increases the risk of substantial losses, particularly in times of high volatility.
- Liquidation Event: A liquidation event, also known as a forced liquidation, occurs when a trader or investor using leverage is unable to meet a margin call on their leveraged position. In such cases, their trading position is forcibly closed or liquidated by the exchange or platform, and the trader may lose all or part of their initial investment.
- Liquidity: Liquidity refers to the ease with which an asset or currency can be bought or sold in a market without significantly affecting its price. An asset with high liquidity has a large number of buyers and sellers and can be quickly traded, whereas an asset with low liquidity may have fewer participants and may be traded less frequently.
- Liquidity Mining: Liquidity mining is a process in which cryptocurrency rewards are provided to liquidity providers who deposit their assets into liquidity pools on decentralized platforms. These rewards are intended to incentivize users to provide liquidity, enhancing the liquidity of a particular cryptocurrency or platform. It helps grow and support the user base of a blockchain ecosystem.
- Liquidity Pool: A liquidity pool, often abbreviated as LP, is a pool of deposited funds created to provide liquidity to a cryptocurrency, network, or smart contract. Liquidity pools are vital for enabling smooth trading and transactions within a decentralized ecosystem. Users deposit their assets into these pools in exchange for rewards or fees generated by the pool’s activities.
- Liquidity Providers: In the context of cryptocurrency and DeFi, liquidity providers are individuals or entities that deposit their assets into decentralized liquidity pools (LPs) to supply liquid capital to exchanges and smart contracts. These providers typically deposit multiple types of assets into the pools and earn rewards or returns on their investments. Liquidity providers may also encounter impermanent loss, a potential drawback of providing liquidity.
- Liquidity Token: A liquidity token is a token issued via smart contracts to users who deposit their assets into liquidity pools. These tokens represent ownership or participation in the pool and can often be traded or exchanged back for the original assets. Examples of liquidity tokens include aDAI, yCRV, and yYFI, which are used in various DeFi protocols for purposes such as yield farming.
M
- Mainnet: Mainnet refers to the fully operational, production blockchain network behind a cryptocurrency token. Examples of mainnets include the Bitcoin blockchain and the Ethereum blockchain. It is the live, real-world version of the blockchain where actual transactions and operations take place. Mainnet is often contrasted with a “testnet,” which is a separate blockchain environment used for testing and development purposes.
- Miner: A miner is a participant in a proof-of-work blockchain network, such as Bitcoin or Ethereum. Miners play a vital role in the network’s security and operation. They gather pending transactions, add a piece of data known as a nonce, and perform cryptographic hashing to create a new block. Miners compete to find a rare cryptographic hash value that meets the network’s criteria, and the first miner to succeed is rewarded with newly created cryptocurrency coins as a direct reward. Miners also earn indirect rewards by collecting transaction fees from the transactions included in their blocks.
- Miner Extractable Value: Miner extractable value (MEV) refers to the profit earned by a miner through various actions, such as front-running pending transactions. For example, a miner may anticipate that a large buy order will increase the price of a cryptocurrency, so they execute their own transaction ahead of it to benefit from the price increase, thereby earning a profit.
- Mint: Minting is an action that increases the supply of tokens within a blockchain or cryptocurrency system. It is the opposite of burning, where tokens are permanently removed from circulation. Minting typically occurs when a user participates in a liquidity pool or acquires an ownership share. In noncollateralized stablecoin models, minting can help stabilize the stablecoin’s value. When the stablecoin becomes too expensive, more tokens are minted, increasing the supply and reducing prices. Minting can also be used as a way to reward user behavior.
N
- Networked Liquidity: Networked liquidity is the concept that any exchange application operating on the same blockchain can access and utilize the combined liquidity and exchange rates available across all exchanges within that blockchain ecosystem. In essence, it means that liquidity and pricing information can be shared and leveraged across various exchange platforms on the same blockchain network.
- Node: A node is a computer or device that is part of a network, specifically in the context of blockchain technology, it refers to a computer that participates in the operation of a blockchain network. Nodes maintain a complete and up-to-date copy of the blockchain ledger. They play a crucial role in validating and relaying transactions, as well as reaching consensus on the state of the blockchain. Nodes can be full nodes, which store the entire blockchain, or light nodes, which rely on others for certain data.
- Nonce (Number Only Once): A nonce is a counter or number used in blockchain mining, particularly in proof-of-work (PoW) blockchains. Miners cycle through various nonce values as they attempt to find a rare cryptographic hash value that meets the network’s criteria. The purpose of the nonce is to add a random element to the cryptographic hashing process. Miners increment the nonce in their attempts to discover a valid hash that meets the network’s difficulty target. The nonce ensures that the same input data hashed multiple times produces different results, allowing miners to find a hash that meets the network’s requirements.
O
- Optimistic Rollup: Optimistic Rollup is a scaling solution designed to improve the efficiency and scalability of a blockchain network. In this approach, transactions are initially processed off-chain or in a separate layer (the “rollup”) and then aggregated into a single summary or digest. This summarized data is periodically submitted to the main blockchain. It’s called “optimistic” because it assumes that the transactions are valid unless proven otherwise, thereby reducing the computational load on the main chain. If a dispute arises, a mechanism exists to provide proofs of the transactions’ validity.
- Oracle: An oracle is a method or mechanism used to fetch and provide information from sources outside of a blockchain. In blockchain applications, smart contracts often require real-world data, such as market prices, weather conditions, or other external events, to make decisions or execute actions. Oracles serve as trusted sources of this external data, providing it to the blockchain so that smart contracts can use it for various purposes.
- Order Book Matching: Order book matching is a process commonly used in decentralized exchanges (DEXs). It involves multiple parties agreeing on the exchange rate for swapping one cryptocurrency for another. Market makers, who create liquidity in the exchange, post bids (buy offers) and asks (sell offers) on the DEX. Takers, who want to trade, can then fill these orders at the pre-agreed prices. Until an offer is taken by a taker, the market maker has the flexibility to withdraw the offer or update the exchange rate, providing liquidity and facilitating trading on the exchange.
P
- Perpetual Futures Contract: A perpetual futures contract is similar to a traditional futures contract in that it allows traders to speculate on the price of an underlying asset without owning the asset itself. However, unlike traditional futures contracts, perpetual futures contracts do not have an expiration date. Traders can hold these contracts indefinitely, and they are designed to closely track the spot price of the underlying asset.
- Proof of Stake (PoS): Proof of Stake is an alternative consensus mechanism used in blockchain networks, including Ethereum 2.0. In PoS, validators commit a certain amount of cryptocurrency (their stake) to participate in the process of creating and validating new blocks. Validators are selected to propose blocks randomly, and their proposed blocks must be attested by a majority of other validators to be considered valid. Validators earn rewards by both proposing blocks and attesting to the validity of others’ proposed blocks. However, if a validator behaves maliciously, there is a penalty mechanism where their stake can be slashed or reduced as a penalty.
- Proof of Work (PoW): Proof of Work is the original consensus mechanism used in leading blockchains like Bitcoin and Ethereum. In PoW, miners compete to solve a complex cryptographic puzzle, which is computationally difficult to find but easy to verify once solved. The first miner to find a valid solution gets to add a new block to the blockchain and is rewarded with cryptocurrency coins. The computational difficulty of solving these puzzles makes it practically impossible to manipulate or rewrite the transaction history of a well-established blockchain.
R
- Retail Investor: A retail investor is an individual investor who is not considered a professional or institutional investor. Retail investors participate in buying, selling, lending, and yield farming of cryptocurrencies, crypto derivatives, and other crypto offerings. Unlike institutional investors or whales, retail investors typically do not have access to volume discounts, preferential treatment, or specialized services offered to larger players in the market. They engage in these activities as individual participants, often paying retail prices for their transactions.
- ROI (Return On Investment): ROI is an acronym that stands for Return On Investment. It is a financial metric used to measure the gains or losses generated from an investment relative to its initial cost or investment amount. ROI is typically expressed as a percentage. For example, if you invest $1,000 in an asset and it doubles in value, resulting in a $1,000 gain, your ROI would be 100%. Conversely, if you lose the entire $1,000 investment, your ROI would be -100%. ROI is a fundamental measure for assessing the performance and profitability of investments.
- Router Contracts: In the context of decentralized exchanges, a router contract is a smart contract that plays a crucial role in determining the most efficient path for executing swaps of digital assets. Its primary aim is to minimize slippage, which refers to the difference between the expected price of an asset and the actual price at which it is bought or sold. Router contracts are especially useful when there is no direct trading pair available for the assets a user wants to exchange. Instead of going through a single direct trading pair, the router contract can identify and execute a series of intermediate trades across multiple pools or assets to achieve the desired swap with the least slippage. This helps users get the best possible exchange rate for their transactions. One well-known example of such a router contract is used on decentralized exchanges like Uniswap, where it helps users find the most optimal path to execute their trades efficiently. In simpler terms, router contracts are like smart guides that navigate through the decentralized exchange ecosystem to find the best route for swapping assets while minimizing price impact. Rebalance: Rebalancing refers to the process of making adjustments or changes to a portfolio or pool of funds for various reasons. This can involve buying or selling assets within the portfolio to bring it back to its desired or target allocation. Rebalancing is typically done to maintain a predefined risk level, optimize returns, or align with investment objectives. For example, if certain assets within a portfolio have performed exceptionally well and now constitute a larger portion of the total, rebalancing may involve selling some of those assets to reallocate funds to other underrepresented assets.
S
- Scaling Risk: Scaling risk refers to the limitations of many current blockchain networks in terms of their ability to handle a large number of transactions per second. This risk arises when the blockchain’s capacity is exceeded, leading to network congestion, slower transaction processing times, and potential bottlenecks. Scaling solutions, such as vertical scaling and horizontal scaling, are sought to mitigate these limitations and improve a blockchain’s capacity.
- Schelling-Point Oracle: A Schelling-point oracle is a type of oracle that relies on the input or votes from individuals who hold a fixed supply of tokens. These token holders are responsible for reporting or determining the outcome of specific events or reporting the price of assets. The consensus among these token holders is used to arrive at an agreed-upon outcome, making it a decentralized way to gather information and make decisions within a blockchain ecosystem.
- Sharding: Sharding is a process of horizontally splitting a blockchain’s database. It’s a form of horizontal scaling that aims to improve a blockchain’s capacity and throughput. In sharding, the blockchain’s workload is divided into smaller pieces, each of which is managed by different nodes. This parallelization increases the efficiency of the blockchain network, reduces congestion, and aims to allow for a higher number of transactions per second. Ethereum 2.0 is adopting sharding as part of its scaling solution.
- Slashing: Slashing is a mechanism employed in proof-of-stake blockchain protocols to discourage certain forms of user misbehavior. When a user behaves in a way that violates the network’s rules or security, they can face penalties in the form of slashed funds. These funds are deducted or taken away from the user’s stake as a consequence of their actions.
- Stablecoin: A stablecoin is a type of cryptocurrency token that is designed to maintain a stable value by being tied to the value of an underlying asset, such as the US dollar. Stablecoins can be collateralized with physical assets (like US dollars in USDC) or digital assets (like DAI), or they can be uncollateralized (like AMPL and ESD). They are often used for stability and as a medium of exchange within the cryptocurrency ecosystem.
- Staking: Staking involves users locking or escrowing their funds (cryptocurrency tokens) in a smart contract as part of a blockchain’s consensus mechanism. Users who participate in staking may receive rewards for their participation but also risk penalties (slashing) if they deviate from expected behavior. Staking is commonly used in proof-of-stake and delegated proof-of-stake blockchain networks.
- Symmetric Key Cryptography: Symmetric key cryptography is a type of cryptographic technique where the same key is used for both encrypting and decrypting a message. It’s called “symmetric” because the same key is shared between the sender and receiver, making it important to keep the key secret to maintain security.
- Slippage: In trading, slippage refers to the difference between the expected price of an asset at the time an order is placed and the actual executed price. This difference can occur because of market volatility, order size, and liquidity. Slippage can result in the final purchase or sale price of an asset being higher or lower than the initially intended price. Slippage is typically measured as a percentage and can vary from a minimal amount to more significant levels, especially for assets with limited liquidity.
- Smart Contract: A smart contract is a self-executing digital contract with the terms of the agreement directly written into code. These contracts are programmed using a programming language that is considered Turing complete, which means it has the capability to perform almost any digital task or process given enough computational power and time. Ethereum, a popular blockchain platform, allows the creation of smart contracts using languages like Solidity and Vyper. Smart contracts automate and enforce the execution of contractual agreements, typically without the need for intermediaries, making them a fundamental component of decentralized applications (DApps) and blockchain ecosystems.
- Spread: The spread in the context of trading refers to the difference between the highest price a buyer is willing to pay (the bid price) and the lowest price a seller is willing to accept (the ask price) for a particular asset on an exchange or market. It represents the gap or disagreement in price expectations between potential buyers and sellers. A wide spread indicates a significant difference between these prices and can result from various factors, including market conditions, supply and demand dynamics, and liquidity. A narrow spread suggests that there is less difference between buy and sell offers, which can lead to lower trading costs and potentially less slippage when executing orders.
T
- Testnet: A testnet is essentially a blockchain network that functions identically to a mainnet (production blockchain) but serves the purpose of testing software and applications. It allows developers to experiment with new features, test smart contracts, and identify and fix bugs or vulnerabilities without risking real assets. In the context of Ethereum testing, the tokens used on a testnet are referred to as “test ETH” and are typically obtained for free from a smart contract known as a “faucet.”
- Transparency: Transparency in the context of blockchain refers to the ability for anyone to access and view the code and all transactions recorded on a smart contract or blockchain. This openness is a fundamental characteristic of blockchain technology. To explore and verify transactions on a blockchain, people commonly use blockchain explorers like etherscan.io, which provide a user-friendly interface to access the data stored on the blockchain.
- Tokenomics, short for token economics, is a term used to describe the design and management of tokens within a blockchain or cryptocurrency ecosystem. It encompasses various factors that impact the behavior and value of these tokens. Some key elements of tokenomics include:Circulating/Max Token Supply: This refers to the total number of tokens that can ever be created (max supply) and the number of tokens currently in circulation. The supply dynamics can affect token scarcity and, consequently, its value.Token Emission Rates: Token emission rates determine how new tokens are created or distributed over time. Some cryptocurrencies have fixed emission schedules, while others may use mechanisms like proof-of-stake or proof-of-work to determine emission rates.Vesting Schedules: Vesting schedules outline when and how tokens are released to token holders or team members. They are often used to incentivize long-term participation or to ensure that team members or advisors don’t immediately sell their tokens.
- Total Value Locked (TVL) is a metric used in the context of decentralized finance (DeFi). It represents the total value of assets, typically cryptocurrencies, that users have deposited or locked into a specific DeFi platform or protocol. TVL is an essential measure because it reflects the amount of liquidity and assets that participants have committed to a particular DeFi project. Higher TVL generally signifies greater trust and adoption of the platform by users.
U
- Utility Token:
- A utility token is a type of fungible cryptocurrency token that has a specific purpose within a smart contract system or blockchain platform.
- These tokens are necessary to access or utilize particular functionalities offered by the smart contract or blockchain.
- Utility tokens can have intrinsic value within the ecosystem they are designed for.
- Underlying Assets:
- In the context of finance and investments, “underlying assets” refers to the original assets from which the value of financial derivatives or related instruments is derived.
- These underlying assets serve as the basis or reference point for the value of the derivative or instrument.
- Perpetuals: Perpetual contracts, often used in cryptocurrency trading, derive their value from the underlying cryptocurrency itself. For instance, the value of a Bitcoin perpetual contract is based on the price of Bitcoin.
- Synthetics: Synthetic assets are financial instruments that mimic the price movements of real assets, such as stocks, commodities, or cryptocurrencies. The value of synthetic assets is linked to the performance of the underlying assets they are designed to replicate.
- LP Tokens (Liquidity Provider Tokens): LP tokens represent ownership in a liquidity pool in decentralized finance (DeFi) platforms. These tokens are typically created when users provide liquidity by depositing assets into a pool. The value of LP tokens is linked to the assets within the liquidity pool, which serve as the underlying assets.
V
- Vampirism: Vampirism in the context of DeFi (Decentralized Finance) refers to the practice of creating a new DeFi platform that is essentially a copy or very similar to an existing platform. The intention behind vampirism is to attract users and liquidity away from the existing platform, often by offering direct incentives or benefits to users. It involves replicating the features and functionalities of the original platform in an attempt to capture a portion of its user base.
- Vault: A vault is a type of smart contract used in blockchain systems, particularly in DeFi applications. Its primary function is to hold and manage collateral assets securely. Vaults keep track of the value of the collateral assets they hold and may trigger actions based on predefined conditions, such as liquidation if the value of the collateral falls below a certain threshold. Vaults are essential components in various DeFi protocols to ensure the security and stability of the system.
- Vertical Scaling: Vertical scaling refers to the approach of centralizing all transaction processing onto a single, powerful machine or server. This approach aims to reduce the communication overhead and latency (time delays) associated with processing transactions in a blockchain network, particularly in proof-of-work blockchains like Ethereum. However, it results in a centralized architecture where a single machine is responsible for the majority of the system’s processing. While it may reduce latency, it sacrifices some of the decentralization and security benefits of blockchain technology.
W
- Wallet: A “cryptocurrency wallet” is a digital or physical tool used to securely store, manage, and conduct transactions with cryptocurrencies. These wallets accommodate various cryptocurrencies, enabling users to send, receive, and oversee their digital assets. There are two primary categories of cryptocurrency wallets:
- Hot Wallet: A hot wallet is an internet-connected cryptocurrency wallet designed for easy accessibility. It’s suitable for active trading or daily transactions. While hot wallets offer convenience, they are considered less secure due to their online connectivity, making them vulnerable to hacking or cyberattacks.
- Cold Wallet: In contrast, a cold wallet is a cryptocurrency storage solution disconnected from the internet. It prioritizes security over accessibility and is primarily used for long-term storage of significant cryptocurrency holdings. Cold wallets protect digital assets from online threats, making them a preferred choice for safeguarding large sums of cryptocurrencies.
- Whale: A “whale” in the cryptocurrency realm refers to an individual or entity holding a substantial amount of cryptocurrency. These whales wield significant influence in the crypto market due to their extensive holdings. Their actions, such as buying or selling large volumes of digital assets, can impact market dynamics significantly. The term “whale” originates from their status as prominent players in the cryptocurrency world, analogous to being the biggest fish in the crypto ocean. Their decisions can have a profound effect on the market’s behavior and trends.
Y
- YIP (Yearn Improvement Protocol): YIP stands for Yearn Improvement Protocol. It’s a system used in Yearn Finance where the community collaboratively generates proposals for improvements or changes to the Yearn Finance ecosystem. These proposals are discussed, refined, and voted upon by YFI token holders and community members. To pass, a YIP must achieve a quorum of 20% of deposited governance tokens and receive a majority vote of 50% or more in favor. Once approved, the YIP is implemented by multisignature wallet signers responsible for the smart contracts governing Yearn Finance.
- yInsure: yInsure is a type of crypto insurance designed by Andre Cronje, the developer behind Yearn Finance. It utilizes underwriting provided by Nexus Mutual. yInsure tokens are liquidity tokens that allow investors to provide liquidity for crypto insurance pools. Liquidity providers earn a share of initiation fees and weekly fees from customers seeking insurance coverage for their digital assets. This innovative insurance system can cover various types of crypto assets, including base assets and composite assets.
- yLiquidate: yLiquidate comprises a set of automated liquidation smart contracts developed for Aave, a decentralized lending platform. These contracts are designed to perform liquidations without requiring additional capital. Currently, yLiquidate is in the testing phase on a testnet environment.
- ySwap: ySwap is a Single-sided Automated Market Maker (AMM) developed by Yearn Finance. It is in production but is still in the beta stage of development. AMMs like ySwap facilitate token swaps without the need for a traditional order book.
- yToken: yToken is a cryptocurrency derivative asset class created by Andre Cronje. These tokens represent liquidity tokens provided by investors in exchange for their deposits. yTokens are used in various Yearn Finance products, including lending, insurance liquidity (yInsure), and automated yield farming (yVault). Examples of yTokens include yCRV, yYFI, and yaLINK, which are derivatives of base crypto assets or other derivatives.
- yVault: yVault is a programmatically adjusted platform within Yearn Finance. It serves as an aggregator, arbitrageur, and optimized yield farming tool. yVault smart contracts are more complex and higher risk compared to Yearn’s simpler smart contracts but tend to offer higher returns on investment. These vaults implement strategies like lending assets through protocols like Aave and Compound, participating in trading on platforms like Uniswap, and taking advantage of liquidity incentives in various DeFi markets.
- Yield Farming: Yield farming is a method used within the world of decentralized finance (DeFi) to provide users with rewards for participating in various blockchain protocols. These rewards are typically in the form of additional cryptocurrency tokens.Here’s how it works: Users can stake their capital (deposit or lock up their cryptocurrency assets) in a DeFi protocol or smart contract. In return for staking their assets, they receive rewards, often in the form of the protocol’s native tokens or other tokens. Yield farming essentially allows users to earn passive income by putting their crypto assets to work within these protocols.The rewards are funded by the protocol itself, which often generates income through various mechanisms like transaction fees, lending, or other activities. Yield farming has become a popular way for cryptocurrency holders to earn additional tokens and make their assets work for them in the DeFi ecosystem.In simpler terms, yield farming is like planting seeds (your assets) in a digital garden (a DeFi protocol), and as those seeds grow, you harvest more tokens as rewards. It’s a way to earn more cryptocurrency by participating in blockchain-based financial services.
- Yield: Yield refers to the earnings or returns that you can generate by depositing or staking your assets within a DeFi (Decentralized Finance) platform. These platforms include popular names like Yearn Finance, Compound, Aave, Curve Finance, or Synthetix.When you deposit your cryptocurrency or assets into one of these DeFi platforms, they are often used within the platform’s ecosystem for various financial activities like lending, borrowing, liquidity provision, or trading. In return for contributing your assets to these activities, you earn a yield, which is essentially the interest or profits generated from those activities.Yield can be paid out in various forms, such as additional cryptocurrency tokens, interest payments, or rewards. The specific yield you earn depends on the platform, the assets you deposit, and the prevailing market conditions.In simpler terms, yield is the reward you receive for letting your crypto assets work for you within a DeFi platform. It’s a way to earn passive income by participating in decentralized financial activities.
- Yield Farming Rebalance: In the context of yield farming strategies, a rebalance is an automated or manual tactical adjustment made to the strategy with the goal of achieving various objectives. This can include gaining profits through arbitrage (taking advantage of price differences on different platforms), securing profits, or reducing risks to investors or pooled funds. During periods of high market volatility, rebalancing becomes crucial, especially when margin or leveraged trading is involved. It helps manage and mitigate risks associated with the strategy by making timely adjustments.
Z
- Zapper: Zapper.fi is a DeFi tool designed to simplify users’ entry and exit into various DeFi products and platforms. It allows users to batch or “zap” transactions, streamlining the process and potentially reducing gas fees. Additionally, Zapper provides detailed insights and tracking of users’ DeFi investments and assets, offering a comprehensive view of their holdings across different protocols and products.
Naren is a finance graduate who is passionate about cryptocurrency and blockchain technology. He demonstrates his expertise in these subjects by writing for cryptoetf.in. Thanks to his finance background, he is able to write effectively about cryptocurrency.