What is DEFI

Aave

Aave is an open source and non-custodial lending protocol enabling the creation of money markets. Users can earn interest on deposits and also borrow assets. Aave provides depositors a Liquidity Token that represents an equivalent derivative deposit in an identical asset. For example, a user can deposit DAI and receive aDAI, which is a type of USD-based crypto derivative that essentially represents the value of the underlying DAI asset plus the interest gains from allowing the borrowing of one’s DAI. That aDAI, could then also be used to implement further strategies to potentially amplify their gains even further.

Alpha Code

Early stage prototype computer code, programs, and algorithms meant to solve a problem, and/or provide new digital goods or services. Alpha software comes with the expectation that the code is at an early prototype stage and is meant for an early testing phase meant for very limited testing. Alpha code or software may be missing all or parts of expected software functionality. Planned features and the security of the software may also be very limited or even non-existent in many aspects.

Audit

An audit is either an internal or independent comprehensive review of a concept, system, process, company, or product. A comprehensive audit includes a thoughtful and in-depth look at the structure, strengths, weaknesses, and vulnerabilities of the thing or process being audited. Audits may be either informal or formal audits, and are meant to be a tool to find and analyze weaknesses, so that issues and problems discovered during an audit may be remediated, mitigated, or corrected.

APY

Annual Percentage Yield, a time-based measurement of the Return On Investment (ROI) on an asset. For example, $100 invested at 2% APY would yield $102 after one year, if there is no compounding of any interest earned on that $100 through the year. Assuming a static APY rate, the Monthly ROI would be 0.16%, in this case.

Arbitrage

The trading of a coin or crypto derivative, where the price spread between two different markets or exchanges for the same asset or product is utilized to earn greater profits. In DeFi, automated yield farming uses algorithmic arbitrage strategies in order to maximize returns for investors. These arbitrage strategies may include buying, selling, lending, and/or providing liquidity of one or more digital assets, often in the same day.

Automated Market Maker(AMM)

An Automated Market Maker (AMM) is a decentralized asset trading pool that enables market participants to buy or sell cryptocurrencies. AMMs are non-custodial and permissionless in nature. Most AMMs utilize either a constant product, constant mean, or constant sum market making formula; however, the most common is a constant product market maker, most notably Uniswap.

Balancer

From the Balancer whitepaper definition: A Balancer Pool is an automated market maker with certain key properties that cause it to function as a self-balancing weighted portfolio and price sensor. Balancer turns the concept of an index fund on its head: instead of paying fees to portfolio managers to rebalance your portfolio, you collect fees from traders, who rebalance your portfolio by following arbitrage opportunities. Balancer uses a Constant Mean Market Maker (CMMM)that enables non-equal weights for pools (e.g., 80/20 vs. 50/50) and also allows LPs to provide single-sided liquidity.

Bear Market

A period marked by prevailing negative investor sentiment about an asset or class of assets. A bear market can last weeks, months, or years.

Beta Code

Later stage prototype computer code, programs, and algorithms meant to solve a problem, and/or provide digital goods or services. Beta code comes with the expectation that the code has more functionality and stability as a mid-to-late stage prototype stage with a Beta testing phase, and that the software functionality, features, and security may still be limited. The code base, process, system, and/or network is often opened up to a limited number of testers who stress test systems and provide feedback for improvements to the developer or development team. Beta code development has the expectation of being one of the critical final phases before the potential public release of Version 1.0 software. Beta software is used with the expectation and understanding that there may still be minor to fatal bugs or security vulnerabilities hidden within this Beta software code or associated processes that may not have been uncovered by previous security reviews, testing, or audits.

Blockchain

An immutable permanent public record or ledger of all transactions since the beginning of a cryptocurrency coin or token.

Bull market

A period marked by prevailing positive investor sentiment about an asset or class of assets. A bull market can last weeks, months, or years, and can sometimes be marked by what economists call a Bubble, where there may be irrational overenthusiasm about an asset or class of assets, leading to explosive price growth followed by an explosive price crash.

CeFi

Centralized Finance. In terms of cryptocurrency, CeFi is represented by centralized cryptocurrency exchanges, businesses or organizations with a physical address, and usually with some sort of corporate structure. These CeFi businesses must follow all applicable laws, rules, and regulations in each country, state, or region in which they operate.

CEX

A CEX is a Centralized Exchange, with a physical address and a corporate structure. Like other CeFi businesses, a CEX must follow all applicable laws, rules, money transmitter licenses, and regulations in each country, state, or region in which they operate. There are significant overhead costs in running a CEX including Corporate leaders, labor, rent and electricity, office supplies, significant legal expenses, and expensive money transmitter licenses to be able to operate in chosen countries, states, or regions.

Compound Interest

Once called the eigth wonder of the world by Einstein, compound interest allows greater interest rates and returns on investments by allowing interest gained to be automatically reinvested back in with the original deposits and accrued interest. This reinvestment period is based on the planned distribution of this interest which may be hourly, weekly, monthly, or an annual interest distribution. With compound interest, the greatest gains are often seen over a certain period in time, with a notably sharp rise in value of investments seen at longer time spans. In general, the longer a deposit benefits from compound interest, the much greater the overall gains when compared to gains made from simple interest.

Composability

The measure of the usability and ability of product to be used as a building block (or “money lego”) in the construction of other products or domains. A protocol that is simple, powerful, and that functions well with other protocols would be considered to have high composability.

Collateralization

The borrowing of a deposit asset or assets to seek further business activities such as Yield Farming. Collateralization can amplify gains or losses, and is thus, considered more risky than not borrowing funds.

Curve

Curve is a decentralized stablecoin Automated Market Maker (AMM), that offers low-slippage trades among stablecoins (DAI, USDC, USDT, TUSD, BUSD, sUSD) and other synthetic assets (wrapped BTC) on the Ethereum blockchain. One advantage to providing liquidity in similar assets such as the above USD equivalents is that it is one solution to mitigating Impermanent Loss (IL) for Liquidity Providers (LPs) for the crypto derivatives and the output of the Curve.Finance Smart Contract, which utilizes four USD digital equivalent tokens to form a composite token called CRV.

dApp

A 21st century invention, a dApp is a decentralized Web3 application that normally runs on a blockchain. Advantages of dApps are that: they allow for new solutions to problems, they are decentralized and are thus rugged, and they are resistant to outages and censorship. dApps can provide decentralized software application services - such as the Brave browser - but it can also be used to trace and track goods, and can be used to enable international financial transactions without the delay, costs, and hassle of middlemen and bureaucracy. They can also be a keystone to the functionality of complex decentralized exchanges and crypto financial services such as price oracles.

DAO

Distributed Autonomous Organization. The first DAO was started in 2016. According to Wikipedia’s definition, it is an: “organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government. A DAO’s financial transaction record and program rules are maintained on a blockchain.” When implemented well, a DAO allows for real world experiments in decentralized democratic organization and control, with more freedom of action and less regulatory oversight for DAO controlled projects and products when compared to legacy corporate structures and organizations.

DeFi

DeFi, or Decentralized Finance, is at its root a set of Smart Contracts running independently on blockchains such as the Ethereum network. Smart Contracts may or may not interact with other smart contracts and even other blockchains. The goal of DeFi is to enhance profitability of investors in DeFi through automated smart contracts seeking to maximize yields for invested funds. DeFi is marked by rapid innovative progression and testing of new ideas and concepts. DeFi often involves high risk investing sometimes involving smart contracts that have not been audited or even thoroughly reviewed (a review is not as comprehensive as an audit, but may be also be included as part of an audit). Due to this and other reasons, DeFi is conventionally considered to be more risky than CeFi or traditional investing.

Delegation

The concept of permitting a person, company, or organization the ability to borrow utilizing another owner’s deposited collateral.

Derivative

In investing, a derivative is an investment instrument or tool that is based on an underlying asset or assets. Investopedia describes it thus: Derivatives can be used to hedge a position, speculate on the directional movement of an underlying asset, or give leverage to holdings. Their value comes from the fluctuations of the values of the underlying asset. Originally, derivatives were used to ensure balanced exchange rates for goods traded internationally. In DeFi, since 2020 there now exists a crypto derivative that is a new type of investment or asset class. This crypto derivative is a representation of an underlying digital base asset such as Ethereum, Dai, Curve or YFI. Examples of their respective derivatives are yETH, aDAI, yCRV, and yYFI.

DEX

Decentralized EXchange. A cryptocurrency exchange that is decentralized, without a physical location. It is a Peer-2-Peer network operating on Smart Contracts where users buy and sell directly to one another, with only the DEX as a middleman. Without the high overhead and regulatory costs of doing business as a CEX, a DEX does not have to follow the stricter rules and regulations that CEXs must follow, and thus can be leaner, more profitable, and more efficient than a CEX. (For example: How does one sue or arrest an automated Smart Contract which is running on a Virtual Machine that is globally distributed? [Comment: TMI?])

Ethereum

Bitcoin is the original cryptocurrency but Ethereum, which launched in July 2015, allows for much more complexity through the use of smart contracts and a Turing complete programming language. Thanks to the ERC-20 protocol, Ethereum has many cryptocurrency coins such as LINK, CRV and YFI built on top of Ethereum, each with their own set of rules.

ERC-20

A cryptocurrency protocol based on the Ethereum blockchain. An ERC-20 coin, by definition uses this protocol.

Fair Launch

A concept where a Developer decides to not seek outside investment and also does not hold back a share of a coin or token’s launch for themselves or others. This is considered to be much more fair to early investors as their share of equity or ownership of a coin or token is not diluted by pre-investors or founders / founding teams.

Flash Loan

A type of loan that is only possible in the world of cryptocurrencies. A Flash Loan is a type of loan where the asset, often Ethereum or an ERC-20 coin, is loaned out only for the duration of the length of time it takes to complete one transaction block on the blockchain. As long as the loan is paid back before the next transaction block begins there is no interest fee incurred by the borrower. Flash Loans allow for new types of investments that are nearly instantaneous algorithmic scripts to run in Smart Contracts that can be stacked upon one another for innovative yet sometimes risky investments. Flash Loans may also have vulnerabilities which may include systems vulnerabilities that take advantage of approved existing systems but used in a novel malicious manner.

FOMO

Fear Of Missing Out. The feeling that everyone else seems to be getting rich, profiting, or generally having a great time without you. In investing, it’s a feeling that your current portfolio isn’t performing well enough when compared to newer and “shinier” investment choices and options.

Gas Fees

Gas fees are rewards paid to Proof Of Work miners to incentivize them to support the network’s transactions which become written to the blockchain. In Ethereum, this gas fee unit amount is expressed in gwei. Withdrawals or transfers to or from CEXs, DEXs Liquidity Pools, and Wallets all incur a gas fee. The amount of this gas fee will vary in cost depending on supply and demand. As currently designed: when demand on Ethereum or an ERC-20 network is at its highest, gas fees are at also their highest.

Governance Token

A token used to govern the operations and influence the direction of a coin, token and/or project controlled by the Governance Token. Holding these tokens are often profitable through direct price appreciation of popular governance tokens, but may come with other benefits that are only available to governance token holders and voters. Examples of governance tokens are MKR and YFI.

Gwei

A unit of measurement of gas fees for transactions on the Ethereum network or ERC-20 coin networks.

HODL

A misspelled word by a crypto investor on an online forum from the early days of cryptocurrency, HODL became a term that was embraced as an inside joke by the nascent community of investors, coders, and entreprenuers who supported coins like Bitcoin and Ethereum in the early days. They believe in the long term promise of cryptocurrencies and held their investments through periods of massive volatility or even no volatility (i.e., price stagnation). The choice or decision to hold onto one’s crypto investments through bull and bear markets is called HODLing.

Impermanent Loss

In Automated Market Makers (AMM) lending providers (LPs) contribute assets for liquidity to market participants. These AMM pools utilize a bonding curve, typically built on a constant function market marker formula. Asset prices are constantly changed by the AMM pool in response to trading activities by participants. This is an effort to ensure that LPs can receive the same amount of assets they deposited when they withdrawal. However, due to volatility of asset prices and arbitragers, LPs occasionally will not receive the exact amount of assets upon withdrawal. The dollar value of the assets they withdraw would typically be lower than if they had no provided liquidity and just held the assets. This dollar value shortfall is known as impermanent loss. The loss is said to be impermanent because if asset prices return to the level during withdrawal the loss is eliminated.

Leverage

The use of multipliers on exchanges or markets that allow leveraged trading, such that providing 1 BTC deposit on such an exchange could provide the investment power of 10 to 100 BTC if used at 10x to 100x leverage. Leveraged trades can amplify gains greatly. However, should the trade be unprofitable, it can also amplify losses greatly. The downside of this risky approach is that the entire deposit, 1 BTC in this example, could be lost in a liquidation event where a margin call on this leveraged trade could result in the entire deposit being lost during times of massive volatility and insufficient reserve funds for the investor, trader, or CII.

Liquidity

A measure of how much available circulating supply there is of an asset or currency, and the activity of that asset or currency in an exchange, economy, or network. A currency with low supply and/or circulation is said to be illiquid.

Liquidity Mining

An energy efficient form cryptocurrency mining that supports work and transactions on a blockchain usually without expensive application or hardware specific equipment required by older forms of cryptocurrency mining. Rewards are provided to liquidity providers as a means to incentivize liquidity mining providers, in addition to growing and supporting a blockchain’s user base.

Liquidity Providers

In the realm of cryptocurrency and DeFi, this refers to investors who deposit an asset to provide liquidity on an exchange and/or network(s) to gain an ROI on their investment. Investors deposit one or more of their digital assets into decentralized Liquidity Pools (LPs) to provide liquid capital to exchanges and smart contracts. Liquidity Providers often provide two or more types of assets, in which Impermanent Loss is sometimes seen.

Liquidity Token

Implemented via Smart Contracts, a liquidity token is given to a depositor in exchange for that investor’s deposit(s) to be used for other purposes such as yield farming. Examples of liquidity tokens include aDAI, yCRV, and yYFI. A liquidity token can be exchanged back

Margin Call

The act of implementing a Forced Liquidation or Liquidation Event when an investor or trader cannot meet debt obligations on leveraged trade positions. Margin calls can be triggered by rapidly changing market conditions and high volatility that bring Liquidation Events for some leveraged traders on exchanges and markets.

Marketcap

Market Capitalization. A measure of the total funds invested in a company or project. This market cap of a coin, company, or project can be calculated by multiplying the asset’s unit price by the total number of coins.

MetaMask

MetaMask is a popular mobile or desktop software cryptocurrency wallet that can hold, transmit or receive Ethereum and ERC-20 compatible coins or tokens.

Mining Pool

A pool of cryptocurrency miners that provides mining services to a cryptocurrency network. Mining Pool operators and contributors are incentivized by a coin or token’s programmed mining rewards to support transactions and provide liquidity on a coin’s network.

Multisig Wallet

A multiple signature wallet is a cryptocurrency wallet that controls access and changes to one or more Smart Contracts. Community governed projects like a DAO often require multiple signers to approve a transaction before it will be executed. For community based efforts, Multisig wallets for DAOs and DeFi projects are often implemented as 6 of 9 wallets, where 6 of 9 community wallet signers must agree to sign a transaction before a Smart Contract can be implemented.

Oracle

A feed of data, such as the current market prices of an asset or assets, that provides a high confidence service to users and other services that the source and detail of the oracle’s data is timely, accurate, and untampered. Sources of data may be singular or decentralized sources and may be dispersed geographically from one another. All exchanges and markets require accurate and timely information to operate properly at high efficiency. An example of the most well known oracle protocol is Chainlink (LINK).

Slippage

In a trade, there is almost always a spread between the price that a buyer will pay and the price that a seller will sell an asset at. When an order is made, this difference in price between buyer and seller expectations results in price slippage. This slippage in price is usually 1-3%, but can be even more for coins with limited liquidity. This slippage can lead to a final sale price of the asset that is either more or less than the requested transaction amount.

Smart Contract

A digital contract that is programmed in a language that is considered Turing complete, meaning that with enough processing power and time, a properly programmed Smart Contract should be able to use its code base and logical algorithms to perform almost any digital task or process. Ethereum’s programming languages, such as Solidity and Vyper, are Turing complete.

Testnet

A testing network for a new coin, project, or product, or for potential improvements to an existing product or offering. Testnets are used to test the viability and vulnerability of new ideas, concepts, code, and processes prior to moving on to a production network or networks of some sort

TVL

The Total Value Locked into a Smart Contract or set of Smart Contracts that may be deployed or stored at one or more exchanges or markets. This is used as a measurement of investor deposits. It is the dollar value of all the coins or tokens locked into a platform, protocol, lending program, yield farming program, or insurance liquidity pool.

Wallet

A software or hardware cryptocurrency wallet that can hold a variety of coins. Wallets may also be considered a cold wallet - meant to be used for long term storage of crypto coins for security purposes or a hot wallet, which is considered more at risk than a cold wallet due to its inaccessibility (usually offline). A hot wallet is meant to be used for active or semi-active transaction in and out of that wallet, as well as a place to withdraw or add funds.

Whale

A person who HODLs a large amount of cryptocurrency or cryptocurrencies.

Yield Farming

The manual or automatic lending and/or arbitrage of digital assets in order to provide an ROI for lending out or depositing digital assets in CeFi or DeFi. Yield Farming can provide an additional income stream over and above any potential increase in the value of an underlying asset. For a number of reasons - including the ability to make rapid changes, much lower overhead costs, and no regulatory costs - DeFi tends to provide much higher yields when compared to CeFi options.

YIP

Yearn Improvement Protocol (YIP). Potential YIPs are collaboratively generated by the yEarn Finance community, and are discussed, rejected, or improved upon by YFI token holders and community members providing feedback and suggestions. YIPs are submitted using a certain approved format and method. Under current governance rules, a quorum of 20% of deposited governance tokens is required to vote on a YIP for it to be considered a valid vote. To pass: a vote on a YIP must have a majority vote of 50%+ of deposited governance tokens voting in favor of the YIP in order for a YIP to be passed. This democratically community approved YIP is then implemented by multisignature wallet signers in charge of the Smart Contracts behind yEarn Finance