⚜️ Address
An identifier used to receive transactions. The address is derived from the user's public key, calculated using asymmetric key encryption algorithms to obtain the public key from the private key. In Ethereum, the public key is 512 bits or 128 hexadecimal characters and is hashed to unique computation using the Keccak-256 algorithm, converting it into 256 bits or 64 hexadecimal characters. The last 40 hexadecimal characters are the public address, usually prefixed with '0x'.
⚜️ Airdrop
Tokens distributed for free to wallets. For example, the Uniswap governance layer airdropped 400 tokens to each Ethereum address that had used its platform.
⚜️ Anti-Money Laundering (AML)
Compliance regulations aimed at detecting and reporting suspicious activities that illicitly conceal the source of funds.
⚜️ Asymmetric Key Cryptography
A means of ensuring communication security. Cryptocurrencies have two keys: a public key (visible to everyone) and a private key (visible only to the owner). These two keys are mathematically linked, with the public key derived from the private key. With current technology, deriving the private key from the public key is not feasible, hence it is an 'asymmetric' algorithm. Users can receive transfers using a public address and spend using the private key. See also symmetric key encryption algorithms.
⚜️ Atomic
If any condition in the contract is not met, resulting in retraction of the contract terms, as if the tokens had never left the account. This is one of the important features of smart contracts.
⚜️ Automated Market Maker (AMM)
A smart contract that holds the assets of both parties in a transaction, continuously quoting buy and sell prices. Based on executed buy and sell orders, the contract updates the asset scale behind the bids and asks and uses this ratio to define the pricing function.
⚜️ Barter
A peer-to-peer transaction mechanism that requires exact matching by both parties. For example, A has two pigs and needs one cow. B has one cow and needs two pigs. There is some debate about whether barter is the first form of trade. For example, anthropologist David Graeber believes that the earliest form of trade was conducted in the form of loans, where people living in the same village would gift each other 'gifts' according to village rules, which would later need to be returned in the form of another gift of usually higher value (interest). Because transactions between people in the same village were infrequent, people simply kept track of trades in their memories. Many years later, with the rise of migration and wars, metal currency began to play a role, and war taxes were one of the earliest forms of taxation.
⚜️ Blockchain
A decentralized ledger invented in 1991 by Stuart Haber and W. Scott Stornetta, where every node has a copy. It can record transactions through consensus mechanisms and has an immutable historical ledger. Blockchain is publicly transparent to everyone.
⚜️ Bonding Curve
A smart contract that allows users to buy or sell tokens using fixed mathematical models. For example, for a linear function where the token price equals supply. In this case, the first token will cost 1 ETH, the second token will cost 2 ETH, rewarding early participants. Buyers and sellers may have different bonding curves. Logarithmic curves are a common bonding curve function.
⚜️ Bricked Funds
Funds trapped in smart contracts due to errors in the smart contract.
⚜️ Burn
Removing tokens from circulation to reduce the supply. Methods of destruction include sending tokens to an unowned Ethereum address or to a contract with no spending ability. It's one of the important functions of many smart contracts, occurring when someone exits a liquidity pool and redeems the underlying assets.
⚜️ Collateralized Currency
Paper currency backed by collateral such as gold, silver, or other assets.
⚜️ Collateralized Debt Obligation
A type of debt instrument in traditional finance, such as a mortgage. In DeFi, an example is stablecoins that are over-collateralized with crypto assets.
⚜️ Consensus Protocol
A mechanism by which parties agree to add new blocks to the existing blockchain. Both Ethereum and Bitcoin use proof-of-work consensus mechanisms, along with many others, such as proof-of-stake consensus mechanisms.
⚜️ Contract Account
Accounts controlled by smart contracts in Ethereum
⚜️ Credit Delegation
The ability for users to allocate collateral to potential borrowers, allowing them to borrow the required assets using that collateral.
⚜️ Cryptocurrency
Digital tokens that use blockchain technology for encryption and transactions. Typical examples are Bitcoin and Ethereum. There are currently many different types of cryptocurrencies, such as stablecoins and tokens representing digital and non-digital assets.
⚜️ Cryptographic Hash
Also known as hash functions or message digests, which uniquely represent input data as a one-way function. It can be viewed as a unique digital fingerprint. Input size is arbitrary, but output size is fixed. A popular hashing algorithm is SHA-256, which returns 256 bits or 64 hexadecimal characters. The Bitcoin blockchain uses SHA-256, while the Ethereum blockchain uses Keccak-256.
⚜️ Decentralized Application (dApp)
Supports peer-to-peer direct interactions (i.e., eliminating central settlement). It features permissionless access and resistance to censorship, allowing everyone to use dApps without centralized control.
⚜️ Decentralized Autonomous Organization (DAO)
An algorithm organized by the coding rules of smart contracts that determines user behavior or upgrades. It typically contains governance tokens.
⚜️ Decentralized Exchange (DEX)
A platform for conducting token swaps in a non-custodial manner. The two mechanisms for DEX liquidity are order matching and automated market makers.
⚜️ Decentralized Finance (DeFi)
Financial infrastructure that does not rely on centralized institutions like banks. It uses blockchain technology and smart contracts for exchanges, lending, and trading on a peer-to-peer basis.
⚜️ DeFi Legos
Creating new protocols by combining existing ones. Sometimes referred to as DeFi money Legos or interoperability.
⚜️ Digest
Also known as a digest. See cryptographic hash.
⚜️ Direct Incentive
Payments or fees related to specific user behaviors, intended as rewards for promoting desired behaviors. For instance, if collateral obligations become under-collateralized, this situation does not automatically trigger liquidation, but is instead triggered by an external account, which then receives a reward (direct incentive).
⚜️ Double Spend
Also known as double spending, a problem that plagued digital currency schemes in the 1980s and 1990s, where digital assets could be perfectly copied and thus spent multiple times. In 2008, Satoshi Nakamoto's (Bitcoin whitepaper) solved this problem using blockchain technology and a proof-of-work consensus mechanism.
⚜️ Equity Token
Cryptocurrency that represents ownership of underlying assets or asset pools.
⚜️ ERC-20 originates from Ethereum Request for Comments (ERC)
Defines the interface for fungible tokens, which are the same in usage and function. The U.S. dollar is a fungible currency, where all $20 bills are equivalent in value, and 20 $1 bills hold the same value as a single $20 bill.
⚜️ ERC-721
Originating from Ethereum Request for Comments, it defines the interface for non-fungible tokens, which are unique and often used for collectibles or specific assets like loans.
⚜️ ERC-1155
Originating from Ethereum Request for Comments, it defines a multi-token model where contracts can hold various tokens, which can be fungible or non-fungible.
⚜️ Ethereum (ETH)
Born in 2015, it is currently the second-largest cryptocurrency or blockchain by market capitalization. Its native cryptocurrency is called Ether (ETH). The Ethereum blockchain has the capability to run smart contract programs. It is a distributed computing platform, sometimes referred to as the Ethereum Virtual Machine.
⚜️ Ethereum 2.0
An improvement proposal for the Ethereum blockchain that utilizes horizontal scaling, proof-of-stake consensus mechanism, and other enhancements.
⚜️ Externally Owned Account (EOA)
An Ethereum account controlled by a specific user.
⚜️ Fiat Currency
Unsecured paper currency, essentially a promissory note issued by the government.
⚜️ FinTech
A general term for technological advancements in the financial sector. Broadly includes technologies in payments, trading, borrowing, and lending, often encompassing big data and machine learning.
⚜️ Flash Loan
A type of unsecured loan with zero counterparty risk and zero term. Used for arbitrage or refinancing loans without collateral. The lack of counterparty risk occurs because, in the transaction, the loan has already been created, all buying and selling of loan funds have been completed, and the loan has been repaid.
⚜️ Flash Swap
Contracts that send tokens to users before they purchase assets. Supports near-instantaneous arbitrage activities. Unlike flash loans, which must be repaid with the same asset, flash swaps can be repaid flexibly with different assets. All transactions occur within the same Ethereum transaction.
⚜️ Fork
Based on open-source code, upgrading or enhancing existing protocols while preserving the historical blockchain. Users can choose to use either the old protocol or the new protocol. If the new protocol is better and attracts sufficient mining power, it will prevail. Forking is one of the key mechanisms that ensure DeFi efficiency.
⚜️ Gas
The fees required to execute transactions and execute smart contracts. Ethereum addresses the halting problem through transaction fees.
⚜️ Geoblock
Technology that blocks users from specific countries, constrained by regulations that disallow users from those countries from using the application.
⚜️ Governance Token
The right of holders to vote on protocol revisions. Examples include MakerDAO's MKR token and Compound's M token.
⚜️ Halting Problem
A computer program trapped in an infinite loop. Ethereum addresses this issue by charging transaction fees. If the transaction fees are exhausted, the program halts.
⚜️ Hash
See cryptographic hash.
⚜️ Hexadecimal
A counting method based on base 16, which includes the first 10 digits 0 to 9 and the first 6 letters of the alphabet a to f. Each hexadecimal character represents 4 bits, where 0 is 0000 and f is 1111.
⚜️ Horizontal Scaling
Also known as sharding, a method of dividing system tasks into sub-tasks while retaining decentralization and improving system throughput through parallel computing. Ethereum 2.0 uses horizontal scaling and proof-of-stake.
⚜️ Impermanent Loss
Applicable to AMMs holding assets on both sides of a trading pair. Assume the automated market maker has set a fixed exchange rate for two assets, and both assets' market prices increase. The appreciation of the first asset is greater than that of the second asset. If users trade all of the first asset, only the second asset remains in the contract. Impermanent loss is the value of the contract if no trades occur (including the value of both tokens) minus the value of the contract after depleting one asset (the value of only the second token).
⚜️ Incentive
Used to reward productive behaviors, including direct incentives and staking incentives.
⚜️ Initial DeFi Offering (IDO)
A method for setting the initial exchange rate for new tokens. Users can become the first liquidity providers for a trading pair, such as a new token and a stablecoin like USDC. Essentially, users set an artificial floor for the price of the new token.
⚜️ Invariant
A constant coefficient in the product rule. For example, the constant coefficient = SA x SB, where SA is the supply of asset A, and SB is the supply of asset B. Assume the instant exchange rate is 1A:1B. The supply of asset A = 4, and the supply of asset B = 4. The constant coefficient = 16. Assuming an investor wants to trade A for B, the investor deposits 4A, so the contract has 8A (SA=4+4=8). Based on the constant coefficient, the investor can only withdraw 2B. Therefore, the new supply of B is 2 (SB=4-2=2). The constant coefficient does not change and remains equal to 16. However, the exchange rate has changed and is now 2A:1B.
⚜️ Keeper
Specific external accounts that perform specific actions of the Deri protocol in a dApp for rewards. Guardians receive rewards in the form of fixed fees or a percentage of incentives. For instance, when collateralized debt obligations become under-collateralized, guardians receive reward fees after liquidating the collateralized debt.
⚜️ Know Your Customer (KYC)
A common regulation in U.S. financial services that requires users to verify their identity. This regulation prevents U.S. users from accessing certain features of some DEXs.
⚜️ Layer-2
Scalability solutions built on top of the underlying blockchain (i.e., layer one) that maintain security levels using cryptography and economic guarantees. For example, small transactions can use multi-signature payment channels. The blockchain is only used when funds enter and exit the payment channel.
⚜️ Liquidity Provider (LP)
Users who earn yield by depositing assets into a liquidity pool or smart contract.
⚜️ Mainnet
The blockchain on which the token operates, such as the Bitcoin blockchain or the Ethereum blockchain. Typically used for comparison with testnets.
⚜️ Miner
Miners use unique random numbers to find target cryptographic hash values through massive computations in proof-of-work blockchains. Miners collect and verify candidate transactions for new blocks, add a unique random number, and execute the cryptographic hash function. If the added unique random number is incorrect, hashing continues. If a miner finds the correct result, they win the mining race and receive a direct reward in the form of newly minted cryptocurrency. Miners can also earn indirect rewards, which are transaction fees for packaging block transactions.
⚜️ Miner Extractable Value
Also known as miner extractable value, one of the profits a miner can obtain. For example, if a miner believes that a pending trade will increase the price of cryptocurrency (i.e., bullish), they can front-run the trade.
⚜️ Mint
An action that increases the supply of tokens, opposite to burning. Typically occurs when users enter a liquidity pool and gain ownership shares. Minting and burning are important mechanisms in the model of unsecured stablecoins. When the price of stablecoins rises, more people mint tokens, thus increasing supply and lowering the price. Minting is also one of the means of rewarding users for specific behaviors.
⚜️ Networked Liquidity
Exchanges can leverage liquidity and interest rates from other exchanges on the same blockchain.
⚜️ Node
Computers that hold a complete copy of the blockchain on the network.
⚜️ Unique Random Number (Nonce)
A counting mechanism used repeatedly by miners in their attempts to find cryptographic hash values. Nonce comes from 'Number Only Once'.
⚜️ Optimistic Rollup
A scalability solution where transactions are summarized off-chain and periodically submitted to the blockchain.
⚜️ Oracle
A method of collecting information outside the blockchain. Participants must acknowledge the source of the information.
⚜️ Order Book Matching
The process by which all parties agree on the exchange rate. Market makers can post bids and asks on DEXs and allow takers to complete quotations at pre-agreed prices. Market makers have the right to withdraw or update quotes before they are accepted.
⚜️ Perpetual Futures Contract
Similar to traditional futures contracts but without an expiration date.
⚜️ Proof of Stake (PoS)
A consensus mechanism, and a core feature of Ethereum 2.0, that replaces proof-of-work mining by staking assets on the next block. In proof-of-work, miners must expend considerable power and equipment wear to win blocks. In proof-of-stake, validators put up capital (stake) to prove the validity of blocks. Validators become candidates by staking cryptocurrency and then a candidate is randomly selected to propose a block. The proposed block must be confirmed by the majority of other validators. Validators earn profits by proposing blocks and confirming the validity of blocks proposed by others. If a validator behaves maliciously, they will be penalized by the slashing mechanism, and their staked funds will be reduced.
⚜️ Proof of Work (PoW)
Originally proposed by Adam Back in 2002, both the Bitcoin blockchain and Ethereum blockchain adopted the proof-of-work consensus mechanism. Miners compete to find cryptographic hash values, which are difficult to find but easy to verify. Once a miner finds a cryptographic hash value, they use it to add a block to the blockchain and receive a reward. The hash calculation power is extremely high, making it impractical to rewrite the history of the leading blockchain.
⚜️ Router Contract
In a DEX, if there is no direct trading pair on exchanges like Uniswap, a contract is used to find the most efficient path to achieve the lowest price slippage.
⚜️ Scaling Risk
Currently, most blockchains have limited processing capacity and cannot handle large volumes of transactions. See vertical scaling and horizontal scaling.
⚜️ Schelling-point Oracle
Oracles that rely on token holders to vote on event outcomes or report asset prices.
⚜️ Sharding
The process of horizontally partitioning the database in the blockchain, also known as horizontal scaling. Dividing system tasks into sub-tasks retains the decentralized nature while improving system throughput through parallel computing. To reduce network congestion and speed up transactions, Ethereum 2.0 employs this method.
⚜️ Slashing
A mechanism in proof-of-stake blockchains to prevent certain users from engaging in improper behaviors (slashing).
⚜️ Slashing Condition
A mechanism that triggers execution reductions. An example of a reduction condition is triggering liquidation when collateral is insufficient.
⚜️ Smart Contract
Contracts that are activated when receiving ETH or transaction fees. Given the distributed nature of the Ethereum blockchain, each node runs smart contracts. This is one of the important features of the Ethereum blockchain, where the smart contract platform is an essential part of DeFi.
⚜️ Specie
Metallic currency, such as gold or silver (or nickel and copper), which itself has value (sold as metal after melting).
⚜️ Stablecoin
A token pegged to the value of assets like the US dollar. Stablecoins can be collateralized by physical assets (like the dollars in USDC) or digital assets (like DAI), or they can be unsecured (like AMPL and ESD).
⚜️ Staked Incentive
Token assets hosted in smart contracts aimed at influencing user behavior. Staking incentives are designed to encourage positive behavior, rewarding users based on the scale of collateral. Staking penalties (slashes) aim to deduct a portion of the user's token assets based on the scale of collateral to curb improper behavior.
⚜️ Staking
Funds hosted in a smart contract that will be penalized (slashed) if the user behaves improperly.
⚜️ Swap
To exchange one token for another. In DeFi, swaps are non-custodial and indivisible. Funds can be temporarily held in a smart contract and can be withdrawn at any time before the swap is completed. If the swap is not completed, the parties retain their custody funds.
⚜️ Symmetric Key Cryptography
A cryptographic method that uses the same key for both encryption and decryption.
⚜️ Testnet
A blockchain with the same functionalities as the mainnet, used for testing software. For example, in testing Ethereum, tokens associated with the testnet are called test ETH, which can be obtained for free from smart contracts that mint test ETH.
⚜️ Transparency
Anyone can view the code sent to the smart contract and all transactions. etherscan.io is a commonly used blockchain explorer.
⚜️ Utility Token
The required fungible tokens to use certain functions of the smart contract. They can be defined by the smart contract, such as stablecoins, whether collateral-based or algorithmic, are functional tokens.
⚜️ Vampirism
Copying DeFi platforms that aim to extract liquidity from existing platforms by providing direct rewards to users.
⚜️ Vault
Smart contracts that host collateral and track the value of the collateral.
⚜️ Vertical Scaling
Concentrating all transaction processing in a supercomputer, which reduces communication overhead (transaction and block latency) associated with proof-of-work blockchains (like Ethereum), but leads to the emergence of centralized architecture.
⚜️ Yield Farming
Methods to reward users for collateralizing assets to the contract or using specific protocols.