Definition
Glossary and Terminology
Blockchain network
Blockchain is a system that records information in a way that makes it difficult or impossible to change, hack, or cheat on the system. It is essentially a digital ledger of transactions that is copied and distributed across the entire network of computer systems on the blockchain. It encrypts data blocks (such as smart contracts and transactions) and links them together to form a chronologically accurate record of data. The security measures and public ledger inherent in blockchain make it a highly applicable technology for many sectors. The blockchain community contributes to the security of this system by implementing various consensus mechanisms.
Ethereum Virtual Machine (EVM)
The Ethereum Virtual Machine is a decentralized virtual machine that executes smart contracts on the Ethereum blockchain. The EVM is a Turing-complete virtual machine that can execute scripts using an international network of public nodes. It enables developers to build and deploy decentralized applications (dApps) on the Ethereum blockchain. This virtual machine is where all Ethereum accounts and smart contracts reside.
Decentralized Finance (DeFi)
Decentralized finance (DeFi) is a financial system built on top of a blockchain network, which allows the creation of DeFi applications and services. This means that these services are not controlled by a single entity or group of entities, but rather operate in a decentralized manner. DeFi platforms offer a wide range of services, including but not limited to lending and borrowing platforms, exchanges, and payment systems. The goal of DeFi is to make financial services more accessible and secure through the use of smart contracts and blockchain technology.
Protocol
A protocol is a set of rules and standards that govern the functioning of a DeFi platform or application. These protocols typically run on a decentralized network, such as a blockchain, and are designed to facilitate financial transactions and interactions in a trustworthy, decentralized manner. It displays a broad set of rules, such as the interface of the blockchain, the interaction of participating computers, the types of data that should be shared, Incentives for developers participating in the network, and more.
Smart contract
A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed blockchain network. Smart contracts allow for the automation of contract execution and enforcement and can be used to facilitate, verify, and enforce the negotiation or performance of a contract. They do not require any centralized party to function, making them highly decentralized. The properties of being trustworthy, permissionless, and decentralized make smart contracts the backbone of the entire Web 3.0 ecosystem. They can be used in a wide variety of applications, such as in the management of supply chains, the handling of financial transactions, the enforcement of legal agreements, and the management of health records.
Cryptocurrency
Cryptocurrency is a digital or virtual asset that uses cryptography for secure financial transactions. It is decentralized and not controlled by any government, bank, or other central authority. Cryptocurrencies are based on distributed ledger technology, such as the blockchain, which is a distributed database that is secure and transparent. Transactions with cryptocurrencies are recorded on the blockchain, which provides a permanent and unchangeable record of all transactions.
Bitcoin was the first and most well-known cryptocurrency, but there are now thousands of different cryptocurrencies with a wide range of functions and applications. Some common uses for cryptocurrencies include making secure online transactions, buying and selling goods and services, and storing value like an asset.
Stablecoin
Stablecoins are a type of cryptocurrency that is designed to maintain a stable value relative to a specific asset or basket of assets. The most common type of stablecoin is pegged to the value of the US Dollar, but it can also be pegged to other assets such as gold or a basket of cryptocurrency assets. Some examples of stablecoins are USDC, USDT, and DAI, which are all USD-pegged.
Token
Tokens are similar to coins in that they can be used as a method of payment, but they have much more functionality than coins. Tokens can be used for a wide range of purposes, including democratic governance of a protocol or system, providing access to certain features or services, and as a way to create liquidity.
Consensus mechanism
A consensus mechanism is a fault-tolerant mechanism that is used in computer and blockchain systems to achieve agreement on a single data value or a single state of the network among distributed processes or multi-agent systems, such as in the case of cryptocurrencies. It is most useful for record-keeping among all functionalities. Currently, the most common mechanisms are Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Work (PoW)
Proof of Work (PoW) is a consensus mechanism used to add blocks to a blockchain. It requires miners to solve complex cryptographic puzzles, which demand a large amount of energy from powerful mining rigs in order to validate new blockchain transactions.
PoW is a secure and decentralized consensus mechanism, however, it is notoriously inefficient. This is how Bitcoin and the first version of Ethereum blockchains operate. However, Ethereum has transitioned to the more efficient 'Proof of Stake’ protocol in 2022.
Proof of Stake (PoS)
Confronted with the high energy demands of PoW, Proof of Stake (PoS) is an updated consensus mechanism that allows blocks to be mined much more efficiently. PoS allows holders of a cryptocurrency to validate new blocks onto the relevant blockchain by staking their cryptocurrency. This means that they may have the opportunity to validate a new block if their stake is chosen by a randomized algorithm, and they will be rewarded with cryptocurrency for this. The more cryptocurrency that is staked, the more chances the user has to be chosen to validate a new block.
While PoW rewards those who have spent the most computational power to solve a cryptographic puzzle, PoS rewards those who have invested their cryptocurrency over a longer period of time.
Decentralized Exchanges (DEXs)
DEXs are blockchain-based apps that coordinate large-scale trading of crypto assets between many users through automated algorithms, instead of using the conventional approach of acting as a financial intermediary between buyers and sellers. As the name implies, DEXs are cryptocurrency exchanges that operate without a central authority. They allow users to trade cryptocurrencies directly with each other, without the need for an intermediary like a traditional centralized exchange.
Automated Market Maker (AMM)
An automated market maker (AMM) is a type of algorithm or system that uses predefined rules to automatically buy and sell assets in a financial market. This eliminates the need for centralized trading and related market-making techniques. The goal of an AMM is to provide liquidity to the market by continuously buying and selling assets in order to maintain a stable price. AMMs are commonly used in decentralized finance (DeFi) to enable the trading of assets on decentralized exchanges (DEXs) without the need for traditional order book-based matching. AMMs use various pricing models, such as the constant product model or the constant sum model, to determine the prices at which they will buy and sell assets.
Proactive Market Maker (PMM)
Proactive market makers (PMMs) use algorithms to actively seek out trading opportunities and provide liquidity to the market, rather than waiting for orders to be placed. This can help to create a more efficient and liquid market by reducing spreads and improving the availability of assets.
Essentially, the difference between this approach and AMM is that the PMM algorithm checks the prices of assets and allocates funds to proactively increase liquidity near the market price. An example of a DeFi platform that uses a PMM model is DODO. In this model, the PMM algorithm continuously monitors the prices of assets and allocates funds to proactively increase liquidity near the market price. This can help to improve the efficiency of the market and reduce spreads for traders.
Liquidity
Liquidity refers to the ability of DeFi platforms and protocols, such as decentralized exchanges (DEXs) and automated market makers (AMMs), to facilitate the buying and selling of assets without causing significant price movements. An asset with low supply and/or circulation is said to be illiquid. These platforms and protocols can use various methods to improve liquidity, such as by providing liquidity incentives for market makers.
Liquidity Pool
A liquidity pool is a collection of assets that are pooled together to provide liquidity to a particular market or platform. Liquidity pools are to enable the buying and selling of assets without causing significant price movements. Incentives or rewards are often provided to those who provide liquidity to liquidity pools (Liquidity Providers, LP). These incentives can be in the form of fees, tokens (LP tokens), or other rewards, and are designed to encourage users to contribute their assets to the pool and to help maintain the liquidity of the pool.
Lending Protocol
A lending protocol is a DeFi protocol that enables peer-to-peer lending and borrowing of assets on a blockchain network. Lending protocols typically use smart contracts to facilitate the lending and borrowing process and to enforce the terms of the loans. It allows borrowers to borrow cryptocurrencies from the platform and pay interest. Additionally, it allows depositors to deposit cryptocurrencies to the platform as lenders to earn interest. DeFi lending protocols can often offer much higher interest rates compared to bank deposit accounts.
Over-collateralized loans
An over-collateralized loan is a type of loan in which the borrower provides collateral that is worth more than the value of the loan itself. This means that the lender has a buffer of extra collateral that can be seized in the event that the borrower defaults on the loan, which provides a degree of security for the lender. Over-collateralized loans are often used in the context of cryptocurrency lending, where the collateral is usually in the form of cryptocurrency assets.
Collateral
In DeFi, collateral refers to assets that are pledged as security for a loan. Collateral is used to reduce the risk of default on a loan and to provide the lender with a way to recover the value of the loan in the event that the borrower defaults.
Yield aggregators
A yield aggregator is a DeFi platform that allows users to earn returns on their assets by aggregating yield across multiple DeFi protocols. Yield aggregators typically support multiple DeFi protocols that offer liquidity mining or other yield-generating opportunities, such as lending, staking, and governance. Yield aggregators help users to obtain higher returns by automatically switching their funds between different protocols in order to take advantage of the best available yield opportunities. This can involve using algorithms to continuously monitor the yields offered by different protocols and to adjust the allocation of funds accordingly.
Oracle
Oracles are an important component of the blockchain ecosystem, serving as a bridge between the blockchain and the real world by providing external data to smart contracts. They act as on-chain APIs that can be queried for information that is necessary for smart contracts to function, such as token price quotations. BoC uses Chainlink, a highly-rated decentralized oracle network, which makes the protocol immune to common price manipulation schemes.
Bridge
Blockchain bridges are designed to connect two different blockchain ecosystems and facilitate communication between them. Just like a physical bridge connects two physical locations, a blockchain bridge connects two separate blockchain networks, allowing for the transfer of information and assets between them. Blockchain bridges can be used for a variety of purposes, including enabling cross-chain transactions, cross-chain data interoperability, and cross-chain communication between smart contracts.
Decentralized Autonomous Organization (DAO)
A DAO is a type of digital organization that is run through smart contracts on a blockchain. It is a decentralized, transparent, and autonomous system that operates without the need for a central authority or management structure. DAOs are designed to be self-governed and self-sustaining, with the rules and decision-making processes for the organization encoded into smart contracts. Members of a DAO can participate in decision-making by voting on proposals using the tokens they hold, known as governance tokens.
DAOs Treasury
The treasury helps DAO to fund critical development, attract contributors and grow their network by incentivizing and rewarding contributors to the organization. It is managed by the smart contracts of the DAO, which specify the rules for how the funds in the treasury can be used and how decisions about the use of the funds are made.
Principles of Treasury Management:
Maintain an infinite time horizon: The treasury should be structured to exist indefinitely (however, treasuries may be dissolved in certain situations).
Ensure that the inflows exceed the outflows: Ultimately, revenue from the protocol, along with the returns of the treasury, should exceed spending.
Diversified: Treasury allocations should ensure that critical expenses can be funded even if the protocol token experiences a significant drop in value.
Governance Token
A governance token is a type of cryptocurrency or digital asset that gives its holders the right to participate in the governance of a blockchain or other decentralized system. Governance tokens are often used in decentralized autonomous organizations (DAOs) and decentralized finance (DeFi) platforms to give token holders the ability to vote on proposals, make decisions about the direction of the platform, or otherwise influence the governance of the system.
Annual Percentage Yield (APY)
APY refers to the percentage yield that can be earned on a particular asset or investment within a DeFi platform or protocol in a year. APY within DeFi platforms is usually calculated based on the current market interest rates for the asset in question, as well as any fees or other factors that may affect the overall return on the investment. Some DeFi protocols offer higher APYs on certain assets as a way to incentivize users to hold and use those assets within the platform. It is important to note that the APY on DeFi platforms can be volatile and may change rapidly based on market conditions and other factors.
Volume
Volume refers to the amount of a particular asset that is traded over a specific period of time, typically a day. In DeFi, volume can be an important metric for evaluating the activity and liquidity of DeFi platforms and protocols.
Burn
Burning assets (or tokens) refers to the process of destroying them by sending them to a null address, which cannot be accessed by anyone because the private keys for that address are not owned. To receive the proprietary payment tokens for a service within the network, users must burn the interest-bearing “tradable tokens” that accrue in value. In BoC, users burn USDi when they redeem their deposited stablecoins.
Mint
In cryptocurrency, minting is a decentralized method that allows an individual to create new tokens without the involvement of a central authority, such as the government or bank. These tokens can be either non-fungible tokens or a cryptocurrency coins. In BoC, the users mint USDi through smart contracts, and they are transferred to their wallets when they deposit stablecoins.
Impermanent loss (IL)
Impermanent loss is a phenomenon that can occur in decentralized finance (DeFi) when a market maker is providing liquidity to a trading pair on a decentralized exchange (DEX).
Impermanent loss occurs when you provide liquidity to a liquidity pool and the value of your deposited assets changes in relation to when you deposited them. The greater the price fluctuations, the more you are exposed to IL. In this case, the loss means that the dollar value of your assets is lower at withdrawal than it was at deposit. IL is the risk that liquidity providers (LPs) take in exchange for the fees they earn from liquidity pools. If IL exceeds the fees earned by a user when they withdraw, this indicates that the user has suffered negative returns compared to simply holding their tokens outside the pool.
Slippage
In crypto trading, slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. This difference can occur for a variety of reasons, including changes in market conditions, delays in filling orders, and the presence of other orders on the opposite side of the trade. Slippage can be either positive or negative, meaning that the trade can be executed at a price that is better or worse than expected.
Arbitrage
Arbitrage opportunities can arise when there are discrepancies in the prices of identical or similar assets in different markets. It involves buying and selling two related assets in two different markets in order to leverage the price or rate differential and earn risk-free profits. However, if not carefully considered, this can lead to losses in the vault.
Circular dependencies
A circular dependency is a relationship between two or more modules in which each module depends on the other(s) to function properly. In DeFi, a circular dependency between two protocols, such as "protocol A" and "protocol B", there could be a potential risk to the stability of the protocols. If "protocol A" invests in "protocol B", and at the same time "protocol B" invests in "protocol A," the two protocols are relying on each other to function properly. If one protocol fails, it could have a cascading effect on the other, leading to a potential collapse of both protocols. Such dependency can be difficult to manage and can increase the risk for investors.
DeFi Lego combination
Interoperability is a key principle in DeFi, and it refers to the ability of different DeFi protocols and applications to work together seamlessly. By building for interoperability, DeFi developers can create a diverse ecosystem of protocols and applications that can be combined and integrated into new ways, much like how individual Lego pieces can be combined to create bigger and more complex structures.
This concept of building and combining DeFi protocols and applications in a modular way is often referred to as the "DeFi Lego combination" because it allows developers to take existing DeFi building blocks and combine them in new and creative ways to create new products and services. This approach allows the DeFi ecosystem to benefit from the progress of individual protocols and applications, and it enables developers to continuously push the boundaries of what is possible with decentralized finance.
Dashboard
A cryptocurrency dashboard is a digital platform that can be accessed through a website or an app on a desktop or mobile device. It allows you to track your cryptocurrency accounts and assets, monitor their historical prices and current values, and manage your cryptocurrency assets and related financial plans. The primary function of a crypto dashboard is to provide an overview of your cryptocurrency holdings and to help you make informed decisions about your investments.
Wallet
A cryptocurrency wallet is a digital wallet that allows you to store, send, and receive cryptocurrencies. It is a software program that interacts with the blockchain, enabling you to manage your digital assets. It has a public address, which is a unique string of characters that represents the location of your wallet on the blockchain, and a private key, which is a secret code that allows you to access and manage your digital assets. It is important to keep your private key secure and not share it with anyone, as it is the only way to access your wallet and the assets it contains.
Application Programming Interface (API)
API is a set of rules and protocols that defines how two or more systems or software programs can communicate with each other. APIs are used to allow one system to access the functionality of another system or service, and to allow different systems and software programs to interoperate and work together. APIs can be used to allow external developers to access certain functionality of a system, or to allow different systems to exchange data and information with each other.
Acronyms
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