# Terms

These terms are integral to understanding how DeFi works and how various elements within this ecosystem interact. They underline the technological innovations and conceptual shifts that decentralised finance represents compared to traditional financial systems.

### 1. Smart Contracts <a href="#id-1.-smart-contracts" id="id-1.-smart-contracts"></a>

#### Definition <a href="#definition" id="definition"></a>

Self-executing contracts with the terms of the agreement directly written into lines of code. These operate autonomously on a blockchain, executing predefined actions when conditions are met.

#### Example <a href="#example" id="example"></a>

A smart contract on Ethereum might automatically execute a payment from one party to another once a service is confirmed to be delivered.

### 2. Decentralized Applications (DApps) <a href="#id-2.-decentralized-applications-dapps" id="id-2.-decentralized-applications-dapps"></a>

Definition

Applications that run on a peer-to-peer network of computers rather than a single computer. DApps are often built on blockchain technology and are integral to DeFi systems.

Example

Uniswap, a decentralised exchange allowing users to swap various cryptocurrencies without a central authority.

### 3. Liquidity Pools <a href="#id-3.-liquidity-pools" id="id-3.-liquidity-pools"></a>

Definition

Collections of funds locked in a smart contract. These pools provide liquidity to facilitate trading, lending, and other financial activities on a DeFi platform.

Example

A pool on a platform like Balancer or Curve containing a mixture of Ethereum and DAI, used for trading between these two assets.

### 4. Yield Farming <a href="#id-4.-yield-farming" id="id-4.-yield-farming"></a>

Definition

The practice of staking or lending crypto assets to generate high returns or rewards in additional cryptocurrency.

Example

Depositing cryptocurrencies into a liquidity pool on SushiSwap to earn SUSHI tokens as a reward.

### 5. Staking <a href="#id-5.-staking" id="id-5.-staking"></a>

Definition

The process of holding funds in a cryptocurrency wallet to support the operations of a blockchain network. Often, staking involves locking cryptocurrencies to receive rewards.

Example

Staking Ether (ETH) in the Ethereum 2.0 contract to support network security and operations, earning additional ETH as a reward.

### 6. Impermanent Loss <a href="#id-6.-impermanent-loss" id="id-6.-impermanent-loss"></a>

Definition

A temporary loss of funds experienced by liquidity providers in a liquidity pool due to volatility in the price of the deposited assets.

Example

If a user deposits an equal value of ETH and DAI into a pool and the price of ETH rises, the pool’s balance of ETH decreases, leading to a potential loss if withdrawn.

### 7. Governance Tokens <a href="#id-7.-governance-tokens" id="id-7.-governance-tokens"></a>

Definition

Tokens that give holders the right to participate in decision-making processes concerning developing and operating a DeFi protocol.

Example

COMP tokens from Compound allow holders to vote on proposals that change the protocol's rules or upgrades.

### 8. Decentralized Exchanges (DEX) <a href="#id-8.-decentralized-exchanges-dex" id="id-8.-decentralized-exchanges-dex"></a>

Definition

Cryptocurrency exchanges that operate without a central authority, enabling users to transact directly with one another.

Example

DEXs like Uniswap or Kyber Network allow users to trade cryptocurrencies directly from their wallets.

### 9. Automated Market Makers (AMM) <a href="#id-9.-automated-market-makers-amm" id="id-9.-automated-market-makers-amm"></a>

Definition

Protocols that provide liquidity to the market through algorithmic rather than traditional order book trading.

Example

Protocols like Uniswap use constant function market makers (AMM) to keep the market liquid.

### 10. Synthetic Assets <a href="#id-10.-synthetic-assets" id="id-10.-synthetic-assets"></a>

Definition

Blockchain-based assets representing other real-world assets, such as currencies, commodities, or stocks.

Example

Synthetix Network allows users to create and trade synthetic versions of real-world assets like gold or Apple stocks.

### 11. Tokenisation <a href="#id-11.-tokenization" id="id-11.-tokenization"></a>

Definition

The process of converting rights to an asset into a digital token on a blockchain. This can include real estate, art, or even company equity.

Example

RealT offers tokenised real estate where each token represents a share in property investment, allowing fractional ownership and earnings from rent.

### 12. Oracles <a href="#id-12.-oracles" id="id-12.-oracles"></a>

Definition

Entities that provide real-world data to blockchains and smart contracts, which cannot access external data themselves.

Example

Chainlink provides price feed data for various cryptocurrencies and traditional currencies to DeFi platforms, ensuring smart contracts have accurate and timely information for executing trades or loans.

### 13. Flash Loans <a href="#id-13.-flash-loans" id="id-13.-flash-loans"></a>

Definition

Loans in DeFi that are issued and repaid within the same transaction block. These do not require collateral but must be returned within one blockchain transaction.

Example

A user borrows and then immediately repays a large amount of cryptocurrency on Aave to take advantage of a trading opportunity, all within a single transaction.

### 14. DeFi Aggregators <a href="#id-14.-defi-aggregators" id="id-14.-defi-aggregators"></a>

Definition

Platforms that optimise cryptocurrency trading, lending, and other operations by routing them through various DeFi services to minimise transaction fees and maximise yields.

Example

Yearn Finance automatically shifts users' funds between various lending protocols to ensure they always receive the best interest rates.

### 15. Vaults <a href="#id-15.-vaults" id="id-15.-vaults"></a>

Definition

Investment strategies executed through smart contracts that automate movements and rebalancing to maximise returns.

Example

Yearn Finance's vaults automatically move users' deposited funds between different DeFi strategies based on the changing potential yields.

### 16. Gas Fees <a href="#id-16.-gas-fees" id="id-16.-gas-fees"></a>

Definition

Transaction fees paid to compensate for the computing energy required to process and validate transactions on a blockchain like Ethereum.

Example

Paying an ETH fee to make a trade on Uniswap compensates Ethereum network miners for processing and validating the transaction.

### 17. Farming Pools <a href="#id-17.-farming-pools" id="id-17.-farming-pools"></a>

Definition

Specialized pools where users can deposit their assets to farm rewards from new tokens, typically by providing liquidity.

Example

Providing liquidity to a new DeFi token's pool on Uniswap to earn rewards in that token, incentivising early liquidity provision.

### 18. Non-Fungible Tokens (NFTs) <a href="#id-18.-non-fungible-tokens-nfts" id="id-18.-non-fungible-tokens-nfts"></a>

Definition

Unique digital tokens that represent ownership of specific items; they cannot be exchanged on a one-for-one basis like cryptocurrencies.

Example

CryptoKitties, where each token represents a unique virtual cat which can be bought, sold, or collected.

### 19. Rug Pull <a href="#id-19.-rug-pull" id="id-19.-rug-pull"></a>

Definition

A scam in DeFi where developers abandon a project and run away with investors' funds, often after exciting the project to inflate its value.

Example

A new token project on a DEX that suddenly withdraws all the liquidity from the pool, leaving other investors with worthless tokens.

### 20. Stablecoins <a href="#id-20.-stablecoins" id="id-20.-stablecoins"></a>

Definition

Cryptocurrencies pegged to a stable asset like the US dollar to reduce volatility compared to typical cryptocurrencies.

Example

USDC (USD Coin) and DAI aim to maintain a value of $1 USD per token, providing a more stable means of transaction and valuation in the DeFi ecosystem.

### 21. Interoperability <a href="#id-21.-interoperability" id="id-21.-interoperability"></a>

Definition

The ability of different blockchain systems and protocols to work together without intermediaries. This is crucial for creating seamless user experiences and increasing the utility of blockchain applications.

Example

Polkadot and Cosmos are projects designed to enable different blockchains to interact and exchange information and value in a decentralised way.

### 22. Liquidity Mining <a href="#id-22.-liquidity-mining" id="id-22.-liquidity-mining"></a>

Definition

A process where users earn rewards for providing liquidity to a DeFi protocol, often as tokens. This is similar to yield farming but specifically focuses on the contribution of liquidity to support trading activities.

Example

Contributing an equal value of two tokens in a Uniswap liquidity pool to facilitate trading between those tokens and earning UNI tokens as a reward.

### **23. Wrapped Tokens** <a href="#id-23.-wrapped-tokens" id="id-23.-wrapped-tokens"></a>

Definition

Tokens representing a cryptocurrency on a blockchain that the original asset doesn’t natively operate on. This is often done to increase a token's compatibility with that blockchain’s ecosystem.

Example

Wrapped Bitcoin (WBTC) is an Ethereum blockchain token representing Bitcoin. One WBTC is equivalent to one BTC, allowing Bitcoin holders to engage with the Ethereum DeFi ecosystem.

### **24. Slippage** <a href="#id-24.-slippage" id="id-24.-slippage"></a>

Definition

The difference between the expected price of a trade and the executed price of that trade. In DeFi, this can happen due to the volatility and liquidity issues inherent in trading pairs on decentralised exchanges.

Example

Attempting to swap a large amount of one token for another on a DEX and receiving less of the second token than expected because the trade affected the liquidity pool’s balance.

### **25. Margin Trading** <a href="#id-25.-margin-trading" id="id-25.-margin-trading"></a>

* Definition: The practice of borrowing funds to increase the size of a trading position beyond what would be available from one's cash balance alone. This can amplify both potential gains and potential losses.
* Example: Using a DeFi platform like dYdX to borrow additional cryptocurrency to leverage a trade, aiming to maximise potential profits.

### **26. Permissionless** <a href="#id-26.-permissionless" id="id-26.-permissionless"></a>

Definition

A characteristic of many DeFi protocols that allows anyone to participate without authorisation from a governing body or intermediary.

Example

Anyone with an internet connection and a compatible wallet can interact with protocols like Compound or MakerDAO without completing a KYC (Know Your Customer) process.

### **27. Trustless** <a href="#id-27.-trustless" id="id-27.-trustless"></a>

Definition

In blockchain and DeFi, this refers to systems that do not require participants to trust one another or a third party for the system to function correctly. Instead, trust is placed in the code and the decentralised network.

Example

Smart contracts that automatically execute transactions based on predefined rules without requiring users to trust a central authority to oversee those transactions.

### **28. Zero-Knowledge Proofs** <a href="#id-28.-zero-knowledge-proofs" id="id-28.-zero-knowledge-proofs"></a>

Definition

A cryptographic method by which one party can prove to another that a given statement is true without conveying any additional information apart from the statement being true.

Example

Zcash uses zero-knowledge proofs to allow transactions without revealing the sender, receiver, or transaction amount for enhanced privacy.

### **29. DAO (Decentralized Autonomous Organization)** <a href="#id-29.-dao-decentralized-autonomous-organization" id="id-29.-dao-decentralized-autonomous-organization"></a>

Definition

A form of investor-directed venture fund in crypto form, DAOs are organisations represented by rules encoded as a transparent computer program, controlled by organisation members and not influenced by a central government.

Example

MakerDAO governs the Maker protocol, where decisions regarding development and changes are made through community voting by MKR token holders.

### **30. Protocol Layer** <a href="#id-30.-protocol-layer" id="id-30.-protocol-layer"></a>

Definition

Refers to the different layers within blockchain architectures, each responsible for providing specific services to the system. In DeFi, different protocol layers handle tasks like smart contracts, token creation, or security.

Example

Ethereum acts as a base layer (Layer 1), providing the environment for executing smart contracts, which DeFi applications use to build their services.

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