# DeFi Glossary

# 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.

# Automated Market Maker

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 Justswap.

# 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.

# 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.

# Coin

A form of digital currency primarily used for payments or a storage of wealth. Coins are secured by encryption algorithms. The market price of the coin represents the value of the ownership of a divisible unit of the coin or token (another name for a coin, but a type of coin with greater functionality) at a given moment in time. This coin or token can represent a share of the ownership and/or governance of a coin, token, protocol, company, or project and all of the benefits that this may entail.

# 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.

# 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.

# Delegated Fund DAO

A Decentralized Autonomous Organization with access to Delegated Funds in the form of Liquidity Pool and governance tokens under delegated control. As of 2020, it is a new concept and seed investment strategy introduced by YFI Developer Andre Cronje that supports the development of Fair Launch coins, tokens, projects, and products that provide new ideas and concepts that support DeFi without taking any allocation of the coin, token, or share of ownership of the new project that applicants intend to be launched. It is meant to incentivize innovation from new or previous crypto builders and designers, while being an experiment in providing a new avenue of procuring seed capital for DeFi builders and designers.

# 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?

# Governance

Governance refers to the control and use of a Governance coin, token, and/or project through various measures in order to grow the ecosystem or product, and to maximize gains for governance token holders.

# 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.

# 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 Pool

An LP, or Liquidity Pool, is pool of deposited funds meant to provide liquidity to a currency, network, or Smart Contract. Liquidity is considered the lifeblood of any physical or digital currency, exchange, or financial network, so there will be designed rewards or incentives given to those who provide liquidity to LPs.

# 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

# 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.

# 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).

# Protocol

In High Technology, a protocol is a set of developed rules or specifications. These rules detail definitions, standards, limitations, and potential stipulations of a protocol. Examples of technology protocols include TCP/IP and TRC-20.

# 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.

# Stake

The act of depositing a cryptocurrency coin or token into a yield farming project and/or protocol, whether the access to the project is either through CeFi or DeFi methods.

Stakers hope to gain interest on their deposits into these yield farming projects and offerings. CeFi is considered safer for a number of reasons - including strict rules, permitting, and regulations. However, DeFi tends to give much high rewards, while being accompanied with much higher risks, the earlier the investor participates in the project's lifecycle, testing, and development.

# Staking

The act of staking a cryptocurrency deposit to yield farm additional cryptocurrency via CeFi or DeFi staking offerings, programs, or projects.