Hello Everyone,
This is my first post on Leo Finance. I’m a cryptocurrency newbie and at the beginning it was quite hard for me to understand all the new terms I was encountering, so this will be my first contribution. A small list of terms that can be useful for someone entering the crypto world.
The definitions are shorts and it is intended. So, it’s quite possible that they are not very specific or lack some precision. The goal is to give a basic understanding, allowing a deeper search afterwards. By the way, english is not my first language, I did my best but there could be some strange phrasing or other mistakes. Don’t hesitate to comment, and I’ll use your feedback to make updated versions !
AMM : Automated Market Maker. Simply put, a market maker is a middle man helping in a transaction. You want to sell, they find someone to buy. The AMM automates this process by creating a “smart contract” holding a pair of coins/tokens with a set of rules. Those are “liquidity pools”.
APR : Annual percentage rate, see Interest. It’s the annual percentage of interests when you don’t compound interests.
APY : Annual percentage yield, see Yield. It’s the annual percentage of interests when you compound interests. The difference between the APR and the APY depends on the compounding frequency. The higher the frequency, the higher the APY compared to APR. eg: Compounding calculator
Coin : A (crypto)money unit. A coin designates a Cryptocurrency, a “native” unit on its own blockchain. eg: Bitcoin, Ethereum.
Compounding : see Yield
DeFi : Decentralized Finance. Financial Tools that are not handled by a centralized authority, like a bank, and, instead, relying on the blockchain technology.
Farming : Set of automated techniques used to maximize the interest rates.
Fees : Every transaction on a blockchain has a cost, called a fee. There are also fees taken by the platforms you use, in order to finance their infrastructure. Transaction fees can be used to reward miners or stakers, or burned to reduce the global circulating supply.
Fiat Money : Designates “real world money”, which is endorsed by a central bank and widely usable. Euro and *Dollar *are fiat money.
Fungible : Is said of a token or coin whose every unit has the same value. If I hold 1 bitcoin, it has the same exact value as your 1 bitcoin. Some tokens are not fungible (NFTs). In a city building game, for example, a house and factory are two tokens of the same game, yet, they don’t have the same value, and you cannot exchange them 1 for 1.
Gas : It is a unit allowing the calculation of transaction costs/fees. It is the “gas” that powers the blockchain. A specific transaction has a specific gas cost. With Ethereum, the gas is a virtual currency that you “buy” with
ICO : Initial Coin Offering. In order to finance a new project, the creators may offer a certain amount of coins at a specific price. Some ICO may yield a very big return, if the value of the coin goes crazy after the real launch. But there is no guarantee !
Interest : like a bank account, you may receive interests on your crypto assets. Those interests may come from staking, loans, liquidity pool fees. Certain platforms try to maximise those interests (see Farming)
Impermanent Loss : When the value of one of the assets in a liquidity pool changes, the equilibrium and global value of a Liquidity Pool may decrease, leading to a “loss” for the liquidity provider. It’s considered impermanent because the liquidity pools are coded in order to return to an equilibrium, restoring the global value of the pool.
LP / Liquidity Pool : A technique used to facilitate the exchange of cryptocurrency in a decentralized manner. Liquidity providers put a couple of assets (two different crypto assets) in the liquidity pool (usually 50/50 based on their value). Users can use this pool to convert one of the assets into the other. The liquidity provider gets a part of the fees, proportionally to its share of the pool. See AMM.
Mining : the terminology is mostly used for Proof of Work blockchains. In order to validate a block, lots of complex calculations are needed. As for a real miner, hard work gives a “salary”, here in the form of coins.
NFT : Non Fungible Token. See Fungible.
Proof of Stake : a method of signing a blockchain transaction. Instead of using complex computation (as in a proof of work blockchain), the algorithm selects someone to sign the transaction. In order to be eligible for signing, one must “stake” (usually lock) a part of his cryptocurrency. As in *PoW * blockchain, the block validator gets a reward.
Proof of Work : Aka ‘POW’. A method of signing/validating a blockchain transaction. Complex calculations are involved, using a CPU, GPU, ASIC… The goal is to find a specific character sequence answering to a strict rule. The first person to find an eligible solution is rewarded and receives a certain amount of coins.
Staking : see proof of stake
Smart Contract : It is a set of rules that are stored on a blockchain providing some kind of service. For instance, liquidity pools are smart contracts allowing you to “swap” a crypto currency for another one. Ethereum is the main blockchain allowing the use of smart contracts, but it’s not the only one.
Token : A token is a non native cryptocurrency unit created on a blockchain. It makes use of another blockchain infrastructure. eg: DAI, USDT, BAT.
Wallet : A software, or hardware, used to ‘store’ your cryptocurrencies. A set of keys allows you to recreate, transfer, or make use of a wallet. Those keys are very important, and should be stored securely.
Yield : A term used when you “compound” interests. If you earn interest on a weekly basis and reinvest it directly, you’ll earn interest on the interests, effectively “compounding” them. This will “yield” a higher “interest” rate. See APR and APY.
Thanks for reading ! Don't hesitate to comment. I'll post an improved version from time to time !
