Crypto Terminology

Blockchain​

A blockchain is a type of shared database that publicly records every transaction on the network. Each transaction is verified by a number of validators, which is designed to filter out invalid or duplicate transactions. In the context of cryptocurrency, this permanent record of validated transactions is known as a “public ledger.” Different blockchains each use their own methods of validating transactions securely, and the blockchains themselves are generally independent and incompatible with each other.

Oracle

When it comes to Oracles, there's not that many out in range, but it's important to understand what they do and how they operate. Oracles are essential to the distributed ledger ecosystem because they expand the possibilities for smart contracts. Without decentralized oracles, smart contracts would only have access to data within their crypto networks, limiting their potential applications.

Decentralized oracles act as an abstraction layer that queries verifies, and authenticates off-chain sources before relaying that data on-chain.

Coin​

A coin is a cryptocurrency that operates its own blockchain and is generally used for transaction fees. Examples of popular coins include Bitcoin and Ethereum. This is different from a token, which exists on network for which it is not the native coin (see following definition).

Token​

A token is an asset that exists on a blockchain for which it is not that network’s native coin. A prime example of a token is SHIB, which is a token that runs on the Ethereum blockchain. The standard for which tokens are built on the Ethereum blockchain is called ERC-20.

Smart Contract​

A smart contract is a program on the blockchain that is designed to execute automatically when certain conditions are met. Smart contracts enable functionalities such as staking, swapping tokens, providing rewards – essentially any blockchain interaction that is more complex than sending tokens to wallets. In general, a smart contract cannot be changed or altered once being deployed to the blockchain.

An application built from smart contracts on the blockchain is known as a Decentralized Application, or dApp.

Blockchain Explorer​

Blockchain explorers are websites such as Etherscan that allow users to view the history of transactions on the blockchain. For example, a user can search for a wallet or smart contract and view all of its activity in chronological order. Explorers can also provide other userful information such as the breakdown of wallets holding each token.

Non-Fungible Token (NFT)​

A Non-Fungible Token, or NFT, is a class of asset where each token in the series is unique and different from the others. Contrast this to a fungible token like SHIB, where all SHIBs are equal to each other (no SHIB is worth more or less than any other). NFTs are mainly designed to be collectible assets, and can be traded on NFT storefronts like OpenSea or LooksRare. While some NFTs are purely collectibles, others may confer certain rights to the holder such as access to events and social clubs, ownership of a physical asset, etc. On the Ethereum blockchain, the standard protocols for NFTs are called ERC-721 and ERC-1155.

Centralized Exchange (CEX)​

A centralized exchange is a third-party platform that holds its user’s fiat and crypto holdings, and records transactions on its own ledger (as opposed to the blockchain, or public ledger). Examples of centralized exchanges are Binance, Coinbase, KuCoin, and Huobi. Each time a user transacts on these platforms, there is no corresponding record on the blockchain, as this all occurs internally within the CEXs own account. However, while this may be convenient for high-frequency traders, the reliance on a third-party ledger eliminates much of the purpose of using cryptocurrencies (see “Custody” below). Fortunately, the vast majority of CEX platforms allow a user to withdraw their crypto holdings to their own individual wallet that resides on-chain.

Custody​

On a centralized exchange, users do not automatically own the keys to their digital assets on the blockchain. These types of exchanges are called custodial accounts because the exchange holds the assets for its users, and provides them with access to trade them on the exchange. The only way to fully control your cryptocurrency is to withdraw it to a private wallet, which then transfers the assets to the user’s ownership.

An analogy in traditional finance would be having money in a savings account (where the bank has custody of the funds), versus having cash in a safe at home (self-custody). The principle of having self-custody over one’s own assets is a core part of Decentralized Finance (DeFi).

Decentralized Exchange (DEX)​

Decentralized exchanges use smart contracts such as automated market makers to process transactions on the blockchain, as opposed to a CEX which uses a traditional order book to match buyers and sellers. Instead of using an order book to determine market price, a DEX uses a mathematical formula to automatically adjust the price each time there is a buy or sell transaction. For example, ShibaSwap is a DEX that uses tokens supplied by liquidity providers to automatically facilitate peer-to-peer transactions. In turn, these liquidity providers in turn are rewarded with a share of the trading fees as well as other incentives such as token rewards.

Wallet​

A crypto wallet is a piece of software that allows a user access to their funds on the blockchain. This can be in the form of a mobile app, desktop web browser extension, or physical device to create and authorize transactions. This is different that leaving funds in a Centralized Exchange, as users with a wallet have full control over their funds.

For example, Metamask is an example of a browser-based wallet that is compatible with many chains including Ethereum, Polygon, BSC, Fantom, and more.

Decentralized Finance (DeFi)​

Decentralized finance is the means in which users can manage their money, investments, and transactions without relying on a third-party entity such as a bank or financial service provider. Key to DeFi are platforms driven by automated software and smart contracts that cut out the middlemen and enable true peer-to-peer interactions.

DYOR (Do Your Own Research)​

DYOR is an acronym which stands for "Do your own research". If a user wants to be best positioned to succeed in crypto, it is vital that they spend time learning about the tokens and platforms that interest them. This also means not relying on a single source to give credible information (such as blindingly believing a vocal proponent, or “shiller”). Decentralization is a double-edged sword; it is up to the individual to maintain a high level of due diligence and self-reliance.

KYC (Know Your Customer)​

KYC is a set of requirements and practices that government bodies require financial institutions to abide by in order to prevent money laundering. In crypto, we most often see this at fiat on-ramps such as exchanges. Typically, an exchange will want users to upload proof of identification when first transferring funds in or out of the platform. This way government agencies have a trail of identified users at each of the end points where crypto is converted to fiat, and vice versa. Note a user must be over the age of 18 to complete KYC procedures.

Limit Order​

A limit order is an order placed on an exchange that specified whether to buy or sell a token or coin at a defined price. Limit orders are useful in that users can have standing orders to automatically buy or sell an asset at the moment a price level is reached without having to manually trigger the trade.

Whitepaper

A whitepaper is a document that acts as the primary source of information for a token or platform. The whitepaper typically gives an overview of the project, description of the technology, as well as specifics on how the project intends to craft a solution to a given problem. For tokens, this often includes fundamentals such as total supply, minting rate, transaction fees, etc., which are collectively called “tokenomics.”

While the concept of a whitepaper is not something unique to crypto, it has been widely adopted as a mode of delivering essential information about a crypto project to a broad audience.

Web3​

Web3 is the vision for a new type of World Wide Web based on the blockchain and related technology. A key tenet of Web3 versus Web2 is empowering individual users through self-custody, decentralization, and elimination of third-party intermediaries. It includes various aspects of DeFi and dApps to build unique web ecosystems.

TVL (Total Value Locked)​

TVL is the total value of the staked or pooled assets in a DeFi application. This value fluctuates by a) the number of tokens stored, and b) the dollar-equivalent value of tokens stored.

APR (Annual Percentage Rate)​

APR is the simple way of expressing interest rate over a year’s time. It is simply how much of the principal amount (original amount) a user can expect to receive in a year. If a user stakes $1,000 at a 5% APR, they can expect to receive $50 in interest over a year’s time.

APY (Annual Percentage Yield)​

APY takes the APR further by accounting for the effect of compounding. For example, if the interest is paid monthly, this gives the user the opportunity to stake the earned amount, earning rewards on that amount too. This is known as compounding. Compounding is a very powerful tool in maximizing yield, particularly in DeFi where rewards can typically be compounded at will.

Seed Phrase/Recovery Phrase​

The seed phrase is a set string of words that acts as the private key to a crypto wallet, similar to a password. However, unlike a password, anyone with the seed phrase will have full access to the wallet, even if they do not know which wallet it is associated with.

It is recommended to store your seed phrase in a safe physical location that only you have access to, such as on paper in a safe.

NEVER GIVE YOUR SEED PHRASE TO ANYONE! The most common scams in crypto are designed to have users input their seed phrase in what appears to be a legitimate webiste. The only place you should ever enter your seed phrase is in your wallet the very first time you set it up (or to import the account to a wallet on a new computer).

DO NOT STORE YOUR SEED PHRASE DIGITALLY OR IN ANY WAY IT CAN BE ACCESSED BY A HACKER OR THIEF! Cloud storage, emails, or photo albums are vulnerable to hacks. Once a hacker has access, a quick search of “recovery,” “seed,” or “key” will quickly bring up whatever file your seed phrase is saved on. This is why we recommend only having the seed phrase written in a physical, protected location.

Gas​

Gas is the fee users pay to validators in order to record transactions on the blockchain. This gas fee is usually paid in the native coin of the blockchain (Ethereum gas is paid in ETH, Shibarium gas is paid in BONE). Gas prices fluctuate based on demand, and quoted in terms of gwei (one gwei is one billionth of a coin). There are websites that help track the current price of gas in gwei in order to avoid heavily congested times when gas will be expensive. A transaction that does not have enough gas will fail, or take a very long time to execute. Wallets such as Metamask help estimate the price of gas needed to ensure a transaction goes through.

Governance​

Governance is a term which describes the process of making decisions related to the operations of a project. Typically, in cryptocurrency projects the power of governance is determined by the amount of governance tokens one holds; in other words one token equals one vote. For instance, if someone submits a proposal for the project, the users that hold the governance token can cast their vote with these token, and their vote is weighted by the amount of tokens each holds.

Liquidity

Liquidity in crypto refers to the assets available for a trade. The more liquidity, the more can be traded without changing the price too much (price impact), which is never desirable to the buyer or seller. In DeFi, liquidity is represented in terms of trading pairs. For example, when a user wants to pay ETH to buy SHIB, the DEX will add the ETH paid to the pool and give the user SHIB, which changes the proportion of ETH to SHIB, and therefore changes the price of SHIB. Liquidity providers who supply these pairs are given LP tokens as proof of the tokens they supplied.

Impermanent Loss (IL)​

Impermanent loss is a side effect that occurs when the price of one token in a pair changes drastically versus another. In simple terms, if one token doubles or triples in value compared to the other, the liquidity providers in that pool will be worse off than if they just held the tokens separately in their wallet. In most cases, the trading fees and reward incentives make up for the impermanent loss occurred, especially over time. However, for volatile pairs, liquidity providers should be careful to make sure their incentives outweight the risk of impermanent loss.

Impermanent loss is named as such as the negative effect reverses if the ratio between the tokens returns to where it was when the liquidity was provided. Otherwise, the impermanent loss becomes permanent once the liquidity provider withdraws from the pool.

Slippage​

Slippage refers to the difference in price that occurs between the time an order is placed and when it is filled. In a DEX, the option for a slippage allows a user to define the change in price they are willing to tolerate before canceling the trade. For example, setting slippage to 2% ensures that the buyer will get up to 98% of the tokens they are quoted when executing the trade; anything less than that will cancel the transaction. Slippage is important for protecting users from price swings in the time it takes to execute a trade. However, setting the slippage too low may result in failed trades.

Audit​

An audit is a meticulous examination of a smart contract (or multiple smart contracts) and the code contained within. Audits are meant to thoroughly examine the functions of these contracts to make sure that they are designed safely, securely, and not vulnerable to hacks or exploits. Audits are two-fold: firstly to prove the developers did not hide any malicious code within the program, and secondly to show the code would be safe from hackers once deployed. While audits are an invaluable tool in terms of DYOR, keep in mind that audits are not infallible. Just because a project was audited does not mean it is 100% guaranteed to not be exploited. The track record and credibility of the auditor plays a large part in determining how much one can trust the accuracy of an audit.

Skynet (by Certik)​

Skynet is a set of automated technologies that continuously scan smart contracts to identify any known vulnerabilities that could exploit a smart contract's functionality. Using these automated technologies, Skynet can assess a smart contract (or multiple contracts) and based on its findings, assign a score from 0-100 which indicates the strength of security in any given smart contract. Skynet's scoring rubric consists of five categories which they call "Security Primitives". These five categories are further organized into two subsets of Security Primitives which they call "Static Primitives" and "Dynamic Primitives"

To learn more, please visit the Skynet page on Certik's website.