Every profession is a conspiracy against the laity, and the world of crypto is no exception. It is in that spirit, I offer this glossary of terms that will make you sound as if you are completely informed and up-to-date when discussing your next crypto project. Please feel free to contribute to the document and offer any comments or corrections (form below).
For a list of useful links to the decentralized ecosystem (Crypto, NFTs, DeFi, DEX, Blockchain) please visit our crypto resources page.
Tip o’ the hat to George Bernard Shaw, Campbell R. Harvey, Ashwin Ramachandran, Joey Santoro, Wikipedia, some friends, and a bunch of subject-specific websites I’ve visited over the past decade. The italicized terms in the definitions are also defined in the glossary.
Address. The address is the identifier where a transaction is sent. The address is derived from a user’s public key. The public key is derived from the private key by asymmetric key cryptography. In Ethereum, the public key is 512 bits or 128 hexadecimal characters. The public key is hashed (i.e., uniquely represented) with a Keccak-256 algorithm, which transforms it into 256 bits or 64 hexadecimal characters. The last 40 hexadecimal characters are the public key. The public key usually carries the pre-fix “0x.” Also known as public address. Note: Keccak-256 does not follow the FIPS-202 based standard (a.k.a SHA-3).
Airdrop. A free distribution of tokens into wallets.
AML (Anti-Money Laundering). A regulation designed to detect and report suspicious activity related to illegally concealing the origins of money.
AMM (Automated market maker). An automated market maker (AMM) is a type of decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets. Instead of using an order book like a traditional exchange, assets are priced according to a pricing algorithm. This formula can vary with each protocol.
Asymmetric key cryptography. is a cryptographic system that uses pairs of keys: public keys (which may be known to others), and private keys (which may never be known by any except the owner). The generation of such key pairs depends on cryptographic algorithms which are based on mathematical problems termed one-way functions. Effective security requires keeping the private key private; the public key can be openly distributed without compromising security. Also, see symmetric key cryptography.
Atomic Swap. An atomic swap is a smart contract technology that enables the exchange of one cryptocurrency for another without using centralized intermediaries, such as exchanges.
Barter. Usually, the action or system of exchanging goods or services without using money. It is a peer-to-peer exchange mechanism in which two parties agree that goods or services to be exchanged are well-matched. For example, A has two pigs and needs a cow. B has a cow and needs two pigs.
Bitcoin. Bitcoin (BTC) is a cryptocurrency invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. The currency began use in 2009 when its implementation was released as open-source software.
Blockchain. A decentralized ledger invented in 1991 by Haber and Stornetta. Every node in the ledger has a copy. The ledger can be added to through consensus protocol, but the ledger’s history is immutable. The ledger is also visible to anyone.
Bonding curve. A smart contract that allows users to buy or sell a token using a fixed mathematical model. For example, consider a simple linear function in which the token = supply. In this case, the first token would cost 1 ETH and the second token 2 ETH, thereby rewarding early participants. It is possible to have different bonding curves for buying and selling. A common functional form is a logistic curve.
Bricked funds. Funds trapped in a smart contract due to a bug in the contract.
Burn. The removal of a token from circulation, which thereby reduces the supply of the token. Burning is achieved by sending the token to an unowned Ethereum address or to a contract that is incapable of spending. Burning is an important part of many smart contracts. For example, burning occurs when someone exits a pool and redeems the underlying assets.
Collateralized currency. Paper currency backed by collateral such as gold, silver, or other assets.
Collateralized debt obligation. In traditional finance, this represents a debt instrument such as a mortgage. In DeFI, an example would be a stablecoin overcollateralized with a cryptoasset.
Consensus protocol. The mechanism whereby parties agree to add a new block to the existing blockchain. Both Ethereum and bitcoin use proof of work, but many other mechanisms exist, such as proof of stake.
Contract account. A type of account in Ethereum controlled by a smart contract.
Credit delegation. A feature whereby users can allocate collateral to potential borrowers who can use the collateral to borrow the desired asset.
Cryptocurrency. A digital token that is cryptographically secured and transferred using blockchain technology. Leading examples are bitcoin and Ethereum. Many different types of cryptocurrencies exist, such as stablecoin and tokens that represent digital and non-digital assets.
Cryptographic hash. (aka “Hash”) A one-way function that uniquely represents the input data. It can be thought of as a unique digital fingerprint. The output is a fixed size even though the input can be arbitrarily large. A hash is not encryption because it does not allow recovery of the original message. A popular hashing algorithm is the SHA-256, which returns 256 bits or 64 hexadecimal characters. The bitcoin blockchain uses the SHA-256. Ethereum uses the Keccak-256.
DAO (Decentralized autonomous organization). An algorithmic organization that has a set of rules encoded in a smart contract that stipulates who can execute what behavior or upgrade. A DAO commonly includes a governance token.
Dapp (Decentralized application). Peer-to-peer, permissionless, censorship resistant applications. Anyone can use them and no central organization controls them.
DeFi (Decentralized finance). A financial infrastructure that does not rely on a centralized institution such as a bank. Exchange, lending, borrowing, and trading are conducted on a peer to-peer basis using blockchain technology and smart contracts.
Defi Legos. The idea that combining protocols to build a new protocol is possible. Sometimes referred to as DeFi Money Legos or composability. DEX. See Decentralized exchange.
DEX (Decentralized exchange). A platform that facilitates token swaps in a noncustodial fashion. The two mechanisms for DEX liquidity are order book matching and AMM.
Digest. See Cryptographic hash. Also known as message digest.
Direct incentive. A payment or fee associated with a specific user action intended to be a reward for positive behavior. For example, suppose a collateralized debt obligation becomes undercollateralized. The condition does not automatically trigger liquidation. An externally owned account must trigger the liquidation, and a reward (direct incentive) is given for triggering the liquation.
Double spend. A problem that plagued digital currency initiatives in the 1980s and 1990s: perfect copies can be made of a digital asset, so it can be spent multiple times. The Satoshi Nakamoto white paper in 2008 solved this problem using a combination of blockchain technology and proof of work.
Equity token. A type of cryptocurrency that represents ownership of an underlying asset or a pool of assets.
EOA (Externally owned account). An Ethereum account controlled by a specific user.
ERC-20. Ethereum Request for Comments (ERC) related to defining the interface for fungible tokens. Fungible tokens are identical in utility and functionality. The US dollar is fungible currency in that all $20 bills are identical in value and 20 $1 bills are equal to the $20 bill.
ERC-721. Ethereum Request for Comments (ERC) related to defining the interface for nonfungible tokens. Nonfungible tokens are unique and are often used for collectibles or specific assets, such as a loan.
ERC-1155. Ethereum Request for Comments (ERC) related to defining a multi-token model in which a contract can hold balances of a number of tokens, either fungible or non-fungible.
Ether (ETH). Ethereum’s cryptocurrency.
Ethereum. Second-largest cryptocurrency blockchain, which has existed since 2015. The currency is known as ether (ETH). Ethereum has the ability to run computer programs known as smart contracts. Ethereum is considered a distributed computational platform.
Ethereum 2.0. A proposed improvement on the Ethereum blockchain that uses horizontal scaling and proof-of-stake consensus.
Faucet. A smart contract that mints “test ETH” (a valueless version of Ethereum’s cryptocurrency) for use on a Testnet.
Fiat currency. Uncollateralized paper currency, which is essentially an IOU by a government.
Fintech (Financial Technology). A general term that refers to technological advances in finance. It broadly includes technologies in the payments, trading, borrowing, and lending spaces. Fintech often includes big data and machine learning applications.
Flash loan. An uncollateralized loan with zero counterparty risk and zero duration. A flash loan is used to facilitate arbitrage or to refinance a loan without pledging collateral. A flash loan has no counterparty risk because, in a single transaction, the loan is created, all buying and selling using the loan funding is completed, and the loan is paid in full.
Flash swap. Feature of some DeFi protocols whereby a contract sends tokens before the user pays for them with assets on the other side of the pair. A flash swap allows for near-instantaneous arbitrage. Whereas a flash loan must be repaid with the same asset, a flash swap allows the flexibility of repaying with a different asset. A key feature is that all trades occur within a single Ethereum transaction.
Fork. In the context of open source code, an upgrade or enhancement to an existing protocol that connects to the protocol’s history. A user has the choice of using the old or the new protocol. If the new protocol is better and attracts sufficient mining power, it will win. Forking is a key mechanism to assure efficiency in DeFi.
Gas (aka Gas Prices, Gas Fees). A fee required to execute a transaction and to execute a smart contract. Gas is the mechanism that allows Ethereum to deal with the halting problem.
Geoblock. Technology that blocks users from certain countries bound by regulation that precludes the application.
Governance token. The right of an owner to vote on changes to the protocol. Examples include the MakerDAO MKR token and the Compound COMP token.
Gwei (gigawei). Is 1,000,000,000 wei. Wei, as the smallest (base) unit of ether (ETH), is what Sats (aka satoshi) are to bitcoin.
Halting problem. A computer program in an infinite loop. Ethereum solves this problem by requiring a fee for a certain amount of computing. If the gas is exhausted, the program stops.
Hash. See Cryptographic hash.
Hexadecimal. A counting system in base-16 that includes the first 10 numbers 0 through 9 plus the first six letters of the alphabet, a through f. Each hexadecimal character represents 4 bits, where 0 is 0000 and the 16th (f) is 1111.
Hierarchical Deterministic (HD) wallet. An HD wallet allows you to interact with your funds without giving up control of your recovery phrase or private keys. Examples: Coinomi, Ledger, Exodus, Jaxx, etc. Examples of platforms that are not HD wallets where you do not control your funds: Coinbase, Binance, Charles Schwab, Chase Bank, etc.
HODL. (Pronounced hoe-dle)Depending upon whom you ask, HODL either means “hold on for dear life,” or it’s just a misspelling of the word “hold.” Either way, a “hodler” is long on crypto.
Horizontal scaling. An approach that divides the work of the system into multiple pieces, retaining decentralization but increasing the throughput of the system through parallelization. This is also known as sharding. Ethereum 2.0 takes this approach in combination with a proof of-stake consensus algorithm.
IDO (Initial DeFi Offering). A method of setting an initial exchange rate for a new token. A user can be the first liquidity provider on a pair, such as, for example, the new token and a stablecoin such as USDC. Essentially, the user establishes an artificial floor for the price of the new token.
Impermanent loss. Applies to AMM, where a contract holds assets on both sides of a trading pair. Suppose the AMM imposes a fixed exchange ratio between the two assets, and both assets appreciate in market value. The first asset appreciates by more than the second asset. Users drain the first asset and the contract is left holding only the second asset. The impermanent loss is the value of the contract if no exchange took place (value of both tokens) minus the value of the contract after it was drained (value of second token).
Incentive. A broad term used to reward productive behavior. Examples include direct incentives and staked incentives.
Keeper. A class of externally owned accounts that is an incentive to perform an action in a DeFi protocol of a Dapp. The keeper receives a reward in the form of a flat fee or a percentage of the incented action. For example, the keeper receives a fee for liquidating a collateralized debt obligation when it becomes undercollateralized.
KYC (Know Your Customer). A provision of US regulation common to financial services regulation requiring that users must identify themselves. This regulation has led to geoblocking of US customers from certain DEX functionalities.
Layer 2. A scaling solution built on top of a blockchain that uses cryptography and economic guarantees to maintain desired levels of security. For example, small transactions can occur using a multi-signature payment channel. The blockchain is only used when funds are added to the channel or withdrawn.
Liquidity provider (LP). A user that earns a return by depositing assets into a pool or a smart contract.
Mainnet. The fully-operational, production blockchain behind a token, such as the Bitcoin blockchain or the Ethereum blockchain. Often used to contrast with testnet.
Miner. Miners cycle through various values of a nonce to try to find a rare hash value in a proof-of-work blockchain. A miner gathers candidate transactions for a new block, adds a piece of data called a nonce, and executes a cryptographic hashing function. The nonce is varied and the hashing continues. If the miner “wins” by finding a hash value that is very small, the miner receives a direct reward in newly minted cryptocurrency. A miner also earns an indirect reward, collecting fees for the transactions included in their block.
Miner extractable value. The profit derived by a miner. For example, the miner could front run a pending transaction they believe will increase the price of the cryptocurrency (e.g., a large buy).
Mint. An action that increases the supply of tokens and is the opposite of burn. Minting often occurs when a user enters a pool and acquires an ownership share. Minting and burning are essential parts of noncollateralized stablecoin models (i.e., when stablecoin gets too expensive more are minted, which increases supply and reduces prices). Minting is also a means to reward user behavior. You mint NFTs as well as cryptocurriences created in many Layer 2 solutions.
Networked liquidity. The idea that any exchange application can lever the liquidity and rates of any other exchange on the same blockchain.
Node. A computer on a network that has a full copy of a blockchain.
Nonce (Number Only Once). A counter mechanism for miners as they cycle through various values when trying to discover a rare cryptographic hash value.
NFT (Non-fungible Token). A non-fungible token as defined by ERC-721 and ERC-1155 is a unique token often used for collectibles or specific assets, such as a loan.
On chain. Slang term used to describe transactions reflected on a blockchain.
Optimistic rollup. A scaling solution whereby transactions are aggregated off-chain into a single digest that is submitted to the chain on a periodic basis. https://optimism.io/ is Ethereum’s version.
Oracle. A method whereby information is gathered outside of a blockchain. Parties must agree on the source of the information.
Order book matching. A process in which all parties must agree on the swap exchange rate. Market makers can post bids and asks to a DEX and allow takers to fill the quotes at the pre-agreed price. Until the offer is taken, the market maker has the right to withdraw the offer or update the exchange rate.
Perpetual futures contract. Similar to a traditional futures contract, but without an expiration date.
Proof of stake (PoS). An alternative consensus mechanism, and a key feature of Ethereum 2.0, in which the staking of an asset on the next block replaces the mining of blocks as in proof of work. In proof of work, miners need to spend on electricity and equipment to win a block. In proof of stake, validators commit some capital (the stake) to attest that the block is valid. Validators make themselves available by staking their cryptocurrency and then they are randomly selected to propose a block. The proposed block needs to be attested by a majority of the other validators. Validators profit by both proposing a block as well as attesting to the validity of others’ proposed blocks. If a validator acts maliciously, there is a penalty mechanism whereby their stake is slashed.
Proof of work (PoW). Originally advocated by Back in 2002, PoW is the consensus mechanism for the two leading blockchains: Bitcoin and Ethereum. Miners compete to find a hash, which is hard to find but easy to verify. Miners are rewarded for finding the cryptographic hash and using it to add a block to the blockchain. The computing difficulty of finding the hash makes it impractical to go backward to rewrite the history of a leading blockchain.
Router contracts. In the context of DEX, a contract that determines the most efficient path of swaps in order to get the lowest slippage, if no direct trading pair is available e.g., on Uniswap.
SATS – Satoshis. A Satoshi is the smallest denomination of a Bitcoin, it’s a hundreth of a millionth, or 0.00000001 BTC.
Satoshi Nakamoto. The name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin’s original reference implementation. As part of the implementation, Nakamoto also devised the first blockchain database.
Scaling risk. The limited ability of most current blockchains to handle a larger number of transactions per second. See vertical scaling and horizontal scaling.
Schelling-point oracle. A type of oracle that relies on the owners of a fixed supply of tokens to vote on the outcome of an event or report a price of an asset.
Sharding. Sometimes called horizontal scaling, sharding divides the work of the system into multiple pieces, retaining decentralization but increasing the throughput of the system through parallelization. Ethereum 2.0 takes this approach with the goal of reducing network congestion and increasing the number of transactions per second.
Slashing. A mechanism in proof of stake blockchain protocols intended to discourage certain user misbehavior.
Slashing condition. The mechanism that triggers a slashing. An example of a slashing condition is when under-collateralization triggers a liquidation.
Smart contract. A smart contract is a computer program or a transaction protocol which automatically executes when conditions of the agreement are met. Smart contracts the key mechanism for DeFi and Dapps and are an important feature of the Ethereum blockchain.
Specie. Metallic currency such as gold or silver (or nickel and copper) that has value on its own (i.e., if melted and sold as a metal).
Stablecoin. A token tied to the value of an asset such as the US dollar. A stablecoin can be collateralized with physical assets (e.g., US dollar in USDC) or digital assets (e.g., DAI) or can be uncollateralized (e.g., AMPL and ESD).
Staking. The escrows of funds in a smart contract by a user who is subject to a penalty (slashed funds) if they deviate from expected behavior.
Staked incentive. A token balance held by a smart contract whose purpose is to influence user behavior. A staking reward is designed to encourage positive behavior by giving the user a bonus in their token balance based on the stake size. A staking penalty (slashing) is designed to discourage negative behavior by removing a portion of a user’s token balance based on the stake size.
Swap. The exchange of one token for another. In DeFi, swaps are atomic and noncustodial. Funds can be custodied in a smart contract with withdrawal rights exercisable at any time before the swap is completed. If the swap is not completed, all parties retain their custodied funds.
Symmetric key cryptography. A type of cryptography in which a common key is used to encrypt and decrypt a message.
Testnet. An identically functioning blockchain to a mainnet, whose purpose is to test software. The tokens associated with the testnet when testing Ethereum, for example, are called test ETH. Test ETH are obtained for free from a smart contract that mints the test ETH (known as a faucet).
Transparency. The ability for anyone to see the code and all transactions sent to a smart contract. A commonly used blockchain explorer is etherscan.io.
Utility token. A fungible token required to utilize some functionality of a smart contract system or that has an intrinsic value defined by its respective smart contract system. For example, a stablecoin, whether collateralized or algorithmic, is a utility token.
Vampirism. An exact or near-exact copy of a DeFi platform designed to take liquidity away from an existing platform often by offering users direct incentives.
Vault. A smart contract that escrows collateral and keeps track of the value of the collateral.
Vertical scaling. The centralization of all transaction processing to a single large machine, which reduces the communication overhead (transaction/block latency) associated with a proof of-work blockchain, such as Ethereum, but results in a centralized architecture in which one machine is responsible for a majority of the system’s processing.
Whale. A person or organization that hodls a large enough amount of a cryptocurrency. The largest Whales can hodl enough crypto to impact market prices.
Yield farming. A means to provide contract-funded rewards to users for staking capital or using a protocol.
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Author’s note: This is not a sponsored post. I am the author of this article and it expresses my own opinions. I am not, nor is my company, receiving compensation for it. I am not a financial advisor. Nothing in this article should be considered financial advice. If you are considering any type of investment you should conduct your own research and, if necessary, seek the advice of a licensed financial advisor.