Common Terms in Decentralised Finance

Active Address - an addresses on a blockchain that has been used to send or receive transactions within a specific time period.

Active Address Ratio - the ratio of active addresses to addresses with a balance.

Altcoin - any cryptocurrency other than bitcoin.

Bitcoin - the first cryptocurrency based on a Proof of Work (PoW) blockchain, created in 2009 by Satoshi Nakamoto.

Block - after a certain number of transactions have been added to the ledger and consensus has been reached among nodes, transactions are cryptographically locked into a “block” and officially recorded in a chain of subsequent blocks.

Block time - time taken for a block to be confirmed by the network.

Blockchain - a shared, immutable ledger that records transactions and tracks assets in a business network.

Blockchain Trilemma - the trade-off between three critical aspects of blockchain technology: security, scalability, and decentralisation.

Blockspace - the limited capacity available within each block, determining the number of transactions that can be included in and recorded on the distributed ledger.

Bridge - connects two blockchain ecosystems to facilitate the transfer of information and assets between blockchains.

Burning - the act of sending a token to an inaccessible address, permanently removing tokens from the circulating supply.

Byzantine Fault / Byzantine Agreement Problem - a condition particularly prevalent in distributed computing systems where components may fail and there is imperfect information on whether a component has failed. To avoid catastrophic failure of the system, the system's actors must agree on a strategy, but some of these actors are unreliable. A component can inconsistently appear both failed and functioning to other components, and different observers see different outcomes. It is, therefore, difficult to declare a component has failed and to shut it out of the network, because participants must first reach a consensus regarding which component has failed. 

Byzantine Fault Tolerance - the resilience of a computer system to Byzantine fault conditions by working to maintain a common view of the world despite the presence of faulty processes that strive to prevent the good processes from reaching agreement.

Central Bank Digital Currency (CBDC) - a form of digital currency issued by a country's central bank, the value of which is fixed and equivalent to the country's fiat currency. CBDCs may trade on a blockchain.

Consensus Mechanism - methodology by which nodes in a network come to agree on the current state before updating the blockchain.

Cryptoassets - assets built on permissionless blockchains, therefore, without a permissioned issuer. Covers cryptocurrencies, NFTs and other digital products.

Daily Active Addresses - addresses that made a transaction with a token on a given day.

Decentralised Application (dApp) - open-source software application with backend code running on a decentralised network, rather than on a centralised server.

Decentralised Autonomous Organisation (DAO) - a digital entity that can span multiple legal jurisdictions and engage with other digital agents and/or corporate entities without conventional human management, relying on smart contracts to execute interactions.

Decentralised Exchange - peer-to-peer marketplaces where cryptoasset traders make transactions directly without handing over management of their funds to an intermediary or custodian.

Decentralised Finance (DeFi) - a movement that allows users access to financial services such as lending, borrowing, trading and investing without the need to rely on centralised entities.

Distributed Ledger - a database in which transactional records are stored sequentially, held across multiple sites, countries and entities.

Ether - the native currency of the Ethereum blockchain.

Ethereum Virtual Machine (EVM) - a decentralised virtual environment that executes code consistently and securely across all Ethereum nodes. Nodes run the EVM to execute smart contracts, using "gas" to measure the computational effort required for operations.

Fiat Currency - Government-issued currency such as GBP, USD and EUR.

Fork - copying an existing application or set of code and modifying it to create an alternate version.

Fungible Token - a token that is mutually interchangeable with another identical item, such as a bitcoin.

Gas - unit of measure of the amount of computational effort required to execute a smart contract and, therefore, is the fee paid to the network for a given transaction.

Halving - the number of bitcoins generated per mined block is decreased by 50% every four years at the halving event.

Hard Fork - a new version of the blockchain that is not compatible with older versions, requiring all participants to move across in order to continue participating on the network.

Hash - a file's digital fingerprint. Each block in a blockchain contains the hash of the one before it and its own distinct hash, ensuring the immutable chain.

Hash Rate - a measure of the computational power of a blockchain network, determined by how many guesses are made per second and helping determine the mining difficulty of a network.

Hashing - an operation performed on sets of data to create a reliable index for that data.

Hot Wallet - a wallet connected to the internet at all times, for example that held on a centralised exchange such as Coinbase.

Immutable - unable to be changed.

Initial Coin Offering - a new method of raising capital that allow businesses to issue digital tokens in exchange for crypto or fiat.

Layer - refers to the different levels or protocols within the network stack.

Liquidity - the ability to quickly purchase or sell an asset and convert it into cash.

Liquidity Pool - a crowdsourced pool of cryptoassets locked in a smart contract that is used to facilitate trades between assets on a decentralised exchange.

Mainnet - the primary network where actual transactions take place on a specific distributed ledger.

Market Capitalisation - the total value of the cryptoasset, calculated as the current existing supply multiplied by the market price.

Maximal Extractable Value (MEV) - refers to the inclusion, exclusion and reordering of transactions within a block in order to extract more value from block verification, typically in excess of what a validator or miner would earn from producing the block as standard.

Maximum Recorded Transactions Per Second - indicates the peak TPS the blockchain has ever reached, typically occurring when the market is volatile and a lot of people want to transact simultaneously.

Meme Coin - a type of cryptoasset inspired by internet memes, characters or trends, typically supported by online communities and lacking a fundamental technological basis.

Miner - a node on a network which competes with others to verify transactions.

Mining - the process by which networks of specialised computers verify new transactions and release new PoW tokens.

Node - a computer which syncs to a blockchain network’s data, coordinates transaction requests and participates in consensus regarding the validity of transactions.

Non-fungible Token (NFT) - a unique digital asset which has no equal token, such as digital art. 

On-chain - transactions are recorded and validated on the blockchain through consensus mechanisms, offering trustless transfers but facing scalability challenges.

Omnichain - an approach aiming to unite various blockchain networks into a cohesive and interoperable ecosystem.

Off-chain - transactions happen outside of the main blockchain and leverage Layer-2 networks for increased scalability and efficiency.

Oracle - entity that communicates data to a smart contract, which can then verify an event or outcome.

Peer-to-Peer (P2P) - interactions that happen directly between two parties, coordinated through an app or network.

Proof of Stake - consensus mechanism for processing transactions and creating new blocks in a blockchain, in which validators are chosen based on the number of staked coins they have.

Proof of Work - consensus mechanism that requires network members to expend effort in solving an encrypted hexadecimal number, releasing minted coins in return for their efforts.

Protocol - a set of predefined rules, standards, and conventions that dictate how different entities within a network interact with each other.

Private Key - an alphanumeric string of data that corresponds to a specific wallet. Whoever controls the private key controls the wallet and, if the key is lost, so is access to the wallet.

Public Key - a cryptographic key that can be obtained and used by anyone to encrypt messages intended for a particular recipient, such that the encrypted messages can be deciphered only by using a second (private) key known only to the recipient.

Public/Private Key Pairs - a design paradigm on blockchain networks to ensure users can freely interact with others on the network while keeping their own account secure.

Real-time Transactions Per Second - how many TPS the blockchain is processing, indicative of actual network throughput. 

Rug Pull - a crypto scam in which developers create hype around a token to draw investors in. Once the price has sufficiently boosted, they liquidate their shares and leave investors with significant losses.

Scalability - a change in size or scale to handle a network’s demands, including traffic, future growth and throughput.

Sidechains - new blockchains, interoperable with the main/parent chain, to extend the capabilities of the main network.

Slashing - under a Proof of Stake consensus mechanism, slashing causes the validator’s deposit to be destroyed.

Smart Contract - a programmable contract that applies the principle of 'if x happens, then do y', allowing two parties to interact without needing to trust a third-party to execute or verify the conditions of a transaction.

Soft Fork - an alternative version of a blockchain, enacted intentionally to apply upgrades to a network, that retains some compatibility with the older version.

Stablecoin - privately issued cryptocurrencies where the value is pegged to that of another currency, commodity or financial instrument, with the aim of providing an alternative to volatile cryptocurrencies which are less suitable for common transactions.

Staking - committing crypto assets to support a blockchain network and confirm transactions, earning crypto in exchange.

Sybil Attack - an attack on a computer network in which the attacker subverts the service's reputation system by creating a large number of pseudonymous identities and uses them to gain a disproportionately large influence on the network.

Token - an asset issued on an existing blockchain.

Total Value Locked - refers to how much value, in tokens, has been deposited into something, often a protocol (e.g., for consensus).

Traditional Finance (TradFi) - finance with centralised institutions such as banks and stockbrokers.

Transaction Block - a collection of transactions, packaged into a block, hashed and added to the blockchain.

Transactions per Second (TPS) - (Block Size / Transaction Size) / Block time.

Trustless - in the context of DeFi, since everyone has a copy of the ledger, there is no need for a central authority to provide the source of truth. Instead, anyone can verify the transactions themselves, obviating the need for trust.

Validator - a node on a network that is responsible for transaction verification and is selected by the network at random to validate transactions.

Wallet - user-friendly interface which manages your private keys/proof of ownership of a blockchain asset. They allow you to send, receive and store cryptocurrencies and may be custodial, whereby a third-party maintains control over your assets on your behalf, or non-custodial, where you take full control of your assets.

Web 2.0 - the second and current generation of the World Wide Web, succeeding Web 1.0 of the 1990s, driven by the proliferation of smartphones, mobile internet access and social networks.

Web 3.0 - the third generation of the World Wide Web, currently a work in progress, envisioning a decentralized and open web with greater utility for its users due to transparency of its code and lack of central authority.

Wrapped Token - digital assets that represent the exact value of an original cryptoasset from a different blockchain or follow a different token standard to the chain it is operating on.

51% Attack - if more than half the computer power on a network is run by a single entity, a 51% attack is in operation, meaning the entity has full control of the network and can control mining, stop or amend transactions and perform other malicious actions.