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Glossary of Common DeFi terms
Automated Market Maker (AMM) - Replaces the order book model and removes third parties from making the market. Users are incentivized to supply liquidity to a pool by taking a share of transaction fees.
APR - Annualized Percentage Rate. Expressed as a percentage of the flat rate of return over the course of a year
APY - Annualized Percentage Yield. Expressed as a percentage of the compounded rate of return over the course of a year. The figure is typically expressed under the premise that harvests are compounded once a day.
Bridge - Sending tokens from one blockchain to operate freely on another. There are several methods, but the most common are lock and mint contracts. This involves minting on the receiving blockchain by locking the original tokens on the sender blockchain.
Decentralized Applications (DApps): Developers are able to build applications through the Ethereum Virtual Machine and leverage consensus from a host blockchain. Simply put, DApps are a platform we use to interact with smart contracts such as farms and DEXs.
Decentralized Exchange (DEX) - Non-custodial, this often peer-to-peer or swapping of digital assets from liquidity pools.
Decentralized Finance (DeFi) - Taking products from traditional finance and enhancing them with blockchain technology. Two main characterizing features of DeFi are that it is decentralized to a variable extents across blockchains and utilizes smart contract protocols to build financial products.
DEX Aggregator - Enables price oracles to source information from multiple exchanges to determine an indexed price.
Harvest - Allocated tokens available to collect from staking tokens into a liquidity mine. Often there will be a specified number of tokens minted per block. E.g. BSC creates approximately 28,880 blocks per day. A liquidity mine may only offer 20 tokens per block. This would equate to 577,600 tokens made available for harvest per day that is proportionally shared between all those staking in the liquidity mine.
Impermanent Loss - Users must supply liquidity in pairs to experience Impermanent Loss. The market value of one side of the pair must match the other upon supplying the liquidity pool. As the price of each token changes in relation to the other, it is possible that tokens are impermanently lost from the LP supplier in order to maintain a 1:1 market value ratio. It is possible over time to restore initial liquidity, the loss only becomes permanent once it has been withdrawn from liquidity. Please research this phenomenon before participating in yield farming.
Farming - The act of staking your derivative LP tokens into a liquidity mine. This is also known as yield farming. Your derivative LP tokens are collateralized by liquidity supplied to a pool.
Frontrunning - A trade being paid with higher gas fees in order to give a transaction priority on a block. This enables users to obtain crypto ahead of other buyers and sellers during high traffic. The effect of this is frontrunners are able to buy cheap and have the remaining orders drive the price up. This can occur on ETH mainnet, however given Binance Smart Chain has faster block times there is less opportunity for congestion to occur.
Gas - To incentivize node operators on a blockchain the end-user is often required to pay a fee to have their transaction minted into a block onto the network. These fees are commonly known as gas. The costs are expressed in gwei (how many gas units you would like to spend) and gas limit (the maximum amount of gwei you are willing to spend).
Routing - Involves swaps going through multiple pools to obtain the desired token. For example, you may swap $CAKE for $RFOX. This will route through the CAKE-BNB pool to obtain $BNB. This $BNB will then be used to purchase $RFOX from the RFOX-BNB pool.
Stake - To lock away tokens in a smart contract or on a CEX for the purpose of receiving a % return. Often these will be single-asset staking pools that release a fixed number of tokens per block that are distributed to stakers based on their share of the total staking pool.
Swapping - Trades take place between the user and liquidity pool. If you want to purchase $VFOX for example, you will need to give matching market value of $RFOX to the pool. TVL - Total Value Locked. This term refers to the total value of a token staked in liquidity pools and farms.
Yields - Return on liquidity supplied to LP and return on staking LP tokens into a liquidity mine (also known as a yield farm).
Yield Farming - Otherwise known as liquidity mining. This involves supplying liquidity and receiving LP tokens. This is evidence you have provided liquidity. You can take these tokens to stake in farms and receive the utility token for that protocol. In our case, we are being incentivized to provide RFOX-VFOX liquidity pair to the pool in order to receive an LP token that we have to stake into a farm to begin harvesting $VFOX.
Arbitrage - Buying a cryptocurrency for a low price on one exchange and selling it for a higher listing price on another.
Binance Smart Chain (BSC) - A layer-1, EVM compatible blockchain.
Blockchain - A ledger distributed across a network that is publicly accessible, decentralized, and immutable.
Burning - The removal of a token from circulation. Typically, "burnt" tokens are sent to a keyless contract address that is publicly visible on the Blockchain.
Consensus - Nodes on a blockchain reaching a majority agreement on the validity of a block created on the chain.
Ethereum Virtual Machine (EVM) - This is effectively an ecosystem for DApps and blockchains to be built within. The ecosystem is secured by Proof of Work Consensus off the ETH Public Chain. Blockchains built within this runtime environment can opt to implement their own consensus mechanism within the EVM.
Exit Scam - An act of calculated malice whereby an often anonymous team will lure investors into their project, sell high volumes of their founder tokens on the market to drive the price to zero. Often malicious developers will proceed to shut down all protocols, social media and website communications.
Hardware Wallet (cold wallet) - Your private keys are stored offline in a hardware device that often resembles a USB. This is regarded as the safest way to manage your holdings as you never have to enter the seed phrases into a digital form to restore access to your holdings. To use your private keys for any outgoing transaction you must authorize it on the hardware wallet first. Seed phrases should only ever be entered into the device itself and never into a digital form.
Interoperability - The ability for a blockchain or utility token within a system to be able to execute contracts or interact with other systems.
Long - Entering a position under the thesis that price will move upwards. Short is the opposite of this.
Non-fungible tokens (NFTs) - Digital tokens that are representative of real-world or digital objects. These tokens have unique digital signatures and are unique. $1 can be traded for $1 as it has fungible value. A piece of art cannot be traded for another piece of art at equal value.
Node - Blockchains consist of multiple nodes that distribute data across the network. This means there is no one single point of failure. This is another form of staking to receive a % return by pledging the native token onto a blockchain to participate in a Proof of Stake consensus algorithm, or a slightly altered variant.
Phishing Scams - When scammers are able to impersonate a company representative and trick them into disclosing personal information. These have been around for years, but have become particularly malicious in cryptocurrencies. Phishing scammers will attempt to get you to disclose the recovery seed phrases to your private keys. NEVER GIVE ANYONE YOUR PRIVATE KEYS FOR ANY REASON.
Similarly, there are clone Telegram and Discord channels that announce people to send Crypto to an address under the pretense they will receive twice as much in return. This is a scam. REDFOX LABS WILL NEVER MESSAGE YOU FIRST.
Private Keys - When you create a public wallet address you require private keys to access that address.
Proof of Stake - Users deposit their cryptocurrencies onto a node to achieve staked returns. Bad actors on a network stand to lose their entire stake when identified by other nodes for dishonest activities. There are multiple variations to this consensus model across different blockchains.
Proof of Work - Miners expend energy using Graphic Processing Units (GPU) to solve algorithms that validate transactions on the network. Bitcoin is commonly known for achieving consensus through these means.
Seed Phrases - Often 12 or 24 random phrases in a set sequence that will unlock your private keys. Only input these when accessing a wallet on a device for the first time or enter manually into your hardware wallet.
Short - Entering a position with the expectation that the price will go down. Typically leverage traders will take a loan for the market value of a position then execute a buy order at a lower price to take profit.
Slippage - Refers to the difference between the quoted price and the price the trade was executed at. Lower liquidity in LPs often leads to higher slippage. In other words, it may cost you more than what you had expected to pay.
Software Wallet (hot wallet) - When opening a software wallet you will be instructed to record seed phrases to recover private keys to this wallet. This is a less safe option compared to cold wallets as yoou still have to enter these seed phrases into a digital form when restoring private keys on a new device. Exercise extreme caution and be mindful of phishing scams when using this method. You should not have to enter your seed phrases into a device again once you have opened your wallet. Do not enter them into any online form if you already have access to your wallet.
Smart Contract - Code that contains the terms of agreement for buyers and sellers that executes when specified conditions have been met. Typically, smart contracts have no third-party or centralized authority that can intervene with the terms or execution of the contract. However, while they tend to be secure enough to avoid being hacked, they are susceptible to loopholes in the rules of the smart contract being exploited.
Volatility - Sudden fluctuations in price.
APR - Annualized percentage rate.
APY - Annualized percentage yield (compound).
BSC - Binance Smart Chain.
CEX - Centralized Exchange.
DApp - Decentralized Application
DEX - Decentralized exchange.
DeFi - Decentralized Finance.
'Degen'/'Chad' - Experienced DeFi users that often participate in high-risk farming ventures.
ETH - Ethereum Public Chain. $ETH is also expressed as the utility token for this blockchain.
EVM - Ethereum Virtual Machine
FOMO - Fear of missing out.
FUD - Fear, uncertainty, doubt.
HODL - Hold on for dear life.
LP - Liquidity Pools.
NFT - Non-fungible tokens.
SAFU - Funds are safe.