Glossary

Alpha

In the TradFi world, Alpha stands for excess return against the market while assuming that markets are efficient and there is no systematic opportunity that returns beat the market.
In Crypto and DeFi, Alpha is a term often used for a first look into a new product, that is released in an early version.

AMM

An Automated Market Maker (AMM) is part of a decentralized exchange (DEX) and automatically gives the trader a quote for price between two assets, thus allowing direct automated settlement of the transaction.

APR

The Annual percentage rate (APR) refers to the yearly interest generated by a sum that's charged to borrowers or paid to investors. Learn more here.

APY

The annual percentage yield (APY) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Learn more here.

Beta

A TradFi-metric to measure the volatility (or system risk) of an asset compared against a benchmark, normally the market as a whole.

Bridging

If a user wants to move funds from one blockchain to another, so say from Ethereum to Solana, or just want to make use of L2 scaling solutions on a sidechain of Ethereum, a bridge helps to transfer these funds. Learn more on bridges here.

Call Option

A Call option gives the right to buy an underlying asset for a specific price within a specific period of time.

Covered Call

A Covered Call refers to the transaction in which an investor is selling a Call Option while holding the equivalent amount of the underlying asset.

Collateralized Lending

The collateralization of a loan gives the lender some level of reassurance against the default risk of the borrower. Collateralization is normally done by locking some valuable asset as a security to the loan, that is then seized by the lender and sold to offset the loss from the defaulted loan.

Correlation / Covariance

Correlation is a statistical relationship between two random variables.
Covariance is a measure of the joint variability of two random variables, in other words, the directional relationship. Learn more here.

Data

As a blockchain works like a decentralized database, understanding how data can be sourced and how you can deal with data issues is crucial for any kind of understanding, analyzing & modeling metrics and tools. Please look here for more details on the general purpose of Data sourcing as well as Market Data and Account Level Data.

DeFi

Short for Decentralized Finance, thus the offering of financial instruments, products and services peer-to-peer via a distributed ledger technology (like the Ethereum blockchain) without a centralized third party like a bank or other institution.

Delta

A TradFi-metric, that describes the rate of change between the price of a Call or Put option and a $1 change in the price of the underlying asset.

Depegging

Deppeging describes the situation, when a stablecoin looses its peg to the underlying fiat currency (in most cases the US-Dollar). Learn more about Depegging risk here.

DEX

Short for Decentralized Exchange, a form of DeFi platform allowing for peer-to-peer exchange of assets (mostly token) by using an AMM to settle transactions.

DCF

Short for Discounted-Cash Flow, a common methodology to value an asset by discounting the future cash flows and thus calculating the fair present value of the asset.

Efficient Frontier

The Efficient Frontier describes a concept of the Modern Portfolio Theory to optimize a portfolio (so a number of different assets) for the lowest level of risk with a given return target. It reduces the variability of the portfolio return and hence increases the Sharpe ratio. More details on the Efficient Frontier can be found here.

Gas / Fee

Gas refers to the unit that measures the amount of computational effort required to execute specific operations on the Ethereum network. Gas fees are the reward given to miners for putting transactions in the blockchain or executing them. Learn more here.

Investment platforms

A Investment platform can be described as an online service (or in terms of DeFi as a protocol) that allows you to buy and hold tokens or deploy your existing tokens into predefined strategies to gain yield. A list of specialized Investment platforms for Liquidity Providing can be found here.

Layer 1 / Layer 2

In distributed ledger systems like blockchains, L1 refers to Layer 1, the so-called base layer of the blockchain where all transactions are finally settled.
L2 refers to a third-party integration (like a side-chain) that processes transactions and bundles them for final settlement on the underlying L1 blockchain. L2 solutions abstract the majority of the processing in order to improve scalability and efficiency. Read more on them here.

Liquidity Coverage Ratio (LCR)

Liquidity Coverage Ratio (LCR) is used to measure liquidity risk. LCR is defined as the proportion of highly liquid assets held by an organization to ensure that they maintain an ongoing ability to meet their short-term obligations (cash outflows for 30 days) in a stress situation. Learn more here.

Liquidity Providing

A Liquidity Provider (LP) is an investor who provides liquidity in terms of token to a protocol, normally an Automated Market Maker (AMM), to help with decentralized trading. The LP normally receives a fraction of the trading fees based on his share in the Liquidity pool. Learn more here.

Mempool

For every blockchain, the Mempool (short for Memory Pool) is a database of unconfirmed transactions. As soon as a transaction is submitted by a user, it gets to the Mempool and as soon as a transaction is picked up in a new block, it gets removed from the Mempool.

MEV

Short for Maximum Extractable Value, in the past Miner Extractable Value. The term refers to the profit someone can make by adding, removing or rearranging transactions in the new blocks that are produced by a blockchain. Please find more details here.

Optimistic Rollup

An Optimistic Rollup is a Layer-2 scaling technique developed by the Optimism Foundation, that is used by major L2 like Optimism and Arbitrum. Optimistic Rollups assumes every transaction is valid (until proven that it is false) and bundle several transactions into one single transaction, that is then published to the Ethereum execution layer.

Perpetual Swaps

A Perpetual Swap is a form of a futures contract that allows speculation (with leverage) on future price movements of a token without an expiration date. Most of these swaps are collateralized with stablecoins and allow for Long (rising prices) or Short (falling prices) positions.

Put Option

A Put option gives the right to sell an underlying asset for a specific price within a specific period of time.

Risk-free Rate

The risk-free rate is defined as the yield an investor will receive without any associated risk, primarily of not getting paid at the maturity date. Learn more here.

Sharpe Ratio

Sharpe ratio is used to measure an investment portfolio´s performance. It represents the return of an asset, without taking into account the “risk-free” interest rate and indicates the return percentage for each risk unit carried by the investment. Learn more here.

Stablecoin

A token that tries to maintain a stable exchange rate to an established fiat currency is called stablecoin. Thus, most stablecoins try to maintain a 1:1 peg to the US-Dollar. Learn more about stablecoins here.

Staking

For Proof-of-Stake blockchains, Staking refers to locking your funds in the native crypto asset of the blockchain to secure the network and be rewarded when a new block is mined and attached to the blockchain. More about Staking services can be found here.

TradFi

Short for Traditional Finance, so the existing financial infrastructure and the banking system with centralized parties like the Central Banks, Banking institutions and the government.

TVL

Total value locked (TVL) is the overall value of crypto assets deposited in a decentralized finance protocol. Learn more here.

Uncollateralized Lending

A loan without any form of collateral as security based on some basis of prior credit or evidence of future cash flows to sustain the obligation.

Value at Risk (VaR)

Value-at-risk (VaR) is a statistical measure used to calculate the maximum potential loss caused by market movement under business-as-usual circumstances. Learn more here.

Yield Farming

Yield farming is a popular strategy in DeFi to boost your yield by lending and re-investing token in various protocols to earn high returns in form of additional token. If you want to learn more about Yield aggregators, look here.

Zero-Knowledge Rollups (ZK-Rollups)

ZK-Rollups are another L2-scaling technique. In contrast to Optimistic Rollups, a ZK-Rollup do not assume that a transaction valid but instead proves it instantly by using so-called validity proofs. Learn more on this here.