DeFi Glossary of Terms
An Automated Market Maker (AMM) is a decentralized asset trading pool that enables market participants to buy or sell cryptocurrencies. AMMs are non-custodial and permissionless in nature. Most AMMs utilize either a constant product, constant mean, or constant sum market-making formula; however, the most common is a constant product market maker, most notably Uniswap.
A Collateral Ratio It is the ratio of collateral value to minted synth value.
CryptoPunks are collectible pieces of crypto art, represented by NFTs on the Ethereum blockchain. There are 10,000 small, 8-bit-style punks, all with unique features. As one of the first famous NFT projects, they inspired a lot of crypto artists and even the development of the ERC-721 token standard for digital collectibles. The project became more popular in 2021 after some CryptoPunks were sold for millions of dollars, making them some of the most expensive NFTs.
The Data Verification Mechanism (DVM) is the oracle process used to resolve disputes on the UMA protocol. When there is a price dispute regarding a liquidation, the DVM requests UMA token holders vote on the correct price. The DVM then relays the correct price to the requestor, rewards UMA token holders who voted correctly.
Decentralized applications — dApps — use blockchain technology to address use cases ranging from investment to lending to governance. Although dApps may appear similar to web applications in terms of UX, dApp back-end processes forgoes centralized servers and transacts in a distributed and peer-to-peer fashion.
A decentralized autonomous organization (DAO) is a blockchain-based organization that is democratically managed by members through self-enforcing open source code and formalized by smart contracts. DAOs lack centralized management structures. All decisions are voted upon by network stakeholders. As DAOs are built on top blockchains — often Ethereum — their transactions are executed transparently on the underlying blockchain.
A decentralized exchange (DEX) is a financial services platform for buying, trading, and selling digital assets. On a DEX, users transact directly and peer-to-peer on the blockchain without a centralized intermediary. DEXs do not serve as custodians of users' funds, and are often democratically managed with decentralized governance organization.
The date at which the Synthetic token expires. At that time, the metric that the token is tracking is determined by the UMA DVM and a final price is given to the token. This may also be referred to as the settlement date.
Gas is the ETH required to power every transaction on Ethereum. Gas is a term that was coined to describe the ETH (ether) required to transact on the Ethereum network.
More specifically, every transaction that occurs on the Ethereum network requires a set amount of gas, which is the unit used to measure the computational power required to process a transaction. To process a transaction and include it in a block, miners are expected to be compensated for this task.
The Global Collateral Ratio is the average collateralization ratio across all token sponsors of a single synths contract, excluding those that have been liquidated. It is calculated by dividing the total collateral deposited by all token sponsors in the contract by the total number of outstanding synthetic tokens. The GCR is used to set collateralization requirements for new synthetic token issuance and to enable “fast” withdrawals.
Impermanent loss describes the temporary loss of funds occasionally experienced by liquidity providers because of volatility in a trading pair. This also illustrates how much more money someone would have had if they simply held onto their assets instead of providing liquidity.
The loss is 'impermanent' because the original value of the tokens can be restored if the liquidity pool restores balance.
Abbreviation for Liquidity Provider. A liquidity provider is someone deposits a pair of tokens to an AMM (Automated Market Maker ie. Uniswap) pool. For example, Providing uGas and ETH on Uniswap makes you an LP.
When the value of the synths that a token sponsor has minted gets close enough to the value of the collateral used to mint those synths (minimum collateral ratio), the collateral can be claimed in a process called liquidation. The token sponsor keeps the synths and the bot will claim the collateral.
The price at which a token sponsor's position will be liquidated. It is calculated by taking a ratio of the price of collateral to the price of the synthetic asset minted. This price may or may not vary depending on whether the collateral for the synth is stable or not.
A measure of how much available circulating supply there is of an asset or currency, and the activity of that asset or currency in an exchange, economy, or network. A currency with low supply and/or circulation is said to be illiquid.
The collateral ratio at which a position is at risk of being liquidated. The minimum CR for many synths is 1.25.
Non-fungibility means that a specific asset is distinguishable or unique from another asset that is similar in nature. A non-fungible token (NFT) is a specialized type of cryptographic token that represents a unique digital asset, which is in contrast to cryptocurrencies and blockchain utility tokens (like Bitcoin and Ethereum) that are fungible in nature. NFT's are created via smart contract technology and are classified within the ERC-721 token standard.
If you mint a synthetic token, you can redeem it at any time to obtain the underlying collateral. If you redeem before expiry, you have to either redeem the exact number of synths that you minted or you can redeem any number of synths less than the required minimum balance. The required minimum balance depends on the synth.
If you bought the synth on Uniswap and hold the token past expiry date, you will be able to settle it and obtain the underlying collateral. Settling is only possible after expiry. Before the expiry date, you can just sell the synth on Uniswap.
A bet that an asset will go down in price. To do this, you would mint and sell a synthetic token.
Short for Synthetic Token and used as abbreviation throughout the docs.
When traders buy or sell tokens from AMM pools on a DEX, they pay a very small fee for each trade. That fee is then shared out among all the pool’s liquidity providers on a pro rata basis.
A TWAP Is a Time Weighted Average Price. It is calculated by taking the average price of an asset in an AMM over a specified period of time. A 2hr TWAP price is used by uGas, uStonks, and uPunks to: a) Calculate the number of synths that can be minted b) Determine prices for liquidations
Uniswap is a decentralized exchange protocol built on Ethereum. To be more precise, it is an automated liquidity protocol. There is no order book or any centralized party required to make trades. Uniswap allows users to trade without intermediaries, with a high degree of decentralization and censorship-resistance.
Yield farming programs, also known as liquidity mining, reward users by paying them in the protocol native token. It’s the equivalent of a Web3 customer acquisition cost–paying early users in the native token that powers DeFi application and often involves voting rights in future upgrades to the protocol.