How to navigate around the modern DeFi space?
In this glossary, we introduce — in alphabetical order — some key vocabulary and concepts that are most relevant to TangleSwap and the overall DeFi space. To get familiar with general Web3 terminology, you can refer to the largest Cryptocurrency glossary. Additionally, you can also explore our Protocol Explainer and our Step-by-step User Guides for in-depth information on TangleSwap's DeFi hub.
Annual percentage rate (APR) is the annual rate of interest earned — or paid — each year without taking into account the effect of compounding. For example, an investment of $100 with an APR of 5% will gain $5 as profit over the course of a year, for a total of $105 after one year.
Annual percentage yield (APY) is equivalent to APR but including the effect of compounding, which is when the new interest you earn also starts earning additional interest. For example, an investment of $100 with an APY of 5% and an interest compounded once a year would also yield $105 at the end of the year, just like with APR. But if the interest would compound more frequently (e.g. monthly or daily), after one year you would have more than $105 because each time the interest is compounded, the amount of money earning interest increases.
Capital efficiency in DeFi refers to the ability of decentralized finance protocols and applications to optimize the value generated from the capital invested in them. In other words, it measures how effectively DeFi applications utilize capital to generate profits or achieve their liquidity depth goals.
A centralized exchange, or CEX, is a type of cryptocurrency exchange that operates under the control of a central authority. Users create accounts with the exchange and deposit their assets into the exchange's custody, allowing them to trade with other users through a middle-man authority.
Unlike traditional AMMs, which require liquidity providers to allocate their capital evenly across the entire price spectrum (from zero to infinity), CLMMs empower users to choose the exact price range where they want to provide liquidity. This innovation dramatically boosts the protocol’s capital efficiency and flexibility.
Shorthand for decentralized application, i.e. any feature-complete software app which is not controlled by a centralized entity.
Decentralized finance (DeFi) refers to applications built on top of Blockchain / DAG networks that provide a more open and accessible alternative to Traditional Financial (TradFi) services. It operates on the principles of decentralization and smart contracts, enabling trustless and permissionless financial transactions.
A decentralized exchange, or DEX, is a type of cryptocurrency exchange that operates in a fully decentralized fashion. It uses a blockchain-based protocol to facilitate transactions between users, without the need for a central authority to manage user accounts or assets. Instead, users control their own private keys and maintain custody of their assets at all times.
Trading is enabled through specific algorithms and liquidity pools to determine the price of assets, instead of an order book with buy and sell orders. These pools consist of two assets locked in a smart contract, creating a market for traders and enabling permissionless — i.e. publicly open — transactions. By pooling assets together, liquidity providers earn a share of trading fees generated by the protocol, thus incentivizing them to contribute to the ecosystem. This mechanism ensures users can effortlessly trade their assets without relying on human intermediaries, fostering a more open, transparent, and empowering financial system for all participants.
An automated market maker (AMM) is a popular type of DEX protocol to enable trades directly between users of the network, by using an algorithm — instead of a human intermediary — to determine the price of assets based on liquidity in a pool. The pricing formula on an AMM is typically fairly simple:
Next generation of AMM DEX, enabling Concentrated Liquidity by incorporating user-specific price ranges into the formula:
Shorthand for Distributed Ledger Technology, i.e. a database that is shared by multiple participants, in multiple places around the planet. DLT constitutes the basis for Blockchain- and DAG-based networks.
Do Your Own Research, typically used to encourage users to complete due diligence into a project before investing or using its applications.
A phenomenon related to the ratio of assets changing in a liquidity pool, which causes liquidity providers to experience a temporary loss of value in their position when compared to simply holding the exact assets during the same period of time. It is called 'impermanent' because the loss will disappear if the ratio of assets returns back to the original proportion. It is comparable to opportunity costs, as it calculates a loss based on alternative hypothetical scenarios.
Check out this explainer video for a precise overview on the real implications of Impermanent Loss.
Liquidity depth refers to the amount of liquidity available on each side of the price for a given pair of tokens. AMMs distribute liquidity uniformly in a flat shape from (0, ∞), while CLMMs like TangleSwap allow users to decide in which range(s) to allocate liquidity, which typically results in a shape that is centred around the current price to maximize volume and fees captured, leading to less price impact, less slippage, and more capital efficiency.
Native and Wrapped Tokens
In the world of decentralized finance (DeFi), you'll often encounter the terms "Native Tokens" and "Wrapped Tokens." Here's a quick breakdown to help you navigate.
While native tokens are the original digital assets generated by a specific blockchain, wrapped tokens are a bit different. They're essentially replicas of a native token but live on a different blockchain. These tokens are backed 1:1 by the original asset and facilitate cross-chain interactions. The beauty of wrapped tokens lies in their ability to unlock functionalities of one blockchain on another. For instance, consider Ether (ETH) & Wrapped Ether (WETH). ETH is native to the Ethereum blockchain, while WETH allows Ethereum's native currency to interact on different chains or ecosystems.
External data sources that provide real-world information to smart contracts, enabling them to interact with off-chain data (i.e. data external to the blockchain).
Often used to describe decentralized frameworks and paradigms, a system is said to be permissionless when there is no entity that can arbitrarily regulate who can use it and how it can be used.
Price impact refers to the change in the price of an asset caused by a specific trade or order in a market. It is measured as the difference between the current market price and the effective price after executing a trade. Large trades can cause significant price impact, especially in illiquid markets, as they move the price away from the current market value, resulting in a less favorable execution price for the trader. It is essential to understand that price impact is a different concept from slippage, although they are often correlated.
TangleSwap's CLMM algorithms provide high capital efficiency and enhanced liquidity depth, thus minimizing price impact for traders.
Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed. It occurs when the market price changes between the time an order is placed, and the time it is executed. In DeFi and decentralized exchanges, slippage is primarily caused by price impact and liquidity constraints. To mitigate the effect, traders can set a maximum acceptable slippage percentage, which determines the maximum possible difference between the expected price and the actual executed price. If slippage exceeds this threshold, the transaction will revert and not be executed.
Active liquidity concentration and price impact are inversely correlated, while price impact and slippage are directly correlated. The more concentrated the liquidity is around a specific price, the less impact a given trade has on that price when swapping tokens. Consequently, reduced price impact leads to less slippage, as the chances of other users moving the price enough to affect your transaction before it executes are significantly diminished.
The process of locking tokens in a smart contract to support the operations of a protocol or blockchain network, typically in exchange for rewards or governance rights.
A swap — or trade — is a type of transaction that allows users to instantly exchange one cryptocurrency for another, typically without the need for an intermediary. Swaps are usually conducted on decentralized exchanges, which determine the exchange rate algorithmically based on the ratio of the assets available in liquidity pools.
The fees generated from trading on decentralized exchanges are used to reward liquidity providers (LPs) who deposit their assets in the liquidity pool. LPs receive a proportionate share of the trading fees generated by the protocol, based on their individual contributions to the overall pool.
Total Value Locked (TVL)
Total Value Locked (TVL) refers to the aggregate value of all assets currently staked or deposited in a decentralized finance protocol.
A popular strategy in decentralized finance where users 'farm' rewards from their digital assets by lending or staking them in a liquidity pool. This process earns the user rewards, often in the form of cryptocurrency, sometimes generating a substantial return — or yield — on their initial investment.