Web3 Knowledge Base
Essential concepts and terminology for understanding blockchain, DeFi, and cryptocurrency markets.
Blockchain
A distributed ledger technology that maintains a continuously growing list of records (blocks) linked and secured using cryptography.
Example:
Bitcoin blockchain records all BTC transactions in chronological order.
Hash
A fixed-length string produced by a hash function that uniquely represents data. Any change to input data produces a completely different hash.
Example:
Bitcoin block hashes start with multiple zeros, indicating proof-of-work completion.
Consensus Mechanism
The method by which a blockchain network agrees on the validity of transactions and maintains network integrity.
Example:
Bitcoin uses Proof-of-Work, while Ethereum 2.0 uses Proof-of-Stake.
Node
A computer that maintains a copy of the blockchain and validates transactions according to network rules.
Example:
Running a Bitcoin full node requires downloading and validating the entire blockchain.
Automated Market Maker (AMM)
A protocol that uses mathematical formulas to price assets and enable trading without traditional order books.
Example:
Uniswap uses the x*y=k formula where x and y are token reserves.
Liquidity Pool
Smart contracts containing tokens that provide liquidity for decentralized exchanges and earn fees for providers.
Example:
ETH/USDC pool on Uniswap allows users to swap between these tokens.
Yield Farming
The practice of providing liquidity or staking tokens to earn rewards, often in the form of additional tokens.
Example:
Lending USDC on Compound to earn COMP governance tokens.
Impermanent Loss
The temporary loss of funds experienced by liquidity providers due to volatility in a trading pair.
Example:
Providing ETH/USDC liquidity when ETH price increases significantly.
Market Cap
Total value of all tokens in circulation, calculated as current price multiplied by circulating supply.
Example:
If ETH trades at $2000 with 120M tokens, market cap is $240B.
Total Supply vs Circulating Supply
Total supply includes all tokens ever created, while circulating supply excludes locked, burned, or unreleased tokens.
Example:
Bitcoin has 19M circulating supply out of 21M total supply.
Token Burn
Permanent removal of tokens from circulation by sending them to an inaccessible address.
Example:
Ethereum burns ETH fees since EIP-1559, reducing total supply.
Vesting
The process of gradually releasing locked tokens to team members, investors, or community over time.
Example:
Team tokens vest over 4 years with 1-year cliff.
DAO (Decentralized Autonomous Organization)
An organization governed by smart contracts and token holders, operating without central authority.
Example:
MakerDAO governs the DAI stablecoin through MKR token holder votes.
Governance Token
Tokens that grant holders voting rights on protocol changes, parameter updates, and fund allocation.
Example:
UNI tokens allow voting on Uniswap protocol upgrades and fee distributions.
Proposal
A formal suggestion for protocol changes that token holders can vote on.
Example:
Changing liquidity mining rewards requires a governance proposal.
Quorum
The minimum number of votes required for a governance proposal to be valid.
Example:
Compound requires 400K COMP tokens to vote for quorum.
Slippage
The difference between expected price and actual execution price, especially in large trades.
Example:
Buying $1M of a small-cap token may experience 5% slippage.
Arbitrage
Profiting from price differences of the same asset across different exchanges or markets.
Example:
Buying ETH on Exchange A for $2000 and selling on Exchange B for $2010.
Market Depth
The volume of buy and sell orders at different price levels, indicating liquidity.
Example:
Deep markets have large orders near current price, reducing slippage.
Front-running
Exploiting advance knowledge of pending transactions to profit, common in MEV extraction.
Example:
Bots detect large DEX trades and place higher gas transactions first.
Smart Contract Risk
The possibility of bugs, exploits, or unintended behavior in protocol code.
Example:
The DAO hack exploited a reentrancy vulnerability for $60M.
Rug Pull
When developers abandon a project and steal invested funds.
Example:
Removing liquidity from DEX pools after attracting investors.
Flash Loan Attack
Exploiting DeFi protocols using uncollateralized loans that must be repaid in the same transaction.
Example:
Borrowing millions to manipulate oracle prices and profit.
Bridge Risk
Security vulnerabilities in cross-chain bridges that lock assets on one chain to mint on another.
Example:
Wormhole bridge exploit resulted in $320M loss in 2022.