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DeFi Concepts

Glossary of DeFi concepts and meaning.

Alpha​

The capacity of an investment strategy to beat the market, or its edge, is referred to as alpha.

Alpha is also known as excess return or abnormal rate of return, which alludes to the assumption that markets are efficient and that there is no way to systematically achieve returns that are higher than the general market.

The Greek letter beta (which reflects the wide market's overall volatility or risk, known as systematic market risk) is frequently employed in conjunction with alpha.

Information Asymmetry: When one party in a transaction is in possession of more information than the other

Fee Markets​

Fee markets in cryptocurrencies are dynamic systems that determine transaction costs based on network demand and capacity. Elements to evaluate include:

  1. Purpose: Fee markets ensure efficient transaction processing and incentivize miners/validators to maintain the network.
  2. Mechanism: Users compete for limited block space by offering higher fees for faster transaction confirmation.
  3. Factors influencing fees:
    • Network congestion
    • Transaction complexity
    • Block size limitations
    • Computational requirements
  4. Variability: Fees fluctuate based on real-time network conditions, often rising during periods of high activity.
  5. User control: Many wallets allow users to set custom fees, balancing cost against confirmation speed.
  6. Impact: Fee markets affect transaction costs, network security, and overall blockchain usability.
  7. Differences: Fee structures vary across cryptocurrencies, with some using fixed fees and others employing more complex models.
  8. Evolution: Technological advancements and network upgrades can significantly impact fee market dynamics over time.

This market-driven approach ensures that blockchain networks remain decentralized and self-regulating while providing an economic incentive for network participants.

Maximal Extractable Value (MEV)​

Maximal Extractable Value (MEV) refers to a strategy to include, omit, or reorder transactions when making a new block to maximize profit.

See Crypto Adoption Problems

Transaction Settlement​

The layer at which a transaction is settled.