Web3 Knowledge Base
Your complete reference guide to understanding blockchain technology, cryptocurrencies, and the decentralized web ecosystem.
Blockchain
A distributed ledger technology that maintains a continuously growing list of records, called blocks, which are linked and secured using cryptography.
Example:
Bitcoin's blockchain records every transaction since its creation in 2009, creating an immutable history of all transfers.
Hash
A fixed-size alphanumeric string produced by a mathematical algorithm that uniquely identifies data and ensures its integrity.
Example:
Bitcoin uses SHA-256 hashing, where any change to transaction data produces a completely different hash value.
Consensus Mechanism
A protocol that ensures all nodes in a distributed network agree on the validity of transactions and the state of the blockchain.
Example:
Proof of Work (Bitcoin) and Proof of Stake (Ethereum 2.0) are two different consensus mechanisms.
Node
A computer that participates in a blockchain network by maintaining a copy of the distributed ledger and validating transactions.
Example:
Bitcoin has over 10,000 nodes worldwide, each storing the complete transaction history.
Automated Market Maker (AMM)
A decentralized exchange protocol that uses mathematical formulas to price assets and create liquidity pools.
Example:
Uniswap uses the x*y=k formula to automatically price token swaps without traditional order books.
Liquidity Pool
A collection of tokens locked in a smart contract that provides liquidity for trading and earns fees for providers.
Example:
The ETH/USDC pool on Uniswap contains millions of dollars worth of both tokens for trading.
Yield Farming
The practice of staking or lending crypto assets to generate high returns or rewards in additional cryptocurrency.
Example:
Users provide liquidity to Compound and earn COMP tokens as rewards on top of lending interest.
Impermanent Loss
The temporary loss of funds experienced by liquidity providers due to volatility in a trading pair.
Example:
If ETH doubles in price while USDC stays stable, LP tokens will have less ETH than originally deposited.
Market Capitalization
The total value of a cryptocurrency calculated by multiplying the current price by the circulating supply.
Example:
Bitcoin's market cap is approximately $800 billion (21 million BTC × $38,000 per BTC).
Token Supply
The total number of tokens that exist, including circulating supply, locked tokens, and those yet to be minted.
Example:
Ethereum has no maximum supply cap, while Bitcoin is capped at 21 million coins.
Token Burn
The permanent removal of tokens from circulation by sending them to an inaccessible wallet address.
Example:
Ethereum burns a portion of transaction fees through EIP-1559, reducing the total ETH supply.
Vesting
A schedule that gradually releases locked tokens to team members, investors, or community members over time.
Example:
Team tokens might unlock 25% per year over 4 years to prevent immediate selling.
DAO (Decentralized Autonomous Organization)
An organization governed by smart contracts and community voting, operating without central authority.
Example:
MakerDAO governs the DAI stablecoin through community proposals and MKR token voting.
Governance Token
A cryptocurrency that gives holders voting rights in protocol decisions and treasury management.
Example:
UNI tokens allow holders to vote on Uniswap protocol upgrades and fee distributions.
Proposal
A formal suggestion for changes to a protocol that token holders can vote on.
Example:
A proposal to reduce trading fees from 0.3% to 0.25% on a DEX platform.
Quorum
The minimum number of votes required for a governance proposal to be valid and actionable.
Example:
A protocol might require 10% of all governance tokens to vote for a proposal to pass.
Slippage
The difference between expected and actual trade execution price due to market movement or low liquidity.
Example:
A $100,000 trade might experience 2% slippage, resulting in $2,000 worse execution than expected.
Arbitrage
The practice of buying and selling identical assets on different markets to profit from price differences.
Example:
Buying ETH for $3,000 on one exchange and selling for $3,050 on another for $50 profit.
Market Depth
The market's ability to sustain large orders without significantly affecting the asset's price.
Example:
A deep market can handle $1M orders with minimal price impact, while shallow markets see large swings.
Front-running
The practice of executing trades ahead of known pending transactions to profit from predictable price movements.
Example:
MEV bots detect large pending swaps and place their own trades first to extract profit.
Smart Contract Risk
The possibility of bugs, vulnerabilities, or exploits in smart contract code leading to fund loss.
Example:
The DAO hack in 2016 drained $60 million due to a smart contract vulnerability.
Rug Pull
A scam where developers abandon a project and steal investor funds, often by removing liquidity.
Example:
Squid Game token creators removed all liquidity and disappeared with investor funds.
Flash Loan Attack
An exploit that uses uncollateralized loans to manipulate markets and drain protocol funds within a single transaction.
Example:
Attackers borrowed millions, manipulated oracle prices, and repaid the loan while keeping profits.
Bridge Risk
Security vulnerabilities in cross-chain bridges that can lead to fund loss or asset freezing.
Example:
The Ronin bridge hack resulted in $625 million stolen due to compromised validator keys.