DeFi Terms

DeFi Terms:

0. AMMs (Automated Market Makers)

   • Automated Liquidity Management

   • Intermediate entities between:

         a) Liquidity providers

         b) Traders

   Pros:

       a) AMMs do not have a bid-ask spread

       b) AMMs can act as an oracle

       c) AMMs are highly gas efficient compared to order books

   Cons:

       a) Price instability as even small orders move the price in AMMs

       b) Vulnerability to price manipulation since Sandwich attacks are largely unavoidable in AMMs

       c) Impermanent Loss to LPs

   Formula:

       𝒳𝒴 ≤ 𝒳′𝒴′
   
           - Here 𝒳′ and 𝒴′ are the token balances of the pool after the trade and 𝒳 and 𝒴 token balances of the pool before the trade. 
           - This guarantees that the pool’s asset holdings can only stay the same or increase.
           - Most pools enforce some kind of a fee. Not only should the product of the balances increase, but it should increase by at least a certain amount to account for a fee.
   

1. Long

   • Calculation:
     • Profit: (Current value of the position - Entry value of the position)
     • Formula: (Position's size in tokens * Current market price) - (Position's size in tokens * Average entry price)

2. Short

   • Calculation:
     • Profit: (Entry value of the position - Current value of the position)
     • Formula: (Position's size in tokens * Average entry price) - (Position's size in tokens * Current market price)

3. Order Size

   • States:
     • Fulfilled, Pending, or Failed

4. Position Size

   • Position STATES:

         A. Profitability:

             1. Winning/Profitable         2. Losing/Unprofitable         3. Breakeven

         B. Holding:

             1. Long term         2. Short term

         C. Risk:         1. High         2. Low

         D. Leverages

             1. Over-leverage

             2. Hedged

         E. Realization

             1. Realized

                 - Closed positions             - Profit/loss already incurred

             2. Unrealized

                 - Open positions             - Profit/loss not known

   • Position TYPES: A. Price Movements Impacted

     1. Long

        • Buying first, selling later

     2. Short

        • Selling first, buying later

     B. Price Movements Agnostic

     3. Flat

     Strategies to Minimize Price Movements:

     1. Hedged position
     2. Leveraged
     3. Unleveraged
     4. Arbitrage
     5. Options
        • Rights or obligations tied to:
          • Price movement
          • Date
     6. Margin positions
        • Borrowing funds against existing assets

5. Flow

   • User Orders:

     • Order Properties:

       • Size
       • Order size changes affecting user position

6. Collateral Price

   • The fair market value of the assets used to secure a loan

   • Questions:

     • Who determines collateral price?
     • Its origin/source?
     • Frequency of obtaining this price?

7. Collateralization Ratio

   • The collateralization ratio is the collateral value of the loan divided by the value of the loan.
   • Checkout CREAM FINANCE
   • Case study: yUSD manipulation

8. Loan Underwater

   • Reference: YouTube Shorts

9. Insolvent Liquidation

   • Questions:

     • Keeper's role in liquidation?
     • Impact of reorgs/block stuffing attacks?
     • Are keepers encoded in smart contracts?

10. Stablecoin Depeg

    • A cryptocurrency whose value is tied to the value of an underlying asset, such as another currency or resource — becomes worth less or more than its pegged asset.

11. Oracles

    • TWAP Oracles

Questions to Ponder:

1. What happens if the contract returns more than the specified length?
   • All memory up to the length is overwritten with return data
   • Extra data is truncated
2. What happens if the contract returns less than the specified length?
   • All data returned is written to memory
   • Extra memory is left unchanged