Hi Everyone
I’ve created a reference below to help newcomers to our community that have no or very limited knowledge of the space in which Centrifuge occupies to get an overview of some relevant terms. The aim is to support our collective literacy and encourage people to undertake their own research to deepen their understanding of what Centrifuge is and the industry it aspires to disrupt.
This reference is not intended to be comprehensive, but simply an introduction to terminology in a way that hopefully beginners or non-technical people (like myself) can grasp. I think one of the keys to adoption is helping people understand the product and the environment. My hope is to build this reference with input from other community members and perhaps encourage others to build similar resources. I’ve included some hyperlinks to further information on specific topics.
Any feedback would be most appreciated.
I’ve categorised the breakdown of key terms under the following:
- Foundational (general terms in blockchain that are relevant in this context)
- Decentralised Finance (most popular terms associated with DeFI)
- Centrifuge (terms that are specific to the Centrifuge project).
FOUNDATIONAL
Application Programming Interface (API): is software which is designed to simplify the users way of interacting with a platform, making the experience more intuitive. APIs can be customisable. They are critical to adoption of blockchain projects.
Blockchain: is an open (often public) and distributed digital system (similar to a database) that can record transactions between people in a way that is permanent, easily verified, and constant (immutable), and if decentralised, removes the need for an intermediary (i.e. corporation).
Consensus protocol: is a system of rules or agreements that inform the way a blockchain operates and the decision making apparatus. Unlike a centralised system (database) where a single authority (administrator) has control and power to confirm, validate records and update the architecture of the system, a consensus protocol democratises this power among many participants. A consensus protocol, which employs algorithmic checks and balances, is a way for participants to rest assured that they are working with a single source of truth. There a number of consensus protocols in blockchain (proof of work, proof of stake, delegated proof of stake etc).
Decentralisation: is the process in which power of control and decision making moves away from a central authority (e.g. financial institution) to a larger group of people or network, providing a greater say in and fairer way to determine the status, function and future direction of the entity.
Fungibility: is the ability of an asset or good to be interchanged with another good of the same class, implying equal value between the goods. In blockchain, the majority of crypto assets are fungible, meaning they can be swapped or traded.
Nodes: Are connected devices (laptops, computers, servers etc) run by participants on the particular blockchain. In a decentralised blockchain, nodes form the infrastructure of the ecosystem and serve a critical function: to store, exchange and update data and validate transactions on the blockchain. Having disparate nodes connected means there is no single point of failure. There is a range of node types which serve different capacities. (master, mining, full, light etc).
Open source: software that is developed by many and shared freely with the aim to collaborate and improve it, with consent given to copy, change, and re-use. It stems from a philosophy of community or a tribe working for the greater good. Blockchain systems are usually implemented with open source, although not all Blockchains are public or open.
Oracle: Is middleware (third party) that functions as a connector between real world data and the blockchain. Its role is crucial to the functioning of smart contracts by providing a means for them to communicate outside of a decentralised blockchain network. It facilitates a stream of transmission between the blockchain and data providers, web APIs, enterprise backends, cloud providers, IOT devices, payment systems and other blockchains. Oracles act as rails to allow enterprises to adopt and integrate blockchain systems. They are critical to the viability and success of blockchain as a technological concept.
Smart contract: is a computer protocol or application on a blockchain that creates a contract in digital form (using code) and executes it between parties when certain contract conditions are met. The contact is stored publicly on the ledger and easily verifiable. Smart contracts are viable on the blockchain because they can be stored securely (i.e. encryption).
Staking: is a way that token holders can receive rewards (e,g. token) on a proof of stake blockchain by locking up their tokens (taking them out of circulation) for a prescribed period of time. Staking works similarly to earning interest on your savings in a bank or financial institution, but has its own risk v reward profile.
Token: is a digital (programmable) asset of value that is issued by a company (project) and is built on top of a particular blockchain. It can only be accessed by a private key for the address holding the tokens, and authorised by the private key holder. Generally, tokens can fall into a number of categories: payment (cryptocurrencies), security, utility/governance or non-fungible.
Validators: provide the infrastructure and maintenance for the network, which includes the production of new blocks, validation of parachain blocks, guaranteeing finality and the overall security of the network.
DECENTRALISED FINANCE
Collateralisation: is the process of using a valuable asset to secure a loan. It gives lenders ressaurance in the event of default. Businesses leverage this option to support growth and expansion of their product. MakerDao is a project that uses collateralisation to enable participants to lend and borrow crypto currencies without an intermediary.
Decentralised exchanges (DEXs): platforms that operate without a central authority, and allows users to transact peer to peer and maintain control of their funds at all times. DEXs reduce price manipulation and other risks, because the crypto assets are never in the custody of the exchange. For blockchain projects, DEXs allows the project to access liquidity without listing fees.
Decentralised finance: builds on the premise of decentralisation (see above) in the digital financial sector. It offers a more open and easier path to access finance (savings, loans, trading, insurance etc) and creates opportunity for democratic digital marketplaces.
Stable coin: is a digital currency (e.g. DAI, USDC etc) on the blockchain that tracks and derives its value from fiat currency (e.g. USD). The stable coin overcomes both the trust issues associated with fiat markets, while also avoiding the severe price volatility that can be commonplace in general crypto currencies; it does this by moving in almost lock step to its pegged fiat cousin. At the same time, it provides a bridge between the digital and real finance world.
CENTRIFUGE
Centrifuge chain - is a single purpose blockchain opitmised for a specific set of transactions which allows it to be free from the bloating and high transaction fees that currently exists on the Ethereum chain. The narrow purpose of this chain allows Centrifuge to offer higher speed, lower cost transactions, effective storage, data integrity and privacy.
Centrifuge Chain Governance: A formalised governance system that allows for on chain voting mechanisms for binding governance to token holders. Any change to the Centrifuge chain requires a stake-weighted majority. In this model, a body of 7 members (Chain Council) are elected by RAD holders, where proposals on a range of issues can be made and voted on.
Ethereum bridge - enables users to securely move assets between the Centrifuge Chain and Ethereum. The bridge is bi-directional, allowing users to transfer data and value two and from the two systems.
Nominated proof of stake NPoS: is the consensus protocol used by Centrifuge based on the proof of stake model. It allows nominators to support validators using their ‘stake’ of tokens as a show of good faith for the good behaviour of the validator on the network. Validators provide the infrastructure and maintenance for the network, which includes the production of new blocks, validation of parachain blocks, guaranteeing finality and the overall security of the network. NPoS differs from delegated proof of stake in that nominators can also lose stake for nominating a bad validator.
Radial Token (RAD): is the native token of Centrifuge, which is used to incentivise funding on the network, as well as accelerate adoption and distribute the token to key users. RAD is the product of a nominated proof of stake consensus protocol, and can be utilised to stake value, on chain governance, and empower RAD holders to have a say in the development of the Centrifuge project. For example, a RAD holder can propose a public referendum, vote for a proposal, support council members or even become a council member. Radial can be viewed as a utility token, because it is integral to the functioning of on-chain governance, a money market and credit insurance.
Substrate: is an independent (blockchain agnostic) web application framework used for creating decentralised systems, including multichain projects (Polkadot). It allows developers and software engineers to create blockchains without some of the consensus code and mechanism requirements. It can provide ‘out of the box’ features with the ability to customise or mix and match components from different projects. Centrifuge chain has been built on substrate.
Tinlake pools: Smart contract pools that enable individuals or businesses (via asset originators) that have a viable product but lack financing to gain access to funds through a process of converting their assets (receipts, invoices, royalties) into non-fungible tokens on the blockchain. It is a protocol that also allows investors with stable coins to earn interest through the acquisition of pool tokens (DROP and TIN).