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Glossary
Plain-language definitions of the terms behind synthetic dollars and onchain yield. Each entry gives a short answer first, then how it works and what to check.
Digital dollars
Synthetic dollar
A synthetic dollar is a token designed to track the value of the US dollar by combining collateral with offsetting positions, rather than holding cash in a bank for every token issued. Because the collateral is actively managed, it can pass a variable return to holders.
Stablecoin
A stablecoin is a token designed to keep a steady value, usually one US dollar, most often by holding cash and short-dated government debt in reserve. It lets dollars move onchain at any hour, but fiat-backed issuers usually keep the interest their reserves earn.
Yield-bearing dollar token
A yield-bearing dollar token is a dollar-denominated token that passes the return of an underlying strategy to its holders, usually by becoming worth more over time. The return can come from government debt, lending or trading strategies, and it is variable.
Depeg
A depeg happens when a token designed to track a reference value, usually one US dollar, trades meaningfully away from that value. Common causes are doubts about the assets behind it, a sudden rush to exit, thin liquidity and a mechanism that stops working.
Collateral
Collateral is an asset pledged to back a loan or a token, so that losses can be covered if something goes wrong. In DeFi its type, quality and location matter as much as its amount, and smart contracts can sell it automatically when its value falls too far.
Strategy and hedging
Delta-neutral
A position is delta-neutral when its total value barely changes as the price of the underlying asset moves, because long and short exposures offset each other. Its return then comes from what the positions earn while they are held, not from betting on market direction.
Currency hedging
Currency hedging uses offsetting positions, such as forward contracts, so that exchange-rate moves do not change an investment's value in the investor's base currency. It removes currency losses and currency gains alike, and it usually has a cost.
Variable yield
Variable yield is a return that changes over time with market conditions instead of being set in advance. In DeFi it should always trace back to a real source, such as borrowers paying interest or income from trading activity; a yield with no explainable source is a warning sign.
Funding rate
A funding rate is a periodic payment between the long and short holders of a perpetual futures contract that keeps the contract's price close to the spot price. When the rate is positive, longs pay shorts; when it is negative, shorts pay longs.
Security and transparency
Proof of reserves
Proof of reserves is an independent check that the assets behind a token or platform actually exist, ideally published continuously so anyone can verify it. It shows the asset side of the balance sheet; on its own it does not prove liabilities or cover every risk.
Smart contract audit
A smart contract audit is an independent security review of a protocol's code that looks for vulnerabilities before, or soon after, it goes live. It lowers risk within its stated scope and date, but it is not a promise that the code is free of bugs.
Bug bounty
A bug bounty program pays security researchers for reporting vulnerabilities responsibly instead of exploiting them, with rewards scaled to how severe the issue is. It keeps a protocol's code under review long after its audits are finished.
Runtime monitoring
Runtime monitoring is the continuous watching of a protocol's live onchain activity to flag, and sometimes block, suspicious transactions as they happen. It complements audits, which review code at one point in time, by watching what the code is actually doing.
Price oracle
A price oracle brings outside data, such as the price of a token, onto a blockchain so that smart contracts can use it. Lending markets value collateral through oracles, so a wrong or manipulated price can trigger liquidations that should never happen.
Standards and infrastructure
ERC-4626
ERC-4626 is an Ethereum standard for tokenized vaults. It defines one common interface for putting assets into a vault, receiving shares in return and calculating what each share is worth, so wallets and protocols can work with any compliant vault without custom code.
Vault token
A vault token is a share in a pool of assets managed by a smart contract. As the vault earns, each share becomes worth more of the underlying asset while the holder's balance stays the same, which makes vault tokens easy for other protocols to hold and track.
Total value locked (TVL)
Total value locked (TVL) is the total market value of the assets held in a protocol's smart contracts at a given moment. It is a rough signal of size and usage, not a measure of safety or profit, and it can count the same assets more than once.
DeFi composability
Composability means DeFi protocols can plug into each other like building blocks, so a token from one protocol can serve as collateral, liquidity or a yield source in another without anyone's permission. It multiplies what a token can do, and it also links the protocols' risks together.
Chainlink CCIP
Chainlink CCIP (Cross-Chain Interoperability Protocol) is a standard for sending messages and tokens between blockchains. A token issuer can adopt it natively, so the same token moves across chains instead of being replaced by wrapped copies from third-party bridges.
Money market
In traditional finance, a money market is where short-term debt is borrowed and lent. In DeFi, the term usually means a lending protocol where users supply assets to earn interest and others borrow against collateral, with rates that move with supply and demand.
Yield tokenization
Yield tokenization splits a yield-bearing token into two parts: a principal token, which can be exchanged for the underlying asset at a set maturity, and a yield token, which collects the variable yield until then. Trading the two lets one party lock in a fixed rate while another takes on future yield.
Liquidity pool
A liquidity pool is a smart contract holding two or more tokens that traders swap against, with prices set by a formula instead of an order book. Liquidity providers supply the tokens and earn a share of trading fees, taking on price and smart contract risk in return.
Written by the Tori Finance team. Not investment advice. Yields vary; capital is at risk.