Cryptocurrency Terminology: Slippage, Staking, FUD & DeFi
This information is not meant to provide investment or financial advice as Howlader & Co are not investment professionals. The digital currency market may experience a high degree of volatility. Clients should be aware of the risks associated with cryptoassets and consult with an investment and/or legal professional before any investment is made. Howlader & Co cannot guarantee future financial performance.
What is slippage in crypto? How about staking, what does a stake mean in crypto?
There’s lots of cryptocurrency terminology out there but if you’re struggling to get your head around it all, don’t worry – we have you covered.
For any crypto newcomers, first check out our previous article about the different types of cryptocurrency coins and tokens, including an overview of digital gold, cash and software platforms.
As well as explaining slippage and staking, we’ll cover terminology queries regarding some confusing acronyms – such as, what is FUD and DeFi in crypto?
In fact, that’s the best place to start.
What is DeFi in crypto?
The concept behind cryptocurrencies is that they are decentralised, in other words there is no administrator or central bank involved as a third party.
Instead transactions are recorded on an open source blockchain or distributed ledger technology system.
So, what is DeFi in crypto, exactly? It stands for decentralised finance.
Currently, the most common blockchain software platform for decentralised finance is Ethereum, created in 2013.
Benefits of using this peer-to-peer financial technology include democratised access to quicker, intermediary-free decentralised exchanges. Here traders can buy and sell digital cash, stablecoins and so on via smart contracts, or condition-based automatic transactions.
There are also DeFi lending platforms, allowing lenders to provide crypto loans to borrowers, with the interest rates set algorithmically rather than by a third party.
However, there’s an argument that this very absence of an administrator or central bank is a considerable risk of using DeFi.
Detractors argue that the lack of regulation and safeguards means there is very limited consumer protection from price volatility and potential hacks or scams.
It has been reported recently that DeFi exchanges in the UK could be subject to a 2% tax, which may ultimately be passed on to traders, under the recent digital services tax.
What is slippage in crypto?
Experienced traders will be familiar with the highs and lows of stock price movements occurring between an order’s execution and the actual trade taking place.
In DeFi, these price movements can be more frequent and more noticeable, due to volatility and liquidity issues.
So, what is slippage in crypto? It’s the money gained, or lost, from these unexpected price movements. Positive slippage gives buyers a better rate than expected, while negative slippage provides a worse one.
It’s possible to reduce the impact of negative slippage by setting order limit tolerance levels. You could specify that transactions shouldn’t take place if the rate changes by a certain percentage, offering protection from undesired price movements.
However, if you set the threshold too low, you could miss out entirely on a big cash-in or cash-out due to, say, a mere 0.1% price change before the rate later shifts dramatically.
Therefore crypto traders need to decide in advance how much slippage they’re willing to accept, to maintain long-term profits and reduce losses.
What is staking in crypto?
Rather than trading, a stake is about securely depositing crypto to receive ‘interest’ in the form of rewards.
Stakers delegate a set amount of their crypto assets to lock up and take out of circulation for a predefined period of time.
This increases the cryptocurrency’s value by limiting its supply. Moreover, if its network uses a proof-of-stake system, the stakings are then used to forge new blockchain blocks.
While stakers go without access to their assets, they benefit from receiving either additional coins and tokens on a randomised basis – or voting rights, similar to owning company stock.
In other words, what is staking in crypto? Think of it as something similar to savings bonds.
It’s a way of growing holdings, or essentially earning interest, but only by accepting a potentially lengthy lock-up period.
That’s one risk and also, volatile price swings could mean that ultimately, staking does not always pay off – similar to the risk of unexpected interest rate changes with savings bonds.
On DeFi exchanges there are often staking fees too, which are usually a small percentage of the rewards.
What is FUD in crypto?
So far in this article we’ve explored both the pros and cons associated with various crypto terminology. However, FUD is an acronym which is only about the negative side.
It stands for fear, uncertainty and doubt. FUD refers to perceived ‘crypto sceptics’ who are either concerned about the risks of cryptocurrency, or dismissive of its potential long-term popularity, or both.
It tends to be a derogatory term used by crypto advocates to counter any negativity from its detractors.
Cryptocurrency supporters may accuse anyone who is openly critical as aiming to spread fear, uncertainty and doubt, with a view to ultimately challenging its continued growth.
Other cryptocurrency terminology
Believe it or not, we’ve barely scratched the surface of all the crypto terminology which has been in use since Bitcoin was first created in 2008.
Other terms linked to the topics we’ve just covered include:
- Yield farming: yield farming, a way to earn “interest” on your crypto, is similar to staking but involves lending out your crypto assets to others.
- Frontrunning: this is when you have knowledge of a future transaction, via publicly unavailable knowledge, and profit from it by placing strategic transactions.
Here is a long glossary of other terms from crypto price-tracking database CoinMarketCap.
Final thoughts: cryptocurrency terminology
We’ve now answered some of the most common questions around cryptocurrency terminology:
- What is DeFi in crypto?
- What is slippage in crypto?
- What is staking in crypto?
- What is FUD in crypto?
For a greater understanding of cryptocurrency tax in the UK, take a look at our recent article interpreting the full HMRC guidance. If you’re looking for support – whether that’s with crypto tax and accounting, or just making sense of the terminology – please contact us. Our team of expert crypto accountants in the UK will be happy to help you.