Cryptocurrency and Blockchain Dictionary

Accretion (of a Discount)

What Is Accretion (of a Discount)? The gain an investor makes after purchasing assets at a discount is referred to as an accretion (of a discount). The investor progressively makes money on the difference between the discounted purchase price and the bond's face value by keeping the bond until it matures. In corporate finance, accretion is the value that you produce when you merge with or acquire another company. The value of your stockholders' shares rises, as a result, raising your earnings per share (EPS). How to Calculate Accretion of a Discount? When you purchase a bond for a price less than its face value, it is known as accumulation and it puts more money in your pocket. But how does it work? Let’s assume you bought a discounted bond for $800 but its face value is $1,000. You keep the bond until the maturity date. When the bond matures, you receive interest on top of the difference between the face value and the discounted price. In other words, if you bought it only for $800, you gained $200. Additionally, you got the interest on the bond's $1,000 face value. When a bond reaches maturity, interest is paid out either yearly or all at once. Either the straight-line technique or the constant-yield method can be used to determine the bond's accretion. Let's check out the two calculation techniques. The Straight-Line Approach Let's assume that the maturity of your bond is after five years. The bond's face value was $500 more than what you paid for it. There are 20 financial periods left till the bond matures because the bond issuer reports its financial standing every quarter. You may observe a $25 addition every quarter until the bond matures (if you divide the discount [$500] by the length of financial periods [20]). In other words, until the bond's maturity date, the value of your amount will rise by $25 every three months. The Constant-Yield Approach The bond's value rises as it gets closer to its maturity date using the constant yield approach. This implies that some financial periods, particularly those approaching the conclusion of the bond's life, will show greater benefits. The accretion of discount can be calculated using the following formula:  Accretion Amount= Purchase Basis x (YTM/Accrual periods per year) - Coupon Interest. Using this approach, you must first get the value of yield to maturity (YTM) in order to calculate the accretion of discount. The earnings on a bond that is held to maturity are known as YTM. Keep in mind that the profit's compounding frequency has a significant impact on YTM.  At the maturity date, both bond accretion computations will result in a profit for you. The constant yield strategy, however, enables the bond issuer to get additional time before they must raise the bond's value.

Acquisition

What Is an Acquisition? An acquisition occurs when one firm buys all or most of another firm’s shares to control the company. Buying over 50% of a company’s shares gives the power to the buyer to make the final decision related to the company’s operations. How Do Acquisitions Work? Companies acquire firms for several reasons. One may be economies of scale, significant market share, diversification, cost reduction or new service offerings. Acquisitions are often used as an entry point into foreign markets. Buying an existing firm in a country makes more sense since the brand is already well-known. It could ensure that the buying company starts on a solid base. Acquisitions are also often done as part of a growth strategy. A large company could acquire a small one to expand its revenue streams. Another reason to acquire another company is to reduce competition. They may also do it to receive new technology. Sometimes, it is more cost-effective to buy another firm and implement its technology than to spend money developing it. Company officers must perform due diligence on target companies before an acquisition. Is Acquisition Amicable? An acquisition is often a pleasant transaction where both firms work together. When there is no cooperation, a takeover occurs where the target firm resists the purchase. An amalgamation happens when the two companies combine to form a new entity. In practice, these terms tend to overlap. Evaluations Before an Acquisition Before the acquisition, the company must evaluate whether the targeted company is the right candidate for an acquisition. The goal is to find out if the price proposed is correct. The exact metrics used will vary by industry. Acquisitions mostly fail because of the asking price of the target company usually exceeds the metrics. Things like the debt load are usually examined. A target company with high levels of liabilities has to be viewed as a warning for problems ahead. Another factor to consider is unnecessary litigation. While lawsuits are common in the business world, a good acquisition candidate should not have excessive legal issues going on. Finally, the financials have to be checked. They need to be properly organized, allowing the buyer to exercise due diligence easily. Transparent financials help to prevent surprises when the acquisition is complete.

Flash Loan Attack

What Is a Flash Loan Attack? Flash loan attacks are decentralized finance (DeFi) exploits where a smart contract designated to support the provision of flash loans is attacked in order to siphon assets stored in any particular pool. In such attacks, the malicious actor opens a loan, uses that borrowed capital to purchase other assets with arbitrage and quickly pays their loan back, taking the assets left with them throughout the whole process as their profit. It is important to understand that this exposure can only happen within DeFi protocols since they are permissionless and entirely run by smart contracts. While disintermediation provides a lot of benefits like cost savings and censorship resistance, having no third party overseeing the provision of uncollateralized loans provided through flash loan contracts make DeFi platforms susceptible to such attacks.  This type of malicious activity is actually complex and difficult to pull off, yet somehow there are many cases where cybercriminals have succeeded in this endeavor.  Most flash loan attacks involve using borrowed capital to arbitrage assets from other DeFi protocols. For instance, in one of the bZx protocol attack, the hacker took out a loan from a contract and immediately converted it into stablecoins. But since smart contracts only function based on the data fed to them, they can be vulnerable to some exploits. The attacker took advantage of that by manipulating the price of the stablecoin, sUSD, by placing a large buy order on it, which helped drive the price of the stablecoin to twice the value it was supposed to be. From there, he took out a bigger loan using the sUSD he swapped as collateral. Then, he repaid all these loans and took away the remaining assets with him as profit. Another well-known flash loan attack occurred earlier on, on the same platform. The flash loan attacker took out a flash loan on dYdx, which is a lending DApp, and sent the capital from that flash loan to both Compound and Fulcrum — on Fulcrum, the attacker shorted ETH against Wrapped Bitcoin (WBTC), while also taking out a Compound loan of WBTC. Without getting too much into the specifics, when WTBC's price pumped due to the effects of Fulcrum acquiring WBTC, the flash loan attacker flipped their WBTC on Uniswap, repaid their own and got away with any of the leftover ETH. In May 2021, popular Binance Smart Chain-based yield farming aggregator PancakeBunny experienced a flash loan attack as well. The flash loan attacker borrowed a large amount of BNB on PancakeBunny, thus manipulating its price against both the Binance USD stablecoin and Bunny tokens — when the flash loan hacker dumped their Bunny on the market, the price plummeted.

Digital Asset

What Is a Digital Asset? A digital asset, in the world of crypto and fintech, refers to the digital representation of something of value. Typically, this value is tokenized, and the resulting tokens can represent either full ownership or fractional ownership that is verified and recorded on a distributed ledger.  A digital asset can include cryptocurrencies or crypto tokens, or can represent a real-world asset (RWA) that is stored on the blockchain in the form of a token that represents its value, identified with its unique ID. RWA can come in the form of a commodity, a file, a record of a land registry, an accounting ledger, a 3D printing raw file, and much more. Asset values can be defined by monetary amount, kilograms, ounces or liters or a digital asset like the digital rights to a film, a non-fungible token (NFT), loyalty and reward points, or a file which can be quantified on the blockchain by the number of users or views granted to the holder for example. Digital assets can be used as either a medium of exchange that can be used to acquire goods or services, or can simply refer to the physical representation of a real-world asset in its digital asset form with its unique identification code. As blockchain and digital assets continue to mature, the use cases for digital assets will likely continue to grow, opening up the world to new opportunities. Author: Johannes Schweifer is the CEO of CoreLedger, a company empowering businesses of all sizes to access the benefits of blockchain technology. Schweifer co-founded several blockchain start-ups, including Bitcoin Suisse. He’s a passionate problem solver, holding a master’s degree in chemistry and a PhD in distributed computing and quantum chemistry.

Digital Commodity

What Is a Digital Commodity? There is a wide range of things that might be termed digital commodities These include things like computing power and storage. Increasingly, however, the term digital commodity is primarily taken to mean digital currencies. In practical terms, digital commodities regulation is targeted squarely at cryptocurrencies. In the U.S., lawmakers signed the Digital Commodity Exchange Act 2020 to regulate the activities of trading platforms. Other laws and regulations governing the use of cryptocurrencies and associated activities have appeared rapidly in recent years, from New York state's BitLicense to the United Kingdom banning the sale of crypto derivatives to retail investors. Because cryptocurrencies are commodities, they can also be used as the basis for derivatives — a popular financial instrument whose value is based on the value of an underlying asset. For example, a trader might choose to enter into a derivatives contract that gives them the right to buy or sell an amount of cryptocurrency at a certain date or value. The growth in derivatives is seen by many as crucial for the mass adoption of digital assets. Confusingly, digital commodity trading can also refer to selling real-world assets such as oil and gas electronically. Here, digital commodity trading relates to the digitization of different elements of the commodity trading chain. 

Cipher

What Is a Cipher? Ciphers arose as an answer to the need for people to exchange information in secret without third parties being able to violate their privacy. They are a fundamental concept in cryptography — the science of secure communication. Ciphers work by transforming plaintext (the original message that the sender intends to encrypt) into ciphertext — the coded text that can be safely sent to the receiver. The receiver then needs to use an additional piece of information — commonly called a “key” — to decrypt the ciphertext back into plaintext. The key is agreed upon by the sender and the receiver prior to initiating the communication, and a good cipher must produce such a ciphertext that is extremely difficult or impossible to decrypt without knowing the key. The earlier ciphers that relied on pen and paper, and have by now been displaced by much more effective computer-assisted encryption methods, are often called classical ciphers. The two main types of these are substitution and transposition ciphers. Advances in cryptanalysis have made these pen and paper ciphers easily crackable and effectively obsolete. The emergence in the mid-20th century of electromechanical encryption devices such as the Enigma machine had prolonged their usefulness somewhat, until the appearance of the corresponding decryption devices, such as the British bombe. Since then, new cryptographic ciphers have emerged that are so computationally intensive that encryption can only be done effectively through the use of computers, and decryption is prohibitively expensive even with the most powerful machines available. Cryptocurrencies rely heavily on the instruments of cryptography, including ciphers, to ensure the continuous operation and high security of their networks.