Glossary

Below is a Glossary covering key terms used throughout the MegaStrategy documentation. The aim is to clarify concepts used by the protocol, which blends decentralized finance (DeFi – smart contracts, tokens, governance) with advanced concepts from traditional finance (TradFi – convertibles, arbitrage, auctions). Please refer to the CONTRIBUTING guidelines to add terms and consider opening a pull request.

[ A ]

Arbitrage

A trading strategy that exploits price differences between two or more markets or instruments to make riskless (or low-risk) profit. In the context of MegaStrategy, “convertible arbitrage” might involve hedging, shorting equities or tokens, or taking advantage of mispricing in convertible instruments.

[ B ]

Bootstrapping

Process by which the initial protocol conditions are set – treasury backing, token distribution, liquidity – to kickstart the system

[ C ]

Collateral

Assets locked in smart contracts (e.g., ETH, stablecoins, or other tokens) to secure a borrowed position. If the value of collateral falls below a certain threshold, liquidation may occur.

Collateralization Ratio

The ratio of the value of collateral locked to the value of debt issued. A higher ratio often reduces liquidation risk.

Convertible Arbitrage

A strategy that typically involves purchasing a convertible and simultaneously shorting (or otherwise hedging) the underlying to benefit from mispricing between the embedded option and volatility priced into the market.

Convertible

A hybrid debt instrument that can be converted into underlying assets at a specified conversion price. Issuers benefit from lower interest rates, while buyers gain upside from embedded optionality if the underlying asset’s price rises.

Conversion Price

The price at which a convertible can be exchanged for underlying assets. If the market price of the underlying rises above this threshold, conversion becomes more attractive.

[ D ]

Debt Auctions

An onchain mechanism for issuing convertibles to participants. MegaStrategy uses debt auctions to raise capital used to purchase ETH.

[ E ]

Ethereum

A public, permissionless blockchain featuring smart contract functionality. The world computer powers DeFi protocols like MegaStrategy through programmable, self-executing code. There is no second best.

[ F ]

Flywheel

A self-reinforcing feedback loop where each cycle into the next. For MegaStrategy, price appreciation enables further debt issuance for increased leverage — which in turn drives additional volatility.

[ G ]

Governance

The mechanisms by which tokenholders make decisions about protocol upgrades, strategy parameters, or treasury deployment. MegaStrategy governance often involves token-based voting.

[ L ]

Leverage

The use of borrowed capital to amplify potential gains (and losses) on a volatile asset. Leverage raises the stakes in volatile markets, increasing both upside and downside risk.

Liquid Staking Token (LST)

A token that represents staked assets on a blockchain. On Ethereum, LSTs represent staked ETH used to secure its Proof-of-Stake (PoS) consensus mechanism. LSTs allow users to earn staking rewards while maintaining the ability to trade the token.

Liquidation

The forced closure of a leveraged position when collateral falls below a required threshold. External platforms typically sell collateral to repay debt, protecting lenders from insolvency. MegaStrategy does not have short-term liquidation risk, structuring its debt on long-term maturities.

Liquidity

The ease with which an asset can be bought or sold without causing large price movements. In DeFi, liquidity often comes from automated market makers (AMMs) or lending pools, and it’s critical for efficient protocol operations.

Liquidity Pool

A pooled group of tokens that are locked in a smart contract. In DeFi, liquidity pools on decentralized exchanges (DEX) facilitate trades between those assets and traders.

Liquidity Provider

A user (or protocol) who deposits tokens into a liquidity pool to facilite trades between those assets. In return for providing liquidity, users receive a percentage of trading fees proportional to volume and their share of the pooled assets.

Loan-To-Value (LTV) Ratio

This ratio expresses the health of a user's loan, represented by the loans value as a percent of the user's collateral. In TradFi, lenders assess a borrower's creditworthiness. In DeFi, loans are generated algorithmically using collateral on the blockchain.

[ M ]

Market Operations

Activities for DeFi protocols that involve token swaps, liquidity provision, price discovery, and potentially arbitrage among different pools or exchanges. MegaStrategy performs market operations for its native tokens based on market conditions and its treasury strategy.

[ O ]

Option

A financial instrument giving the holder the right (but not the obligation) to buy or sell an asset at a certain price on or before a specific date. Convertibles function similarly with the embedded conversion option on the underlying asset.

[ S ]

Smart Contracts

Self-executing code on the Ethereum blockchain that automates financial transactions and enforces protocol rules. In MegaStrategy, smart contracts custody treasury assets, execute market operations, and initialize lending markets.

[ T ]

Treasury

The collection of assets held by MegaStrategy, consisting of ETH, LSTs, stablecoins, and other tokens. The protocol’s mechanisms revolve around managing, growing, and leveraging this treasury.

[ V ]

Volatility

The magnitude and frequency of price movements in an asset or market. High volatility increases both the potential return and the risk of leveraged positions, and it often enhances the value of convertible instruments.