A little while ago, we wrote about basic blockchain concepts, such as decentralization and crypto. Beyond what we've covered in the first part, there are more advanced concepts in the blockchain space that you may want to explore further. These include:
So, let’s dive into these Web3 terms together, and you’ll be fully equipped to impress your first date by explaining to her all the different tokens while she’s sipping her third glass of wine and looking for the waiter to order the fourth.
Consensus
Think of 'consensus' in the blockchain world as a way of making sure everyone agrees on the records in a digital ledger, even though they're all over the place and don't necessarily trust each other. It's like having a group project where everyone needs to agree on the final version of the project report. In blockchain, this is crucial for keeping the system honest and secure.
There are different ways to reach this agreement. The most well-known are Proof of Work (PoW) and Proof of Stake (PoS).
PoW, used by Bitcoin, is a race where computers compete to solve tough puzzles, a process known as ‘mining’. The winner is then able to add new information to the blockchain. It’s secure but uses a lot of electricity. Because of this, there was controversy surrounding Bitcoin mining, as it had a significant negative impact on climate change.
PoS - a much more eco-friendly option, is a raffle where your chance to add to the blockchain depends on how much cryptocurrency you hold. It's more energy-efficient and becoming increasingly popular. Most protocols today use PoS (Ethereum, Near, Solana)
Coins vs Tokens
A coin is a digital asset that is native to its own blockchain. Think of coins like Bitcoin or Ethereum as the digital equivalent of money. They are used primarily as a form of currency, meaning they are a medium of exchange, a unit of account, and a store of value. Coins are typically used in the same way as traditional money – for buying goods and services or as an investment.
Tokens are digital assets that are created on existing blockchains. Unlike coins, they often represent assets or utilities other than money. They can represent assets like real estate, stocks, or even intangible things like access rights, voting rights, or use in a specific software application. They are used for decentralized finance (DeFi) applications, non-fungible tokens (NFTs), voting systems in decentralized autonomous organizations (DAOs), and much more
NFTs
You've probably heard of NFTs. They became a massive trend in 2021, attracting everyone from renowned artists to SoundCloud rappers with their own NFTs. If you're still not quite sure what an NFT is, think of it as a unique digital sticker that declares, “This is one of a kind!”
These stickers can be attached to digital items, like digital art or tweets, to affirm their uniqueness and establish ownership.
However, NFTs are more than just images of monkeys and pixel art. Their characteristic of being non-fungible means they can represent actual ownership of physical assets. NFTs are also used to encourage collaboration. For instance, many projects reward their NFT holders with airdrops and other benefits. There are numerous types of NFTs, and it's not necessary to know all of them (and it's pretty much impossible, as new ones are emerging every day). I'll share a few of my favourites.
Soul Bound Tokens
Soul Bound Tokens (SBTs) serve as proof of identity or achievements that are linked to someone's identity. Think of them as a digital version of your high school diploma or wedding certificate. These tokens are non-tradeable and are uniquely linked to you for obvious reasons.
Proof of Attendance NFTs
Proof of Attendance NFTs (POAs) are a fantastic way to engage audiences at events and similar occasions. Anyone attending an event or a course can mint an NFT, which acts as both a nice memorabilia and proof of their attendance.
Real World Asset NFTs
RWA NFTs are digital counterparts of real-life assets, streamlining the process of proving ownership, facilitating online trade, or even allowing for ownership to be shared among several people. Imagine not having to go through a years-long process to prove ownership of that piece of land your great-granduncle left you. However, it's important to note that the regulatory aspects, especially for RWA NFTs, are complex and subject to ongoing development.
Airdrops
Airdrops are a way of distributing new tokens directly to the digital wallets of users. Sometimes you can find airdrops on social media and within communities, but often there are special requirements for you to be eligible. This could mean having a certain amount of an existing cryptocurrency, being an active user, or just having a wallet that can handle the new token.
DAOs
Imagine a club where decisions aren't made by just one person in charge, but by every member voting on important matters. It's a democratic club running online, where rules aren't enforced by people but by computer programs (smart contracts).
These rules are written in code and can be seen by everyone. This means that no one person or a small group has all the power. Instead, anyone who holds tokens in the DAO can vote on decisions such as how the organization should use its money, which projects to work on, and changes to its rules.
DAOs can be used for all sorts of things, from managing a cryptocurrency project to running a virtual investment fund or even collectively owning digital art. They offer a modern way of organizing and managing projects, businesses, or communities, completely online and with full transparency and democracy.
DeFi (Decentralized Finance)
DeFi is the future of banking and finance but without any banks or financial institutions.
It supports all the usual financial activities—whether it's taking out a loan, saving money, investing in stocks, or buying insurance—directly with others on the Internet.
How does it work? DeFi runs on smart contracts. Think of these as digital agreements that carry out their terms automatically based on the code. In this world, 'Code is Law' - the rules written in the code govern everything automatically.
The best part? Anyone with an internet connection can use DeFi services, no approval needed from a regular bank. This is especially great for people in countries where banking is a hassle.
DeFi also brings transparency and speed to the table. Everything is logged on a blockchain, making it clear and fast. Say goodbye to the long wait for international transfers; with DeFi, that money from your aunt in Germany could be in your account in just a minute.
DeFi is rapidly expanding, showing us a glimpse of a future where financial power is in the hands of everyday people, not just big institutions.
Wrapping up
Congratulations, you’ve made it to the bottom of the article. In short, we've cracked the blockchain code: from the coin/token debate to NFTs shaking up art, DAOs redrawing democracy, and mining redefining power. Now you’re ready to impress your coworkers and confuse your mom. Keep exploring, stay sharp, and remember, in the blockchain world, knowledge is not just power, it's seeing the future.