The blockchain hype is spreading more and more.
That is why I explain in detail in this article what is behind blockchain and buzz words such as DeFi, smart contracts and NFT.
Here we go.
Blockchain Hype Introduction
Many are not aware of it, but cryptocurrencies and blockchains are the great technological innovations of our time.
While many are waiting for quantum computers and the Internet of Things, cryptos and their technologies are changing the way we deal with money and the Internet.
But what exactly is this hype about? Which technologies and new concepts are the foundations of this new market and ushering in a new Web3.0?
This article is intended to help clarify terms such as “DeFi” and “Non-fungible Token” and why people are becoming more and more enthusiastic about them.
The "cryptocurrencies" are merely a collective term. The digital currencies themselves do not represent the true innovation, but the blockchain behind it. Digital currencies already exist, only blockchains make crypto currencies possible.
Ultimately, only laypeople speak of cryptocurrencies. Anyone who delves deeper into the subject gets to know the different representatives, their blockchain projects, their functions and goals.
Bitcoin is one and the most famous of them. Bitcoin is primarily about a digital, censorship-resistant and decentralized payment network that belongs to everyone and is open to everyone.
Over time, however, many more blockchain projects have developed that can have far-reaching consequences for the Internet, finance, trade, administration and the media.
Cryptocurrencies - what are they and what can they do?
A cryptocurrency is a digital, cryptographically encrypted currency based on the blockchain. It is not the first digital currency of its kind. There have been attempts at free internet money in the past and large amounts of euros, US dollars and other fiat currencies only exist as numbers on bank accounts.
What makes cryptocurrencies special is the blockchain and its decentralized, self-managing, barrier-free network. In theory, anyone can install a node, download the blockchain or take part in mining (the latter is becoming increasingly difficult for private users).
This system is not controlled by any central authority (such as governments, central banks or monopoly-like large corporations). Decisions are made by the community and if there is disagreement, a split and a new blockchain can occur (as with Bitcoin and Bitcoin Cash).
New transactions are independently checked and verified by the network. The miners (prospectors) with their powerful hardware confirm the transactions and receive a reward (block reward). The cryptographic encryption is used to protect the data in the blockchain from attackers and attempts at manipulation.
The term “coin” describes cryptocurrencies whose main function is to be stored, received and sent as a digital means of payment. Thanks to the blockchain, people should be able to regain control of their own finances.
Some coins also have encrypted transactions. As a rule, cryptocurrencies are not "crypto" because the transactions are secret. Rather the opposite is the case, the transaction data is stored transparently on the blockchain.
But you don't have to enter any private data such as your own name. In this regard, transactions are indeed anonymous. The address of another wallet is enough to carry out a transaction. However, the transactions can often be traced.
This is where "privacy coins" come into play.
Privacy coins are cryptocurrencies that place greater emphasis on anonymity and privacy. Transactions are obfuscated and encrypted using special technologies. Each Privacy Coin uses its own technologies for this.
Finally there are the stable coins. These are backed by a fiat currency or another physical asset such as gold. Stable coins allow the fast and barrier-free exchange of real goods using blockchain technology.
See also "How to invest in cryptocurrencies"
Advantages of cryptocurrencies
The best cryptocurrencies have many advantages.
The transaction speed of cryptocurrencies can be very different. Bitcoin with its 10 minutes is still slow. Compared to a transfer at the bank, it is a lot faster with much less effort. Especially in comparison to transfers across national borders.
Especially for transactions across national borders, the transaction fees are significantly cheaper compared to conventional bank transfers. Above all, this makes it possible for people with little or no capital to transfer funds.
Cryptocurrencies don't care who you are, who you send them to and who can receive them. Anyone with internet access and some start-up capital can buy Bitcoin and Co. You are not dependent on a bank or other institutes.
There is therefore great potential, especially among the “unbanked” in the Third World.
The financial policy of a cryptocurrency is exactly as it was programmed. Therefore, they are also considered a good hedge against inflation. We know from Bitcoin that there will be a maximum of 21,000,000 BTC in the distant future. No more and no less. That creates security and trust.
Not all, but many coins are designed to be deflationary. Bitcoin is getting fewer and fewer coins. Meanwhile, the value of fiat currencies such as the euro continues to melt due to the unimpeded expansion of the money supply. Bitcoin and other coins are a better store of value.
Some coins are more, some less anonymous. Your own identity is not tied to your cryptocurrencies, it doesn't matter. If you still use a privacy coin, you can send and store money completely anonymously. You can't do that with a bank.
No central institution or company alone decides on the development and monetary policy of a cryptocurrency. As decentralized systems, they are difficult to attack, difficult to manipulate and abuse.
Cryptocurrencies have been around for more than 10 years, but most people have not yet reached them. We are in the early stages of adoption. The potential for high prices is therefore high, even if not every project is likely to be successful in the long term.
Most famous coins
The mother of all cryptocurrencies, the first block was created in January 2009. Ignored for a long time, decried as a worthless object of speculation or only for criminals, Bitcoin (BTC) is now one of the most valuable goods in the world. Everyone who has heard of cryptocurrencies knows Bitcoin.
Bitcoin is a pure coin. The focus here is on the decentralized exchange of the cryptocurrency and storage as a store of value. With Bitcoin, people should take their finances back into their own hands without having to rely on banks and states.
Bitcoin is traditionally mined using the proof-of-work process. There will be a maximum of 21,000,000 BTC. This amount is expected to be reached around the year 2140. Until then, the money supply will expand more and more slowly.
Litecoin (LTC) was created in 2011 as a better alternative to Bitcoin. Originally it was a copy of Bitcoin. The block time is only 2.5 minutes and the maximum amount has been increased to 84,000,000 LTC.
Some refer to Litecoin as the silver to Bitcoin's gold. Even if Litecoin never comes close to the market capitalization, prices and trading volume of Bitcoin, it is still a good alternative.
Bitcoin Cash (BCH) is the result of a dispute within the Bitcoin community. It was about how many transactions should have space in a block in the future.
The result was Bitcoin Cash, a hard fork with an increased block size from 4 megabytes to 8 megabytes. This means that more transactions can be processed per block. The block size was later increased to 32 megabytes. Other than that, Bitcoin Cash and the original Bitcoin are very similar. The maximum amount is also BCH 21,000,000.
For a long time as a meme coin, ridiculed as a pointless fun currency, Dogecoin (DOGE) attracted attention, especially at the beginning of 2021, when the price rose tremendously. The coin with the friendly Shiba has been around since December 2013.
Although, according to the developers and the community, the focus is primarily on fun and togetherness, Dogecoin is still a serious crypto currency and investment. It is even faster than Bitcoin and specially designed for the transaction of small amounts.
Just keep in mind that Dogecoin is designed as an inflationary currency. There is no upper limit to DOGE, the amount is increasing slowly but steadily. This should make it more common than Bitcoin as an everyday means of payment.
Monero (XMR) is one of the most famous privacy coins. The cryptocurrency was created in 2014 and uses the CryptoNote protocol to encrypt its transactions. Monero gained growing popularity in the Darknet, among other places.
Transactions are encrypted using "Ring Signatures" and "Stealth Addresses". These conceal the traces of the transaction and at the same time ensure that the XMR still safely reaches its destination.
What is DeFi?
“DeFi” stands for “Decentralized Finance”. This is about financial services that run on a public, decentralized blockchain. In addition to cryptocurrencies, they offer a range of special financial services.
DeFi makes use of the peer-to-peer transactions of the blockchains and thus offers trading in cryptocurrencies and other assets without the need for a central platform. You don't need a stock exchange, a broker, or a bank. Buyers and sellers come into direct contact with one another.
This is how the "Decentralized Exchanges", or DEX for short, came into being. These are exchanges that do not have a central administration, but are based on a blockchain. On Decentralized Exchanges, users can exchange cryptocurrencies with one another or buy them with fiat currencies.
The smart contracts fulfill an important function here. These programmed contracts (more on this later) regulate payment transactions, conditions and ensure that everything runs correctly in trading. The smart contracts do it all by themselves, there is no need for a third party or an intermediary.
In addition to the exchange of crypto currencies, other financial services have established themselves. Among other things, DeFi offers lending, in which users deposit a currency and thus offer loans.
Yield farming allows users to invest tokens in DeFi platforms and earn interest over time. A special variant of this is liquidity mining, in which investors provide liquidity by depositing trading pairs and receiving a crypto currency as a reward.
Then there are the Prediction Markets. Here users can speculate on the occurrence of certain events. The users deposit a cryptocurrency and make a profit if they are correct. Prediction markets should be able to make better predictions than ordinary surveys.
DeFi thus offers services that are otherwise only offered by banks and institutionalized trading platforms. Access is barrier-free and open to everyone. The entry hurdles and entry costs are low.
The DeFi blockchain does not ask for nationality, income, name, address or profession. There is no paperwork or bureaucracy. Trades are executed within seconds and at a comparatively low cost.
The DeFi principle originated with Ethereum, the second largest blockchain in the world. Their smart contracts and the ability to create your own tokens based on the ERC token standard made DeFi platforms possible in the first place. In the meantime, other DEXs have developed on the basis of other smart contract platforms.
Advantages of DeFi
Open and anonymous:
Many advantages of cryptocurrencies and blockchains also apply to DeFi. Decentralized finance is open to everyone who does not discriminate DEX based on income, occupation, nation, gender, etc. Your own name and private data are irrelevant.
Fast and cheap:
Transactions and trades are executed instantly with DeFi. Thanks to the smart contracts, there is no need for an employee or bureaucrat to first approve the whole thing. This can be especially important when the timing is right.
Decentralized and worldwide:
Crypto currencies, interest rates and fiat currencies flow barrier-free across national borders, which would otherwise be associated with increased bureaucratic effort and additional costs. Even people in less affluent regions of the world will have access to more advanced financial services.
All transactions, the conditions and mechanisms are transparently recorded in the blockchains and smart contracts. Everyone can check them out for themselves. It is not necessary to trust the provider because everything is open.
Most famous DeFi tokens
Uniswap (UNI) is the name of the token and the DeFi platform. The DEX was created in September 2020 on the basis of Ethereum. The token has the highest market capitalization among the DeFi tokens.
Users can provide tokens as liquidity on the DEX ERC-20. These liquidity pools can be staked, for which the users receive a reward. The tokens can then be traded on the DEX. The UNI Token itself mainly fulfills governance functions.
Chainlink (LINK) is an Oracle network. The job of oracles is to provide information from the real world so that smart contracts can perform their functions. Chainlink has been around since September 2017, but has only really grown in value since 2020.
Chainlink's network consists of a number of nodes that provide information for which they need LINK. Trustworthy and correct nodes are rewarded, false information and dodgy behavior are punished.
Aave (AAVE) is a decentralized platform for lending. Users can deposit or borrow cryptocurrencies. Those who provide liquidity can earn interest. Aave was created in October 2020.
Those who use Aave on their own DEX benefit from discounts. Borrowers do not have to pay any fees on their loans when using Aave. Owners also get discounts on the fees. At the same time, Aave is also used for governance.
Pancake Swap (CAKE) is another DeFi token, but this time based on the Binance Smart Chain. The DEX thus supports BEP-20 tokens. Apart from that, it offers yield farming and liquidity tools. CAKE has been trading since September 2020.
What are smart contracts?
Ethereum founded the concept of smart contracts. We are one step further with Web3.0.
Smart contracts have the potential to optimize many areas of the internet, finance, administration, insurance, entertainment, mobility and commerce.
Smart contracts are programmed, intelligent contracts. Basically, they are software and run on their respective blockchains. Here they are recorded transparently and can be checked by anyone.
A smart contract automatically implements its contract content and checks it itself. A simple example would be insurance companies: an insured person has suffered damage and transmits the data to the insurance company. The smart contract checks this without the need for an employee and automatically carries out the agreed steps.
There is no need for an intermediary or an executing human hand. That saves effort, costs and time. A big benefit for the consumer is that smart contracts are neutral and do exactly what they were programmed to do. Manipulation is very difficult.
Theoretically, smart contracts can be used in a wide variety of areas. Smart cities, smart factories and even the Internet of Things are conceivable. The tokens of the blockchain often act as fuel, as a fee that you have to pay for each execution, or are necessary for voting.
In the case of smart contract platforms, one does not speak of coins, but of tokens. They focus on the functions on the respective platform. They serve as fuel, are staked for governance or have other functions depending on the blockchain.
Benefits of smart contracts
Smart contracts are also referred to as “trustless”, not because they cannot be trusted, but because trust is not necessary. According to “code-is-law”, they act exactly as they were programmed, are impartial and objective.
The smart contracts are recorded publicly and transparently on the blockchain and can be checked by anyone there.
Fast and low cost:
The contents of the contract are processed and executed immediately. You don't have to wait for a real person to take care of it. The automation saves costs and reduces the dependency on intermediaries.
Most famous tokens
The concept of smart contracts and tokenization began with Ethereum in 2015. The creation of Vitalik Buterin, Charles Hoskinson and Gavin Wood has led the altcoins since then and is in 2nd place in market capitalization behind Bitcoin.
Ethereum is the most classic platform for smart contracts. The first blockchain games were tested on the basis of their blockchain, the first DeFi platforms emerged, this is where most of the developers cavort and there are most of the dApps (decentralized applications).
Due to the large number of visitors, Ethereum sometimes struggled with scaling problems. Transaction fees also rose during the peak periods. That is why Ethereum wants to switch from PoW to PoS in the future. The proof of stake consensus mechanism is intended to make the blockchain more scalable, cheaper and faster.
The development of Cardano began in 2015. This smart contract platform should be superior to all other blockchain projects of its kind in terms of speed, scalability and security. To this end, scientific standards are adhered to during development.
Charles Hoskinson, the Cardano Foundation, the Japanese company Emurgo and the IOHK (Input-Output Hong Kong) are responsible for the development. A few more years of development will have to pass before Cardano can keep its promises.
Tezos (XTZ) is another smart contract platform. The special thing about Tezos is the governance and the ability to introduce new upgrades without having to perform a hard fork. Holders of the Tezos token can vote on improvements.
TRON (TRX) is a smart contract platform launched in 2018 with a focus on media and entertainment. Video producers, musicians, bloggers etc. should upload their content to the TRON network and be rewarded for it. Platform operators such as YouTube, who claim a bear share of the revenue, are no longer required.
What are non-fungible tokens?
“Non-fungible tokens”, or NFT for short, are tokens that only exist once. "Fungible" means "interchangeable, replaceable". “Non-fungible”, on the other hand, means that they are unique and that each token is only available once.
Usually a blockchain cannot distinguish between one BTC and another BTC. It is different with an NFT, they can be clearly assigned. They exist on the blockchain, but they cannot be multiplied or shared. They can still be sent quickly and cheaply via the blockchain.
This token is tied to a real or digital good. “Tokenization” is the keyword. Goods are provided with a token, which from then on stands for this. Whoever owns this token also owns the value behind it.
Many NFT projects are based on Ethereum.
The non-fungible tokens use the ERC-721 token standard to create new, own tokens and thus digitize a wide variety of goods.
Non-fungible tokens thus make use of the advantages of blockchains. On the one hand, the ownership claims are cryptographically securely and clearly stored on the blockchain. Everyone can transparently track them here. At the same time, real goods can be sent quickly, unbureaucratically and cheaply.
At the moment, objects of art in particular, be it digital art or real works, or fan articles are tokenized. An NFT can be unique, the object behind it only exist once. Several NFTs can also be created for one good. For example, a musician can sell his songs as NFTs.
Only those who have the token can listen to the song. In this way, the unauthorized copying of pieces of music can theoretically be prevented. In addition, the musician can sell his pieces directly to his fans on the blockchain without a third party making money.
Advantages of the non-fungible tokens
Like any other cryptocurrency, NFTs can be sent quickly, cheaply and without any effort. This is a great advantage with tokenized systems that can otherwise only be sent with great effort.
Clear and transparent: ownership claims to an NFT are stored on the blockchain. Here this information is safe from forgery and manipulation. At the same time, everyone can see it without much effort.
Theoretically unlimited amount:
Since NFTs only exist digitally, you can theoretically make as many of them as possible. This allows, for example, the ownership of a property to be divided into many small tokens. Each token holder thus owns a share in the property. One also speaks of "Multi Layer NFT".
Most famous non-fungible tokens
CryptoPunks is an Ethereum-based NFT platform for digital art. The works of art are small, 8-bit punks, each of which is unique. There is a limited selection of 10,000 figures.
Decentraland is a virtual world similar to Second Life. In order to be able to call land and soil one's own here, property claims are required. Land can be acquired by purchasing the associated NFTs.
CryptoKitties is the first NFT project ever. The digital cats were traded for the first time in 2017. Each cat is unique and tied to an NFT. CryptoKitties is also based on the Ethereum blockchain.
Opensea is a marketplace for NFTs of various kinds. Here, rare, unique items are traded exclusively.
NBA top shots:
In 2019, the National Basketball Association began working with the crypto company Dapper. This resulted in the NBA Top Shots, special game moments in video form, represented by an NFT. The tokens were able to fetch high prices, a dunk by LeBron James even sold for 200,000 US dollars.
Participate in the blockchain hype
If you want to participate in the blockchain hype (cryptocurrencies, DeFi, NFT, etc), there is a relatively simple option:
Buy a portfolio of coins and tokens on an exchange. And if you don't want to actively manage it yourself, you can also let a trading bot work for you.
It works like this:
It’s your turn
From my point of view, the blockchain technology with its offshoots crypto currencies, DeFi, smart contracts and NFT represents a technological milestone. Similar to the development of the Internet and cell phones recently.
It is therefore essential to provide more knowledge about these topics and to exchange experiences.
In this respect, my final question to you:
Do you have experience in applying blockchain topics? If so, what are your experiences?
Just write me a comment!