We have all heard about bitcoin, Ethereum, Solana, etc. But when someone says I own one bitcoin, or I have withdrawn my crypto from the blockchain to my wallet, how are those cryptocurrencies represented? in the wallet or the blockchain how come I can have a wallet to store something digital and abstract like these currencies? Or maybe you’ve asked yourself what the hell is a DAO? or a Ledger. Or why is everyone talking about DeFi? Why should I care? what is it all about?
Well, today we’re going to demystify these terms. You’ll have a perfect understanding of what they mean and how they apply to the blockchain ecosystem.
Cryptocurrency or Tokens
What comes to your mind when you think about a token or cryptocurrency coin? I’m sure you think about a file that is sent from one wallet to another on the blockchain. If that is the case, then you’re not right. The term token is just a metaphor.
A token is an entry in a ledger in a blockchain address, only the person with the private key to that address can access those tokens. And note that, your digital wallet, does not contain your tokens. Instead, it contains the private keys to access your tokens on the blockchain.
Bitcoin is the first and biggest cryptocurrency or token. It was first mentioned in 2008 in a “White Paper”( https://www.bitcoin.com/bitcoin.pdf ) authored by the famous Satoshi Nakamoto.
Bitcoin is well known for its volatile price but less for the concept of decentralization it brought. Its price went about the $60K mark in 2021, and experts predict it will go above the $100K bar in a few years to come.
NFT stands for non-Fungible token. As mentioned on the Ethereum website, NFTs are special tokens that can be used to represent ownership of unique items. NFTs, let us tokenize real-world items on the blockchain. These include arts, real estate, etc.…. The special thing about NFTs is that no one can modify the ownership of an NFT if it is yours, then it is yours.
The blockchain is simply a data structure in which information is stored in blocks that are linked together.
What is a data structure you may ask? a data structure is simply a way of organizing and storing data.
Each block on the blockchain is hashed, and the hash value becomes a digital fingerprint of that block. And each block contains the hash of the prior block, linking back to the first ever block (The genesis block). If the value of a block is modified, its hash will no longer be what it is, and every node will know that the data was compromised.
Think of it as a chain of people, where the next person holds the identity card of the previous.
What is a hash you might ask, let’s find out. I wrote an article about 5 disruptive Web3 innovations the blockchain is bringing to us. You can find it here.
A smart contract is a self-enforcing agreement, whose terms are established and executed as code that runs on the blockchain. This is basically a piece of software, and the agreements found in this contract are enforced by a consensus mechanism that runs on the blockchain. Since this consensus is made by nodes on the blockchain, you can’t tamper with the rules in a contract once it is established.
Decentralized Autonomous Organization This is an organization in which there is no central authority and token holders participate in the decisions and
DAOs according to the Ethereum website:
According to the Ethereum website ( https://ethereum.org/en/dao/ ), this is what a DAO is:
“A DAO is a collectively-owned, blockchain-governed organization working towards a shared mission.
DAOs allow us to work with like-minded folks around the globe without trusting a benevolent leader to manage the funds or operations. There is no CEO who can spend funds on a whim or CFO who can manipulate the books. Instead, blockchain-based rules baked into the code define how the organization works and how funds are spent.
They have built-in treasuries that no one has the authority to access without the approval of the group. Decisions are governed by proposals and voting to ensure everyone in the organization has a voice, and everything happens transparently on-chain.”
According to the Ethereum website again, here are examples of how a DAO could be used:
“A charity – you could accept donations from anyone in the world and vote on which causes to fund.
Collective ownership – you could purchase physical or digital assets and members can vote on how to use them.
Ventures and grants – you could create a venture fund that pools investment capital and votes on ventures to back. Repaid money could later be redistributed amongst DAO members.”
How do DAOs work? NOTE: READ THE ETHEREUM WEBSITE’s content.
Decentralized finance is a term given to a set of peer-to-peer financial activities taking place on the blockchain.
Defi offers financial services offered by banks, except that there is no central entity involved in these. Some of these services include lending, saving with interest, borrowing, etc. These services have an advantage over the traditional banking system because.
- There is no central entity.
- Anonymous, you don’t need to provide your identity.
- It is very fast.
You might ask yourself how is this secure? well, DeFi is done using smart contracts, and blockchain consensus this technology is built with the assumption that every network actor is not trustworthy, thus instructions about a transaction on a smart contract cannot be altered once decided.
For example, a smart contract can be tasked to send funds from an address to a particular address regularly based on an agreement made by the owners of both addresses and these instructions cannot be changed or altered.
This is a mathematical function that takes in data of any length, and spits out data of fixed length, but very different from the input.
On the blockchain, blocks of varying sizes are passed through this function and the output is of a fixed size, but uniquely distinguishes that block from others.
Think of it as a giant animal that swallows “Blocks” of food of different sizes, and for each block, shits pop of the same mass, but unique odor.
The Distributed Ledger
This is a file that keeps track of every transaction made, in the form of chained-in blocks. In other words, this is a digital file containing a record of every transaction made or every cryptocurrency exchanged just like a bank, but as opposed to a bank, this file is not stored by a central entity. Its copy is stored by multiple private computers around the world that participate in the network.
Everyone can inspect transactions on the ledger, but no single entity can control it. To change the data in the ledger, all participants must agree about the change.
Think of this as a spreadsheet in the cloud, that everyone can consult. But this spreadsheet’s copy is stored by several nodes on the blockchain.
As mentioned on “Ethereum.org” “The term consensus mechanism refers to the entire stack of protocols, incentives, and ideas that allow a network of nodes to agree on the state of a blockchain.” Examples of consensus mechanisms include Proof of stake, proof of work, etc.
This is a software or physical device that stores your private keys to your blockchain address and provides a convenient way of checking your cryptocurrency balances.
Note that a crypto wallet does not store your bitcoin or Ethereum. Your tokens remain on the blockchain.
This is an online tool that allows anyone to view in real-time every transaction that occurs on a blockchain.
Smart contracts can be invoked from within the blockchain, and out of the blockchain (that is, off-chain) the entities that invoke smart contracts from outside the blockchain are called “Oracles”. Oracles can be software or hardware entities. There are basically two main types of oracles (though you might find some more over the internet, I will only mention two types for brevity).
According to Binance,
“A whitepaper summarizes, in a single document, the important information related to a blockchain or cryptocurrency project. It’s a popular way of explaining how a certain project works and what problems it’s aiming to solve.”
This document is aimed at investors principally, and also contributors since these are the most important actors in a crypto project. The first provides money usually by purchasing the first tokens, and the second provides code, to make the project evolve.
Examples of this include:
https://blockstream.info/ An open-source blockchain explorer for Bitcoin.
https://etherscan.io/ Ethereum’s block explorer.