100,000 Questions and Answers about Cryptocurrencies 29

What is a non-fungible token (NFT)?

A non-fungible token (NFT) is a unique digital asset that represents ownership of a digital item, such as an artwork, a collectible, or even a digital real estate. NFTs are stored on a blockchain and cannot be replicated, ensuring their uniqueness and authenticity.

How do NFTs work?

NFTs work by assigning a unique identifier to a digital asset and storing it on a blockchain. This identifier links the digital asset to its owner and proves ownership and authenticity. NFTs can be bought, sold, or traded on NFT marketplaces, just like physical collectibles.

What are the uses of NFTs?

NFTs have various uses, including representing ownership of digital art, music, videos, and other creative works. They can also be used to represent digital collectibles, virtual goods in games, and even digital real estate in virtual worlds. NFTs enable creators to monetize their digital content and provide a unique way for fans to support their favorite artists.

What is the ERC-721 standard?

ERC-721 is a technical standard for non-fungible tokens on the Ethereum blockchain. It defines the basic functionality and interface for NFTs, including methods for minting new tokens, transferring ownership, and querying token metadata. ERC-721 tokens are widely used in NFT projects on Ethereum and other compatible blockchains.

What is gas in Ethereum?

Gas in Ethereum refers to the fee required to perform transactions or execute smart contracts on the network. Gas is paid in Ethereum's native cryptocurrency, Ether (ETH), and the amount of gas required depends on the complexity of the operation. Gas fees help incentivize miners to include transactions in blocks and secure the network.

How are gas fees determined?

Gas fees in Ethereum are determined by supply and demand. Miners set a minimum gas price that they are willing to accept for including transactions in blocks. Transaction senders can specify a higher gas price to increase the priority of their transaction and ensure it is included in the next block. The more congested the network is, the higher the gas prices tend to be.

What is the DAO hack?

The DAO hack refers to a major security incident that occurred in 2016 involving the Decentralized Autonomous Organization (DAO), a smart contract-based crowdfunding platform on the Ethereum blockchain. An attacker exploited a vulnerability in the DAO's smart contract code, draining over US$50 million worth of Ether from the DAO's funds. This incident led to the hard fork of the Ethereum blockchain, creating Ethereum Classic (ETC) as a separate blockchain.

What is Ethereum Classic (ETC)?

Ethereum Classic (ETC) is a blockchain that emerged as a result of the DAO hack and the subsequent hard fork of the Ethereum blockchain. ETC adheres to the original Ethereum protocol and maintains the blockchain state before the hard fork. Supporters of ETC argue that it represents the principles of decentralization and immutability by refusing to reverse the DAO hack.

What is sharding?

Sharding is a scaling solution for blockchains that aims to improve transaction throughput and reduce latency. It involves splitting the network into smaller pieces, or "shards," each of which processes a subset of transactions independently. This allows the network to handle more transactions in parallel, increasing overall throughput.

How does sharding work?

Sharding works by dividing the blockchain network into multiple shards, each of which operates independently. Transactions are assigned to specific shards based on criteria such as the sender's or receiver's address. Each shard processes its assigned transactions and maintains its own state, while still being able to interact with other shards as needed. The shards are then combined to provide a global view of the blockchain state.

What is the InterPlanetary File System (IPFS)?

The InterPlanetary File System (IPFS) is a distributed file system that aims to make the web faster, safer, and more open. It uses content addressing and a peer-to-peer network to store and retrieve files, without relying on centralized servers. IPFS can be used to store and share large files efficiently, and it is often integrated with blockchains to provide decentralized storage solutions.

How does IPFS work?

IPFS works by assigning a unique identifier, called a content identifier (CID), to each file stored on the network. This CID is based on the file's content and acts as a fingerprint that uniquely identifies the file. Files are stored in a distributed manner across the IPFS network, with each node storing and sharing parts of the file. When a user requests a file, the IPFS network finds the nodes that have the file's content and retrieves it efficiently.

What is liquidity mining?

Liquidity mining is a technique used in decentralized finance (DeFi) protocols to incentivize users to provide liquidity to decentralized exchanges or liquidity pools. Users who provide liquidity earn rewards in the form of protocol tokens or transaction fees. Liquidity mining helps ensure sufficient liquidity in DeFi protocols, enabling efficient trading and lending activities.

What is yield farming?

Yield farming refers to the practice of earning rewards by depositing cryptocurrencies into DeFi protocols such as lending platforms, liquidity pools, or staking pools. Users can earn rewards in the form of interest, transaction fees, or protocol tokens by providing liquidity or staking their funds. Yield farming allows users to generate passive income from their cryptocurrencies.

What is impermanent loss?

Impermanent loss refers to the potential loss of value that can occur when providing liquidity to a liquidity pool in a decentralized exchange. This loss arises due to price movements between the two assets in the pool. While the pool's overall value may increase over time, an individual user's share of the pool may decrease if the price of one asset moves against them.

What is a decentralized autonomous organization (DAO)?

A decentralized autonomous organization (DAO) is an organization that is run and governed by smart contracts on a blockchain. DAOs aim to remove the need for centralized management and decision-making, enabling decentralized governance and autonomy. DAOs can be used for various purposes, including funding projects, managing assets, and coordinating communities.

How do DAOs work?

DAOs work by encoding the organization's rules and governance mechanisms into smart contracts on a blockchain. These smart contracts define the DAO's objectives, membership criteria, voting rights, and other governance parameters. DAO members can propose and vote on changes to the DAO's rules and operations using the blockchain's consensus mechanisms. The smart contracts execute the decisions made by the DAO members and update the DAO's state accordingly.

What is a wrapped Bitcoin (WBTC)?

Wrapped Bitcoin (WBTC) is an ERC-20 token issued on the Ethereum blockchain that represents ownership of Bitcoin. WBTC allows Bitcoin holders to use their Bitcoin on the Ethereum network, enabling cross-chain interoperability and access to DeFi applications. WBTC is backed by a reserve of actual Bitcoin, ensuring its peg to the underlying asset.

How does WBTC work?

WBTC works by locking Bitcoin in a custody solution and minting an equivalent amount of WBTC tokens on the Ethereum blockchain. The custody solution ensures the safety and security of the locked Bitcoin, while the WBTC tokens represent ownership of that Bitcoin on the Ethereum network. Users can redeem their WBTC tokens for the underlying Bitcoin at any time, ensuring the peg between WBTC and Bitcoin.

What is the difference between Bitcoin and Bitcoin Cash?

Bitcoin Cash (BCH) is a hard fork of the original Bitcoin blockchain that occurred in 2017. The main difference between Bitcoin (BTC) and Bitcoin Cash is the block size limit. Bitcoin Cash increased the block size limit to allow for larger transaction capacity, while Bitcoin maintains a smaller block size limit to prioritize decentralization and security. This difference has led to different use cases and communities for the two cryptocurrencies.