100,000 Questions and Answers about Cryptocurrencies 33

What is a stablecoin?

A stablecoin is a type of cryptocurrency designed to maintain a stable value relative to a real-world asset or currency, such as the US dollar. Stablecoins aim to mitigate the volatility often seen in traditional cryptocurrencies like Bitcoin and Ethereum.

How do stablecoins maintain their stability?

Stablecoins maintain their stability in different ways. Some are backed by a reserve of fiat currency or other assets held in a trust or custody. Others use algorithmic mechanisms to adjust the supply of tokens based on market conditions, aiming to maintain a peg to a target price.

What is decentralized finance (DeFi)?

Decentralized finance (DeFi) refers to financial applications and services built on top of blockchain technology that do not rely on traditional, centralized financial institutions. DeFi applications enable peer-to-peer lending, trading, borrowing, and other financial activities without the need for intermediaries.

What are some examples of DeFi applications?

Examples of DeFi applications include decentralized exchanges (DEXs) that allow users to trade cryptocurrencies without a central order book, lending protocols that enable peer-to-peer lending and borrowing, and yield farming platforms that reward users for providing liquidity to liquidity pools.

What is a smart contract?

A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. Smart contracts are stored on a blockchain and are automatically enforced by the network.

How do smart contracts work?

Smart contracts work by executing predefined instructions encoded in the contract's code when certain conditions are met. These conditions are specified in the contract and can be triggered by external events or the fulfillment of certain criteria. Once triggered, the smart contract automatically executes the agreed-upon actions, ensuring that the terms of the contract are fulfilled without the need for intermediaries.

What is a DAO (Decentralized Autonomous Organization)?

A DAO (Decentralized Autonomous Organization) is an organization that is run through rules encoded as smart contracts on a blockchain. DAOs aim to automate decision-making and remove the need for human intermediaries, enabling organizations to operate transparently and democratically.

How do DAOs make decisions?

DAOs make decisions through a voting process encoded in their smart contracts. Token holders within the DAO can vote on proposals, and the outcomes of these votes are automatically enforced by the smart contracts. This enables DAOs to make decisions transparently and democratically, without the need for centralized leadership.

What is a blockchain fork?

A blockchain fork occurs when the blockchain splits into two separate chains due to a disagreement in the network about the validity of certain blocks. This can happen due to software updates, changes in consensus rules, or other network issues.

What is the difference between a hard fork and a soft fork?

A hard fork occurs when the blockchain splits into two incompatible chains, requiring nodes to upgrade their software to follow one of the chains. A soft fork, on the other hand, allows for backward compatibility, meaning that nodes running older software can still participate in the network but may be subject to certain restrictions.

What is a zero-knowledge proof?

A zero-knowledge proof is a cryptographic technique that allows one party to prove to another party that a statement is true without revealing any additional information beyond the fact that the statement is true. Zero-knowledge proofs are used in various applications, including blockchain and privacy-preserving systems.

How are zero-knowledge proofs used in blockchain?

Zero-knowledge proofs are used in blockchain to enable privacy-preserving transactions and operations. They allow users to prove that they have certain assets or fulfill certain conditions without revealing their identities or other sensitive information. This helps protect user privacy while still enabling secure and verifiable transactions on the blockchain.

What is cross-chain interoperability?

Cross-chain interoperability refers to the ability of different blockchains to communicate and interact with each other, enabling the transfer of value and data across multiple chains. This allows for more efficient and flexible use of blockchain technology by connecting disparate systems and enabling new use cases and applications.

How is cross-chain interoperability achieved?

Cross-chain interoperability is achieved through various techniques and protocols. These include atomic swaps, which enable direct peer-to-peer trading of assets across different blockchains, and cross-chain bridges, which provide a gateway for transferring assets and data between chains. Other approaches involve the use of sidechains or child chains that are pegged to the main blockchain and enable off-chain transactions while maintaining security guarantees.

What is a blockchain oracle?

A blockchain oracle is a service that provides external data to smart contracts on a blockchain. Smart contracts often need access to real-world information, such as prices, events, or other data, to execute their functions. Blockchain oracles act as a bridge between the blockchain and external data sources, fetching and verifying this information and making it available to smart contracts.

How do blockchain oracles work?

Blockchain oracles work by connecting to external data sources and fetching the required information. They then verify the authenticity and accuracy of this data using various techniques, such as cryptographic signatures or trusted third-party verification. Once the data is verified, it is made available to smart contracts on the blockchain, where it can be used to trigger actions or fulfill conditions.

What is gas limit in Ethereum?

Gas limit refers to the maximum amount of gas that a user is willing to spend on a transaction in Ethereum. Gas is the unit that measures the computational effort required to execute a transaction or smart contract function on the Ethereum network. By setting a gas limit, users can control the maximum amount they are willing to pay for a transaction, helping to prevent overspending or malicious attacks.

How does gas limit work in Ethereum?

When a user sends a transaction on the Ethereum network, they specify a gas limit and a gas price. The gas limit represents the maximum amount of gas the user is willing to spend on the transaction, while the gas price determines the amount paid per unit of gas. The total cost of the transaction is calculated by multiplying the gas limit by the gas price. If the transaction requires more gas than the specified limit, it will fail and not be executed.

What is a layer-2 solution?

A layer-2 solution refers to a technology or protocol that aims to improve the scalability and efficiency of a blockchain network by offloading some transaction processing to a second layer separate from the main blockchain. Layer-2 solutions aim to reduce congestion on the main chain and enable faster, lower-cost transactions while maintaining the security guarantees of the underlying blockchain.

What are some examples of layer-2 solutions?

Examples of layer-2 solutions include state channels, sidechains, and rollups. State channels enable off-chain transactions between two or more parties, with only the final state being settled on the main chain. Sidechains operate parallel to the main chain and can handle transactions independently while maintaining a two-way peg to the main chain's assets. Rollups bundle multiple transactions into a single transaction on the main chain, reducing the number of transactions required and improving scalability.