100,000 Questions and Answers about Cryptocurrencies 59

What is a non-fungible token (NFT)?

A non-fungible token (NFT) is a unique digital asset that represents ownership of a real-world or digital item. Unlike traditional cryptocurrencies, which are fungible (interchangeable), NFTs are non-fungible, meaning each one is unique and cannot be replaced by another.

How do NFTs work?

NFTs work by storing unique identifying information on a blockchain, typically Ethereum. This information includes details about the asset, such as its creator, date of creation, and ownership history. The blockchain ensures the authenticity and scarcity of NFTs, making them valuable collectibles and investments.

What are some common use cases for NFTs?

Common use cases for NFTs include digital art, gaming items, virtual real estate, and collectibles. Artists can sell their digital artworks as NFTs, gamers can own and trade in-game items as NFTs, and real estate developers can tokenize virtual land as NFTs.

What is a decentralized finance (DeFi) application?

A decentralized finance (DeFi) application is a financial service built on a blockchain that operates without a central authority or intermediary. DeFi applications enable peer-to-peer lending, borrowing, trading, and other financial activities without relying on traditional financial institutions.

How do DeFi applications differ from traditional finance?

DeFi applications differ from traditional finance in that they are decentralized and operate on a blockchain network. This means that DeFi applications have no single point of failure, are resistant to censorship, and allow for transparent and trustless interactions between users. However, DeFi also faces unique challenges like scalability, security, and regulatory uncertainty.

What is a liquidity pool in the context of DeFi?

A liquidity pool in the context of DeFi refers to a pool of funds locked in a smart contract that allows for trading of digital assets without a traditional order book. Traders provide liquidity to the pool by depositing tokens, and in return, they earn a share of the trading fees generated by the pool.

How do liquidity pools work?

Liquidity pools work by using an automated market maker (AMM) algorithm that determines the price of an asset based on the ratio of tokens in the pool. Traders can deposit tokens into the pool to provide liquidity and earn trading fees, or they can withdraw tokens from the pool at the current price determined by the AMM algorithm.

What is gas in the context of Ethereum?

Gas in the context of Ethereum refers to the fee required to conduct transactions or execute smart contracts on the Ethereum network. Gas is paid in Ethereum's native token, Ether (ETH), and is used to compensate miners for their efforts in validating and securing the network.

How do gas prices affect transactions on Ethereum?

Gas prices affect transactions on Ethereum by determining the cost of conducting a transaction or executing a smart contract. Higher gas prices mean higher transaction costs, which can discourage smaller or less urgent transactions. Conversely, lower gas prices make transactions more affordable but may incentivize spam or malicious transactions.

What is gas limit in Ethereum transactions?

Gas limit in Ethereum transactions refers to the maximum amount of gas that a user is willing to pay for a transaction. It acts as a safety mechanism to prevent a transaction from consuming more gas than the user intended, which could result in unexpected costs or transaction failures.

What is an ERC-20 token?

An ERC-20 token is a standard for tokens issued on the Ethereum blockchain. ERC-20 defines a common set of rules and functions that all ERC-20 tokens must follow, allowing them to be easily integrated into Ethereum-based applications and wallets.

How do ERC-20 tokens work?

ERC-20 tokens work by implementing the ERC-20 standard, which defines functions for token transfer, balance checking, and approval of token transfers by third parties. This allows ERC-20 tokens to be seamlessly integrated into Ethereum-based applications and wallets, enabling their use in a wide range of decentralized finance and other applications.

What is Ethereum Virtual Machine (EVM)?

Ethereum Virtual Machine (EVM) is a runtime environment for smart contracts in Ethereum. It allows developers to write smart contracts in high-level languages like Solidity and then compile them into bytecode that can be executed on the Ethereum blockchain.

How does EVM enable smart contracts?

EVM enables smart contracts by providing a runtime environment where contracts can be executed securely and deterministically. It ensures that contract code runs as intended and cannot be tampered with, making smart contracts a trustworthy foundation for decentralized applications and financial services.

What is a blockchain explorer?

A blockchain explorer is a tool that allows users to view and search the contents of a blockchain. It provides detailed information about blocks, transactions, addresses, and other data stored on the blockchain, enabling users to track and analyze the network's activity.

How do blockchain explorers work?

Blockchain explorers work by indexing and storing blockchain data in a searchable format. They typically connect to the blockchain network and download blocks of data as they are added to the chain. This data is then parsed and stored in a database, allowing users to search and query the blockchain using a web-based interface or API.

What is a DAO (Decentralized Autonomous Organization)?

A DAO (Decentralized Autonomous Organization) is an organization that is run entirely by smart contracts on a blockchain. DAOs are governed by a set of rules encoded in the smart contracts and do not rely on traditional hierarchical management structures or intermediaries.

How do DAOs work?

DAOs work by using smart contracts to encode the organization's rules, objectives, and decision-making processes. Members of the DAO can interact with the smart contracts to propose, vote on, and execute decisions using tokens as voting power. This allows DAOs to operate autonomously and transparently, with all decisions and actions being recorded on the blockchain for public scrutiny.

What is a stablecoin?

A stablecoin is a type of cryptocurrency that aims to maintain a stable value relative to a real-world asset or currency. Unlike traditional cryptocurrencies, which are volatile and subject to market fluctuations, stablecoins are designed to maintain a stable peg to a fiat currency like the US dollar or a commodity like gold.

How do stablecoins maintain their peg?

Stablecoins maintain their peg in various ways, depending on the specific implementation. Some stablecoins are backed by a reserve of fiat currency or commodities that are held by a custodian and used to redeem stablecoins at a fixed price. Others use algorithmic mechanisms to adjust the supply of stablecoins based on market conditions, aiming to maintain a stable price through supply and demand dynamics.