100,000 Questions and Answers about Cryptocurrencies 78
What is an oracle in blockchain?
An oracle in blockchain refers to a trusted source of external data that feeds information into smart contracts. Since blockchains are isolated and cannot directly access off-chain data, oracles act as bridges between the blockchain and the real world, enabling smart contracts to incorporate real-time data and execute based on external events.
How do oracles work?
Oracles work by retrieving data from trusted sources, such as APIs, sensors, or human input, and securely delivering it to smart contracts on the blockchain. This data can then be used by smart contracts to trigger actions or make decisions based on real-world events. Oracles must be reliable and tamper-proof to ensure the integrity of the data they provide.
What is a stablecoin?
A stablecoin is a type of cryptocurrency designed to maintain a stable value relative to a real-world asset, such as the US dollar or gold. Stablecoins aim to address the volatility issues of traditional cryptocurrencies by pegging their value to a stable asset.
How do stablecoins maintain their value?
Stablecoins maintain their value through various mechanisms, including being collateralized by reserves of fiat currency or other assets, being algorithmically managed to maintain a target price, or being backed by credit or insurance. These mechanisms aim to keep the price of the stablecoin stable relative to its pegged asset.
What is decentralized finance (DeFi)?
Decentralized finance (DeFi) refers to financial applications and services built on top of blockchain technology that operate without traditional financial intermediaries. DeFi applications enable peer-to-peer lending, decentralized exchanges, derivatives trading, and other financial activities in a secure, transparent, and censorship-resistant manner.
How does DeFi work?
DeFi works by utilizing smart contracts and blockchain technology to automate and decentralize traditional financial services. Users can interact directly with smart contracts to borrow, lend, trade, and earn interest without the need for banks, brokerages, or other financial institutions. DeFi applications often utilize tokens as a means of participation and governance.
What is a liquidity pool?
A liquidity pool refers to a pool of funds locked into a smart contract that enables decentralized trading on a decentralized exchange (DEX). Liquidity providers deposit funds into the pool in exchange for trading fees and liquidity provider tokens. The pool's funds are used to facilitate trades between buyers and sellers, providing liquidity for the exchange.
How do liquidity pools work?
Liquidity pools work by allowing liquidity providers to deposit funds into a smart contract. These funds are then used to facilitate trades between buyers and sellers on a decentralized exchange. The price of trades is determined based on the ratio of funds in the pool, and liquidity providers earn trading fees for providing liquidity.
What is non-fungible token (NFT)?
A non-fungible token (NFT) is a unique digital asset that represents ownership of a real or digital item. Unlike traditional cryptocurrencies, which are fungible (interchangeable), NFTs are non-fungible, meaning each NFT is unique and cannot be replaced with another NFT. NFTs are often used to represent digital art, collectibles, in-game items, and other unique assets.
How do NFTs work?
NFTs work by encoding unique metadata and ownership information into a token on a blockchain. This metadata describes the underlying asset represented by the NFT, such as an image, video, or audio file. The ownership of the NFT is tracked and secured on the blockchain, allowing for the transfer and sale of the underlying asset.
What is gas in Ethereum?
Gas in Ethereum refers to the fee required to perform a transaction or execute a smart contract on the Ethereum network. Gas is paid in Ethereum's native cryptocurrency, Ether (ETH), and is used to compensate miners for their efforts in validating and executing transactions on the network.
How does gas work in Ethereum?
Gas works in Ethereum by requiring users to specify a gas limit and gas price for each transaction they submit. The gas limit determines the maximum amount of gas that can be consumed by the transaction, while the gas price sets the cost per unit of gas. Miners prioritize transactions with higher gas prices, and the total gas fee paid is determined by multiplying the gas used by the transaction by the gas price.
What is Ethereum Virtual Machine (EVM)?
Ethereum Virtual Machine (EVM) is a runtime environment that allows developers to execute smart contracts on the Ethereum blockchain. The EVM is a Turing-complete machine that provides a set of opcodes for executing smart contracts and interacting with the Ethereum state.
How does EVM work?
EVM works by executing smart contracts written in Solidity or other supported languages and compiled into EVM bytecode. When a transaction is submitted to the Ethereum network, the EVM interprets and executes the bytecode, interacting with the Ethereum state and performing the desired actions. The results of the execution are then recorded on the blockchain.
What is a hard fork?
A hard fork refers to a change in a blockchain protocol that is not backward compatible, meaning nodes running the old protocol will no longer be able to validate blocks on the new chain. Hard forks typically occur when there is a disagreement among the community regarding the direction of the blockchain, leading to the creation of two separate chains.
How does a hard fork occur?
A hard fork occurs when a significant portion of the network decides to upgrade to a new protocol version that is not backward compatible with the old version. Nodes running the new protocol will begin validating blocks according to the new rules, creating a separate chain. Users and miners have the choice to upgrade to the new chain or remain on the old chain, resulting in a split in the network.
What is a soft fork?
A soft fork refers to a change in a blockchain protocol that is backward compatible, meaning nodes running the old protocol can still validate blocks on the new chain. Soft forks allow for gradual upgrades and improvements to the blockchain while maintaining compatibility with older versions.
How does a soft fork occur?
A soft fork occurs when a new protocol version is released that includes changes that are backward compatible with the old version. Nodes running the new protocol will begin validating blocks according to the new rules, while nodes running the old protocol can still validate blocks on the chain. Over time, as more nodes upgrade to the new version, the network transitions to the new protocol.
What is the difference between a permissioned and permissionless blockchain?
A permissioned blockchain requires permission or authorization to participate in the network, typically granted by a central authority or consortium of participants. In contrast, a permissionless blockchain is open and accessible to anyone, allowing anyone to join the network and participate in consensus without permission. Permissionless blockchains are more decentralized and permissioned blockchains offer more control and privacy.
What is a blockchain shard?
A blockchain shard refers to a partition of the blockchain network that handles a subset of the overall transactions and data. Sharding is a technique used to improve the scalability of blockchains by distributing the load across multiple shards, enabling higher throughput and lower latency.