100,000 Questions and Answers about Cryptocurrencies 97

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. It automatically enforces the terms of the agreement when predetermined conditions are met.

How do smart contracts work?

Smart contracts work by executing predetermined functions when specific conditions are met. They are typically deployed on a blockchain, allowing for secure, transparent, and tamper-proof execution. Smart contracts can handle a wide range of transactions, including financial agreements, supply chain management, and voting systems.

What is Initial Coin Offering (ICO)?

An Initial Coin Offering (ICO) is a means of crowdfunding, where new projects sell their underlying cryptographic tokens in exchange for Bitcoin, Ethereum, or other cryptocurrencies.

How does an ICO work?

An ICO works by allowing project teams to raise funds by selling their tokens to investors. The tokens represent ownership in the project or provide access to certain features and services. ICOs are typically conducted on a blockchain platform like Ethereum, using smart contracts to handle the token sale and distribution.

What is DeFi (Decentralized Finance)?

DeFi refers to financial applications and services built on decentralized networks, typically using blockchain technology. It aims to provide financial access and services without relying on traditional financial institutions.

How does DeFi work?

DeFi works by leveraging smart contracts and decentralized networks to enable financial transactions and services. These include lending, borrowing, trading, derivatives, and more. DeFi applications are typically open-source and permissionless, allowing anyone to participate and interact with the system.

What is NFT (Non-Fungible Token)?

NFT stands for Non-Fungible Token. It is a unique and non-interchangeable unit of data stored on a blockchain. NFTs can represent digital assets like art, music, videos, or in-game items.

How do NFTs work?

NFTs work by assigning a unique identifier to a digital asset and storing it on a blockchain. This allows the asset to be authenticated, tracked, and traded securely. NFTs enable the tokenization of digital assets, opening up new possibilities for ownership, licensing, and trading.

What is a sidechain?

A sidechain is a separate blockchain that is pegged to a main blockchain, allowing for the transfer of value and assets between the two networks. It aims to provide scalability and interoperability by offloading transactions from the main chain.

How does a sidechain work?

A sidechain works by using a two-way peg mechanism to anchor the value of its tokens to the main chain. This allows for the secure transfer of assets between the two networks. Sidechains can have different consensus mechanisms, block sizes, and transaction speeds, enabling them to scale and handle more transactions than the main chain.

What is cross-chain interoperability?

Cross-chain interoperability refers to the ability of different blockchains to interact and exchange value with each other. It aims to break down silos and enable the seamless flow of assets and data across different networks.

How does cross-chain interoperability work?

Cross-chain interoperability works by using various bridging solutions and protocols that allow different blockchains to communicate and exchange value. These solutions can include atomic swaps, sidechains, and interoperability protocols like Polkadot and Cosmos. Cross-chain interoperability enables the creation of a more interconnected and interoperable blockchain ecosystem.

What is Zero-Knowledge Proof (ZKP)?

Zero-Knowledge Proof (ZKP) is a cryptographic technique that allows one party to prove to another that a statement is true without revealing any additional information beyond the fact that the statement is indeed true.

How does Zero-Knowledge Proof work?

ZKP works by having the prover construct a cryptographic proof that demonstrates the validity of a statement without revealing any sensitive information. The verifier can then validate the proof without needing to know the underlying data or computations. ZKP is used in various applications, including privacy-preserving cryptocurrencies, secure authentication systems, and more.

What is a Layer 2 solution?

A Layer 2 solution refers to a scalability technique that operates on top of a base layer blockchain like Ethereum. It aims to offload transactions from the main chain, improving scalability and transaction throughput.

How do Layer 2 solutions work?

Layer 2 solutions work by handling transactions off-chain, either by executing them in parallel on a separate network or by bundling multiple transactions together into a single transaction on the main chain. This reduces congestion on the main chain and enables faster and cheaper transactions. Layer 2 solutions can include payment channels, state channels, sidechains, and rollups.

What is a hard fork?

A hard fork is a permanent divergence in a blockchain, creating two separate versions of the network that operate independently. It occurs when there is a significant change in the protocol or consensus rules that is not backward compatible.

How does a hard fork work?

A hard fork works by introducing a new set of rules or protocol changes that are not backward compatible with the existing network. This creates a split in the blockchain, with nodes running the new software following one version of the chain (the new chain) and nodes running the old software continuing on the original chain. Hard forks can lead to the creation of new cryptocurrencies or significant changes in the network's operations.

What is a soft fork?

A soft fork is a backward-compatible change in a blockchain's protocol or consensus rules. It allows new rules to be introduced without splitting the network into two separate chains.

How does a soft fork work?

A soft fork works by introducing new rules that are backward compatible with the existing network. Nodes running the new software will enforce the new rules, while nodes running the old software will continue to operate as before. However, the new rules are designed in such a way that they do not invalidate any previous blocks or transactions. This allows the network to gradually transition to the new rules without splitting into two separate chains.