Understanding Crypto — Part 2
Introduction
The first part describes the high level ideas behind blockchain, cryptocurrencies, smart contracts and dApps. This post will continue expanding on those concepts and introduce a few more.
NFT (Non-Fungible Token)
Before we dive into this, let’s first understand what does a crypto token mean? The words cyrptocurrency and token are used interchangeably — they are both digital assets that can be transacted on blockchains. However, cryptocurrencies are the native asset of the blockchain like BTC, ETH, SOL, etc.; whereas tokens are built on existing blockchain using smart contracts. The token behavior is not a property of the blockchain but of the smart contracts that implement it. These smart contracts generally conform to the EIP-20 token standard; making it easy for users, wallets, exchanges, etc. to interact with them.
NFTs are essentially tokens that are unique and must have an owner. These tokens can be bought and sold by transferring the ownership from one account to another. The blockchain verifies that the token transferred is the unique token that is being transacted. The entire ownership history is of every NFT is public record. Most NFTs are built using a consistent standard known as ERC-721.
Aside: Non fungible in economics refers to items that have unique properties and are not interchangeable with other items; e.g. — your furniture, your computer, etc; whereas USD, BTC, ETH etc. are fungible items as 1 USD can be exchanged with another 1 USD.
One thing to note is that the NFT is not a collectible item/image iteslf but data (say a URL) that points to a server that hosts the collectible item/image. The underlying server could change, the image on the URL could change or even not load. The blockchain ensures that the metadata of the NFT is unique and that ownership is validated but it does not maintain the item itself. This is a potential risk where your NFT points to a server that is not maintained and you lose access to the image/item. Even in such cases, the NFT itself will always be available for you to sell but the underlying asset may not be accessible. Refer NFT Art URLs Explained for more details.
Utility of NFT?
There are many potential use cases of NFTs but perhaps the biggest use case is artists/creators/popular personalities publishing their own NFT to engage with their audience. Imagine Lebron James publishing NFTs and people who buy his tokens get to have lunch with him / get tickets to his basketball games. Or your favorite author publishes NFTs and if you buy it, you get early access to his next book / get to be involved in the development of his next project. The creator space is where NFT shines the most and some call it Proof of Passion.
There are many marketplaces where you can buy and sell all kinds of NFTs.
References:
NFTs — Get Started
Overview of the NFT ecosystem
Humans and their love to collect things — A talk by Cryptokitties founder
A NFT experiment
Decentralized Autonomous Organizations (DAOs)
The best definition I found is that a DAO is an internet community that jointly controls a cryptocurrency wallet to pursue common goals — such as running a business or charity — without having to ask anyone for permission.
Membership of a DAO is determined by ownership of some of the DAO’s ‘token’, which is issued on a blockchain like Ethereum and acts much like a digital membership card, enabling access to gated content, voting rights and other benefits.
One of the main benefits of a DAO is that they are more transparent than traditional companies since all actions and funding in the DAO are viewable by anyone. This significantly reduces the risk of corruption and censorship. Publicly traded companies must provide independently audited financial statements, but shareholders only get to see the financial health of the organization at a snapshot in time. Since a DAO’s balance sheet exists on a public blockchain, it is completely transparent at all times, down to every single transaction.
There are also two big downsides —
1. Since everything is operated by an open source software — hackers can exploit bugs and issues with that code
2. There are no business secrets, how the DAO works is available for anyone to read
References:
Everything you need to know about DAOs
What is a DAO?
How do DAOs work?
What the heck is Web 3.0?
When you hear anyone say Web 3.0, they are basically referring to dApps running on blockchain. The term has gain a lot of popularity with people reimagining all applications running on top of a decentralized backend in an open and transparent way. The main thing to take away is that in Web 3 applications, the ownership and control is decentralized. There’s no one company like a Google or a Spotify controlling the service but the collective “we” would govern how the service operates.
At this point, there’s not a lot of difference between Web 3 and dApps. I’ve added it as we will come across this more and more as this ecosystem grows and dApps gain adoption.
References:
Web 2 vs Web 3
Architecture of a Web 3 application
Why Web 3 matters?
Conclusion
The big take away is that smart contracts are being utilized in many different ways to do a number of things and that this number will keep growing.
There are a lot of challenges that we need to overcome to build decentralized applications that are cost efficient, can scale and have good UX. But this is what makes this space so exciting. I have no doubt that people will solve these problems and we will have some great applications come out of this.
Part 1 of this post can be found here. If you find any errors or mistakes, please let me know in the comments.
