The world of Cryptocurrency and blockchains can be daunting for beginners. Bitcoin, NFT, DeFi- there are so many new concepts to learn and understand! So, what exactly do these terms mean, and how do they work? Let’s take a look.
What are blockchains?
First of all, it’s important to understand what blockchains are. A blockchain is a sort of decentralized database, where data is stored in encrypted blocks. Many computers over the world can contribute to being part of a blockchain network. Anyone with access to the blockchain can add data in real-time, with many operations taking place at the same time. Blockchains are unique in the sense that they are extremely secure and offer transparency at the same time.
Non Fungible Tokens
Blockchain programmers can create digital files containing different types of media as tokens. These can either be audio files, pictures, and even various documents like certificates and receipts. One type of blockchain token that is rising in popularity is Non-Fungible Tokens or NFTs. DeFi plays a major role. NFTs are basically digital artworks that people buy in order to claim ownership of it. However, the artwork can still remain free for anyone to download a copy of. The owner simply owns the rights to the image.
So why is it called Non-Fungible Token? Fungibility means an object’s ability to be exchanged for another object which is exactly the same. In this case, all objects of that type have the same value. For example, two $10 notes are fungible because they can be interchanged with no change in value. Two bitcoins are also interchangeable the same way, meaning they are also fungible in nature. However, two NFTs may not have the same value. NFTs should be viewed the same way that artwork is- a doodle obviously won’t have the same value as the Mona Lisa. Two pieces of art may be valued very differently- depending on how they are viewed. Hence, these digital tokens are non-fungible in nature.
DeFi
DeFi is an abbreviated term for Decentralized Finance. It refers to the transfer of funds between people and corporations at a decentralized version i.e., without the involvement of any intermediary like a bank or other financial institute. Many blockchain networks like Ethereum have begun to offer services that banks do- like taking loans, trading assets, buying insurance, and other financial activities.
The most popular example of DeFi is cryptocurrency. Any two people can buy and sell crypto coins amongst themselves without the involvement of a bank or other platform. This is known as peer-to-peer finance, as it takes place between two individuals and completely cuts out the middleman. Blockchains are a great alternative to banking services, as they remove all the associated costs like property, salaries, and more. Anyone with the proper knowledge of blockchains and cryptocurrency and an internet connection can take part in DeFi activities. This makes financial activities much more accessible to people who may be wary of approaching larger banks and corporations.
Using this technology is quick and easy. Anyone can contribute to these activities, and can even stay anonymous if they wish. People need to simply create a wallet to store their crypto coins in. One can even transfer their assets and even close their wallet without any prior warning, and without paying expensive service fees. Though users can stay anonymous if they wish, all the transactions they make are completely transparent and anyone in the general public can view them.
Decentralized Apps
So, how can you participate in Decentralized finance activities? People can engage in such activities via DApps or Decentralized apps (DeFi). These apps are developed on the Ethereum blockchain network, and anyone can get access to them. They are not hosted on a centralized platform operated by a single corporation, but rather on a peer-to-peer network protocol. DApps use smart contracts to perform functions typically done by middlemen, eliminating them completely. Doing so helps to save both time and costs. The blockchain network saves smart contracts on computers all across the world. Other than that, DApps work and look like any other app. The DApp users can directly send some amount of cryptocurrency to the creator to obtain the source code and use the application.
Limitations of DeFi
However, DApps are not as popular as traditional apps as of yet. If too many people use a DApp, it may cause congestion in the blockchain network and cause delays. Incorrectly written codes by individuals may also not be as complex or user-friendly as those developed by larger corporations. The presence of bugs may also be a huge problem. In order to encourage more people to use DApps (DeFi) developers will have to create more user-friendly interfaces and show a level of expertise that matches those of traditional apps.
Another limitation is that apps need constant updates and modifications to keep up with the customers’ demands. This may be difficult to do as once data is encrypted in a blockchain, it becomes extremely difficult to change. Even the owner is unable to actually modify the data at times.
Hence, as of now, users are using DApps (DeFi) only to facilitate the exchange of cryptocurrency and other similar activities. Until DApp developers are able to overcome the hurdles of adapting to blockchain technology, the usage of DApps will not rise. The issues of network overloading, scaling, and bugs are still huge problems that can make a DApp unstable and inconvenient to use.
Conclusion
Cryptocurrency and blockchains are taking over the world by storm. There is no doubt that with the rising use of this technology, developers will come up with more uses for the blockchain network. Decentralization of various activities may help decrease costs by cutting out the middleman, but it may also lead to many people losing their jobs and livelihoods. Hence, it is extremely important to slowly adapt to and integrate such technologies in different parts of the financial sector. Developers still need to refine the way they develop Dapps (DeFi) and smart contracts in order to make them usable for the general public.
