A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are limited entries in a database that no one can change unless specific conditions are fulfilled.
In early 2009, an anonymous programmer or a group of programmers under an alias Satoshi Nakamoto introduced Bitcoin. Satoshi described it as a ‘peer-to-peer electronic cash system.’ It is completely decentralized, meaning there are no servers involved and no central controlling authority. The concept closely resembles peer-to-peer networks for file sharing.
One of the most important problems that any payment network has to solve is double-spending. It is a fraudulent technique of spending the same amount twice. The traditional solution was a trusted third party — a central server — that kept records of the balances and transactions. However, this method always entailed an authority basically in control of your funds and with all your details on hand.
In a decentralized network like Bitcoin, every single participant needs to do this job. This is done via the Blockchain — a public ledger of all transactions that ever happened within the network, available to everyone. Therefore, everyone in the network can see every account’s balance.
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Smart-contract work as a deterministic program. It executes a particular task when and if certain conditions are met. As such, a smart contract system often follows switch statements.
Ethereum smart contracts are made of a contract code and two public keys. The first public key is the one provided by the creator of the contract. The other key represents the contract itself, acting as a digital identifier that is unique to each smart contract.
The deployment of any smart contract is made through a blockchain transaction, and they can only be activated when called by an EOA (or by other smart contracts). However, the first trigger is always caused by an EOA (user).
An Initial Coin Offering (or ICO) is a method for teams to raise funds for a project in the cryptocurrency. In an ICO, we generate blockchain-based tokens to sell to early supporters. This serves as a crowdfunding phase — users receive tokens that they can use (either immediately or in the future), and the project receives money to fund development.
The practise was popularized in 2014 when it was used to fund the development of Ethereum. While the name sounds similar to an Initial Public Offering (IPO), the two are fundamentally very different methods of acquiring funding.
IPOs usually apply to established businesses that sell partial ownership shares in their company as a way to raise funds. In contrast, ICOs are used as a fundraising mechanism that allows companies to raise funds for their project in very early stages. When ICO investors purchase tokens, they are not buying any ownership in the company.
Decentralized Finance (DeFi) refers to an ecosystem of financial applications that are built on top of blockchain networks.
More specifically, the term Decentralized Finance may refer to a movement that aims to create an open-source, permissionless, and transparent financial service ecosystem that is available to everyone and operates without any central authority. The users would maintain full control over their assets and interact with this ecosystem through peer-to-peer (P2P), decentralized applications (dapps).
The core benefit of DeFi is easy to access to financial services, especially for those who are isolated from the current financial system. DeFi applications on public blockchains will potentially create entirely new financial markets, products, and services.
Yield farming also referred to as liquidity mining, is a way to generate rewards with cryptocurrency holdings. In simple terms, it means locking up cryptocurrencies and getting rewards.
In many cases, it works with users called liquidity providers (LP) that add funds to liquidity pools. Liquidity pool is a smart contract that contains funds. In return for providing liquidity to the pool, LPs get a reward. That reward may come from fees generated by the underlying Defi platform, or some other source.
Some liquidity pools pay their rewards in multiple tokens. Those reward tokens then may be deposited to other liquidity pools to earn rewards there, and so on. You can already see how incredibly complex strategies can emerge quite quickly. But the basic idea is that a liquidity provider deposits funds into a liquidity pool and earns rewards in return.
Now you know something about DeFi and yield farming which are making a lot of noise these days.
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