In the last issue, we discussed the features of the Blockchain which can be summarized into Decentralization, Immutability (security) and Transparency (pseudonymity).
In this issue, let us take a look at how these features are used to apply Blockchain technology in real life. Let's get started, shall we?
We will be looking at two major standpoints, Decentralized Finance (DeFi) and Decentralized agreements (smart contracts).
- Decentralized Finance (DeFi):
You might have heard of it; crypto, tokens, BTC, ETH, SOL among so much more. Decentralized Finance is simply running a financial system on a Decentralized entity, the Blockchain. How does it different from Traditional Finance (TradFi).
In DeFi, you are in control, no intermediary between you and a receiving party when making transactions. No central body can freeze your funds or reject transactions because they want to. You funds are secure in a wallet controlled by a private key that you should never reveal to any one. Hence the saying "not your keys, not your coins". When making transactions, funds are sent directly from your wallet to a receiving wallet, it is a peer-to-peer system.
In contrast, TradFi involves the conventional banking model where a central body (the bank) manages your funds. They can freeze your funds without your permission or if the bank goes insolvent, your funds are gone. Funds that are controlled by a third-party party are not really yours, are they?
That is what the DeFi aims to solve, giving the power back to the owners.
Examples of DeFi are tokens like:
Native tokens (Tokens used within a particular Blockchain network, e.g. BTC on Bitcoin, ETH on Ethereum, MATIC on Polygon, etc.
ERC20 tokens: Tokens that follow the ERC20 standard.
Governance tokens: Used in Decentralized Autonomous Organizations (DAOs)
and many more...
- Decentralized Agreements (smart contracts):
Picture this, you are saving with your friends for an event you planned to hold at the end of the year, just to have a good time with your friends.
You all agreed to save the money with one person, you trusted this person because you are friends with them and you expect them to keep their own part of the bargain.
It is almost the end of the year, and you tried to reach out to the person holding the funds and SIKE! He lost the money or spent it or even ran away with a year worth of savings from about four or five people. You cannot reach him neither can you find the money. What do you do? You are lost and pained.
That is what smart contracts solve, smart contracts are simply agreements in form of code that run on the Blockchain. They are decentralized (not controlled by one person), immutable (once deployed, cannot be changed), and transparent (anyone with the contract address can view the terms I. the contract).
With smart contracts, you do not have to trust a body or any person, all the terms are baked I to code and cannot be altered once deployed. You can be assured of outcomes as long as the requirements are met. It is a trust-minimized system.
With smart contracts, you and your friends can send money to the contract, yes, smart contract can hold funds too!
By the end of the year, each person can withdraw what he has saved and everyone has a good time. No hassle.
Those are some of the real-world applications of the Blockchain. I hope you enjoyed the read.
In the next issue, we will talk about fundamental concepts that make the Blockchain work. See you in the next!