In your lifetime, you may have come across the famous quote by Albert Einstein that goes, "If you can't explain it simply, you don't understand it well enough." These profound words encapsulate the essence of effective communication and highlight the significance of defining terminology.

In the world of cryptocurrencies, where complex concepts, ideas, and jargon abound, the ability to simplify and articulate our understanding becomes absolutely crucial. Countless times, I have found myself answering questions from both colleagues and friends, such as: What is blockchain? What are smart contracts? What it DeFi? and so on.

In this blog, I will explore some of these words and questions that have been posed to me, aiming to clarify my understanding and provide simplified explanations in my own words.

Note that the list will continue to be updated as time goes by.

Table of Contents

• What is Blockchain?
• What is Bitcoin?
• What is Ethereum?
• What are Smart Contracts?
• What is EVM?
• What is DeFi?

What is Blockchain?

A blockchain is a decentralized and transparent digital ledger that records transactions in a secure and permanent way. It is called “blockchain” because it is made up of blocks, which are like individual pages of a ledger, linked together in a chain.

In traditional systems, like banks or government databases, there is usually a central authority that manages and controls the records. However, in a blockchain, there is no central authority. Instead, the information is stored and managed by a network of computers, often referred to as nodes, spread across different locations.

When a new transaction or piece of information needs to be added to the blockchain, it is first verified by the network of computers through a process called consensus. This ensures that the information is valid and agreed upon by the majority of the network. Once verified, the transaction or information is bundled together with other approved transactions and added as a new block to the chain.

What is Bitcoin?

Bitcoin is a digital currency that operates on a decentralized network called a blockchain. It was created in 2009 by an anonymous person or group of people using the pseudonym Satoshi Nakamoto.

Unlike traditional currencies, such as the U.S. dollar or the euro, Bitcoin is not issued or controlled by any central authority, like a government or a bank. Bitcoin is created through a process called mining, where computers compete to solve complex mathematical problems. When a problem is solved, new Bitcoins are generated and added to the network.

You can think of Bitcoin as a digital money that exists solely in a digital form. With Bitcoin, you can send and receive funds directly between users without the need for intermediaries like banks. It means your money is owned by you. No one can touch and control because remember that transactions are records and they are verified by a network of computers (nodes) spread across the globe. These transactions are secured through cryptography, making them highly secure and resistant to fraud.

What is Ethereum?

Ethereum is another type of digital currency that was proposed by Vitalik Buterin in late 2013 and developed in 2014 with the goal of expanding the capabilities of blockchain technology beyond simple financial transactions like Bitcoin. You can think of Ethereum as a general purpose blockchain.

At its core, Ethereum blockchain contains a record of all transactions and smart contracts that have ever occurred on the network. We can get into what smart contracts later.

Ethereum has its native cryptocurrency called Ether (ETH). Ether is used to pay for transactions and computational services on the Ethereum network. It also serves as an incentive for network participants, such as miners, who help maintain the network's security and process transactions.

Additionally, Ethereum introduced the concept of ERC-20 tokens, which are fungible tokens that can be created and traded on the Ethereum blockchain. These tokens have played a significant role in the growth of initial coin offerings (ICOs) and the broader cryptocurrency ecosystem.

At the time of writing, Ethereum has a large and active development community, with developers around the world building applications, protocols, and decentralized services on top of the Ethereum platform. It has gained significant popularity and has become one of the most widely used blockchains for creating decentralized applications and executing smart contracts.

What are Smart Contracts?

Smart contracts are self-executing programs with predefined rules and conditions written in code on the Ethereum blockchain. They automatically execute when these conditions are met, removing the need for intermediaries in many transactions.

This opens up a wide range of possibilities, including decentralized applications (DApps), decentralized finance (DeFi), non-fungible tokens (NFTs), and more.

What is EVM?

The Ethereum Virtual Machine, shortened is as EVM, is the part of Ethereum blockchain platform that handles smart contract deployment and execution. At a high level, the EVM running on the Ethereum blockchain can be thought of as a global decentralized computer containing millions of executable objects, each with its own permanent data store.

What is DeFi?

DeFi stands for Decentralized Finance. It refers to financial applications and services that are built on decentralized networks, primarily on blockchain platforms like Ethereum.

DeFi aims to transform traditional financial systems by leveraging the benefits of blockchain technology, such as decentralization, transparency, and programmability.

Let’s dive into what are some key aspects and features of DeFi:

• Decentralization: DeFi applications operate in a decentralized manner, meaning they are not controlled by any central authority or intermediaries. Instead, they run on blockchain networks, where transactions and operations are executed by a network of computers (nodes) that reach consensus.
• Open and Permissionless: DeFi protocols are typically open to anyone with an internet connection. They allow individuals worldwide to access financial services without requiring permission or going through banks.
• Smart Contracts: DeFi relies heavily on smart contracts, which are self-executing contracts with predefined rules written in code (see the above definition). These contracts automate and enforce the terms of various financial agreements, such as lending, borrowing, trading, and more. Due to the immutable nature of blockchain, once deployed, some people think that smart contracts cannot be altered and trust them 100%. However, in reality it is not true. It is important to acknowledge that not all smart contracts are guaranteed to be safe and secure. They can be susceptible to bugs, vulnerabilities, and even intentional exploits by malicious actors. Users should exercise caution, conduct due diligence, and be aware of the inherent risks before interacting with any smart contract or DeFi protocol.
• Lending and Borrowing: DeFi platforms offer decentralized lending and borrowing services. Users can lend their digital assets to earn interest or borrow assets by collateralizing their existing holdings. These lending and borrowing protocols operate through smart contracts, allowing for efficient and transparent lending processes.
• Decentralized Exchanges: DeFi includes decentralized exchanges (DEXs) that facilitate the trading of cryptocurrencies and tokens directly between users. These exchanges operate without a central order book, using automated market-making algorithms and liquidity pools. DEXs offer increased control, privacy, and security compared to traditional centralized exchanges.

DeFi has gained significant traction in recent years, offering innovative and decentralized alternatives to traditional financial systems. I strongly believe that it has the potential to disrupt and reshape various aspects of finance, providing greater accessibility, efficiency, and inclusivity to individuals worldwide.

The list continues to be added...

Getting one step closer to blockchain world ❤️