“Change is the only constant thing in the world”, and this quote signifies everything that exists in the world we are living in. Blockchain, as part of our world, can not defy this principle. As the crypto space has been maturing, the pace of adoption is increasing as well. With wide-scale adoption come sweeping changes that aim to define the market in a new light. As a result, the crypto market is witnessing a wide array of developments, from the birth of DeFi to the introduction of NFTs and to the rise of stablecoins. But what actually is DeFi and its components? What do NFTs signify? And what is the meaning of stablecoins?  

What is DeFi (Decentralized Finance)?

DeFi is an acronym that stands for Decentralized Finance which further refers to all decentralized financial applications and services running on a Blockchain (often on Ethereum). This is in contrast with CeFi, or Centralized Finance which is constituted by traditional financial institutions, namely banks, insurance companies, brokerage firms, centralized exchanges. Contrary to centralized institutions, DeFi aims at establishing a financial ecosystem with no central authority, similar to how cryptocurrencies have decentralized purchasing power inherited by traditional currencies. 

In simpler terms, instead of resorting to services rendered by banks and other financial intermediaries, in order to make deposits, avail loans, earn interest, get insurance, you can simply access all of this and more via a Blockchain from the comforts of your own couch. 

DeFi is an excellent alternative to traditional investment avenues for earning passive income easily by employing your idle crypto coins. The main reason behind the soaring DeFi popularity is that it solves the twin problems of low returns and high entry barriers that exist in the traditional finance markets.

But how can one trade in a decentralized manner? That’s where DEXes come into the picture.

DEX or decentralized exchanges are an integral part of the DeFi ecosystem. Popular DEXes like Uniswap, Kyber act as the intermediary layer connecting buyers and sellers directly. These are the platforms on which you can access a wide variety of decentralized financial services such as lending, borrowing, staking, yield farming, liquidy mining, and more.

(Now you must be wondering what on earth is staking, liquidity mining, and yield farming. Well, more on that some other time but in layman terms, these three are the DeFi investment strategies used by crypto traders to earn regular high returns on their investments by staking or freezing their coins as collateral.)

Decentralized cryptocurrency exchanges differ from centralized cryptocurrency exchanges like Binance, in a way that the former are non-custodial, which means that you are the sole owner of your private keys unlike in the latter ones, where your private keys are stored and protected by the centralized exchange.

DEX also provides trustless transactions through smart contracts. Also, contrary to the identification policies such as KYC and AML used by centralized exchanges, DEXes do not usually require users to disclose their identity. Thus, the functionalities, privacy, and security provided by DEXes mirror the original vision of Blockchain technology.

What are stablecoins?

Stablecoins, as the name suggests, refer to that branch of crypto coins that is relatively stable. Stablecoins like Tether, DAI, USDC, aim to provide the stability of fiat currency along with the functionalities and benefits of cryptocurrencies. This is achieved by backing the value of the stablecoins against reserves held in either fiat currency, other crypto coins, or any commodity like gold. This mechanism follows a similar principle of how national currencies are pegged against gold or forex reserves.

Stablecoins, by their basic principle, eliminate the high volatility experienced by other “store of value” coins (e.g. BTC) and act as the “true medium of exchange”. But what utility do stablecoins provide if their value does not increase over time? 

Here’s an example; imagine you have invested $1,000 in DOT at the price of $20/DOT. Now, the value shows upward trends and hits $30/DOT, and you wish to redeem the value. However, due to the high volume of trade happening on the exchange where you want to sell your coins, the deposits and withdrawals to fiat are restricted. Now, to avail the profit provided by the prices at that point, you have the option to swap the DOT into a Stablecoin like Tether (USDT), thereby locking the value and avoiding the risk of DOT moving downward to the price where it either neutralizes the profit or results in a loss.

Another benefit provided by stablecoins is the ease and speed of transfer across various crypto exchanges, which is particularly useful when dealing with DEXes that function on a peer-to-peer basis and where the user can not trade coins directly with fiat (US dollar, Euro, Pound, etc.)

Why are NFTs trending?

Explaining NFTs isn’t quite easy and making sense of NFTs is an even harder nut to crack. NFT basically stands for non-fungible token where the term “non-fungible” refers to an asset that is unique and irreplaceable. This is in contrast to fungible coins / tokens like Bitcoin. Let’s say you have 1 BTC and your friend has 1 BTC and you decide to exchange it, what difference would it even make, given the value of both your Bitcoins would remain the same at any given point?

But this is not the case with NFTs. A non-fungible token is irreplaceable. It simply is a smart contract or in even simpler terms, a token or digital certificate that contains unique information about a particular asset (e.g. a digital piece of art) and is used to represent ownership.

Let us try to understand it more prominently; imagine that you have created a painting on your computer and you wish to earn some money for it. Now you can mint it on Ethereum or in other words, just convert it into an NFT on any website that allows you to do so. In the process of minting, your art will be attached to a “token”, which will contain the distinctive characteristics of your painting, making that token unique unlike other crypto tokens (BTC, ETH, ADA etc.) or even other NFTs. Moving forward, you can list this art online on an NFT marketplace and transfer that token (aka NFT) for Bitcoin or any crypto coin, thereby transferring the ownership (again that NFT) to the buyer. All this makes NFT a digital certificate that represents the ownership of a variety of digital or physical assets be it paintings, songs, concert tickets, GIFs, etc.

If this is still too much for you, then consider what happens when you buy a physical asset such as a car. The only thing that can serve as legal proof that the car indeed belongs to you is the certificate of ownership that is issued in your name. The certificate contains unique information about the car such as the engine number. In the future, a digital certificate, using NFT technology, might replace the physical certificate. 

But here comes that part where you have to make sense of it. In the case of a car, another person can not perform the “right click and save it as image” function which is of course possible with a digital painting. So why would anyone buy something that absurd? Well, someone bought a banana duct-taped to a wall for a whopping $120,000, so never underestimate the power of extraordinary wealth. Having said that, paying $20 worth of crypto to support your favorite artist sounds like a fair deal. A good number of artists on the internet produce a lot of novel and remarkable content which doesn’t fetch any real value in terms of money. NFTs are just an extraordinary albeit a bit controversial attempt to provide due credit to the original creators. 

Summary 

The Blockchain space is currently witnessing a crazy amount of developments and there’s not a single dull day in the sector. Naturally, it’s becoming increasingly daunting to keep up with the pace of innovation. However, once you have stepped into the Crypto space, the desire to get the hang of things will never leave you alone. And as you learn, so you grow.