DeFi 2.0: The New Version of Decentralized Finance
If you’ve been following the crypto space for some time now, you’ve undoubtedly heard about DeFi - decentralized finance. It was a really hot topic in the summer of 2020 and has retained its relevance, as a new field of finance, to this day.
However, while DeFi might still be a new concept, there’s actually an even newer term being thrown around - DeFi 2.0. And this type of decentralized finance aims to solve the core issues that DeFi 1.0 is facing.
In this section, I’m going to tell you about DeFi 2.0. To be a bit more specific, I’ll tell you what DeFi 2.0 is, how it’s different from DeFi 1.0, and also give an illustrative example of one of the most successful DeFi 2.0 projects.
Now, let’s get to it!
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What is Defi 2.0? (Explained with Animations)
What is DeFi 2.0?
So, before we jump into DeFi 2.0, there are a couple of terms that you need to be familiar with, first. Since it’s not exactly a very simple topic, if you feel that you need more information at any point in time, make sure to check out the previous sections of this BitDegree Crypto 101 Handbook.
So, the very first term that you need to be familiar with is DeFi. It means “decentralized finance”, and is a form of finance that doesn’t have any central authorities, and is instead governed by the communities behind DeFi crypto projects.
So think about it this way - with DeFi 1.0, instead of getting a loan from a centralized bank, you would go to a dApp (a decentralized application, or simply - a DeFi project) that specializes in loans, and borrow money from there. This money would be supplied to you by the community behind the project, and you would be able to interact with the dApp anonymously. On top of that, everything would be governed by smart contracts, so there’s no room for human error or a single person's decision.
One of the key features of DeFi, and the second big term that you need to be familiar with in this section, are liquidity pools. A liquidity pool is a place that stores all of the cryptocurrency tokens that are available to be traded and are provided by liquidity providers - the DeFi community. It’s like a shelf of candy in a shop - if there are 5 candies on the shelf, that means that you can purchase up to 5 candies until the shop runs out of stock.
That being the case, however, if there’s only one candy on the shelf, it’s probably going to be much more expensive, since while the demand for candies remains the same, the supply is limited to a single candy. This works both ways, mind you - if there are hundreds of candies available to be sold, and the demand doesn’t increase, the candies will cost less!
Up to this point, everything is just basic economics. However, this is where liquidity pools come in.
A liquidity pool allows a project to attract investors - the new liquidity providers, who will then bring in two types of tokens - a project token, as well as some sort of leverage, such as Ethereum or DAI.
Over time, as other people come in and trade these two tokens on the liquidity pool, the investors receive passive interest from the trading fees that these people pay. So, you have happy investors (since they receive passive income), as well as happy traders (since they don’t need to find another person to perform the trade, and can trade anonymously on the liquidity pool).
Now, just to be meticulous about the details, the traders don’t actually trade on the liquidity pools. Instead, the trading processes happen on Automated Market Makers - special platforms designed to facilitate those trading activities utilizing liquidity pools. Not to go into too much depth regarding the subject, I’ll put it this way - you can look at AMMs as those same shops where you buy candy. In this case, liquidity pools would be the shelves where the candy is placed.
To sum up, DeFi is an automated decentralized financial field with no single owner, that has implemented Automated Market Maker algorithms that utilize liquidity pools, which are filled with cryptocurrencies provided by liquidity providers (AKA investors and initial project owners).
It’s like a shop with no single owner but instead owned by people who have brought their own goods into the same shop’s pool, so that the shop would trade them for other goods brought by other clients. By doing so, these liquidity pool creators become co-owners of the whole shop, with voting and business decision rights. Their shop trades the collectively-provided goods with their clients autonomously, without the intervention from owners or any other humans. All those trades are based on pre-programmed trading rules.
Finally, shop co-owners receive their passive interest rate income after each trade happens. Theoretically, the pool will never become empty, since, every time a trade happens, it receives new goods from clients in exchange for old ones. Pre-programmed trading rules of the shop correct the prices and exchange value ratio automatically, based on the supply & demand of goods, and the actual quantities of the goods in its own pool.
So, basically, if the pool is full of Coca-Cola, its price will go down, and the price of Pepsi will start to rise because the pool is currently in scarcity of it.
That's about it on the terminology side of things - at least for the time being. Now, let’s move on to DeFi 2.0.
To put it very simply, DeFi 2.0 is the second generation of dApps that are concerned with decentralized finance. While the differences between DeFi 1.0 and DeFi 2.0 aren’t going to be evident for an outsider looking in, if you know what to look out for, you’ll soon notice that there’s a rather obvious trend. Specifically, DeFi 2.0 projects aim to improve on the weakest and most vulnerable parts of traditional DeFi.
DeFi 2.0 vs DeFi 1.0
One thing that is super-important in all DeFi ventures is the liquidity of the pool. It’s actually the main area where DeFi 2.0 is different from traditional decentralized finance.
With your traditional DeFi projects, teams tend to put a lot of their native token into the liquidity pool, hoping this will attract other investors. With time, it’s often successful - investors come in and bring their own coins and tokens into the pool, and as they start earning passive returns, the pool becomes more and more popular.
However, this is where the core issue reveals itself - if a DeFi project depends on the investors’ funds in the liquidity pool in order to survive, it risks huge token price volatility and general uncertainty.
Think of it this way - if you have no interest in a project, and are only investing in order to mine liquidity (earn a passive income), whenever you spot a better offer (such as one with a higher annual percentage yield), you’re probably going to jump ship, and transfer your investment there! It’s like eating at the same restaurant every day since the food there is OK and the prices are great. If, however, the prices start to rise, or the quality of the food goes down, you will surely consider switching your lunch providers!
This puts a lot of pressure on the liquidity pool, and the project that it’s associated with. In turn, if there’s a big liquidity provider turnaround, this will create a lot of instability and will lead to the price of the project token swinging quite a bit.
The only hope that DeFi 1.0 projects have when it comes to preserving their investors in the long run, is to try and create an amazing and appealing project. This, in turn, would incentivize investors to keep their investment on the platform, even after the initial liquidity mining period is over.
As you can probably imagine, though, creating a unique and groundbreaking project isn’t easy to do. Since retaining long-term investors is such a struggle for traditional, DeFi 1.0 projects, some crypto enthusiasts have come up with very interesting and unique decisions on how to avoid this issue altogether.
These decisions lead us to DeFi 2.0. In order to better understand what I’m talking about, let’s take one of the most popular DeFi 2.0 projects as an example.
OlympusDAO
OlympusDAO is often seen as the biggest representing project of DeFi 2.0. Many crypto enthusiasts view OlympusDAO as the most interesting decentralized finance experiment of our time, due to its innovative approach to solving the liquidity problems of traditional DeFi projects!
In short, OlympusDAO is a decentralized reserve currency protocol. Essentially, Olympus has a token called OHM, and bases all of its operations around it. These operations include staking, bonds, liquidity provision, and so on.
The OHM token is actually what makes Olympus stand out from the crowd. Each OHM token is backed by a selection of cryptocurrency assets - this, in turn, establishes a ground price for the token. In other words, OHM has a certain price threshold (or a floor price) which theoretically shouldn’t be crossed.
In order for you to understand this concept better, think about it this way. Imagine the same candy store I mentioned earlier. Now, let’s say that a candy bar in the store is priced at $1. However, the shop owner has also backed each of these candy bars with other chocolate bars that he has in the warehouse. Meaning that people will always be able to trade a candy bar for a chocolate bar, at a ratio of 1:1.
Now, the candy bar can become more expensive, and cost $2, if there’s a huge demand for it. However, it can theoretically never go below $1, since this is the value of the chocolate bars in the warehouse. So, there’s another asset to back the price of the candy bars!
Getting back to OlympusDAO and DeFi 2.0, users are able to do two things with their OHM tokens. They can stake them, and get more OHM tokens as rewards, or trade their cryptocurrencies for OHM tokens, at a discounted price. By the way, if you're not familiar with what staking is, make sure to read the section dedicated to this topic - it will all become much clearer!
Now, the second process that I’ve mentioned is where the DeFi 2.0 magic happens. Whenever someone trades OHM tokens, at a discounted price, the cryptocurrencies that they trade for the OHM tokens go to OlympusDAO. This process is called bonding.
OlympusDAO then uses these newly acquired assets - such as Ethereum, or the DAI stablecoin - as liquidity for their operations. So, essentially, Olympus becomes the liquidity holder and can stake the assets on other popular liquidity pools, such as that of Uniswap.
Remember when I told you that liquidity providers leaving a project is the main problem of traditional DeFi 1.0 platforms? Well, in the case of Olympus, since it becomes the liquidity holder, it’s not going to “leave itself”, since all of the liquidity is in the project’s metaphorical hands. This, in theory, creates a somewhat safe and established liquidity flow and ensures that the project is funded, long-term.
Finishing Off
Now, I do have to admit - this can all be pretty difficult to wrap your head around.
DeFi 2.0 is a complex subject, but to recap, I can tell you this - the main message that you should have gotten out of this section is that traditional DeFi (AKA DeFi 1.0) suffers from liquidity providers leaving projects for other, more-promising opportunities at almost any time, and DeFi 2.0 projects aim to solve this by implementing special, complex mechanisms that allow them to become the holders of their own liquidity. In many cases, this solution results in the projects not relying on assets staked by other, third-party investors.
Naturally, the topic is even more complex - OlympusDAO itself has launched OlympusPRO, which offers other projects the opportunity to use the same bonding mechanism in their own tokenomics. Then you have dedicated marketplaces, advanced staking pool functionality, and many more intricacies, but all of these probably should be discussed in another section more thoroughly.
Now, if you’ve spent any time online in the past half a year or so, you might have heard the big news - Mark Zuckerberg, the CEO of Facebook, has announced that his company will now be called Meta and that they will invest in creating metaverse-based technology.<\/p>\n<p>This is a HUGE topic, so I would highly suggest you’d go and check the section <strong>\"<a href=https://www.bitdegree.org/"//crypto//learn//what-is-the-metaverse/">What is the Metaverse?<\/a>\". <\/strong>In short, though, Mark isn’t the first guy to come up with the concept - a “metaverse” is actually just a <strong>digital world<\/strong> where you can have your own avatar, and interact with other people!<\/p>\n<p>Where do dApps come in, you might ask? Well, when you’re baking a cake, a cake tin is absolutely necessary - if you try to make a cake without one, it will probably turn out a blob - formless, squished, and unappealing.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-dapps-5.o.jpg/" alt=\"What are dApps in crypto: Mark Zuckerberg investing in metaverse-based technology.\" width=\"800\" height=\"350\" \/><\/p>\n<p>The same logic applies to the metaverse, as well! If the underlying technology is poorly-made, the concept itself will be a fluke, too. On the flip side, if the metaverse was built on a decentralized application, this would give it a huge leap in the right direction.<\/p>\n<p><em>How so? <\/em>Well, users would be able to remain <strong>anonymous, <\/strong>all of their transactions and interactions would be <strong>recorded on the blockchain,<\/strong> and everything happening within the metaverse would be <strong>provably fair.<\/strong> In other words, everything related to the digital world would be following the rules of the smart contract lying underneath!<\/p>\n<p>Now, I really don’t want to get any techier than I already have, so I’ll stop with the dApp examples here. That being said, my point through all of this was that dApps have <strong>infinite potential<\/strong> - there are countless examples and possibilities of how they can be integrated into our lives!<\/p>\n<h2>dApps in the Future<\/h2>\n<p>With time, everything is slowly advancing and getting more intricate - it’s certain that decentralized applications will only improve in the future, too! Which dApps could we see sticking around, though - which of them have the best potential?<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-dapps-6.o.jpg/" alt=\"What are dApps in crypto: dApps in the future.\" width=\"800\" height=\"251\" \/><\/p>\n<p>Well, people probably asked these questions in the early 2000s, when tech stocks were dominating the financial landscape - no one knew which companies would survive and go on to become multi-billion dollar businesses, and which ones would fail!<\/p>\n<p>When it comes to dApps, <strong>decentralized exchanges<\/strong> <strong>and projects such as the metaverse<\/strong> are surely going to stick around in people's minds, at least for some time - projects like these serve some awesome purposes and can be useful in advancing the technology sector, as a whole.<\/p>","definition":"Did you know that you can earn real-life profits by breeding and growing creatures in a game? Well, you can, if the game is a dApp.","status":"published","meta_title":"What are dApps in Crypto? The Most Popular Types","meta_description":"Have you ever wondered what are dApps in crypto? If you have, you'll definitely find everything you need to know about dApps right here!","meta_keywords":"what are dapps in crypto, dapps meaning","modified_content":"<p>In this section, I will tell you <strong>all about dApps!<\/strong><\/p>\n<p>You probably have different applications installed on your computer - things like a calendar, Facebook, a weather app, some games, and so on.<\/p>\n<p>Just like you have all of these apps on your computer or phone, there are also dApps - or <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-decentralized-applications-dapps/">decentralized applications<\/strong><\/a> -, as well. However, there is one big difference between dApps and your common apps. Be patient though, I'll talk about that in a sec.<\/p>\n<p>Now, in this section, I’ll cover what dApps are, in the first place, talk about the most common dApp types, and also ponder on how these pieces of software could affect your life, in the future.<\/p>\n<p><em>Let’s get to it!<\/em><\/p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 suggested-comparisons pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//assets//images//compare-crypto-exchanges.gif/"/n alt=\"What are dApps in Crypto? (Explained with Animations)\"\n title=\"What are dApps in Crypto? (Explained with Animations)\" class=\"border-0\">\n <p>Video Explainer<\/p>\n <\/div>\n <\/div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: What Are dApps and How Do They Work?<\/h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"What Are dApps and How Do They Work?\" video explainer<\/p>\n <\/div>\n <\/div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"position-relative youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"LVASq8IVYA8\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"><\/div>\n <p class=\"text-left dyk-video-title\">What are dApps in Crypto? (Explained with Animations)<\/p>\n <img data-srcset=\"https:\/\/assets.bitdegree.org\/youtube\/crypto-finally-explained\/what-are-dapps-in-crypto-explained-with-animations.jpg?tr=w-420 500w,\n https:\/\/assets.bitdegree.org\/youtube\/crypto-finally-explained\/what-are-dapps-in-crypto-explained-with-animations.jpg?tr=w-760 1000w\"\n alt=\"What are dApps in Crypto? (Explained with Animations)\"\n title=\"What are dApps in Crypto? (Explained with Animations)\"\n class=\"p-0 lazyload\">\n <img class=\"play-button lazyload\" data-target=\"#video-modal\"\n data-src=\"https:\/\/assets.bitdegree.org\/crypto\/assets\/video-button.png?tr=w-85\"\n alt=\"What are dApps in Crypto? (Explained with Animations)\">\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https:////www.youtube.com//c//CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener noindex\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"><\/i>\n <\/div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE<\/h4>\n <span>ON YOUTUBE<\/span>\n <\/div>\n <\/div>\n <\/a>\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n<\/div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"><\/i>\n <\/button>\n <div id=\"iframe\"><\/div>\n <\/div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https:////www.youtube.com//c//CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener noindex\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//assets//crypto-subscribe.jpg/" alt=\"Subscribe\">\n <\/div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE<\/span>\n <\/p>\n <\/div>\n <\/div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease<\/h4>\n <span>New explainer videos every week!<\/span>\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n <\/a>\n <\/div>\n <\/div>\n<\/div>\n<h2>What are dApps?<\/h2>\n<p>So - to begin with, let’s establish what are dApps in crypto.<\/p>\n<p>As I’ve mentioned at the beginning of this section, a “dApp” stands for decentralized application. To continue with the earlier example, dApps aren’t too different from the apps that you have on your devices - games, news applications, social media platforms, and the like.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-dapps-1.o.jpg/" alt=\"What are dApps in crypto: Decentralized application.\" width=\"800\" height=\"450\" \/><\/p>\n<p>The key difference, however, lies in the <strong>underlying platform that hosts the app.<\/strong> So, if you’re using, say, TikTok, all of your information is sent back to the servers of the company - in other words, your data is collected and stored by a centralized institution.<\/p>\n<p>With dApps, however, this is not the case. Instead, decentralized applications <strong>don’t have a single, governing authority<\/strong> - <em>it’s in the name, really!<\/em> All dApps are built not on company-specific servers, but on <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-public-blockchain/">public blockchains<\/strong><\/a>.<\/p>\n<p>Now, a blockchain is a special database that’s used to store information. The things that make it special are that it’s <strong>decentralized<\/strong> (belonging to no single authority), and that it <strong>stores information in chronological order.<\/strong> I won’t go further in-depth with the topic, but for the sake of this section, I’ll also mention that <strong>everyone is able to view the transactions<\/strong> (sales, trades, exchanges, and so on) happening on public blockchains.<\/p>\n<p>If you’d like to understand how blockchains work in a more thorough manner, check out the <a href=https://www.bitdegree.org/"//crypto//learn//what-is-blockchain/">section dedicated to this topic<\/strong><\/a>.<\/p>\n<p>So - decentralized applications are built on blockchains. <em>What’s the big deal?<\/em><\/p>\n<p>Well, the “big deal” here is that, when you’re using a dApp, your <strong>data won’t be siphoned and sent to a centralized institution,<\/strong> so that they could then sell it to third-party advertisers. On top of that, dApps are governed differently, too - instead of a company making decisions, you have the community behind the dApp responsible for its well-being.<\/p>\n<p>Such communities are referred to as DAOs. Since it’s a bit of a complex topic, I won’t be discussing it here - make sure to check the <a href=https://www.bitdegree.org/"//crypto//learn//what-is-a-dao-in-crypto/">section about this topic<\/strong><\/a> to get a thorough understanding of the whole picture! Suffice to say that, with dApps, the whole community is incentivized to take care of the applications.<\/p>\n<p>The easiest way to understand everything we’ve talked about up until this point is this: imagine that there are two online social media platforms, like Facebook. Say, the first one is just like the one we have now - the “traditional” Facebook, owned by Meta.<\/p>\n<p>Now, let’s call the other platform “Decentralized Facebook”. That’s because, while it looks and interacts completely the same as Facebook, it does not belong to Mark Zuckerberg’s company - instead, it’s built on the blockchain and is completely decentralized.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-dapps-2.o.jpg/" alt=\"What are dApps in crypto: Traditional Facebook VS Decentralized Facebook.\" width=\"800\" height=\"276\" \/><\/p>\n<p>With traditional Facebook, your personal information is being collected on a regular basis. This information is then sold to advertisers so that they could target those pesky ads at you better. Your personal privacy is invaded, and sold off, for the sake of ad money.<\/p>\n<p>Decentralized Facebook, on the other hand, acts nothing like that. It only sees the information that you choose to provide, and if you’d like, you are able to remain anonymous on the dApp. No targeted ads, no information gathering.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-dapps-3.o.jpg/" alt=\"What are dApps in crypto: Two versions of Facebook.\" width=\"801\" height=\"465\" \/><\/p>\n<p>On top of that, with our current Facebook, Meta (the company behind the platform) makes all of the decisions on what to change, improve, or update. They aren’t too concerned with what the community wants, or what’s best for the social fabric - instead, they only care about their bottom line, even if the cost is less convenient for the user.<\/p>\n<p>On the flip side, a dApp version of Facebook would be looked over by the community behind it. And who knows what the platform needs better than the actual people who actively use it, every single day?!<\/p>\n<p>All dApps are run with the help of <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">smart contracts<\/a>. <\/strong>These are automated agreements that are programmed and set on the blockchain - generally speaking, once a smart contract is engaged, it cannot be stopped, changed, or altered. If you’d like to learn more about smart contracts, make sure to check out the section<strong> \"<a href=https://www.bitdegree.org/"//crypto//learn//what-are-smart-contracts/">What are Smart Contracts<\/a>?\".<\/strong><\/p>\n<p><span style=\"font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;\">Lastly, as a quick note, in order to start using dApps for yourself, in most cases, you will need to have a <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//best-cryptocurrency-wallet/">cryptocurrency wallet<\/strong><\/a>, as well as some funds within it.<\/span><\/p>\n<h2>The Main Types of dApps<\/h2>\n<p>Now, we’ve established that <strong>dApps are applications that are based on blockchains, and that allow people to use them anonymously, securely, and without fear of data aggregation.<\/strong><\/p>\n<p>In order for you to get a better understanding of the topic, though, let’s take a look at some of the most popular examples of the different types of dApps that are out there.<\/p>\n<p>First up, <strong>gaming dApps.<\/strong> Without a doubt, these are some of the most popular decentralized applications that have come out of the industry. If you’ve heard about <strong>NFT gaming<\/strong> or “<a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-play-to-earn-play2earn/">Play-2-Earn” games, most all of them can be considered dApps.<\/p>\n<p>Think about <strong>Axie Infinity,<\/strong> one of the most popular cryptocurrency games on the market. Within the game, you breed and grow creatures called Axies, battle other players, and are able to sell your Axie pets for real-world profits. With all of the amazing features of the game, it’s also decentralized, and built on a blockchain.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-dapps-4.o.jpg/" alt=\"What are dApps in crypto: Gaming dApps.\" width=\"800\" height=\"425\" \/><\/p>\n<p>What this means is that you can inspect the code behind the game, check all of its transactions, and play anonymously - no formal registrations, no “self-doxing” (or, revealing sensitive information about yourself), none of that!<\/p>\n<p>Next up, <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-decentralized-exchange-dex/">decentralized cryptocurrency exchanges<\/a>.<\/strong><\/p>\n<p>A crypto exchange platform is a place where people go to exchange different crypto assets. By default, these platforms are centralized and follow the “<a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-know-your-customer-kyc/">Know Your Customer<\/strong><\/a>” financial guidelines - in other words, if you want to trade cryptocurrencies on them, you will need to provide your personal information, ID, residential address, and so on.<\/p>\n<p>Think of the process as you would do with a bank. In order to open a bank account, all of these procedures need to be passed, as well. However, with a bank, you can be sure that you’re providing information to a reliable, established business.<\/p>\n<p>With cryptocurrency exchanges, though, things aren’t always that simple. Many exchanges, to this day, aren’t really well-established, and you might not even be aware of who you’re dealing with.<\/p>\n<p>On top of that, <strong>crypto exchanges do still get hacked,<\/strong> on a rather frequent basis. You risk not only losing your cryptocurrencies but also getting your personal information leaked, as well!<\/p>\n<p>Now, with a decentralized cryptocurrency exchange (also known as a DEX), most of those concerns are nullified. You won’t need to reveal your personal information, DEXes usually don’t hold your crypto assets, and you are able to trade some niche crypto assets on them, as well!<\/p>\n<p>The last example that I want to give you while talking about what are dApps is that of the <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-metaverse/">metaverse./n Now, if you’ve spent any time online in the past half a year or so, you might have heard the big news - Mark Zuckerberg, the CEO of Facebook, has announced that his company will now be called Meta and that they will invest in creating metaverse-based technology.<\/p>\n<p>This is a HUGE topic, so I would highly suggest you’d go and check the section <strong>\"<a href=https://www.bitdegree.org/"//crypto//learn//what-is-the-metaverse/">What is the Metaverse?<\/a>\". <\/strong>In short, though, Mark isn’t the first guy to come up with the concept - a “metaverse” is actually just a <strong>digital world<\/strong> where you can have your own avatar, and interact with other people!<\/p>\n<p>Where do dApps come in, you might ask? Well, when you’re baking a cake, a cake tin is absolutely necessary - if you try to make a cake without one, it will probably turn out a blob - formless, squished, and unappealing.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-dapps-5.o.jpg/" alt=\"What are dApps in crypto: Mark Zuckerberg investing in metaverse-based technology.\" width=\"800\" height=\"350\" \/><\/p>\n<p>The same logic applies to the metaverse, as well! If the underlying technology is poorly-made, the concept itself will be a fluke, too. On the flip side, if the metaverse was built on a decentralized application, this would give it a huge leap in the right direction.<\/p>\n<p><em>How so? <\/em>Well, users would be able to remain <strong>anonymous, <\/strong>all of their transactions and interactions would be <strong>recorded on the blockchain,<\/strong> and everything happening within the metaverse would be <strong>provably fair.<\/strong> In other words, everything related to the digital world would be following the rules of the smart contract lying underneath!<\/p>\n<p>Now, I really don’t want to get any techier than I already have, so I’ll stop with the dApp examples here. That being said, my point through all of this was that dApps have <strong>infinite potential<\/strong> - there are countless examples and possibilities of how they can be integrated into our lives!<\/p>\n<h2>dApps in the Future<\/h2>\n<p>With time, everything is slowly advancing and getting more intricate - it’s certain that decentralized applications will only improve in the future, too! Which dApps could we see sticking around, though - which of them have the best potential?<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-dapps-6.o.jpg/" alt=\"What are dApps in crypto: dApps in the future.\" width=\"800\" height=\"251\" \/><\/p>\n<p>Well, people probably asked these questions in the early 2000s, when tech stocks were dominating the financial landscape - no one knew which companies would survive and go on to become multi-billion dollar businesses, and which ones would fail!<\/p>\n<p>When it comes to dApps, <strong>decentralized exchanges<\/strong> <strong>and projects such as the metaverse<\/strong> are surely going to stick around in people's minds, at least for some time - projects like these serve some awesome purposes and can be useful in advancing the technology sector, as a whole.<\/p>","youtube_video":{"id":14,"channel_id":1,"sort":82,"video_title":"What are dApps in Crypto? (Explained with Animations)","description":"What are dApps in crypto?\n\n\u201cdApp\u201d stands for \u201cdecentralized application\u201d. It\u2019s a type of app built on a blockchain, and coded with the logic of smart contracts. \n\nPopular types of dApps include decentralized exchanges \u201cDEXs\u201d, blockchain-based \u201cPlay-to-Earn\u201d games, NFT marketplaces, and so on. In order to use dApps, all that you will need to have is a cryptocurrency wallet, and some funds within it. In this video, I will break down the concept of dApps in a simple manner, as well as mention some popular examples of well-known decentralized applications.\n\nHave you ever used a dApp before? If so, which one? Do share your experience, in the comment section below!\n\nVideo Time Table:\n\n0:00 Introduction to What are Dapps in Crypto\n0:54 What are dApps in Crypto?\n5:02 Gaming dApps\n5:45 Decentralized Cryptocurrency Exchanges (DEX)\n6:54 dApps in the Metaverse\n8:19 Wrap-up: What are dApps in Crypto?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps:\/\/twitter.com\/crypto_xplained\n\n#WhatAredAppsinCrypto #dAppsMeaning #dApps #WhatisadApp #dAppsinCrypto","video_id":"LVASq8IVYA8","duration":562,"view_count":1059,"thumbnail_url":"https:\/\/assets.bitdegree.org\/youtube\/crypto-finally-explained\/what-are-dapps-in-crypto-explained-with-animations.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-03-03T14:52:59.000000Z","created_at":"2022-03-03T23:00:02.000000Z","updated_at":"2024-01-09T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}}"
:prev-section="{"id":1,"chapter_id":6,"order":1,"featured_image_id":3034,"youtube_video_id":11,"author_id":1,"created_at":"2022-05-02T06:07:35.000000Z","updated_at":"2023-12-15T11:13:45.000000Z","slug":"what-are-nfts","title":"What are Non-Fungible Tokens (NFTs)?","content":"<p>Many people who have gotten into <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-non-fungible-token-nft/">NFTs will tell you that the learning curve is really confusing. Both crypto experts, and also traditional artists that have never heard about <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-blockchain/">blockchain technology<\/a><\/strong> before are going to have completely different outlooks on what an NFT is, and what it can be used for.<\/p>\n<p>Personally, I believe that everyone should have at least a fundamental understanding of NFTs since they are becoming increasingly more popular by the day. Understanding the concept will surely help you clearly see what NFTs are and why they are so valuable.<\/p>\n<p>In this section, we’re going to take a good look at NFTs - specifically, what they are, where they come from, why they are so expensive, and how you can purchase or even create them yourself. And don’t worry - we’ll avoid any and all technical jargon, and only introduce industry terms when they’re absolutely essential to the context of the section. <\/p>\n<p><em>So, let’s dive in!<\/em><\/p>\n<h2>What are NFTs?<\/h2>\n<p>An “NFT” is a “<strong>non-fungible token<\/strong>”. “Non-fungible” is a fancy way of saying that something is completely unique, and cannot be replaced with something else.<\/p>\n<p>For example, think of your car (of course, if you have one) - sure, there are other cars out there that are probably just like yours, but they’ll have different mileage, different tires, engines, personal interior gadgets, various dings & dents, or even those stupid stickers on the trunk. All of these things make your car UNIQUE - there’s only ONE car purely like THAT!<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-1.o.jpg/" alt=\"What are NFTs: "Non-Fungible Token" definition.\" width=\"1000\" height=\"550\"><\/p>\n<p>So, before we continue, an example of a “<strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-fungible/">fungible” asset would be the <strong>value of a $1 bill<\/strong>. This is because the value of your $1 will always be equal to the value of another $1 bill, and you can trade your $1 for any other $1 bill out there - something you wouldn’t be able to do with your car.<\/p>\n<p>Following that, a token is simply a <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-digital-asset/">digital asset<\/a><\/strong>. <\/p>\n<p>Rather, tokens are used as <strong>representations of different asset kinds<\/strong>. Obviously, you can’t physically take your car and just put it into the internet, as you put it into your garage. That's why you need some sort of digital representation tool! And this is where tokens come in. <\/p>\n<p>So, if you have a car, you could create a token to represent that car on the internet, as a physical object. Although there’s much more to it, in this context, you can think of it as a digitalized version of a physical item.<\/p>\n<p>Moving on and continuing with that car example, let’s imagine you have taken a picture of your car, and later created a digital token for it - this would be the NFT of your car! It’s “non-fungible” since it’s unique, and it’s a token since it’s not the actual car, but rather, <strong>a digital representation<\/strong> of it!<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-2.o.jpg/" alt=\"What are NFTs: transforming a physical object into an NFT.\" width=\"1000\" height=\"550\"><\/p>\n<p>Most people associate the term NFT with trading cards, digital artwork, or in-game items and characters. It’s important to understand that the NFTs themselves aren’t the actual assets, but rather, representations of those assets on the blockchain.<\/p>\n<p>Now, <strong>blockchains are essentially data storage locations<\/strong> - <em>virtual databases, if you will<\/em>. If you were to create a unique token - an NFT - on a blockchain, it would receive <strong>a special code,<\/strong> which would be used to identify it in the future. Since blockchains are (mostly) public, everyone would be able to see that the token was both created by you and that it’s the original - not a copy-pasted version made by your friend or a random guy on the internet.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-3.o.jpg/" alt=\"What are NFTs: Blockchain and NFTs.\" width=\"1000\" height=\"800\"><\/p>\n<p><em>Heh, that’s a lot to wrap your head around, I’ll admit. <\/em>But don’t worry - it gets easier from here.<\/p>\n<p>Let me give you another example by referencing <strong>Twitter former CEO’s Jack Dorsey’s tweet. <\/strong>Dorsey created an NFT out of his first-ever tweet and auctioned it off for <strong>over $2,9 million.<\/strong><\/p>\n<p>Is the tweet available for everyone to see? Yes. However, the creator-signed NFT version of the tweet belongs solely to the individual who won the auction - this is very simple to prove with the help of the blockchain.<\/p>\n<p>When viewed on the blockchain, NFTs are simply <strong>strings of data. <\/strong>This textual data references an image, a GIF, or any other asset that can be viewed on the <strong><a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//best-cryptocurrency-exchange/">exchange platforms<\/a><\/strong> where the NFT is located on. Thus, when you purchase an NFT, you actually purchase that referential data.<\/p>\n<p>Now, this point is crucial to understand - if you own an NFT, it actually means that <strong>you own only that data.<\/strong> Not an image, nor a GIF, nor some sort of a virtual character - instead, you own the data that references the aforementioned assets. This data is encoded on the blockchain and references the place where the asset (picture, GIF, etc.) is located (the server).<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-4.o.jpg/" alt=\"What are NFTs: how NFTs work.\" width=\"1000\" height=\"550\"><\/p>\n<p>Theoretically, the marketplace platform could swap out the image on their servers, and your data would point to a different picture of GIF than the one you’ve bought! Also, the image can simply be deleted from the server - your data on the blockchain, on the other hand, can not.<\/p>\n<p>Personally, this idea always bothered me the most, when it comes to NFTs. However, when you understand that you don’t own the actual image, but rather, the data on the blockchain, things start making much more sense.<\/p>\n<p>So, why do people buy NFTs, and why are some NFTs priced as high as they are? I mean, the earlier-mentioned Jack Dorsey’s tweet is a good reference here as well as some of the image collections from the popular NFT creators like <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-cryptopunks/">CryptoPunks or <strong><a href=https://www.bitdegree.org/"https:////en.wikipedia.org//wiki//Bored_Ape/" target=\"_blank\" rel=\"nofollow noindex noopener\">Bored Ape<\/a><\/strong>.<\/p>\n<p>Well, there are actually a few things that lead to NFTs being as desirable as they are.<\/p>\n<p>For starters, they are <strong>a true innovation<\/strong> in the first place, and as most have heard, also an easy way to invest and get some profits. NFTs are the first phenomenon of this kind, and people still don’t really know what to make of them. Should they purely become a future art? Maybe the gaming industry could benefit most from them? Is there any utility for an NFT?<\/p>\n<p>These questions showcase that NFTs are still very new, and people are attracted to innovations that may potentially prove to be a good investment.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-5.o.jpg/" alt=\"What are NFTs: why do people buy expensive NFTs?\" width=\"1000\" height=\"650\"><\/p>\n<p>This is actually the second big reason behind their popularity - the speculated value of what NFTs will be worth in the future. Some people compare NFTs to tech stocks back in the late 90s and the early 2000s. When the internet was still very young, people had no way of telling how much Amazon or Google stocks would be worth in a couple of decades.<\/p>\n<p>Nowadays, though, you have some NFTs being sold for huge amounts of money. For example, one of the most expensive NFTs ever sold is Beeple’s <strong>“EVERYDAY: THE FIRST 5000 DAYS”<\/strong> - it was sold for <strong>over $69,3 million.<\/strong> Following that, Beeple’s “One” was sold for $28,9 million. Some CryptoPunks have also been sold for anywhere from almost $8 million to over $10 million.<\/p>\n<p>The parallel here is that NFTs are still <strong>a very new concept,<\/strong> and a volatile market to be entering. It’s like a carnival - everything’s shiny and colorful, you never really know what sort of cool attraction lies around the corner, and every once in a while, you may find yourself on a rollercoaster ride - the last part is true for many NFT prices.<\/p>\n<p>This brings me to my next point - the reason why some NFTs are priced as high as they are. The answer here is actually very boring and simple - it’s a <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-supply-and-demand/">supply & demand<\/a><\/strong> type of deal.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-6.o.jpg/" alt=\"What are NFTs: why are NFTs so expensive?\" width=\"1000\" height=\"580\"><\/p>\n<p>Imagine that you have a very rare painting. You decide to auction it off on eBay, without setting a minimum bid. Sure, someone may come around and offer a couple of dollars for the painting.<\/p>\n<p>However, since it’s so rare, it’s highly likely to attract a lot of attention from art fans. This results in huge demand for something that’s very scarce - in other words, something that has <strong>a limited supply. <\/strong>This makes the price of the asset go up, exponentially.<\/p>\n<p>The same is true with many NFTs, as well. If the token is part of an exclusive collection, and there are only 10 NFTs that will ever be created within that collection, this makes it desirable for a lot of people - hence, the price goes up.<\/p>\n<p><strong>Social influence and renown<\/strong> are often huge factors, as well. Once again, think about the earlier-mentioned Jack Dorsey’s tweet NFT. Being one of the founders of Twitter, Jack Dorsey is a prominent figure in the business world - naturally, him selling an NFT of his very first tweet on the platform that he founded would draw a lot of attention and interest!<\/p>\n<p>Taking a step back, another reason why NFTs are as hyped up as they are is <strong>the utility factors. <\/strong>While most people assume that non-fungible tokens are merely used for collectible purposes, this isn’t necessarily true.<\/p>\n<p>Imagine if your favorite clothing store would issue a set of limited NFTs. In addition to being some cool images or GIFs that you can acquire, each NFT would provide the holder with lifetime access to set discounts when shopping within the store. This is a case for the utility aspect of an NFT - in other words, it creates tangible, real-world value for a non-fungible token.<\/p>\n<p>Combine this with the fact that there’s a limited number of NFTs available, and that all of them are auctioned off to the highest bidders, and this can result in some tokens possessing a huge price tag.<\/p>\n<p><em>So, let’s recap<\/em>. <strong>NFTs are valuable and sought-after<\/strong> because they are rare, might be created or owned by a famous or well-known individual, can provide tangible, real-world value, and are an innovation. The sum of these features leads to everyone, including their pets, having at least heard of NFTs, even if you know nothing else about the crypto space.<\/p>\n<p>Now, when you think about valuable NFTs today, the first names that would probably come to my mind are <strong>CryptoKitties, CryptoPunks, Decentraland, the Bored Ape Yacht Club, and Banksy.<\/strong> This is fair - many of these NFTs were the catalysts that drove the relatively niche industry into the mainstream.<\/p>\n<p>However, what was the very first NFT that was ever created? And when did this happen?<\/p>\n<p>Surprisingly, it’s not any one of the names mentioned earlier. Instead, the very first NFT - of the kind that we’re used to today, that is - was created all the way back in 2014, by a man named <strong>Kevin McCoy. <\/strong>The piece is called<strong> “Quantum”<\/strong> and is up for sale for <strong>over $7 million dollars.<\/strong><\/p>\n<p>So, while pop culture-relevant non-fungible tokens helped bring mainstream awareness to the market, and exploded the topic into unparalleled popularity, artists have been experimenting with the technology long before that.<\/p>\n<p>Finally, on the topic of experimenting with the technology, let’s now take a look at how YOU, - <em>yes, YOU<\/em> - <strong>can create an NFT of your own. <\/strong>Allow me to reassure you - while it may sound difficult from the sidelines, creating an NFT is actually very straightforward.<\/p>\n<p>First things first - you’re going to need a <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-wallet/">cryptocurrency wallet<\/a>. <\/strong>This will act as the storage area for your NFTs, and will also house the <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-cryptocurrency/">cryptocurrency needed to pay for the creation process of the token. Think of it this way - if an NFT is a car, then the cryptocurrency used to make it is gas. Without gas, the car is practically useless. Following this example, a crypto wallet would be like a garage for your car.<\/p>\n<p>The most popular wallet in this regard is called <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-metamask/">MetaMask. It’s free to use, and you can download and install it as a browser extension. Once you set it up, you’ll be able to start using the wallet almost instantly.<\/p>\n<p>Next up, you need to fund the wallet. This can be done by visiting an exchange platform and purchasing some cryptocurrency for <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-fiat/">fiat money<\/a>.<\/strong> The currency that you’ll want to buy is known as <strong><a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-ethereum-eth/">Ether (commonly referred to simply as Ethereum).<\/p>\n<p>Before we continue, though - why Ether? Well, the absolute <strong>majority of NFTs are created on the Ethereum blockchain.<\/strong> Thus, in order to pay for the creation process, you need to use the native currency of this particular blockchain - Ether.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-7.o.jpg/" alt=\"What are NFTs: how to create an NFT?\" width=\"1000\" height=\"650\"><\/p>\n<p>Once you purchase Ether and transfer it from the exchange to your MetaMask wallet, you’re ready to go!<\/p>\n<p>Now, you will need to visit what’s known as <strong>an<\/strong> <strong>NFT marketplace<\/strong> where NFTs are auctioned. Just like eBay or Amazon for traditional goods, NFT marketplaces allow you to browse through different non-fungible tokens, and <strong>bid, purchase or sell the ones that you like.<\/strong> On that note, these marketplaces also allow you to create NFTs on them in a simple and efficient manner. For the sake of this example, I’ll reference the most popular NFT marketplaces out there - <strong>OpenSea and Rarible.<\/strong><\/p>\n<p>What you’ll need to do is <strong>connect your MetaMask wallet to OpenSea<\/strong> - this is like creating an account on the marketplace. Once you do so, you’ll be able to start the NFT creation process - OpenSea has a very detailed tutorial that guides you all through the process, and even if it’s your first time, you shouldn’t face any struggles whatsoever.<\/p>\n<p>Once you upload your picture or GIF and set all of the properties to your liking, all that you’ll need to do is create the NFT. Upon completion, your wallet address (the unique identification number of your personal cryptocurrency wallet) will <strong>forever be tied to the NFT,<\/strong> and no matter who owns it, you will always remain the verified creator of the asset in the blockchain log.<\/p>\n<p>Moving on, now that you’re equipped with the knowledge of how NFTs are created, buying a token will seem like a super-simple process.<\/p>\n<h2>How to Buy an NFT? <\/h2>\n<p>In order to buy an NFT, you will need to have the same MetaMask wallet connected to OpenSea, and that wallet will need to be funded with Ether, as well. It’s <strong>not possible to purchase NFTs with fiat money,<\/strong> and thus, it needs to be exchanged for crypto.<\/p>\n<p>With your wallet connected, you are now able to purchase your desired NFT (if it’s on sale) or bid on it at an auction. If you win, the token will be transferred to your wallet. That’s it - you’re a proud owner of a non-fungible token!<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-8.o.jpg/" alt=\"What are NFTs: how to acquire an NFT?\" width=\"1000\" height=\"600\"><\/p>\n<p>Make sure to keep your tokens secure, however - you could still store them in your MetaMask wallet, but if you want extra added security, you could also look into purchasing a <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-hardware-wallet/">hardware wallet<\/a><\/strong> (a physical crypto wallet device), and connecting it to your MetaMask.<\/p>\n<p>Now as a recap, we took a good, non-technical look at the essentials of NFTs. We’ve covered what they are and what they aren’t, talked about their value proposition, and also covered the questions of how to create and purchase your desired non-fungible tokens.<\/p>\n<p>Anyways, if you want to learn more about the MetaMask wallet, make sure to check out the section <strong>\"<a href=https://www.bitdegree.org/"//crypto//learn//what-is-metamask/">What is the MetaMask?<\/a>\".<\/strong><\/p>","definition":"Can you wrap your head around the fact that one of the most expensive NFTs in the world was sold for over $69,3 million?","status":"published","meta_title":"What are NFTs? A Guide to Creating or Purchasing One","meta_description":"Can't find a clear and simple explanation about what are NFTs? Find an answer right here alongside a guide to creating or purchasing an NFT.","meta_keywords":"what is an nft, what are nfts, what is a nft, what is a nft, what is nft mean, what is nft stand for, are nfts worth it, what are nfts in crypto","modified_content":"<p>Many people who have gotten into <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-non-fungible-token-nft/">NFTs will tell you that the learning curve is really confusing. Both crypto experts, and also traditional artists that have never heard about <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-blockchain/">blockchain technology<\/a><\/strong> before are going to have completely different outlooks on what an NFT is, and what it can be used for.<\/p>\n<p>Personally, I believe that everyone should have at least a fundamental understanding of NFTs since they are becoming increasingly more popular by the day. Understanding the concept will surely help you clearly see what NFTs are and why they are so valuable.<\/p>\n<p>In this section, we’re going to take a good look at NFTs - specifically, what they are, where they come from, why they are so expensive, and how you can purchase or even create them yourself. And don’t worry - we’ll avoid any and all technical jargon, and only introduce industry terms when they’re absolutely essential to the context of the section. <\/p>\n<p><em>So, let’s dive in!<\/em><\/p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 suggested-comparisons pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//assets//images//compare-crypto-exchanges.gif/"/n alt=\"What is an NFT? (Explained with Animations)\"\n title=\"What is an NFT? (Explained with Animations)\" class=\"border-0\">\n <p>Video Explainer<\/p>\n <\/div>\n <\/div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: What are Non-Fungible Tokens (NFTs)?<\/h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"What are Non-Fungible Tokens (NFTs)?\" video explainer<\/p>\n <\/div>\n <\/div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"position-relative youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"YL0-sEzDDNI\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"><\/div>\n <p class=\"text-left dyk-video-title\">What is an NFT? (Explained with Animations)<\/p>\n <img data-srcset=\"https:\/\/assets.bitdegree.org\/youtube\/crypto-finally-explained\/what-is-an-nft-explained-with-animations.jpg?tr=w-420 500w,\n https:\/\/assets.bitdegree.org\/youtube\/crypto-finally-explained\/what-is-an-nft-explained-with-animations.jpg?tr=w-760 1000w\"\n alt=\"What is an NFT? (Explained with Animations)\"\n title=\"What is an NFT? (Explained with Animations)\"\n class=\"p-0 lazyload\">\n <img class=\"play-button lazyload\" data-target=\"#video-modal\"\n data-src=\"https:\/\/assets.bitdegree.org\/crypto\/assets\/video-button.png?tr=w-85\"\n alt=\"What is an NFT? (Explained with Animations)\">\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https:////www.youtube.com//c//CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener noindex\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"><\/i>\n <\/div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE<\/h4>\n <span>ON YOUTUBE<\/span>\n <\/div>\n <\/div>\n <\/a>\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n<\/div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"><\/i>\n <\/button>\n <div id=\"iframe\"><\/div>\n <\/div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https:////www.youtube.com//c//CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener noindex\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//assets//crypto-subscribe.jpg/" alt=\"Subscribe\">\n <\/div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE<\/span>\n <\/p>\n <\/div>\n <\/div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease<\/h4>\n <span>New explainer videos every week!<\/span>\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n <\/a>\n <\/div>\n <\/div>\n<\/div>\n<h2>What are NFTs?<\/h2>\n<p>An “NFT” is a “<strong>non-fungible token<\/strong>”. “Non-fungible” is a fancy way of saying that something is completely unique, and cannot be replaced with something else.<\/p>\n<p>For example, think of your car (of course, if you have one) - sure, there are other cars out there that are probably just like yours, but they’ll have different mileage, different tires, engines, personal interior gadgets, various dings & dents, or even those stupid stickers on the trunk. All of these things make your car UNIQUE - there’s only ONE car purely like THAT!<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-1.o.jpg/" alt=\"What are NFTs: "Non-Fungible Token" definition.\" width=\"1000\" height=\"550\"><\/p>\n<p>So, before we continue, an example of a “<strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-fungible/">fungible” asset would be the <strong>value of a $1 bill<\/strong>. This is because the value of your $1 will always be equal to the value of another $1 bill, and you can trade your $1 for any other $1 bill out there - something you wouldn’t be able to do with your car.<\/p>\n<p>Following that, a token is simply a <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-digital-asset/">digital asset<\/a><\/strong>. <\/p>\n<p>Rather, tokens are used as <strong>representations of different asset kinds<\/strong>. Obviously, you can’t physically take your car and just put it into the internet, as you put it into your garage. That's why you need some sort of digital representation tool! And this is where tokens come in. <\/p>\n<p>So, if you have a car, you could create a token to represent that car on the internet, as a physical object. Although there’s much more to it, in this context, you can think of it as a digitalized version of a physical item.<\/p>\n<p>Moving on and continuing with that car example, let’s imagine you have taken a picture of your car, and later created a digital token for it - this would be the NFT of your car! It’s “non-fungible” since it’s unique, and it’s a token since it’s not the actual car, but rather, <strong>a digital representation<\/strong> of it!<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-2.o.jpg/" alt=\"What are NFTs: transforming a physical object into an NFT.\" width=\"1000\" height=\"550\"><\/p>\n<p>Most people associate the term NFT with trading cards, digital artwork, or in-game items and characters. It’s important to understand that the NFTs themselves aren’t the actual assets, but rather, representations of those assets on the blockchain.<\/p>\n<p>Now, <strong>blockchains are essentially data storage locations<\/strong> - <em>virtual databases, if you will<\/em>. If you were to create a unique token - an NFT - on a blockchain, it would receive <strong>a special code,<\/strong> which would be used to identify it in the future. Since blockchains are (mostly) public, everyone would be able to see that the token was both created by you and that it’s the original - not a copy-pasted version made by your friend or a random guy on the internet.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-3.o.jpg/" alt=\"What are NFTs: Blockchain and NFTs.\" width=\"1000\" height=\"800\"><\/p>\n<p><em>Heh, that’s a lot to wrap your head around, I’ll admit. <\/em>But don’t worry - it gets easier from here.<\/p>\n<p>Let me give you another example by referencing <strong>Twitter former CEO’s Jack Dorsey’s tweet. <\/strong>Dorsey created an NFT out of his first-ever tweet and auctioned it off for <strong>over $2,9 million.<\/strong><\/p>\n<p>Is the tweet available for everyone to see? Yes. However, the creator-signed NFT version of the tweet belongs solely to the individual who won the auction - this is very simple to prove with the help of the blockchain.<\/p>\n<p>When viewed on the blockchain, NFTs are simply <strong>strings of data. <\/strong>This textual data references an image, a GIF, or any other asset that can be viewed on the <strong><a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//best-cryptocurrency-exchange/">exchange platforms<\/a><\/strong> where the NFT is located on. Thus, when you purchase an NFT, you actually purchase that referential data.<\/p>\n<p>Now, this point is crucial to understand - if you own an NFT, it actually means that <strong>you own only that data.<\/strong> Not an image, nor a GIF, nor some sort of a virtual character - instead, you own the data that references the aforementioned assets. This data is encoded on the blockchain and references the place where the asset (picture, GIF, etc.) is located (the server).<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-4.o.jpg/" alt=\"What are NFTs: how NFTs work.\" width=\"1000\" height=\"550\"><\/p>\n<p>Theoretically, the marketplace platform could swap out the image on their servers, and your data would point to a different picture of GIF than the one you’ve bought! Also, the image can simply be deleted from the server - your data on the blockchain, on the other hand, can not.<\/p>\n<p>Personally, this idea always bothered me the most, when it comes to NFTs. However, when you understand that you don’t own the actual image, but rather, the data on the blockchain, things start making much more sense.<\/p>\n<p>So, why do people buy NFTs, and why are some NFTs priced as high as they are? I mean, the earlier-mentioned Jack Dorsey’s tweet is a good reference here as well as some of the image collections from the popular NFT creators like <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-cryptopunks/">CryptoPunks or <strong><a href=https://www.bitdegree.org/"https:////en.wikipedia.org//wiki//Bored_Ape/" target=\"_blank\" rel=\"nofollow noindex noopener\">Bored Ape<\/a><\/strong>.<\/p>\n<p>Well, there are actually a few things that lead to NFTs being as desirable as they are.<\/p>\n<p>For starters, they are <strong>a true innovation<\/strong> in the first place, and as most have heard, also an easy way to invest and get some profits. NFTs are the first phenomenon of this kind, and people still don’t really know what to make of them. Should they purely become a future art? Maybe the gaming industry could benefit most from them? Is there any utility for an NFT?<\/p>\n<p>These questions showcase that NFTs are still very new, and people are attracted to innovations that may potentially prove to be a good investment.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-5.o.jpg/" alt=\"What are NFTs: why do people buy expensive NFTs?\" width=\"1000\" height=\"650\"><\/p>\n<p>This is actually the second big reason behind their popularity - the speculated value of what NFTs will be worth in the future. Some people compare NFTs to tech stocks back in the late 90s and the early 2000s. When the internet was still very young, people had no way of telling how much Amazon or Google stocks would be worth in a couple of decades.<\/p>\n<p>Nowadays, though, you have some NFTs being sold for huge amounts of money. For example, one of the most expensive NFTs ever sold is Beeple’s <strong>“EVERYDAY: THE FIRST 5000 DAYS”<\/strong> - it was sold for <strong>over $69,3 million.<\/strong> Following that, Beeple’s “One” was sold for $28,9 million. Some CryptoPunks have also been sold for anywhere from almost $8 million to over $10 million.<\/p>\n<p>The parallel here is that NFTs are still <strong>a very new concept,<\/strong> and a volatile market to be entering. It’s like a carnival - everything’s shiny and colorful, you never really know what sort of cool attraction lies around the corner, and every once in a while, you may find yourself on a rollercoaster ride - the last part is true for many NFT prices.<\/p>\n<p>This brings me to my next point - the reason why some NFTs are priced as high as they are. The answer here is actually very boring and simple - it’s a <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-supply-and-demand/">supply & demand<\/a><\/strong> type of deal.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-6.o.jpg/" alt=\"What are NFTs: why are NFTs so expensive?\" width=\"1000\" height=\"580\"><\/p>\n<p>Imagine that you have a very rare painting. You decide to auction it off on eBay, without setting a minimum bid. Sure, someone may come around and offer a couple of dollars for the painting.<\/p>\n<p>However, since it’s so rare, it’s highly likely to attract a lot of attention from art fans. This results in huge demand for something that’s very scarce - in other words, something that has <strong>a limited supply. <\/strong>This makes the price of the asset go up, exponentially.<\/p>\n<p>The same is true with many NFTs, as well. If the token is part of an exclusive collection, and there are only 10 NFTs that will ever be created within that collection, this makes it desirable for a lot of people - hence, the price goes up.<\/p>\n<p><strong>Social influence and renown<\/strong> are often huge factors, as well. Once again, think about the earlier-mentioned Jack Dorsey’s tweet NFT. Being one of the founders of Twitter, Jack Dorsey is a prominent figure in the business world - naturally, him selling an NFT of his very first tweet on the platform that he founded would draw a lot of attention and interest!<\/p>\n<p>Taking a step back, another reason why NFTs are as hyped up as they are is <strong>the utility factors. <\/strong>While most people assume that non-fungible tokens are merely used for collectible purposes, this isn’t necessarily true.<\/p>\n<p>Imagine if your favorite clothing store would issue a set of limited NFTs. In addition to being some cool images or GIFs that you can acquire, each NFT would provide the holder with lifetime access to set discounts when shopping within the store. This is a case for the utility aspect of an NFT - in other words, it creates tangible, real-world value for a non-fungible token.<\/p>\n<p>Combine this with the fact that there’s a limited number of NFTs available, and that all of them are auctioned off to the highest bidders, and this can result in some tokens possessing a huge price tag.<\/p>\n<p><em>So, let’s recap<\/em>. <strong>NFTs are valuable and sought-after<\/strong> because they are rare, might be created or owned by a famous or well-known individual, can provide tangible, real-world value, and are an innovation. The sum of these features leads to everyone, including their pets, having at least heard of NFTs, even if you know nothing else about the crypto space.<\/p>\n<p>Now, when you think about valuable NFTs today, the first names that would probably come to my mind are <strong>CryptoKitties, CryptoPunks, Decentraland, the Bored Ape Yacht Club, and Banksy.<\/strong> This is fair - many of these NFTs were the catalysts that drove the relatively niche industry into the mainstream.<\/p>\n<p>However, what was the very first NFT that was ever created? And when did this happen?<\/p>\n<p>Surprisingly, it’s not any one of the names mentioned earlier. Instead, the very first NFT - of the kind that we’re used to today, that is - was created all the way back in 2014, by a man named <strong>Kevin McCoy. <\/strong>The piece is called<strong> “Quantum”<\/strong> and is up for sale for <strong>over $7 million dollars.<\/strong><\/p>\n<p>So, while pop culture-relevant non-fungible tokens helped bring mainstream awareness to the market, and exploded the topic into unparalleled popularity, artists have been experimenting with the technology long before that.<\/p>\n<p>Finally, on the topic of experimenting with the technology, let’s now take a look at how YOU, - <em>yes, YOU<\/em> - <strong>can create an NFT of your own. <\/strong>Allow me to reassure you - while it may sound difficult from the sidelines, creating an NFT is actually very straightforward.<\/p>\n<p>First things first - you’re going to need a <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-wallet/">cryptocurrency wallet<\/a>. <\/strong>This will act as the storage area for your NFTs, and will also house the <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-cryptocurrency/">cryptocurrency needed to pay for the creation process of the token. Think of it this way - if an NFT is a car, then the cryptocurrency used to make it is gas. Without gas, the car is practically useless. Following this example, a crypto wallet would be like a garage for your car.<\/p>\n<p>The most popular wallet in this regard is called <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-metamask/">MetaMask. It’s free to use, and you can download and install it as a browser extension. Once you set it up, you’ll be able to start using the wallet almost instantly.<\/p>\n<p>Next up, you need to fund the wallet. This can be done by visiting an exchange platform and purchasing some cryptocurrency for <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-fiat/">fiat money<\/a>.<\/strong> The currency that you’ll want to buy is known as <strong><a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-ethereum-eth/">Ether (commonly referred to simply as Ethereum).<\/p>\n<p>Before we continue, though - why Ether? Well, the absolute <strong>majority of NFTs are created on the Ethereum blockchain.<\/strong> Thus, in order to pay for the creation process, you need to use the native currency of this particular blockchain - Ether.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-7.o.jpg/" alt=\"What are NFTs: how to create an NFT?\" width=\"1000\" height=\"650\"><\/p>\n<p>Once you purchase Ether and transfer it from the exchange to your MetaMask wallet, you’re ready to go!<\/p>\n<p>Now, you will need to visit what’s known as <strong>an<\/strong> <strong>NFT marketplace<\/strong> where NFTs are auctioned. Just like eBay or Amazon for traditional goods, NFT marketplaces allow you to browse through different non-fungible tokens, and <strong>bid, purchase or sell the ones that you like.<\/strong> On that note, these marketplaces also allow you to create NFTs on them in a simple and efficient manner. For the sake of this example, I’ll reference the most popular NFT marketplaces out there - <strong>OpenSea and Rarible.<\/strong><\/p>\n<p>What you’ll need to do is <strong>connect your MetaMask wallet to OpenSea<\/strong> - this is like creating an account on the marketplace. Once you do so, you’ll be able to start the NFT creation process - OpenSea has a very detailed tutorial that guides you all through the process, and even if it’s your first time, you shouldn’t face any struggles whatsoever.<\/p>\n<p>Once you upload your picture or GIF and set all of the properties to your liking, all that you’ll need to do is create the NFT. Upon completion, your wallet address (the unique identification number of your personal cryptocurrency wallet) will <strong>forever be tied to the NFT,<\/strong> and no matter who owns it, you will always remain the verified creator of the asset in the blockchain log.<\/p>\n<p>Moving on, now that you’re equipped with the knowledge of how NFTs are created, buying a token will seem like a super-simple process.<\/p>\n<h2>How to Buy an NFT? <\/h2>\n<p>In order to buy an NFT, you will need to have the same MetaMask wallet connected to OpenSea, and that wallet will need to be funded with Ether, as well. It’s <strong>not possible to purchase NFTs with fiat money,<\/strong> and thus, it needs to be exchanged for crypto.<\/p>\n<p>With your wallet connected, you are now able to purchase your desired NFT (if it’s on sale) or bid on it at an auction. If you win, the token will be transferred to your wallet. That’s it - you’re a proud owner of a non-fungible token!<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-are-nfts-8.o.jpg/" alt=\"What are NFTs: how to acquire an NFT?\" width=\"1000\" height=\"600\"><\/p>\n<p>Make sure to keep your tokens secure, however - you could still store them in your MetaMask wallet, but if you want extra added security, you could also look into purchasing a <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-hardware-wallet/">hardware wallet<\/a><\/strong> (a physical crypto wallet device), and connecting it to your MetaMask.<\/p>\n<p>Now as a recap, we took a good, non-technical look at the essentials of NFTs. We’ve covered what they are and what they aren’t, talked about their value proposition, and also covered the questions of how to create and purchase your desired non-fungible tokens.<\/p>\n<p>Anyways, if you want to learn more about the MetaMask wallet, make sure to check out the section <strong>\"<a href=https://www.bitdegree.org/"//crypto//learn//what-is-metamask/">What is the MetaMask?<\/a>\".<\/strong><\/p>","youtube_video":{"id":11,"channel_id":1,"sort":95,"video_title":"What is an NFT? (Explained with Animations)","description":"What is an NFT?\n\nAn NFT is a non-fungible token - a representation of digital or physical assets on the blockchain. Popular for many reasons, from a sense of exclusivity to investment, NFTs are often thought to be the future of financial technology and art! \n\nNFTs have really taken the world by storm over the past few years, but to some they are still as mysterious as ever. In this video, I\u2019ll explain to you what an NFT is and what you need to know about it in a simple way. Without using any crypto jargon, I\u2019ll give you simple examples and analogies to make you understand how NFTs are made, how they work, and what they have become in our modern world!\n\nHave you ever created, bought, or sold NFTs before? Share your experience in the comments below!\n\nVideo Time Table:\n\n0:00 What is an NFT?\n1:12 What Are NFTs?\n2:49 Blockchain And NFTs\n3:37 Example of an NFT - a Tweet\n4:00 What Do You Actually Buy?\n5:13 Why Do People Buy NFTs?\n7:07 Why Are NFTs So Expensive?\n9:07 How Are NFTs Made?\n10:00 How Can YOU Make an NFT?\n12:33 How To buy an NFT?\n13:19 Wrap-up: What is an NFT?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps:\/\/twitter.com\/crypto_xplained\n\n#WhatIsAnNFT #WhatAreNFTs #GuideToNFTs #NFT #NFTs #NFTs2022 #Crypto #Tokens #Blockchain","video_id":"YL0-sEzDDNI","duration":826,"view_count":17298,"thumbnail_url":"https:\/\/assets.bitdegree.org\/youtube\/crypto-finally-explained\/what-is-an-nft-explained-with-animations.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-01-20T15:06:18.000000Z","created_at":"2022-02-21T13:20:28.000000Z","updated_at":"2024-01-09T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}}"
:model="{"id":24,"chapter_id":6,"order":2,"featured_image_id":null,"youtube_video_id":25,"author_id":1,"created_at":"2022-05-05T12:28:40.000000Z","updated_at":"2023-12-22T07:08:16.000000Z","slug":"what-is-defi-2-0","title":"DeFi 2.0: The New Version of Decentralized Finance","content":"<p>If you’ve been following the crypto space for some time now, you’ve undoubtedly heard about <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-defi/">DeFi - decentralized finance<\/a>. <\/strong>It was a really hot topic in the summer of 2020 and has retained its relevance, as a new field of finance, to this day.<\/p>\n<p>However, while DeFi might still be a new concept, there’s actually an even newer term being thrown around - <strong>DeFi 2.0.<\/strong> And this type of decentralized finance aims to solve the core issues that DeFi 1.0 is facing.<\/p>\n<p>In this section, I’m going to tell you about DeFi 2.0. To be a bit more specific, I’ll tell you what DeFi 2.0 is, how it’s different from DeFi 1.0, and also give an illustrative example of one of the most successful DeFi 2.0 projects.<\/p>\n<p><em>Now, let’s get to it!<\/em><\/p>\n<h2>What is DeFi 2.0?<\/h2>\n<p>So, before we jump into DeFi 2.0, there are a couple of terms that you need to be familiar with, first. Since it’s not exactly a very simple topic, if you feel that you need more information at any point in time, make sure to check out the previous sections of this BitDegree Crypto 101 Handbook.<\/p>\n<p>So, the very first term that you need to be familiar with is DeFi. It means <strong>“decentralized finance”<\/strong>, and is a form of finance that doesn’t have any central authorities, and is instead governed by the communities behind DeFi crypto projects.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-6290791e91dba.o.jpg/" alt=\"What is Defi 2.0: DeFi - decentralized finance.\" width=\"1000\" height=\"667\" \/><\/p>\n<p>So think about it this way - with DeFi 1.0, instead of getting a loan from a centralized bank, you would go to a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-decentralized-applications-dapps/">dApp (a decentralized application, or simply - a DeFi project) that specializes in loans, and borrow money from there. This money would be supplied to you by the community behind the project, and you would be able to <strong>interact with the dApp anonymously. <\/strong>On top of that, everything would be governed by <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">smart contracts<\/strong><\/a>, so there’s no room for human error or a single person's decision.<\/p>\n<p>One of the key features of DeFi, and the second big term that you need to be familiar with in this section, are <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity-pool/">liquidity pools<\/a>. <\/strong>A liquidity pool is a place that <strong>stores all of the cryptocurrency tokens<\/strong> that are available to be traded and are provided by <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity-provider/">liquidity providers<\/strong><\/a> - the DeFi community. It’s like a shelf of candy in a shop - if there are 5 candies on the shelf, that means that you can purchase up to 5 candies until the shop runs out of stock.<\/p>\n<p>That being the case, however, if there’s only one candy on the shelf, it’s probably going to be much more expensive, since while the demand for candies remains the same, the supply is limited to a single candy. This works both ways, mind you - if there are hundreds of candies available to be sold, and the demand doesn’t increase, the candies will cost less!<\/p>\n<p>Up to this point, everything is just basic economics. However, this is where liquidity pools come in.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-6290792019658.o.jpg/" alt=\"What is Defi 2.0: Liquidity pools.\" width=\"1000\" height=\"872\" \/><\/p>\n<p>A liquidity pool allows a project to <strong>attract investors<\/strong> - the new liquidity providers, who will then bring in two types of tokens - a project token, as well as some sort of <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-leverage/">leverage, such as <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-ethereum-eth/">Ethereum or <strong>DAI.<\/strong><\/p>\n<p>Over time, as other people come in and trade these two tokens on the liquidity pool, the investors receive passive interest from the trading fees that these people pay. So, you have happy investors (since they receive passive income), as well as happy traders (since they don’t need to find another person to perform the trade, and can trade anonymously on the liquidity pool).<\/p>\n<p>Now, just to be meticulous about the details, the traders don’t actually trade on the liquidity pools. Instead, the <strong>trading processes happen on <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-automated-market-maker-amm/">Automated Market Makers<\/a><\/strong> - special platforms designed to facilitate those trading activities utilizing liquidity pools. Not to go into too much depth regarding the subject, I’ll put it this way - you can look at AMMs as those same shops where you buy candy. In this case, liquidity pools would be the shelves where the candy is placed.<\/p>\n<p>To sum up, <strong>DeFi is an automated decentralized financial field with no single owner<\/strong>, that has implemented Automated Market Maker algorithms that utilize liquidity pools, which are filled with cryptocurrencies provided by liquidity providers (AKA investors and initial project owners).<\/p>\n<p>It’s like a shop with no single owner but instead owned by people who have brought their own goods into the same shop’s pool, so that the shop would trade them for other goods brought by other clients. By doing so, these liquidity pool creators become co-owners of the whole shop, with voting and business decision rights. Their shop trades the collectively-provided goods with their clients autonomously, without the intervention from owners or any other humans. All those trades are based on pre-programmed trading rules.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-629079214e9ea.o.jpg/" alt=\"What is Defi 2.0: An example with a shop.\" width=\"1000\" height=\"595\" \/><\/p>\n<p>Finally, shop co-owners receive their passive interest rate income after each trade happens. Theoretically, <strong>the pool will never become empty<\/strong>, since, every time a trade happens, it receives new goods from clients in exchange for old ones. Pre-programmed trading rules of the shop correct the prices and exchange value ratio automatically, based on the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-supply-and-demand/">supply & demand<\/strong><\/a> of goods, and the actual quantities of the goods in its own pool.<\/p>\n<p>So, basically, if the pool is full of Coca-Cola, its price will go down, and the price of Pepsi will start to rise because the pool is currently in scarcity of it.<\/p>\n<p>That's about it on the terminology side of things - at least for the time being. Now, let’s move on to DeFi 2.0.<\/p>\n<p>To put it very simply, <strong>DeFi 2.0 is the second generation of dApps that are concerned with decentralized finance.<\/strong> While the differences between DeFi 1.0 and DeFi 2.0 aren’t going to be evident for an outsider looking in, if you know what to look out for, you’ll soon notice that there’s a rather obvious trend. Specifically, DeFi 2.0 projects aim to improve on the weakest and most vulnerable parts of traditional DeFi.<\/p>\n<h2>DeFi 2.0 vs DeFi 1.0<\/h2>\n<p>One thing that is super-important in all DeFi ventures is <strong>the liquidity of the pool. <\/strong>It’s actually the main area where DeFi 2.0 is different from traditional decentralized finance.<\/p>\n<p>With your traditional DeFi projects, teams tend to put a lot of their native token into the liquidity pool, hoping this will attract other investors. With time, it’s often successful - investors come in and bring their own coins and tokens into the pool, and as they start earning passive returns, the pool becomes more and more popular.<\/p>\n<p>However, this is where the core issue reveals itself - if a DeFi project depends on the investors’ funds in the liquidity pool in order to survive, <strong>it risks huge token price volatility and general uncertainty.<\/strong><\/p>\n<p>Think of it this way - if you have no interest in a project, and are only investing in order to mine liquidity (earn a passive income), whenever you spot a better offer (such as one with a higher annual percentage yield), you’re probably going to jump ship, and transfer your investment there! It’s like eating at the same restaurant every day since the food there is OK and the prices are great. If, however, the prices start to rise, or the quality of the food goes down, you will surely consider switching your lunch providers!<\/p>\n<p>This puts a lot of pressure on the liquidity pool, and the project that it’s associated with. In turn, if there’s a big liquidity provider turnaround, this will create a lot of instability and will lead to the price of <strong>the project token swinging quite a bit.<\/strong><\/p>\n<p>The only hope that DeFi 1.0 projects have when it comes to preserving their investors in the long run, is to try and create an amazing and appealing project. This, in turn, would incentivize investors to keep their investment on the platform, even after the initial liquidity mining period is over.<\/p>\n<p>As you can probably imagine, though, creating a unique and groundbreaking project isn’t easy to do. Since <strong>retaining long-term investors is such a struggle<\/strong> for traditional, DeFi 1.0 projects, some crypto enthusiasts have come up with very interesting and unique decisions on how to avoid this issue altogether.<\/p>\n<p>These decisions lead us to DeFi 2.0. In order to better understand what I’m talking about, let’s take one of <strong>the most popular DeFi 2.0 projects<\/strong> as an example.<\/p>\n<h2>OlympusDAO<\/h2>\n<p><strong>OlympusDAO is often seen as the biggest representing project of DeFi 2.0.<\/strong> Many crypto enthusiasts view OlympusDAO as the most interesting decentralized finance experiment of our time, due to its innovative approach to solving the liquidity problems of traditional DeFi projects!<\/p>\n<p>In short, <strong>OlympusDAO is a decentralized reserve currency protocol.<\/strong> Essentially, Olympus has a token called OHM, and bases all of its operations around it. These operations include <strong>staking, bonds, liquidity provision, and so on.<\/strong><\/p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is Defi 2.0: OlympusDAO.\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-62907e735d53b.o.png/" alt=\"What is Defi 2.0: OlympusDAO.\" width=\"1000\" height=\"329\" \/><\/strong><\/p>\n<p>The OHM token is actually what makes Olympus stand out from the crowd. Each OHM token is backed by a selection of cryptocurrency assets - this, in turn, establishes a ground price for the token. In other words, OHM has a certain price threshold (or a floor price) which theoretically shouldn’t be crossed.<\/p>\n<p>In order for you to understand this concept better, think about it this way. Imagine the same candy store I mentioned earlier. Now, let’s say that a candy bar in the store is priced at $1. However, the shop owner has also backed each of these candy bars with other chocolate bars that he has in the warehouse. Meaning that people will always be able to trade a candy bar for a chocolate bar, at a ratio of 1:1.<\/p>\n<p>Now, the candy bar can become more expensive, and cost $2, if there’s a huge demand for it. However, it can theoretically never go below $1, since this is the value of the chocolate bars in the warehouse. So, there’s another asset to back the price of the candy bars!<\/p>\n<p>Getting back to OlympusDAO and DeFi 2.0, users are able to do two things with their OHM tokens. They can <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-staking/">stake <strong>them, and get more OHM tokens as rewards,<\/strong> <strong>or<\/strong> <strong>trade their cryptocurrencies for OHM tokens, at a discounted price.<\/strong> By the way, if you're not familiar with what staking is, make sure to read <a href=https://www.bitdegree.org/"//crypto//learn//what-is-staking-in-crypto/">the section dedicated to this topic<\/strong><\/a> - it will all become much clearer!<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-629079250ac35.o.jpg/" alt=\"What is Defi 2.0: Bonding.\" width=\"1000\" height=\"561\" \/><\/p>\n<p>Now, the second process that I’ve mentioned is where the DeFi 2.0 magic happens. Whenever someone trades OHM tokens, at a discounted price, the cryptocurrencies that they trade for the OHM tokens go to OlympusDAO. This process is called <strong>bonding.<\/strong><\/p>\n<p>OlympusDAO then uses these newly acquired assets - such as Ethereum, or the DAI stablecoin - as liquidity for their operations. So, essentially, Olympus becomes the liquidity holder and can stake the assets on other popular liquidity pools, such as that of <strong>Uniswap.<\/strong><\/p>\n<p>Remember when I told you that liquidity providers leaving a project is the main problem of traditional DeFi 1.0 platforms? Well, in the case of Olympus, since it becomes the liquidity holder, it’s not going to “leave itself”, since all of the liquidity is in the project’s metaphorical hands. This, in theory, creates a somewhat safe and established liquidity flow and ensures that the project is funded, long-term.<\/p>\n<h2>Finishing Off<\/h2>\n<p>Now, I do have to admit - this can all be pretty difficult to wrap your head around.<\/p>\n<p>DeFi 2.0 is a complex subject, but to recap, I can tell you this - the main message that you should have gotten out of this section is that traditional DeFi (AKA DeFi 1.0) suffers from <strong>liquidity providers leaving projects for other, more-promising opportunities at almost any time<\/strong>, and DeFi 2.0 projects aim to solve this by implementing special, complex mechanisms that allow them to become the holders of their own liquidity. In many cases, this solution results in the projects not relying on assets staked by other, third-party investors.<\/p>\n<p>Naturally, the topic is even more complex - OlympusDAO itself has launched OlympusPRO, which offers other projects the opportunity to use the same bonding mechanism in their own <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-tokenomics/">tokenomics. <\/strong>Then you have dedicated marketplaces, advanced staking pool functionality, and many more intricacies, but all of these probably should be discussed in another section more thoroughly.<\/p>","definition":"Did you know that the total value locked in DeFi protocols is over $78 billion?","status":"published","meta_title":"What is Defi 2.0 and Why is It Better Than DeFi 1.0?","meta_description":"Are you trying to answer the question what is Defi 2.0? Find everything you need to know right here including its comparison with DeFi 1.0.","meta_keywords":"what is defi 2.0, defi 2.0 explained, defi 2.0 definition, defi 2.0 projects, defi 2.0 coins, defi 2.0 vs 3.0, defi 1.0 vs 2.0","modified_content":"<p>If you’ve been following the crypto space for some time now, you’ve undoubtedly heard about <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-defi/">DeFi - decentralized finance<\/a>. <\/strong>It was a really hot topic in the summer of 2020 and has retained its relevance, as a new field of finance, to this day.<\/p>\n<p>However, while DeFi might still be a new concept, there’s actually an even newer term being thrown around - <strong>DeFi 2.0.<\/strong> And this type of decentralized finance aims to solve the core issues that DeFi 1.0 is facing.<\/p>\n<p>In this section, I’m going to tell you about DeFi 2.0. To be a bit more specific, I’ll tell you what DeFi 2.0 is, how it’s different from DeFi 1.0, and also give an illustrative example of one of the most successful DeFi 2.0 projects.<\/p>\n<p><em>Now, let’s get to it!<\/em><\/p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 suggested-comparisons pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//assets//images//compare-crypto-exchanges.gif/"/n alt=\"What is Defi 2.0? (Explained with Animations)\"\n title=\"What is Defi 2.0? (Explained with Animations)\" class=\"border-0\">\n <p>Video Explainer<\/p>\n <\/div>\n <\/div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: DeFi 2.0: The New Version of Decentralized Finance<\/h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"DeFi 2.0: The New Version of Decentralized Finance\" video explainer<\/p>\n <\/div>\n <\/div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"position-relative youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"SG9gyN8jqro\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"><\/div>\n <p class=\"text-left dyk-video-title\">What is Defi 2.0? (Explained with Animations)<\/p>\n <img data-srcset=\"https:\/\/assets.bitdegree.org\/youtube\/crypto-finally-explained\/what-is-defi-20-explained-with-animations.jpg?tr=w-420 500w,\n https:\/\/assets.bitdegree.org\/youtube\/crypto-finally-explained\/what-is-defi-20-explained-with-animations.jpg?tr=w-760 1000w\"\n alt=\"What is Defi 2.0? (Explained with Animations)\"\n title=\"What is Defi 2.0? 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(Explained with Animations)\">\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https:////www.youtube.com//c//CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener noindex\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"><\/i>\n <\/div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE<\/h4>\n <span>ON YOUTUBE<\/span>\n <\/div>\n <\/div>\n <\/a>\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n<\/div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"><\/i>\n <\/button>\n <div id=\"iframe\"><\/div>\n <\/div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https:////www.youtube.com//c//CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener noindex\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//assets//crypto-subscribe.jpg/" alt=\"Subscribe\">\n <\/div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE<\/span>\n <\/p>\n <\/div>\n <\/div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease<\/h4>\n <span>New explainer videos every week!<\/span>\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n <\/a>\n <\/div>\n <\/div>\n<\/div>\n<h2>What is DeFi 2.0?<\/h2>\n<p>So, before we jump into DeFi 2.0, there are a couple of terms that you need to be familiar with, first. Since it’s not exactly a very simple topic, if you feel that you need more information at any point in time, make sure to check out the previous sections of this BitDegree Crypto 101 Handbook.<\/p>\n<p>So, the very first term that you need to be familiar with is DeFi. It means <strong>“decentralized finance”<\/strong>, and is a form of finance that doesn’t have any central authorities, and is instead governed by the communities behind DeFi crypto projects.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-6290791e91dba.o.jpg/" alt=\"What is Defi 2.0: DeFi - decentralized finance.\" width=\"1000\" height=\"667\" \/><\/p>\n<p>So think about it this way - with DeFi 1.0, instead of getting a loan from a centralized bank, you would go to a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-decentralized-applications-dapps/">dApp (a decentralized application, or simply - a DeFi project) that specializes in loans, and borrow money from there. This money would be supplied to you by the community behind the project, and you would be able to <strong>interact with the dApp anonymously. <\/strong>On top of that, everything would be governed by <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">smart contracts<\/strong><\/a>, so there’s no room for human error or a single person's decision.<\/p>\n<p>One of the key features of DeFi, and the second big term that you need to be familiar with in this section, are <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity-pool/">liquidity pools<\/a>. <\/strong>A liquidity pool is a place that <strong>stores all of the cryptocurrency tokens<\/strong> that are available to be traded and are provided by <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity-provider/">liquidity providers<\/strong><\/a> - the DeFi community. It’s like a shelf of candy in a shop - if there are 5 candies on the shelf, that means that you can purchase up to 5 candies until the shop runs out of stock.<\/p>\n<p>That being the case, however, if there’s only one candy on the shelf, it’s probably going to be much more expensive, since while the demand for candies remains the same, the supply is limited to a single candy. This works both ways, mind you - if there are hundreds of candies available to be sold, and the demand doesn’t increase, the candies will cost less!<\/p>\n<p>Up to this point, everything is just basic economics. However, this is where liquidity pools come in.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-6290792019658.o.jpg/" alt=\"What is Defi 2.0: Liquidity pools.\" width=\"1000\" height=\"872\" \/><\/p>\n<p>A liquidity pool allows a project to <strong>attract investors<\/strong> - the new liquidity providers, who will then bring in two types of tokens - a project token, as well as some sort of <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-leverage/">leverage, such as <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-ethereum-eth/">Ethereum or <strong>DAI.<\/strong><\/p>\n<p>Over time, as other people come in and trade these two tokens on the liquidity pool, the investors receive passive interest from the trading fees that these people pay. So, you have happy investors (since they receive passive income), as well as happy traders (since they don’t need to find another person to perform the trade, and can trade anonymously on the liquidity pool).<\/p>\n<p>Now, just to be meticulous about the details, the traders don’t actually trade on the liquidity pools. Instead, the <strong>trading processes happen on <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-automated-market-maker-amm/">Automated Market Makers<\/a><\/strong> - special platforms designed to facilitate those trading activities utilizing liquidity pools. Not to go into too much depth regarding the subject, I’ll put it this way - you can look at AMMs as those same shops where you buy candy. In this case, liquidity pools would be the shelves where the candy is placed.<\/p>\n<p>To sum up, <strong>DeFi is an automated decentralized financial field with no single owner<\/strong>, that has implemented Automated Market Maker algorithms that utilize liquidity pools, which are filled with cryptocurrencies provided by liquidity providers (AKA investors and initial project owners).<\/p>\n<p>It’s like a shop with no single owner but instead owned by people who have brought their own goods into the same shop’s pool, so that the shop would trade them for other goods brought by other clients. By doing so, these liquidity pool creators become co-owners of the whole shop, with voting and business decision rights. Their shop trades the collectively-provided goods with their clients autonomously, without the intervention from owners or any other humans. All those trades are based on pre-programmed trading rules.<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-629079214e9ea.o.jpg/" alt=\"What is Defi 2.0: An example with a shop.\" width=\"1000\" height=\"595\" \/><\/p>\n<p>Finally, shop co-owners receive their passive interest rate income after each trade happens. Theoretically, <strong>the pool will never become empty<\/strong>, since, every time a trade happens, it receives new goods from clients in exchange for old ones. Pre-programmed trading rules of the shop correct the prices and exchange value ratio automatically, based on the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-supply-and-demand/">supply & demand<\/strong><\/a> of goods, and the actual quantities of the goods in its own pool.<\/p>\n<p>So, basically, if the pool is full of Coca-Cola, its price will go down, and the price of Pepsi will start to rise because the pool is currently in scarcity of it.<\/p>\n<p>That's about it on the terminology side of things - at least for the time being. Now, let’s move on to DeFi 2.0.<\/p>\n<p>To put it very simply, <strong>DeFi 2.0 is the second generation of dApps that are concerned with decentralized finance.<\/strong> While the differences between DeFi 1.0 and DeFi 2.0 aren’t going to be evident for an outsider looking in, if you know what to look out for, you’ll soon notice that there’s a rather obvious trend. Specifically, DeFi 2.0 projects aim to improve on the weakest and most vulnerable parts of traditional DeFi.<\/p>\n<h2>DeFi 2.0 vs DeFi 1.0<\/h2>\n<p>One thing that is super-important in all DeFi ventures is <strong>the liquidity of the pool. <\/strong>It’s actually the main area where DeFi 2.0 is different from traditional decentralized finance.<\/p>\n<p>With your traditional DeFi projects, teams tend to put a lot of their native token into the liquidity pool, hoping this will attract other investors. With time, it’s often successful - investors come in and bring their own coins and tokens into the pool, and as they start earning passive returns, the pool becomes more and more popular.<\/p>\n<p>However, this is where the core issue reveals itself - if a DeFi project depends on the investors’ funds in the liquidity pool in order to survive, <strong>it risks huge token price volatility and general uncertainty.<\/strong><\/p>\n<p>Think of it this way - if you have no interest in a project, and are only investing in order to mine liquidity (earn a passive income), whenever you spot a better offer (such as one with a higher annual percentage yield), you’re probably going to jump ship, and transfer your investment there! It’s like eating at the same restaurant every day since the food there is OK and the prices are great. If, however, the prices start to rise, or the quality of the food goes down, you will surely consider switching your lunch providers!<\/p>\n<p>This puts a lot of pressure on the liquidity pool, and the project that it’s associated with. In turn, if there’s a big liquidity provider turnaround, this will create a lot of instability and will lead to the price of <strong>the project token swinging quite a bit.<\/strong><\/p>\n<p>The only hope that DeFi 1.0 projects have when it comes to preserving their investors in the long run, is to try and create an amazing and appealing project. This, in turn, would incentivize investors to keep their investment on the platform, even after the initial liquidity mining period is over.<\/p>\n<p>As you can probably imagine, though, creating a unique and groundbreaking project isn’t easy to do. Since <strong>retaining long-term investors is such a struggle<\/strong> for traditional, DeFi 1.0 projects, some crypto enthusiasts have come up with very interesting and unique decisions on how to avoid this issue altogether.<\/p>\n<p>These decisions lead us to DeFi 2.0. In order to better understand what I’m talking about, let’s take one of <strong>the most popular DeFi 2.0 projects<\/strong> as an example.<\/p>\n<h2>OlympusDAO<\/h2>\n<p><strong>OlympusDAO is often seen as the biggest representing project of DeFi 2.0.<\/strong> Many crypto enthusiasts view OlympusDAO as the most interesting decentralized finance experiment of our time, due to its innovative approach to solving the liquidity problems of traditional DeFi projects!<\/p>\n<p>In short, <strong>OlympusDAO is a decentralized reserve currency protocol.<\/strong> Essentially, Olympus has a token called OHM, and bases all of its operations around it. These operations include <strong>staking, bonds, liquidity provision, and so on.<\/strong><\/p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is Defi 2.0: OlympusDAO.\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-62907e735d53b.o.png/" alt=\"What is Defi 2.0: OlympusDAO.\" width=\"1000\" height=\"329\" \/><\/strong><\/p>\n<p>The OHM token is actually what makes Olympus stand out from the crowd. Each OHM token is backed by a selection of cryptocurrency assets - this, in turn, establishes a ground price for the token. In other words, OHM has a certain price threshold (or a floor price) which theoretically shouldn’t be crossed.<\/p>\n<p>In order for you to understand this concept better, think about it this way. Imagine the same candy store I mentioned earlier. Now, let’s say that a candy bar in the store is priced at $1. However, the shop owner has also backed each of these candy bars with other chocolate bars that he has in the warehouse. Meaning that people will always be able to trade a candy bar for a chocolate bar, at a ratio of 1:1.<\/p>\n<p>Now, the candy bar can become more expensive, and cost $2, if there’s a huge demand for it. However, it can theoretically never go below $1, since this is the value of the chocolate bars in the warehouse. So, there’s another asset to back the price of the candy bars!<\/p>\n<p>Getting back to OlympusDAO and DeFi 2.0, users are able to do two things with their OHM tokens. They can <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-staking/">stake <strong>them, and get more OHM tokens as rewards,<\/strong> <strong>or<\/strong> <strong>trade their cryptocurrencies for OHM tokens, at a discounted price.<\/strong> By the way, if you're not familiar with what staking is, make sure to read <a href=https://www.bitdegree.org/"//crypto//learn//what-is-staking-in-crypto/">the section dedicated to this topic<\/strong><\/a> - it will all become much clearer!<\/p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https:////assets.bitdegree.org//crypto//storage//media//what-is-defi-2-629079250ac35.o.jpg/" alt=\"What is Defi 2.0: Bonding.\" width=\"1000\" height=\"561\" \/><\/p>\n<p>Now, the second process that I’ve mentioned is where the DeFi 2.0 magic happens. Whenever someone trades OHM tokens, at a discounted price, the cryptocurrencies that they trade for the OHM tokens go to OlympusDAO. This process is called <strong>bonding.<\/strong><\/p>\n<p>OlympusDAO then uses these newly acquired assets - such as Ethereum, or the DAI stablecoin - as liquidity for their operations. So, essentially, Olympus becomes the liquidity holder and can stake the assets on other popular liquidity pools, such as that of <strong>Uniswap.<\/strong><\/p>\n<p>Remember when I told you that liquidity providers leaving a project is the main problem of traditional DeFi 1.0 platforms? Well, in the case of Olympus, since it becomes the liquidity holder, it’s not going to “leave itself”, since all of the liquidity is in the project’s metaphorical hands. This, in theory, creates a somewhat safe and established liquidity flow and ensures that the project is funded, long-term.<\/p>\n<h2>Finishing Off<\/h2>\n<p>Now, I do have to admit - this can all be pretty difficult to wrap your head around.<\/p>\n<p>DeFi 2.0 is a complex subject, but to recap, I can tell you this - the main message that you should have gotten out of this section is that traditional DeFi (AKA DeFi 1.0) suffers from <strong>liquidity providers leaving projects for other, more-promising opportunities at almost any time<\/strong>, and DeFi 2.0 projects aim to solve this by implementing special, complex mechanisms that allow them to become the holders of their own liquidity. In many cases, this solution results in the projects not relying on assets staked by other, third-party investors.<\/p>\n<p>Naturally, the topic is even more complex - OlympusDAO itself has launched OlympusPRO, which offers other projects the opportunity to use the same bonding mechanism in their own <strong><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-tokenomics/">tokenomics. <\/strong>Then you have dedicated marketplaces, advanced staking pool functionality, and many more intricacies, but all of these probably should be discussed in another section more thoroughly.<\/p>","youtube_video":{"id":25,"channel_id":1,"sort":71,"video_title":"What is Defi 2.0? (Explained with Animations)","description":"What is DeFi 2.0 in crypto?\n\nDeFi 2.0 is a new concept inspired by traditional DeFi, or decentralized finance. DeFi 2.0 aims to solve some of the biggest issues that traditional DeFi projects face on a daily basis, such as liquidity providers not being loyal to a project, and transfering their funds to platforms that offer better returns.\n\nDeFi 2.0 is an advanced crypto topic, and can seem quite complex to break down! In this video, I try to make things simple and understandable by telling you what DeFi 2.0 is, in the first place, how it\u2019s different from traditional decentralized finance, as well as giving you the an example of and explaining arguebly the most well-known DeFi 2.0 platform.\n\nDo you know any great DeFi 2.0 projects? Tell me about them, in the comments below!\n\nVideo Time Table:\n\n0:00 Introduction to What is Defi 2.0 in Crypto\n0:56 What is Defi?\n4:43 Defi 2.0 vs Defi 1.0\n7:00 Defi 2.0 Example: OlympusDAO\n9:22 Wrap-up: What is Defi 2.0?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps:\/\/twitter.com\/crypto_xplained\n\n#WhatisDefi2 #Defi2Explained #Defi2Definition","video_id":"SG9gyN8jqro","duration":624,"view_count":619,"thumbnail_url":"https:\/\/assets.bitdegree.org\/youtube\/crypto-finally-explained\/what-is-defi-20-explained-with-animations.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-05-27T14:55:25.000000Z","created_at":"2022-05-27T23:00:02.000000Z","updated_at":"2024-01-09T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}},"featured_image":null}"
:chapter-list="[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-blockchain.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/blockchain-101.jpg","rating":100,"sections":[{"chapter_id":1,"order":1,"slug":"what-is-blockchain","title":"What is the Blockchain?","status":"published","modified_content":null},{"chapter_id":1,"order":2,"slug":"decentralized-blockchain","title":"Anonymous & Decentralized Blockchains: The Cornerstone of Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":3,"slug":"blockchain-transaction","title":"What is a Blockchain Transaction in Crypto?","status":"published","modified_content":null},{"chapter_id":1,"order":4,"slug":"crypto-fees","title":"The Different Types of Crypto Fees Explained","status":"published","modified_content":null},{"chapter_id":1,"order":5,"slug":"what-is-bridging-in-crypto","title":"The Key Notion Behind the Concept of Bridging in Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":6,"slug":"types-of-blockchains","title":"Different Types of Blockchains: What to Look Out For?","status":"published","modified_content":null}]},{"id":2,"title":"Cryptocurrencies","slug":"cryptocurrencies","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-cryptocurrencies.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/cryptocurrencies-101.jpg","rating":100,"sections":[{"chapter_id":2,"order":1,"slug":"what-is-a-cryptocurrency","title":"What is a Cryptocurrency?","status":"published","modified_content":null},{"chapter_id":2,"order":2,"slug":"how-does-cryptocurrency-work","title":"How Does Cryptocurrency Work?","status":"published","modified_content":null},{"chapter_id":2,"order":3,"slug":"is-cryptocurrency-a-good-investment","title":"Is Cryptocurrency a Good Investment? The Pros & Cons","status":"published","modified_content":null},{"chapter_id":2,"order":4,"slug":"coin-vs-token","title":"Coin VS Token: How Do They Differ?","status":"published","modified_content":null},{"chapter_id":2,"order":5,"slug":"what-are-stablecoins","title":"What are Stablecoins, Altcoins & Wrapped Coins?","status":"published","modified_content":null},{"chapter_id":2,"order":6,"slug":"what-is-a-bitcoin","title":"Bitcoin: the Pioneer of the Crypto World","status":"published","modified_content":null},{"chapter_id":2,"order":7,"slug":"what-is-ethereum","title":"The Ultimate Blockchain for dApp Creation: Ethereum","status":"published","modified_content":null},{"chapter_id":2,"order":8,"slug":"what-is-cardano-in-crypto","title":"What is Cardano and What is It Used For?","status":"published","modified_content":null},{"chapter_id":2,"order":9,"slug":"what-is-shiba-inu-coin","title":"Shiba Inu: the Dogecoin 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Standards","status":"published","modified_content":null},{"chapter_id":3,"order":5,"slug":"how-to-buy-crypto","title":"From Fiat to Crypto: How to Buy Crypto for the First Time","status":"published","modified_content":null},{"chapter_id":3,"order":6,"slug":"fiat-to-crypto","title":"Taking Profits: Turning Crypto Into Fiat","status":"published","modified_content":null},{"chapter_id":3,"order":7,"slug":"how-to-use-crypto","title":"You\u2019ve Got Crypto: What Can You Do With It?","status":"published","modified_content":null}]},{"id":4,"title":"Crypto Wallets","slug":"crypto-wallets","updated":false,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-crypto-wallets.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/crypto-wallets-101.jpg","rating":80,"sections":[{"chapter_id":4,"order":1,"slug":"what-is-a-crypto-wallet","title":"What is a Crypto 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The Ins and Outs","status":"published","modified_content":null},{"chapter_id":5,"order":3,"slug":"buying-nft","title":"Tips and Tricks of Choosing the Right NFTs","status":"published","modified_content":null},{"chapter_id":5,"order":4,"slug":"how-to-store-nft","title":"How to Store NFTs: Best Practices","status":"published","modified_content":null},{"chapter_id":5,"order":5,"slug":"how-to-create-an-nft","title":"How to Create Your Own NFTs?","status":"published","modified_content":null},{"chapter_id":5,"order":6,"slug":"how-to-make-passive-money-with-nft","title":"Making Passive Money with NFTs","status":"published","modified_content":null}]},{"id":6,"title":"dApps & Defi","slug":"dapps-and-defi","updated":true,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-dapps.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/dapps-defi-101.jpg","rating":80,"sections":[{"chapter_id":6,"order":1,"slug":"what-are-nfts","title":"What are Non-Fungible Tokens (NFTs)?","status":"published","modified_content":null},{"chapter_id":6,"order":1,"slug":"what-is-defi","title":"What is Decentralized Finance (DeFi)?","status":"published","modified_content":null},{"chapter_id":6,"order":2,"slug":"what-is-defi-2-0","title":"DeFi 2.0: The New Version of Decentralized Finance","status":"published","modified_content":null},{"chapter_id":6,"order":3,"slug":"what-are-dapps-in-crypto","title":"What Are dApps and How Do They Work?","status":"published","modified_content":null},{"chapter_id":6,"order":4,"slug":"defi-dapps","title":"Picking the Right dApps: Dos and Don'ts","status":"published","modified_content":null},{"chapter_id":6,"order":5,"slug":"what-is-web-3-0","title":"Web 3.0: The Future of the Internet","status":"published","modified_content":null},{"chapter_id":6,"order":6,"slug":"what-are-smart-contracts","title":"What is the Core Purpose of Smart Contracts?","status":"published","modified_content":null},{"chapter_id":6,"order":7,"slug":"what-is-a-dao-in-crypto","title":"The Notion of a Decentralized Autonomous Ogranization (DAO)","status":"published","modified_content":null},{"chapter_id":6,"order":8,"slug":"what-is-staking-in-crypto","title":"What is the Goal of Staking Crypto Assets?","status":"published","modified_content":null},{"chapter_id":6,"order":9,"slug":"what-is-liquidity-pool-in-crypto","title":"What is a Liquidity Pool and How Does It Work?","status":"published","modified_content":null},{"chapter_id":6,"order":10,"slug":"what-is-automated-market-maker","title":"Automated Market Maker: the Cornerstone of the Decentralized Crypto Exchange Industry","status":"published","modified_content":null},{"chapter_id":6,"order":11,"slug":"what-is-yield-farming-in-crypto","title":"The Main Yield Farming 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current-chapter="dapps-and-defi"
current-section="what-is-defi-2-0">