Introduction#
Web3 has always been referred to as the next generation of the internet. Currently, it gives a somewhat elusive feeling—yet it is full of potential, but also seems a bit abstract. With the implementation of smart contracts and decentralized applications (dApps), Web3 is no longer just talk; it has become tangible.
What is a Smart Contract?#
Smart contracts are the heart of Web3. They are a piece of code, similar to the contracts we sign in daily life, but without intermediaries, no paper documents, and completely reliant on blockchain for execution.
Simple Understanding:#
A smart contract is like an automated machine that operates without human intervention. You write the rules clearly, and it can run automatically. For example, if you set the condition "ship goods upon receiving ETH," once the other party pays, the system automatically executes the shipping operation, with no need for trust or customer service intervention.
Advantages:#
- Automated execution, saving time and manpower;
- No one can change the rules, preventing defaults;
- Data is on-chain, results are public and transparent.
EVM: The "Home" of Smart Contracts#
At this point, we must mention a key infrastructure: EVM (Ethereum Virtual Machine).
You can think of it as the "blockchain operating system" that runs smart contracts.
EVM is a "runtime environment" where all smart contracts deployed on Ethereum must operate. It acts like a "virtual computer," ensuring that all nodes globally can synchronize and execute code in the same way without errors.
Why is EVM Important?#
- It gives smart contracts "cross-platform compatibility": a contract written in Solidity can be deployed not only on Ethereum but also run on EVM-compatible chains (like Polygon, BNB Chain, Avalanche).
- EVM is the most mature battleground for Web3 development, with a wealth of tools, documentation, and frameworks built around it.
In other words, EVM provides a "unified language environment" for Web3 programmers to write smart contracts, rather than building from scratch.
Decentralized Applications (dApp)#
Smart contracts are the "rules," while dApps (Decentralized Applications) are the "products."
dApps are apps that run on the blockchain, requiring no reliance on servers, and no single company can shut them down.
For example:
- When you swap tokens on Uniswap, there’s no need for a human to facilitate the trade; it’s done through smart contracts;
- When you borrow or lend on Aave, there’s no bank approval needed; the contract automatically handles the lending process.
The biggest differences from traditional apps are:
- Data and permissions are not held by a single platform but are on the blockchain;
- Users control their own assets; the application is merely a "neutral frontend";
- Open-source, immutable, and transparent.
Of course, the cost of decentralization is: a relatively rough experience, slightly higher barriers to entry, and bugs are more common. But if viewed as the next generation of internet products, these drawbacks are acceptable.
Decentralized Finance (DeFi)#
The combination of smart contracts and dApps has given rise to a whole new financial ecosystem—Decentralized Finance (DeFi). DeFi is not just a technological breakthrough; it has completely changed the rules of traditional finance. In the DeFi world, you can do almost everything traditional finance can do, and even more.
Core Features of DeFi:
- No Need for Banks or Intermediaries: On DeFi platforms, all operations like lending, trading, and asset management are automatically completed through smart contracts, eliminating reliance on traditional financial intermediaries.
- Decentralized and Transparent: DeFi operates on the blockchain, with all transactions and operations being public and transparent, allowing anyone to review them, ensuring fairness and justice.
- Globally Accessible: As long as you have an internet connection, anyone can participate in DeFi, regardless of where they are.
Four Core Concepts of DeFi#
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Lending/Borrowing
In traditional finance, borrowing usually requires a bank as an intermediary, while in DeFi, lending is executed automatically through smart contracts. You can deposit assets (like cryptocurrencies) into decentralized platforms to earn interest or lend assets. All lending agreements are executed automatically by smart contracts, reducing reliance on third parties.
For example, Aave and Compound are two typical decentralized lending platforms where users can freely borrow and lend crypto assets without providing the credit history required by traditional banks.
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Trading (DEX - Decentralized Exchanges)
Traditional exchanges require a central trading platform, while decentralized exchanges (like Uniswap) use smart contracts to execute trades directly on the blockchain, allowing users to always maintain control over their assets.
DEX allows trading without relying on centralized institutions, providing higher transparency and lower fees. Due to the operation of the automated market maker (AMM) mechanism, users can directly exchange assets with other users through smart contracts.
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Liquidity Mining
Liquidity mining is an important concept in DeFi, referring to users earning token rewards by providing liquidity (i.e., depositing assets). For example, on Uniswap, users deposit their tokens into a liquidity pool, providing liquidity for other traders and earning a share of transaction fees and reward tokens.
Liquidity mining not only helps decentralized exchanges provide liquidity but also promotes the flow of funds throughout the entire DeFi ecosystem.
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Staking
Staking involves locking crypto assets in a blockchain network to support the network's security and operations (like validating transactions). On DeFi platforms, staking can yield interest or token rewards. For example, in Ethereum 2.0, users can stake ETH in the network, participate in the network's validation work, and earn rewards.
Staking usually comes with a lock-up period, meaning you cannot withdraw or trade these assets for a certain time, but in return, you will receive certain returns.
Advantages of DeFi:
- Decentralization: Eliminates the scrutiny mechanisms of traditional banks, allowing anyone to participate.
- Higher Transparency and Security: Blockchain records all transactions, which cannot be altered.
- Low Fees: Decentralized platforms do not have the fees and costs associated with traditional financial institutions.
NFT: Ownership Protocol for Digital Assets#
Another important application of smart contracts is Non-Fungible Tokens (NFTs). NFTs are proof of ownership for digital content, giving virtual assets a real value representation. In the world of NFTs, each digital asset has its uniqueness and cannot be replaced.
The charm of NFTs lies in their ability to make digital artworks, game items, virtual real estate, etc., unique and tradable globally.
Applications of NFTs#
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Digital Artworks
NFTs provide artists with a new platform, allowing digital artworks to be recorded on the blockchain, granting them unique ownership. For example, artist Beeple sold an NFT digital artwork for $69 million, marking the recognition of the value of digital art.
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Virtual Real Estate
Virtual worlds like Decentraland and The Sandbox offer buying and leasing of virtual real estate, where users purchase "plots" in the form of NFTs to build their houses, shops, etc., in the virtual world. These virtual properties are similar to real-world real estate, possessing unique ownership and value.
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Game Items and Equipment
In blockchain games, players can own truly personal items, equipment, characters, etc., and these assets can be transferred or sold via NFTs. For example, Axie Infinity and CryptoKitties use NFTs as ownership certificates for virtual pets or characters, which players can use in the game and trade in secondary markets.
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Tickets and Membership Tokens
NFTs are also widely used for event tickets or membership tokens. For example, purchasing a certain NFT may mean you have obtained a virtual concert ticket or membership in an exclusive community. The application of NFTs as tickets can effectively prevent counterfeiting issues, as each NFT ticket is unique and immutable.
Advantages of NFTs:#
- Uniqueness and Scarcity: Each NFT is unique and can represent a unique artwork, rare item, or identity.
- Tradability: Ownership of NFTs can be freely transferred across multiple platforms, and transaction histories are traceable, ensuring transaction transparency.
- Smart Contract Empowerment: Through smart contracts, additional functionalities can be attached to NFTs, such as royalty settings, time locks, etc., making them complex digital assets.
"Non-Fungible" = Unique + Non-Interchangeable + Varying Value + Indivisible (e.g., artworks, collectible cards, real estate, NFTs).
DAO: Can Organizations Be Automated Behind NFTs?#
Furthermore, many NFT communities actually operate under a DAO (Decentralized Autonomous Organization).
A DAO is an organization governed by smart contracts, with rules written into code, and major decisions made through on-chain voting.
You can think of a DAO as: an open-source company that operates based on rules rather than relying on a boss.
For example:
- Holding a certain NFT allows you to participate in project governance voting;
- All fund usage must go through on-chain proposals + voting;
- Each participant has "shares" (usually in the form of tokens or NFTs).
Common types of DAOs:
- Protocol DAOs: Like Uniswap and Compound, managing protocol upgrades and fund flows;
- Investment DAOs: For example, Flamingo DAO, where the community collectively invests in NFTs;
- Social DAOs: Like Friends with Benefits, organizing events, producing content, and planning exhibitions;
- Guild DAOs: "Gold farming" guilds formed by Web3 gamers.
DAOs bring "organizational collaboration" onto the blockchain, representing a higher-level application of dApps.