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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, but 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 rely on the blockchain for execution.

Simple Understanding:#

A smart contract is like an automatic 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 throughout the process.

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, a key infrastructure must be mentioned: 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 run. 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 not only be deployed on Ethereum but can also run on EVM-compatible chains (like Polygon, BNB Chain, Avalanche).
• EVM is the most mature battlefield for Web3 development, with a wealth of tools, documentation, and frameworks built around it.

In other words, EVM is the "unified language environment" that allows Web3 programmers to write smart contracts without building from scratch.

Decentralized Applications (dApps)#

Smart contracts are the "rules," while dApps (Decentralized Applications) are the "products."

dApps are applications that run on the blockchain, requiring no reliance on servers, and no company can shut them down.

For example:

• When you swap tokens on Uniswap, there’s no need for a human to facilitate the transaction; it’s matched by smart contracts;
• When you borrow on Aave, there’s no bank review; the contract automatically handles the borrowing process.

The biggest difference between them and traditional apps is:

• Data and permissions are not in the hands of a single platform but are on the blockchain;
• Users control their own assets; the application is merely a "neutral front end";
• Open source, immutable, and transparently verifiable.

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 internet product, these drawbacks are acceptable.

Decentralized Finance (DeFi)#

The combination of smart contracts and dApps has given rise to a brand new financial ecosystem—Decentralized Finance (DeFi). DeFi is not just a technical breakthrough; it has fundamentally 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:

1. No Banks or Intermediaries Needed: On DeFi platforms, all operations such as lending, trading, and asset management are automatically completed through smart contracts, eliminating reliance on traditional financial intermediaries.
2. Decentralized and Transparent: DeFi operates on the blockchain, where all transactions and operations are public and transparent, allowing anyone to review them, ensuring fairness and justice.
3. 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#

1. Lending/Borrowing

   In traditional financial systems, lending usually requires banks as intermediaries, while lending in DeFi is executed automatically through smart contracts. You can deposit assets (like cryptocurrencies) into decentralized platforms to earn interest or lend out 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 lend and borrow crypto assets without providing the credit history required by traditional banks.

2. Trading (DEX - Decentralized Exchange)

   Traditional exchanges require a central trading platform, while decentralized exchanges (like Uniswap) execute trades directly on the blockchain using smart contracts, allowing users to maintain control over their assets.

   DEX enables trading without relying on centralized institutions and offers higher transparency and lower fees. Thanks to the automated market maker (AMM) mechanism, users can directly exchange assets with other users through smart contracts.

3. 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.

4. Staking

   Staking involves locking crypto assets in a blockchain network to support the network's security and operations (such as 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 period, but in return, you will receive some returns.

Advantages of DeFi:

• Decentralization: Eliminates the review mechanisms of traditional banks, allowing anyone to participate.
• Higher Transparency and Security: The blockchain records all transactions, which cannot be tampered with.
• 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#

1. Digital Artworks

   NFTs provide artists with a new platform, allowing digital art pieces 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.

2. Virtual Real Estate

   Virtual worlds like Decentraland and The Sandbox offer buying and leasing of virtual real estate, where users purchase "land" in the form of NFTs to build their homes, shops, etc., in the virtual world. These virtual properties are similar to real-world real estate, possessing unique ownership and value.

3. Game Items and Equipment

   In blockchain games, players can truly own their items, equipment, characters, etc., and these assets can be transferred or sold through NFTs. For example, Axie Infinity and CryptoKitties use NFTs as certificates of ownership for virtual pets or characters, which players can use in the game and trade in secondary markets.

4. Tickets and Membership Tokens

   NFTs are also widely used for event tickets or membership tokens. For example, purchasing a certain NFT might 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 one-of-a-kind artwork, rare item, or identity.
• Transferability: The ownership of NFTs can be freely transferred across multiple platforms, and the transaction history is traceable, ensuring transparency in transactions.
• 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 Values + Indivisible (e.g., artworks, collectible cards, real estate, NFTs).

DAO: Can Organizations Be Automated Behind NFTs?#

Furthermore, many NFT communities actually operate behind 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 without relying on a boss.

For example:

• Holding a certain NFT allows you to participate in project governance votes;
• 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: Such as 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.