Everything you need to know before learning Solana (part 5)

Hey everyone ~ back with another chapter in our Web3 journey. Took more time than I thought but its worth it . If you’ve been following along, you already have an idea of Part 1, 2, 3, and 4 took us through the wild world of blockchain, hashing, cryptography, and those mind-bending consensus mechanisms. I mean, we’ve come a long way

But now, we’re stepping into the most interesting part: the money, the assets, and the financial revolution that’s happening on top of all this tech. This is Part 5 , and I’m combining two massive topics Digital Assets and Decentralized Finance (DeFi) into one giant can be the longest part comparatively to all parts . So read with alot of patience and yeah focus ofcourse.

When I first heard about crypto, I thought it was just Bitcoin. Like, send some coins, get rich, done. But, I was wrong. The moment I stumbled into DeFi, my mind was blown there’s a whole financial system out there, and it’s not just about trading coins BUT
It’s about owning stuff, lending, borrowing, earning interest, all without banks or middlemen. This post is all about breaking down what digital assets are (the coins, tokens, NFTs ) and how they power DeFi, which is like the Wild West of finance but on the blockchain. I gonna cover every single thing.

Disclaimer: This is a long one. Take your time, read it slowly, maybe twice. Grab a coffee, be patient, and trust me it’s worth it. If I can go from head-banging confusion to loving this stuff, so can you.

Your Digital Assets & How Decentralized Finance (DeFi) Works Under the Hood

Part One ~ Your Digital Assets

Before we jump into the world of DeFi, we need to understand the tools we’re working with: digital assets. These are the coins, tokens, NFTs, and other stuff that Web3’s economy tick.

1.1 → Coins vs Tokens

Okay, coins and tokens sound similar, but they’re not the same. I used to mix them up all the time.
This might sound like a minor detail, but understanding the difference between coins and tokens is needed.

Coins are like the main currency of a blockchain. They’re native to their own network.
For example, Bitcoin (BTC) is the coin of the Bitcoin blockchain, Ethereum (ETH) is for Ethereum, and Solana (SOL) is for Solana. These coins are used to pay for stuff like transaction fees (called gas on Ethereum), staking to secure the network, or even voting on how the blockchain should be run. They’re the backbone of their ecosystems.

Tokens, on the other hand, are built on top of an existing blockchain. They’re like apps running on someone else’s platform. For example, on Ethereum, you’ve got tons of tokens like USDC or Chainlink (LINK) that follow something called the ERC-20 standard.

On Solana, tokens use the SPL Token Program. Tokens are super flexible because they’re programmable through smart contracts means bits of code that let them do all sorts of things, like representing a share in a project or a ticket to an event.

In simple words coins are kind of like the official currency of a country, like rupees in India. Tokens are like gift cards, stocks, or loyalty points you can use within that country’s economy. Coins power the whole blockchain; tokens are the cool thing you build on top.

Well, you can't build a Web3 economy without these essential digital assets. Interestingg right ?

1.2 → Fungible Tokens: The Digital Cash and More

Now let’s talk about fungible tokens. Fungible (what’s that fungus or what was my first reaction) just means interchangeable. Like, one 100-rupee note is the same as another 100-rupee note. Same with fungible tokens one Bitcoin is equal to another Bitcoin, one USDC is equal to another USDC. These tokens are the digital cash of Web3, but they can do more than just act as money.

Fungible tokens follow standards like ERC-20 on Ethereum or SPL on Solana. Huh what are these ??
These are just standard like rulebooks that make sure all tokens work the same way. Because they ensure interoperability. If all ERC-20 tokens follow the same rules, then any wallet or exchange that understands ERC-20 can handle all of them. They define basic functions, like how to transfer tokens, check someone’s balance, or approve someone to spend your tokens. This makes it easy for apps, wallets, and exchanges to support tons of tokens without reinventing the wheel. Soooo

What can fungible tokens do ~ Fungible tokens are incredibly versatile. They can act as digital currency for payments, be used for governance (giving holders a say in how a decentralized project is run), or provide utility within a specific decentralized application (dApp), granting access to features or services.

→ Currency: You can use them to buy stuff, send money, or trade.

→ Governance: Some tokens let you vote on decisions in a project, like how a platform should upgrade.

→ Utility: They can unlock features in apps, like paying to access a game or a service.

1.3 → Non-Fungible Tokens (NFTs): I’m sure you must have heard about this

Now, non-fungible tokens, or NFTs, are where things get unique. Unlike fungible tokens, NFTs are one-of-a-kind. Think of a 100-rupee note (fungible) versus a rare painting (non-fungible).
You can swap one 100-rupee note for another, but you can’t swap a Picaso painting for another painting and expect it to be the same. NFTs are like that they’re unique digital assets on the blockchain.

NFTs use standards like ERC-721 or ERC-1155 on Ethereum. These standards let NFTs represent unique things, like a specific piece of digital art, a collectible card, or even a virtual sword in a game. The blockchain proves you own that exact NFT, and no one can fake it or steal it (unless you give away your private key, so ever don’t do that!

NFTs have exploded in popularity and for good reason. They are used for digital art (proving ownership of a unique piece), collectibles (like digital trading cards), gaming items (owning unique swords or skins in a game), tickets (digital event passes that can't be counterfeited), and even digital identity. They fundamentally change the idea of digital ownership, making it provable and transferable.

What are NFTs used for then

→ Digital Art: Artists sell their work as NFTs, like those crazy pixelated Crypto things.

→ Collectibles: Think trading cards or rare virtual pets.

→ Gaming: NFTs can be weapons, skins, or land in virtual worlds.

→ Tickets: NFT concert tickets that can’t be counterfeited.

→ Digital Identity: In the future, NFTs could represent your ID or credentials.

When I first saw NFTs, I thought, “Why pay millions for a JPEG?” But then I realized it’s about ownership. You’re not just buying a picture you’re buying proof that you own the original, and that’s a big deal in a digital world. Hope someday someone can buy my painting but I know my sketches aren’t that good haha.

1.4 → Stablecoins: Bridging Crypto Volatility to Real World Value

One of the biggest challenges with cryptocurrencies is their price swings. They can be incredibly volatile. That's where stablecoins come in. Crypto prices can be a rollercoaster. One day Bitcoin’s up, the next it’s crashing. That’s fun for traders but not great if you want to buy a coffee or lend money.

Enter stablecoins tokens designed to stay stable, usually pegged to something like the US dollar. One USDC or USDT is supposed to always be worth about $1. The Problem which is being solved is they offer a solution to crypto volatility. Imagine trying to buy groceries with Bitcoin if its price could drop 20% in an hour! Stablecoins aim to maintain a stable value, usually pegged to a traditional asset like the US dollar. How interesting and how securely stable right

There are a few types of stablecoins:

→ Fiat-backed: These are tied to real money in a bank, like USDT or USDC. These are the most common. Companies like Tether (USDT) and Circle (USDC) hold actual fiat currency (like US dollars) in reserves to back every stablecoin they issue. One USDC is supposed to always be worth one US dollar

→ Crypto-backed: These use other crypto as collateral, like DAI, which is backed by ETH in a smart contract. It’s more decentralized but trickier. These are overcollateralized by other cryptocurrencies. DAI is a good example. To mint 100 DAI, you might have to lock up $150 worth of Ether. This overcollateralization acts as a buffer against price drops in the backing crypto. ( I know its sounds complicated but no worries)

→ Algorithmic: These try to stay stable using code and math, but they’re risky. These stablecoins attempt to maintain their peg using complex algorithms and smart contracts, without direct fiat or crypto collateral. It's important to briefly mention that some algorithmic stablecoins, Remember the UST/LUNA crash? Yeah, that was a disaster billions wiped out because the algorithm broke.

Stablecoins are huge in Web3. They let you trade, pay, or lend without worrying about price swings. They’re like the bridge between the crypto world and the real world. I used to think, “Why not just use dollars?” But stablecoins are global, fast, and work 24/7 on the blockchain (no bank holidays here) haha.

I’m sorry its not completed yet more to it just read I know it might be overwhelming but interesting too

1.5 → Wrapped Tokens: Crossing the Blockchain Divide

Blockchains, for all their benefits, can sometimes feel like isolated islands. What if you want to use an asset from one blockchain on another? That's where wrapped tokens come in. One of my favorite concepts to reflect on when I first learned about this everything in web3 has a solution let me explain.

Ever wondered how you can use Bitcoin on Ethereum’s DeFi apps? That’s where wrapped tokens come in. Blockchains don’t naturally talk to each other, so wrapped tokens let you “wrap” an asset from one chain to use it on another. For example, Wrapped Bitcoin (WBTC) is Bitcoin locked on the Bitcoin blockchain, with a matching token minted on Ethereum.

In simple words you lock your BTC in a special vault (sometimes run by a company, sometimes a smart contract). Then, you get a token like WBTC on Ethereum that represents your BTC. You can use WBTC in DeFi apps, like lending or trading, and later “unwrap” it to get your BTC back. It’s like giving your Bitcoin a passport to travel to another blockchain.

Just a breif explanation of how it works u lock an asset on its native blockchain (e.g., Bitcoin on the Bitcoin blockchain). Then, an equivalent representation of that asset is minted (created) on another blockchain (e.g., Wrapped Bitcoin, or WBTC, on the Ethereum blockchain). When you want your original asset back, you burn the wrapped token, and your original asset is unlocked. This can happen through a custodian (a trusted third party) or through more decentralized wrapping mechanisms.

This blew my mind when I learned it. It’s like taking your rupees and exchanging them for dollars to spend abroad, but for crypto. Wrapped tokens make Web3 more connected, letting assets flow between chains.

Yayy on to next one which is last on this part one then will jump straight into DeFi.

1.6 → Tokenomics ( No its not that complicated as economics though)

Tokenomics is a fancy word for the economics of a cryptocurrency token. It covers how a token is created, distributed, managed, and used within its ecosystem. Every coin or token has rules about how it’s created, distributed, and used. It’s like the constitution of a crypto project. Understanding tokenomics helps you see why a token has value (or why it might crash).

Key bits of tokenomics:

→ Supply & Demand:

Total Supply: The maximum number of tokens that will ever exist.
Circulating Supply: The number of tokens currently available and in public hands.
Inflation/Deflation: Some tokens are designed to increase in supply (inflationary), while others might decrease over time (deflationary) through mechanisms like burning.

→ Vesting Schedules: You often hear about founders or team members having "vested" tokens. This means they don't get all their tokens at once. Instead, they receive them gradually over time, usually months or years. This incentivizes them to stick around and work for the long term success of the project.

→ Incentives: Tokens are often designed to incentivize specific behaviors that benefit the network. This could be staking rewards for securing a proof of stake blockchain, or liquidity mining rewards for providing liquidity to a DeFi protocol simple words tokens reward people for helping the network.

→ Market Cap: This is the total value of a token (price × circulating supply). It’s a quick way to see how big a project is, but it’s not the whole story. This is a widely used metric. It's simply the circulating supply of a token multiplied by its current price. It gives you a general idea of the total value of a cryptocurrency project. Tokenomics for me is like Math, But it’s so much more it’s the rules that keep a project alive or let it flop. Good tokenomics can make a project thrive; bad ones can tank it.

Okkkk finally that concludes our first part digital assets hope you understood it well lets jump into DeFi.

Part 2 ~ Decentralized Finance (DeFi) - The New Frontier of Money

Now that we know our tools (coins, tokens, NFTs, stablecoins), let’s talk about what we can do with them: Decentralized Finance, or DeFi. This is where Web3 gets really exciting it’s like building a whole new financial system without banks, brokers, or middlemen. I used to think finance was boring, but DeFi is like finance on steroids, powered by blockchain. Lets understand what in the world is DeFi

2.1 → What is DeFi?

DeFi is short for Decentralized Finance. It’s a way to do financial stuff trading, lending, borrowing, earning interest without traditional banks or companies. Everything happens peer-to-peer, using smart contracts on blockchains like Ethereum or Solana. It’s open to anyone with an internet connection, no permission needed. wow how interesting right ( no banks, brokers, or centralized exchanges no headache )

Comparing that to traditional finance (TradFi). In TradFi, you need a bank account, ID, and sometimes a middleman taking a cut. DeFi? You just need a crypto wallet. It’s global, transparent (all transactions are on the blockchain), and composable (DeFi apps can plug into each other like Lego bricks). When u first try a DeFi app, you will definitely feel like this
“Wait, I can lend money to someone across the world and earn interest, no bank needed?” Yes, that’s DeFi.

2.2 → Automated Market Makers (AMMs) & Liquidity Pools

Trading Without a Middleman

A little off track when I first started exploring web3 used to see this words often in videos a lot always used wonder what is even this AMM’s this that so you don’t have to think like this because here is breakdown

One of the coolest parts of DeFi is trading on decentralized exchanges (DEXs) like Uniswap or Raydium. But how do you trade without a central exchange like Binance? That’s where Automated Market Makers (AMMs) and liquidity pools come in.

AMMs → Instead of matching buyers and sellers like a traditional stock exchange, AMMs use math to set prices. You’ve got a formula (like x × y = k) that balances two tokens in a pool. If someone buys one token, the price adjusts automatically to keep the pool balanced. No order book, no middleman, just code.

AMMs clear explanation : Automated Market Makers are smart contracts that use mathematical formulas to set the prices of assets. Instead of matching specific buy and sell orders, an AMM maintains a "pool" of two or more assets. When someone wants to trade, they interact directly with this pool, and the AMM's formula automatically adjusts the price based on the ratio of assets left in the pool. The most common formula is x∗y=k, where x and y are the quantities of two tokens in the pool, and k is a constant.

( Might be complicated to sink in at first but u will understand try again and again )

Liquidity Pools: These are pools of tokens provided by users (called Liquidity Providers, or LPs). For example, in an ETH/USDC pool, users deposit equal values of ETH and USDC. Traders can swap between those tokens, and LPs earn a small fee (like 0.3%) for every trade. It’s like running your own mini-exchange and getting paid for it.

Liquidity clear explanation →These are literally pools of cryptocurrency assets that are locked in a smart contract. They are made up of asset pairs, for example, ETH and USDC. Who puts these assets into the pool? Liquidity Providers (LPs) do! LPs are users who deposit their crypto into these pools. In return for providing this "liquidity," LPs earn a portion of the trading fees generated by the AMM. This is how decentralized trading happens!

Impermanent Loss : This is a crucial risk for Liquidity Providers. It's when the value of the assets you put into a liquidity pool changes relative to each other after you deposit them. When you withdraw your assets, the value might be less than if you had simply held them outside the pool.

Example: Imagine you put $100 worth of ETH and $100 worth of USDC into a pool (total $200). If the price of ETH then doubles, and you decide to withdraw your assets, the AMM's formula would have resulted in you having less ETH and more USDC than you started with, in order to maintain the pool's balance. The "loss" is impermanent because if the prices eventually return to their original ratio, the loss disappears. But if you withdraw while the prices are different, that loss becomes real. It's a trade off for earning trading fees. Thats alot of thinkingggg and understanding never mind u will get there soon

2.3 → Lending & Borrowing Protocols: Your Digital Bank

DeFi lets you lend and borrow crypto without a bank. Platforms like Aave or Compound are like digital banks, but instead of a building, it’s all smart contracts. working scenario is users deposit their crypto assets into a lending protocol's smart contract. These users are the lenders, and they earn interest on their deposits. Other users can then borrow from these pools, typically by providing collateral (another crypto asset). The smart contract automatically manages the loans, interest rates, and collateral

→ Lenders: You deposit your crypto (like USDC or ETH) into a pool. Other people borrow from that pool, and you earn interest. It’s like putting money in a savings account, but you’re lending directly to the blockchain.

→ Borrowers: You can borrow crypto from these pools, but you need to put up collateral (usually more than you borrow, called overcollateralization). If you don’t pay back, your collateral gets liquidated (sold off) to cover the loan.

→ Interest Rates: These change based on supply and demand. If lots of people want to borrow ETH, the interest rate goes up. It’s all automatic, no bank manager needed.

I remember thinking, “This is like lending my friend money, but the blockchain makes sure I get paid back.” It’s secure because of collateral and smart contracts, but you still need to be careful bugs in code can be a problem (more on that later).

2.4 → Yield Farming & Staking for Returns: Earning with Your Crypto

One of the most attractive aspects of DeFi is the potential to earn returns on your cryptocurrency holdings beyond just holding them. DeFi lets your crypto earn money while you sleep. Two big ways to do this are yield farming and staking (not the consensus kind we talked about in Part 4, but similar).

→ Yield Farming: This is a strategy where users move their crypto assets between different DeFi protocols in a quest to maximize returns. This often involves providing liquidity, lending, or using various other strategies to earn rewards, frequently in the form of newly issued tokens (this is often called liquidity mining rewards). Yield farming can be complex, often involves multiple steps, and carries high risks but also promises high rewards.

→ Staking (DeFi Context): While we discussed staking for Proof of Stake consensus (like with ETH), staking in DeFi can also refer to users locking their assets within a specific protocol to support its operations or provide security, and in return, they earn rewards from that protocol. This is different from network consensus staking and is more about participating in the economics of a particular dApp.

2.5 → Flash Loans: The Power of Instant, Uncollateralized Loans (Briefly)

This is a more advanced concept, but fascinating at its peak.

Flash loans are unique because they allow you to borrow assets without any collateral, provided you repay the loan within the exact same blockchain transaction. If the loan isn't repaid in that single transaction, the entire transaction is simply reversed, as if it never happened.

Use Cases: They are primarily used by developers and advanced users for things like arbitrage (taking advantage of small price differences across different exchanges) or collateral swaps (changing the type of collateral you've used for a loan without fully repaying it first).

Risks: While innovative, flash loans have also been frequently exploited in smart contract attacks, where malicious actors use them to manipulate markets or drain funds from vulnerable protocols. This highlights the bleeding edge nature of some DeFi innovations.

2.6 → Key DeFi Metrics & Risks ( final topic )

DeFi’s awesome, but it’s not all rainbows. Let’s wrap up with some key metrics and risks to keep in mind.

Total Value Locked (TVL): This is a very common metric in DeFi. TVL represents the total amount of crypto assets currently locked within a specific DeFi protocol or across the entire DeFi ecosystem. A higher TVL often indicates greater adoption and confidence in a protocol's health and security.

While DeFi offers incredible opportunities, it's crucial to understand the risks involved.

Risks involved

→ Smart Contract Hacks: The code that powers DeFi protocols can have bugs or vulnerabilities that hackers can exploit, leading to loss of funds.

→ Oracle Manipulation: Oracles feed real world data (like asset prices) into smart contracts. If an oracle is compromised, it can lead to incorrect data being used by a protocol, causing losses.

→ Rug Pulls: This is a type of scam where developers launch a new token or project, attract investor funds (often into a liquidity pool), and then suddenly withdraw all the liquidity, leaving investors with worthless tokens.

→ Economic Exploits: These involve finding clever ways to manipulate a protocol's economic design for personal gain, often by exploiting pricing mechanisms.

→ Regulatory Uncertainty: The regulatory landscape for DeFi is still evolving, and future regulations could impact protocols and assets.

→ Impermanent Loss (reiterate): As discussed earlier, this is a specific risk for liquidity providers in AMMs.

Start exploring DeFi, you will be hyped but nervous. The rewards are huge, but so are the risks. Start small, maybe on a testnet (a fake blockchain for practice), and learn the ropes.

With that said that’s a lot to digest especially if you’re a beginner but read twice thrice understand

Conclusion and Final thoughts

We went from coins and tokens to DeFi’s wild world of trading, lending, and earning. Digital assets are the tools coins power blockchains, tokens do everything from payments to governance, NFTs prove unique ownership, stablecoins keep things steady, and wrapped tokens connect chains. DeFi takes those tools and builds a financial system that’s open, global, and unstoppable. No banks, no borders, just code and crypto.

This stuff isn’t easy, I know. I’ve been there, staring at terms like “impermanent loss” and feeling my brain melt. But take it slow, read this again, and try things out. Consider visiting some DeFi platforms (many have "testnet" versions where you can experiment with fake money) or even try interacting with small amounts of crypto to get a feel for how it all works. You’re getting better each day, and this post is long

Oh, like last time couldn’t deliver blog on time took time more than I think maybe, this blog came from my notes, my struggles, my way of explaining things. I’ve been diving deep into Web3 for weeks, compiling everything I’ve learned from docs, videos, and trial-and-error. This is my journey, and I’m sharing it because I know how hard it is to learn this stuff from scratch.

Also I didn’t add any pictures in this because honestly I didnt like any and AI also isn’t generating well so.

With that said yeah Alright hope you understand this
And yeah, I know… this was another long one (deal with it).
But I’d rather over-explain than leave you half-cooked in Web3.

RESOURCES

Coinbase Learn: Your crypto questions, answered
Binance Academy | Free Crypto & Blockchain Education
Fungibility: What It Means and Why It Matters
DefiLlama - DeFi Dashboard ( u will get headache )
Coin Bureau - YouTube (whenever you are bored watch this)
https://www.youtube.com/@WhiteboardCrypto ( one of fav channels to learn from )

If it helped you understand things in a way that saves you from banging your head on the wall like I did mission complete. Welcome to the world of Web3 and blockchain with me. The journey starts here. Keep learning keep coding keep reading..

It doesn’t stop here ~ Maha ( Haha just kidding any doubt just a dm away)

Thankyou ~ ciaa in next part with some blockchain trilemma.

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Web3 Before Solana - 5