How do Decentralized Economies Work?

As discussed, centralized systems exist because of the need to create trust. We trust banks to hold and transfer our money, governments to enforce contracts and laws and corporations to establish the legitimacy and ownership of digital goods.

Decentralized systems are so innovative because they allow us to do all of these functions without the aforementioned “middlemen”.

Decentralized Systems Provide the Money, Goods and Law of a Digital Nation

They do this by combining three separate innovations – decentralized ledgers, smart contracts and NFTs:

• Decentralized Ledgers: Decentralized ledgers, often referred to as “blockchains”, serve as the “bank” of a decentralized economy. They are responsible for creating, storing and transferring money

• Smart Contracts: Smart contracts codify and enforce the “laws” of a digital nation. They are digital agreements that execute automatically when pre-determined conditions are met. Smart contracts operate on decentralized computers known as smart contract platforms (or “Layer 1 protocols”)

• NFTs: Non-fungible tokens are the “goods” of a decentralized economy. They can represent digital assets (e.g. virtual land, digital art, music, games, videos, software), physical assets (e.g. gold, oil or real-estate) or intangible assets (e.g. voting rights, ownership stakes, membership privileges)

Let’s see how all of these tie together…