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 Fundamentals of Crypto
An Introduction to Bitcoin, Blockchains, NFTs and
more

Aryan Bhasin

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 Fundamentals of Crypto
Copyright © 2022 by Aryan Bhasin
www.fundamentalsofcrypto.com
All rights reserved. No part of this book may be reproduced or used in any
manner without written permission of the copyright owner, except for the
use of brief quotations in a book review. For more information, please
address: [email protected]

The information contained herein is for educational and entertainment

purposes only. Every attempt has been made to provide accurate, up-to-
date, reliable, and complete information. No warranties of any kind are
expressed or implied. The author of this book does not receive any
compensation for recommendations made in reference to the resources,
products, or services mentioned in this book. Readers acknowledge that the
author is not engaging in the rendering of legal, financial, or professional
advice.

By reading this document, the reader agrees that under no circumstances

shall the author be responsible for any losses incurred, either directly or
indirectly, as a result of the use of information contained within this
document, including, but not limited to, errors, omissions, or inaccuracies.
All opinions expressed herein are solely the views of the author.
The value of your investment may go down as well as up.
First edition January 2022
Editing by Christopher Sheldon
Front cover image source: ethereum.org
Book design by Vedika Bhasin

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To my family for all their support

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 Table of Contents

Introduction
Chapter 1. A Brief History of Money
Chapter 2. Breaking down Bitcoin
Chapter 3. Blockchain Explained
Chapter 4. Crypto in Everyday Life
Chapter 5: Get Started With Crypto
Chapter 6. Thinking in Tokens
Chapter 7. The Magic of Smart Contracts
Chapter 8. NFTs in Action
Chapter 9. Earn Without Gambling
Chapter 10. Arbitrage, Airdrops and More
Conclusion
Author’s Note
References
Links and Resources
Glossary

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 Introduction

This book will simplify the world of Bitcoin, cryptocurrencies and other
assets so you can understand and use them in your life. It does not presume
any knowledge of economics or computer science. Each chapter of this
book introduces a new concept or technology with two goals: to explain it
as simply as possible and share resources to apply it. To prioritize brevity
over depth, explanations are kept short and succinct.
The book starts with breaking down the basics of Bitcoin and other
cryptocurrencies. It then turns to the practical aspects of buying and using
cryptocurrencies. In the second half, we move on to a wider discussion on
the crypto world seen through the lens of a newer technology called
Ethereum. We provide an overview of concepts like smart contracts, NFTs,
staking and more.
By the end of the book, you'll have a basic understanding of the terms used
in the crypto industry. More importantly, you'll have a set of resources,
websites and tips to jump into this world. Whether you're just curious about
cryptocurrencies or want to profit from them, you'll find this book useful as
a starting point.

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 Chapter 1. A Brief History of Money

Before civilizations existed, people exchanged goods and services for self-
sustenance without using money. One could live as a hermit, building their
own house and foraging for food. However, bartering for goods and
services was easier and improved everyone's quality of life. This way, a
skilled hunter could share their excess food with a builder, in exchange for
help building a house.
But, sustaining a barter system like this was difficult for several reasons.
Firstly, you had to find someone who possessed what you needed - who
also wanted what you could provide. That is, you needed a "double
coincidence of value". Secondly, storing goods for future bartering was
difficult with perishable items. Lastly, you had to express the value of your
own goods or services as part of another vendor’s, which wasn't always
workable. For example, how much house-building was worth one meal?
Communities invented money to solve these complications. In essence,
money was a commodity that was accepted by people in exchange for
goods and services. As long as a group of people agreed on what the
commodity was, they would accept it as a reward for any good or service.
They could then redeem this reward by purchasing another good or service
that they wanted.
In order to solve problems with bartering systems, a commodity would have
to be small and easy to store, accumulate and/or carry. It would also have to
be discrete, i.e. there would have to be several units of the commodity, each
separate from the rest. Choosing a rare gem as money wouldn't be a smart
idea because there wouldn't be enough gems available. Choosing pebbles
wouldn't work either because they're not scarce enough.
So, which commodities fit our narrow criteria? Cattle, sheep and camels
were one of the earliest choices for civilizations. Mollusk shells, like
Cowrie shells, were also very common. Metal objects, like beads, rings and
round tokens called "coins", soon became mainstream. Paper notes were
also ideal because they were easier to carry.[1]
With the advent of minting and printing, coins and paper notes became
easier to produce at scale. Governments eventually took up the
responsibility to produce these forms of currency and oversee their
distribution into the hands of people. To make this convenient, they loaned
currency to organizations called banks that, in turn, loaned it to the
populace. Banks also provided other financial services that allowed their
customers to save money. Together, banks and governments controlled the
circulation of money into the economy.
Over time, two changes occurred in monetary systems. Firstly, people's
concept of money shifted away from using it as a medium of exchange.
Instead of using it for bartering, they started to use it for accountability. By
lending or borrowing money, they could quantify how much value they
owed to or were owed by others.
In other words, people moved from the "money of exchange" to the "money
of account" framework. Money, as we now know it, is a unit of account that
tells you exactly how much value society owes you. You can extract this
value anytime by purchasing a good or service or doing whatever else you
please.
Secondly, governments changed how they valued their economy's currency.
Instead of determining value through precious metals like gold, they
determined value through regulation and law. This new form of money was
called "fiat money". Unlike precious metals, fiat money did not derive value
from intrinsic properties like shininess or color. Rather, it was valuable
because governments deemed it acceptable as a payment for any debt.
Making this transition allowed governments to control a currency’s value
through monetary policies.
For a long time, coins and banknotes functioned as the most common way
of exchanging fiat money. However, with the invention of the Internet, this
trend has started to shift. Money is now represented through data (i.e. 1’s
and 0’s) recorded as balances in accounts. These can be balances in bank
accounts, investment accounts, or even credit cards.
With this shift, transactions, or transfers of money, have become much
simpler. Sending money to someone else is as easy as changing two account
balances. When you send money to someone, the amount gets deducted or
debited from your account. When you receive money, that amount gets
added or credited to your account.
Financial institutions like banks handle these processes for you. They debit
and credit accounts and store records for all of the transactions. The
transactions are still made through fiat money. The only difference is their
representation through data.
With tangible money, you can hand someone a banknote and be sure that
only they possess it. This is because that particular banknote can't be
present at two places at the same time.
However, with digital banking, this newer form of exchanging money,
things become more difficult. People send money to each other through
clicks and taps on screens. Hence, they need to trust their bank when it
comes to handling the transfer. They also need to trust it for storing their
transaction somewhere and not tampering with it. Everyone must, in fact,
trust their bank to maintain a robust record of all transactions.
Banks record their users' transactions in a central database called a ledger.
They need to ensure this ledger remains intact and doesn’t get hacked or
modified. To do so, they invest in technology and labor that is dedicated
towards data security. Banks usually finance their services through
transactional or account fees charged to users. They also earn interest on
money that is loaned to them. In exchange, users trust their bank to keep
their accounts intact.
The problem with trusting a bank with all of these services is that, at the
end of the day, it is controlled by a single party. If someone were to hack its
servers, or if it defaulted, your account balance could be affected. This
motivated researchers to look into alternatives that didn't rely on such
centralized institutions. In the late 1900s, computer scientists considered
various digital forms of currencies.[2] Their goal was to find a secure way of
exchanging value without using centralized systems.
If successful, this would have many benefits. Transactions would be faster
and easier, since you wouldn't have to open or use bank accounts. People
would save on the costs that were paid to central institutions for their
services. They also wouldn't have to trust a third party for securing their
transactions. Removing dependencies on another party, in general, has
strong implications. It simplifies the process, reduces the likelihood of fraud
and enables trust.
In 2008, a new digital currency called Bitcoin claimed to meet these goals.
It was a peer-to-peer medium of exchange - a medium reliant only on its
users, instead of a third party. Imagining monetary exchanges without
governments or banks can seem difficult. Bitcoin realized this vision by
stringing together decades of research in Computer Science. To understand
how it made this possible, we need to look at the underlying technologies it
builds upon. The next chapter explains some of these technologies.

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 Chapter 2. Breaking down Bitcoin

Bitcoin is a type of electronic cash that was created pseudonymously by

Satoshi Nakamoto. It is "electronic" because it is intangible, unlike coins
and banknotes, and it’s a type of "cash" because it fulfills the same
functions as other forms of money. Namely, Bitcoin acts as a medium of
exchange and as a store of value that is interchangeable with fiat money.
Like fiat money, Bitcoin follows the "money of account" model. In other
words, a Bitcoin transaction is nothing more than a transfer of balance from
one account into another. However, unlike fiat money, your balance cannot
be withdrawn as a physical asset, coin, or note.
What exactly is being transacted, then, and where are these transactions sent
to? To answer these questions, let’s first look at how digital transactions
occur in general.
Cash based transactions occur between a sender and a receiver. These two
parties must be unique (because you can't send money to yourself!) and
there must be a way to verify their identities. When I give cash to a friend, I
can verify their identity by confirming their physical appearance. In the
digital world, identities are represented as randomly generated number
sequences, called "keys". Each user has their own unique key, and because
keys are long, each one is virtually guaranteed to be different from another.
Keys are often short-handedly represented by alphanumeric characters that
don't make sense to the naked eye. For example, a key could be something
like 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2 . Bitcoin and other
digital currencies offer two keys to each user: one public and one private. A
public key is a unique address that is used for sending and receiving the
currency. A private key is used to verify one’s identity and is kept secret by
the user.
In short, digital transactions are money transfers from one public key to
another, an example of which could be, "$100 sent from
1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2 to
1FfmbHfnpaZjKFvyi1okTjJJusN455paPH ". In the example, the “from”
address is the sender's public key, while the “to” address is the receiver's.
Thus, when sending a currency like Bitcoin to someone, I use their public
key as the receiver's address.
Digital transactions use public and private keys to prevent strangers from
tampering with your transactions or spending your money. This is done
through a technique called digital signatures.
A digital signature replicates the concept of a handwritten signature using
mathematics. It is used by the sender to “sign” the intent of sending money
and by everyone else to “verify” the intent. The sender uses their private
key and a message about the transaction to generate another number that is
specific to that key and message. This number acts as the digital signature.
If either the private key or the message were to change, the number would
also change. Thus, an attacker can’t tamper with the message without
altering the signature. They also can’t replicate someone’s digital signature
without knowing their private key, which prevents them from stealing
identities and spending others’ money.
When I transfer Bitcoin to someone, I capture this intent in a message that
is encrypted or scrambled to conceal its information. This message is also
known as a “hash” and it contains information about all past transactions
made with that particular Bitcoin. I "sign" this encrypted message with my
private key to produce a digital signature. The receiver, or anyone else, can
use this signature and my public key to “verify” its legitimacy. Once the
signature is verified, the ownership of the Bitcoin transfers to the recipient!
Figure 1 shows the process of signing transactions with a digital signature
and verifying the signature:
Figure 1: Digitally signing a message and verifying the signature
We can now answer the question "What exactly is Bitcoin?" Nakamoto's
original whitepaper defines Bitcoin as a "chain of digital signatures".[2] A
Bitcoin is a series of digital signatures linked together through code. Each
of these signatures represents a transfer of ownership from one user to
another. The chain itself represents a timeline of all of those transfers, as
shown in Figure 2 below. Thus, the last signature in the chain represents the
chain's current ownership.

Figure 2: Bitcoin as a chain of digital signatures

If this is difficult to visualize, imagine a line of descendants that was being
used to track the current owner of a precious jewel - with the latest
descendant being the current owner. Using our example, Bitcoin represents
not only the jewel, but the entire line of descendants.
Try re-reading this section if it is difficult to absorb. What you learned
about was a field of Computer Science called Public-Key Cryptography.
Bitcoin uses Public-Key Cryptography to give users an identity and make
their transactions robust, which helps the currency maintain its integrity.
Precious metals derive value from physical properties like shininess and
malleability. Bitcoin, however, derives value from mathematical properties
that fuel its security. Its robustness is what makes people confident about
using it, which, in turn, drives up its value.
We can now look at how Bitcoin creates a financial system that doesn't
require banks. The next chapter examines blockchain, the technology that
enables this decentralization.

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 Chapter 3. Blockchain Explained

So far, we have discussed an electronic coin and the use of cryptography to

transfer its ownership. This coin fulfills the common functions of money,
but it doesn't prevent double spending. The issue of double spending is
simple: a person must not be able to send the same coin to more than one
person.
We don't encounter this problem with a physical coin or banknote, because
it can only be in the pocket of one person at a time. With digital assets,
though, the situation is different. When I email someone a file, I still have a
copy, and I can send this to as many people as I want while still retaining
possession of the original. When it comes to digital cash, we must address
this problem because money only acts as a store of value if it is scarce.
Banks solve the problem of double spending by maintaining a ledger of
users' balances. When a user sends money to someone, the bank records this
transaction in their ledger. The sender can't spend this money again because
the bank has already deducted it from their balance. If the receiver claims
that they have not received the money, the bank can check the ledger and
resolve the dispute. As long as the ledger remains intact, no one can double-
spend money or claim that they have not received it.
With electronic cash, we need to ensure that a user can't "sign" the same
coin to two users at the same time. What we need, therefore, is some way of
knowing which transaction signature came first, without a third party.
Bitcoin addresses this problem by recording all of its transactions on a
tamperproof public database known as a blockchain.
The path to understanding blockchains begins with its most basic unit: the
transaction. In the context of Bitcoin, a transaction is a chunk of
information relating to the transfer of Bitcoin value. Each transaction has an
input address - a public key that represents the sender. It also has an output
address - another public key that represents the receiver. Transactions can
also have multiple outputs to divide a single payment between several
receivers.
If a transaction of 1 BTC (Bitcoin) lists your public key as its output, you
now own that amount. This amount is unspent. If you already had another 1
BTC unspent, then your total "balance" would be 2 BTC available for
spending. Bitcoin doesn't store users' account balances. Rather, it only
keeps a track of the total unspent amount that each user has. However, it is
easier to conceptualize your total unspent amount as an account “balance”.
Each transaction has a timestamp to note when it took place. It also has a
unique identifier of alphanumeric characters, called a transaction "hash" or
id. Finally, each transaction has a small fee deducted from the total amount
that is spent. This fee goes to the maintainers of the Bitcoin system (more
on this later in the chapter). An example of a transaction with all these
details is shown below in Figure 3 :

Figure 3: Basic anatomy of a transaction

Here’s an example of a real transaction listed on blockchain.com :
 Figure 4: Redacted screenshot of a real Bitcoin transaction [3]
Notice a few things about the transaction above:

It flows from one public key (bc1qhha… ) to another

(3J81tV2… ), left-to-right. For the receiver, the 0.00442541
BTC is an unspent transaction amount added to their “balance”.
The amount received is slightly less than the amount spent
because of a small transaction fee
The transaction has a hash starting with 382f77… to uniquely
identify it
These are all of the big pieces of any Bitcoin transaction. Let's recall the
problem that Bitcoin was trying to solve in the first place. How do we
decide which transaction came first, to prevent double-spending? This is
where the innovation of the blockchain comes in.
Bitcoin proposed a system where lots of computer systems take on the role
of a bank together. Namely, computers across the world store transactions
and agree on their chronological order. These computers record transactions
on a public database, so that anyone can see them. Hence, they all agree on
one single "state" of the database at any one time. Since no one has their
own version of the database, the transactional order remains consistent.
All of the computers must approve any changes or new transactions that are
made to the database. This way, if an attacker tried to alter the database, the
alteration would simply be rejected. Why? Because, if you recall, each
transaction requires a digital signature to guarantee authenticity. An
attacker’s alteration would have an invalid signature, and the change would
therefore be discarded.
Let's formalize these ideas with some concrete terminology. Computers that
maintain the order of transactions are called "nodes". These nodes can
communicate to each other and send data, thus forming a network of
computers. All nodes are responsible for verifying digital signatures of
transactions and storing their record in chronological order.
Nodes are rewarded for their efforts in two ways. Firstly, they receive fees
from the transactions that they add to the database, and secondly, they
receive newly minted Bitcoin from the “protocol”. There is no owner or
creator disbursing these rewards. They are distributed automatically through
terms described in Bitcoin’s development code.
To ensure scarcity, Bitcoin has an upper cap of 21 million coins that are
available for minting. This makes the rewards more valuable over time and
incentivizes nodes to stay honest. Here, honesty means that a node will
reject any changes with invalid signatures and will not attempt to attack the
database. Any changes made to the database are approved by a majority
agreement, so the system remains robust as long as more than 51% of the
nodes remain honest.
Because Bitcoin is akin to digital gold, the nodes mining this gold are also
referred to as "miners". To systematically order all transactions, miners
group transactions into blocks. Each block is a collection of transactions
created within a time frame of approximately 10 minutes. Like transactions,
a block also has its own hash to uniquely identify it. This lets miners link
one block to the next, chronologically, through their hashes.
You can visualize this linking or chain as a bead necklace. The beads
represent blocks and their linking thread represents the previous block's
hash. Because blocks are chronologically ordered, they form a timeline of
all valid Bitcoin transactions. This one-directional chain of blocks is called
a “blockchain”. Figure 5 shows the architecture of part of a blockchain:
Figure 5: Architecture of a blockchain
The blockchain is our tamperproof public database of transactions. At any
given moment, it represents the state and the order of all of the transactions
within the system. Let’s understand why it is tamperproof.
Imagine replacing a bead in a necklace. You must first cut the thread in
order to remove and replace the bead. Within the blockchain, trying to alter
a previous transaction is similar. It will change the transaction's encrypted
message, which, in turn, will change the hash of its own block. This will
"break" the linkage between other blocks and, as a result, honest miners will
reject the alteration.
To successfully attack the system, an attacker would have to amass an
incredible amount of computing power - more than 51% of all of the
miners’ computing power, to be precise. An attack like this is extremely
unlikely, making it virtually impossible to tamper with transactions on the
blockchain. This is a stark difference from banks having the power to alter
transaction records. It enables people to trust the blockchain and its
underlying maintainers. As a result, Bitcoin is able to overcome the trust
issue and function decentrally.
With theory out of the way, let's look at a run-through of how the network
operates in a small time frame. Users across the world can connect to the
Bitcoin network and send Bitcoin to other users. Each time a user makes a
transaction, it is broadcast to the entire network of nodes. While everyone
can see this user's transaction, no one can deduce their identity because it is
masked behind a public key.
Every 10 minutes or so, there are enough queued up transactions to create a
block. All of the miners compete to push the block onto the chain. They do
this by solving a random cryptographic puzzle that is unique to the
particular block. The miner that solves the puzzle first gets to push the
block onto the chain, thus receiving its rewards as transaction fees and
newly minted Bitcoin.
This miner now has a database that holds an extra set of transactions. To
synchronize this change with the entire network, they share the state of their
database with all of the other nodes, who then validate the new block and
accept it onto the blockchain. This process repeats over and over with new
transactions and blocks. Figure 6 outlines the different steps in this process:

Figure 6: The process of updating the blockchain

The mechanism of solving a puzzle to choose who appends the next block
is called "Proof of Work". The puzzle itself is simple: keep trying random
numbers to see which one, when a mathematical function is applied to it,
starts with a particular number of zeroes. Solving the puzzle requires brute
force and takes up a lot of computing power. Hence, finding its solution
literally acts as a “proof of work” - it proves that the computer expended
effort into updating the blockchain.
Proof of Work disincentivizes attackers from altering a past transaction,
because doing so without breaking the blockchain would require re-doing
all ensuing blocks’ puzzles. This would take up too much computational
energy, thus preventing attackers from overtaking the network. At that
point, an attacker would rather revert to being an honest miner and
receiving higher rewards. Because mining takes a lot of effort, miners often
pool their computer systems together. These “mining farms” run constantly
to solve the puzzles.
To summarize, a blockchain is a sequence of grouped transactions that are
linked chronologically. Miners verify new transactions through their digital
signatures before committing any changes to the blockchain. To push a new
block onto the chain, all of the nodes compete to solve a random
mathematical puzzle. With this Proof of Work mechanism, Bitcoin wards
off attackers and ensures that all nodes agree on the state of the blockchain.
This enables decentralization (i.e. distribution across multiple computers)
for recording transactions that everyone can trust.
The next chapter combines our learnings to share an overview of the crypto
sector. We explore the real-life implications, uses and drawbacks of Bitcoin
and other digital currencies.

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 Chapter 4. Crypto in Everyday Life

Bitcoin builds upon the research of several digital cash systems that rely on
cryptography. None of these systems, though, solved the problem of
double-spending without a centralized system. By clearing this hurdle,
Bitcoin invited people to use and even launch their own cryptographic
digital currencies, also known as cryptocurrencies.
Cryptography and blockchains are the two fundamental pillars that support
all cryptocurrencies. Cryptography is essential, because it ensures that users
can verify transactions between each other's masked identities. Together,
private and public keys help sign these transactions and verify identities,
thus deterring attackers and impostors.
Cryptography enforces trust while making a transaction. Blockchains, on
the other hand, enforce trust after the transaction has been made. They store
transactions in an organized and irreversible fashion. The way these
transactions are stored and linked isn't revolutionary. Rather, it's the
protocol that allows computers to cooperate in maintaining a shared
database.
Satoshi Nakamoto constrained their decentralized innovation to a digital
currency. This was revolutionary given its timing. Nakamoto launched the
currency on the heels of the 2008 recession, after major banks had filed for
bankruptcy. The value proposition for trying out cryptocurrencies was very
high in that context. Anyone could exchange money via technology,
decentrally and anonymously. This is why many Bitcoin supporters started
calling it the "currency of the Internet".[4]
The Internet enabled information exchange without relying on post offices
or other third parties. In other words, it was a decentralized means of
exchanging information. Slowly, use cases for the Internet grew to sharing
photos and videos too. The Internet infiltrated every corner of the world,
creating a network of billions of people. These are all people that use
technology to exchange information.
Bitcoin, instead, is a technology-native way to exchange value rather than
information. Like the Internet, it is a decentralized protocol that is scattered
across multiple computers. Unlike the Internet, however, it is anonymous
and in its very early stages, without much regulation. This grants its own
merits and drawbacks.
For many people, a decentralized means of exchanging value is very
beneficial. Transactions with Bitcoin can happen between any two parties in
the world. There is no need to exchange currencies or wait for international
transfer delays. Bitcoin is also easier to store and transfer compared to
alternatives such as gold. For the 1.7 billion people without bank accounts,
[5] cashless transactions become a reality.

Unfortunately, as a new and unregulated technology, Bitcoin has many

barriers to overcome. Being a digital currency, it is unavailable for use in
cash-only stores. Many brick-and-mortar stores don't accept it as payment
because it is not considered a legal tender. Governments are still a while
away from standardizing its usage alongside fiat currencies, and even then,
it might be unlikely that it becomes a global currency replacing all fiat ones.
This possibility often creates a hindrance for people to explore Bitcoin, but
Bitcoin's power comes from complementing fiat currencies rather than
substituting them. It is much more effective as a "currency of the Internet"
and is likely to remain so along with other cryptocurrencies. Adopting it as
a global currency would require regulation from central authorities, which
would contradict its core value of decentralization.
Another demerit of Bitcoin is its potential for use by malicious actors.
Bitcoin can sometimes be perceived as a haven for criminal activities
because of its anonymous nature. This argument is debatable on both sides.
It shouldn't be used to criticize the usage of cryptocurrencies, though,
because criminal activities would still persist without them. In fact, most
illicit activities are still funded and undertaken via cash.[6]
Perhaps the biggest obstacle that prevents people from purchasing Bitcoin
is its volatility. Bitcoin is not backed by stable assets like gold or fiat
currency. As a result, its value fluctuates based on the market forces of
demand and supply. This creates a major bifurcation in people's rationale
for buying it.
On one side, there’s the group of buyers that are confident about its future
as a viable currency. These buyers retain the coins they own for a long
period of time, instead of "liquidating" them back to fiat currency. The
Bitcoin community calls this process "Hold on for dear life", acronymized
as "HODL". On the other side of the coin, so to speak, are the group of
buyers who intend to profit from Bitcoin's volatility. For example, those that
"Buy Low, Sell High" profit if its value appreciates after purchase.
Depending on how long you plan to invest, you can welcome Bitcoin's
volatility or you can be indifferent to it. If you plan on buying it over a
longer term, you should shrug off daily volatility. This becomes easier when
you understand the technology and its value. Many people fail to do so and
resort to rash decisions on buying and selling the asset.
That said, there is an alternative for those interested in avoiding Bitcoin's
volatility. Some cryptocurrencies are stable by design because their value is
pegged to assets with stable exchange rates. These currencies are called
stablecoins. They marry the technology behind cryptocurrencies with the
stability of fiat currencies. This makes them interchangeable with fiat
currencies without risk of losing purchasing power.
Tether and USD Coin are two popular examples of stablecoins. These are
pegged to the value of the US Dollar and have a nearly constant 1:1
exchange rate with it. Thus, you can purchase 1 Tether coin or USD Coin
for $1 and exchange it back for the dollar at any time. This
interchangeability makes stablecoins a safe way of test-driving crypto.
Stablecoins are just one of the many developments that have been made in
the post-Bitcoin crypto sector. A few years after Bitcoin gained adoption,
developers started looking beyond cryptocurrencies. They realized that
blockchains and their decentralization are useful in many more applications.
Ethereum was one of the first technologies to act on this realization.
The next chapter details some practical steps on how to buy
cryptocurrencies. After that, the book diverges from currencies and looks
into the world of crypto that Ethereum unlocked. By doing so, it captures an
outlook into what's new in crypto and how it shapes our future.

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 Chapter 5: Get Started With Crypto

If you've made it this far, congratulations! You should now understand more
about cryptocurrencies than the majority of buyers. An important step now
is to go beyond theoretical understanding and commit to a small purchase.
This helps you tinker with the technology and see if it's something that you
can see yourself using.
A common philosophy for any purchase is to only buy as much as you can
afford to lose. Set a personal limit of how much money you'd be okay with
losing to try out the technology. It could be as low as a few bucks, and that's
fine. You're unlikely to suddenly lose all of your stake, but the philosophy
still helps with limit-setting. Once you have decided upon an amount to
buy, proceed with the next steps.
The easiest way of buying a cryptocurrency is to exchange it with another
asset, like fiat currencies. You could also earn as a miner, but that may
require large investments into specialized hardware for it to be profitable. It
is much easier to exchange a cryptocurrency with a fiat currency like the
US Dollar. You can do this on platforms called crypto exchanges.
These platforms operate similar to regular currency exchanges. They act as
a marketplace for exchanging different crypto and fiat currencies. Changes
in the demand for a cryptocurrency are reflected in its exchange rate, with a
higher demand resulting in an appreciation of its value. Hence, when people
say that Bitcoin's price went up from $X to $Y, what they're saying is that
its value has increased vis-a-vis the dollar.
To exchange a cryptocurrency, you need an address for sending and
receiving it. Recall that Bitcoin requires a set of private and public keys for
signing transactions. This requirement holds true for other cryptocurrencies
too. You can generate your own keys through a crypto wallet - a special
piece of hardware or software that stores your keys and signs your
transactions. Wallets also allow you to generate new public keys after each
transaction. This makes your previous transactions untraceable, since
they're all sent or received via different addresses.
Obtaining a crypto wallet is easy. Software wallets, which can be used on
your computer or mobile phone, can be downloaded from the Internet, App
Store and/or Play Store. Many wallets offer multiple platforms for more
convenience. Two popular software wallets for those new to
cryptocurrencies are Metamask and Exodus . You can download them for
free of charge. Bitcoin also offers a 5-step quiz to help you pick a wallet,
which you can take here: https://bitcoin.org/en/choose-your-wallet .
If you want an extra layer of security, you can get a hardware wallet instead.
Hardware wallets are secure physical drives that you can plug into your
computer to exchange cryptocurrencies. Trezor and Ledger are two of the
leading hardware wallet providers. Their most popular products, the Trezor
One and the Ledger Nano S, sell for about $60. You can purchase a
hardware wallet direct-online or through Amazon. If you're choosing
between different hardware and software wallets, check out this list for a
comparison: https://www.cryptowisser.com/wallets
Finally, you can get a wallet through crypto exchanges themselves. Many
exchanges automatically create software wallets for you when you open an
account. This makes it convenient to store and exchange currencies under a
single platform and is ideal for people looking for simplicity. Three popular
crypto exchanges that offer in-built wallets are Coinbase , Binance and
Gemini .
Different exchange services charge different fees for transactions and
withdrawals. Here are two tools to find the right (or cheapest) platform for
you:

Cryptoradar to find platforms with the best exchange rates

CryptoFeeSaver to compare fees across different platforms
Some mainstream stock trading apps like Robinhood, Webull and eToro are
also crypto exchange-friendly. You might find it convenient to use them if
you already have an account. If you plan on investing in stocks or
exchange-traded funds, you can kill two birds with one stone through these
platforms.
To recap, there are two steps to buying a cryptocurrency. First, you must get
a crypto wallet. It can be a software wallet, a hardware wallet, or an in-built
wallet on a crypto exchange. Then, you can pick an exchange service and
exchange fiat currency for your chosen asset. With these two steps, you can
get started with most cryptocurrencies that are listed on the exchanges!
There are a lot of resources jammed into this chapter, making it difficult to
filter out options. Try talking to a friend who's already purchased a
cryptocurrency to see what wallet and exchanges they use. Or, narrow down
your options by how much you value ease-of-use versus security.
Until now, we looked at a buyer's perspective for getting started with
cryptocurrencies. Let’s also consider the consumer’s perspective. Hundreds
of thousands of Internet retailers across the world accept Bitcoin and other
assets as payments. You can buy all sorts of things with cryptocurrencies
nowadays. The options range from electronics and furniture to esoteric
items seen on Amazon. Here are some platforms to explore for crypto
consumption:

Overstock is an e-commerce platform to buy household items

Purse is another platform to buy anything from Amazon via
Bitcoin
BitPay lets you buy gift cards or get a Mastercard to spend
crypto as cash
Lolli gives you Bitcoin 'cash-back' if you shop from 1000+
brands
Spendabit and Coinmap both help you to find merchants who
accept crypto
Many corporations like WeWork and Expedia also accept payments via
Bitcoin,[7], [8] and the list is only expected to grow. These examples signal
cryptocurrencies’ growing adoption and prove its usefulness to non-
investors. The only caveat is that most online merchants accept just a
handful of cryptocurrencies as payment, so make sure you do your research
beforehand.
If you want to spend cryptocurrencies as easily as fiat currency, you can get
a crypto debit card. Many companies, including BitPay and Coinbase, offer
cards backed by Mastercard and Visa to allow you to spend crypto for
everyday transactions. At the time of purchase, these cards automatically
convert crypto into fiat currency to complete the transaction. Their
simplicity makes them a great way to phase cryptocurrencies into your day-
to-day life.
You're now armed with enough information to look beyond crypto as a
currency. Moving forward, we refer to “cryptocurrencies” as “crypto assets”
or “crypto” to recognize their broader utility. In the next chapter, we’ll
examine Ethereum and see how it empowers people to develop their own
blockchain-powered apps. We’ll then decrypt buzzwords like smart
contracts, DeFi and NFTs. Finally, we’ll take a look at some newly formed
areas that are centered around earning and investing.

OceanofPDF.com
 Chapter 6. Thinking in Tokens

Bitcoin offers a programming language that allows developers to build

simple applications on it. In doing so, it makes the platform extensible and
allows developers to use its protocols. This is similar to Apple and Google
allowing people to build apps on the iOS and Android protocols.
Bitcoin’s programming language, however, is difficult to use. It also lacks
certain features that prevent developers from building complex applications
on it. Partly, this is because Bitcoin never intended to create an ecosystem
of crypto-developers. It focused on upending the financial system.
Thus, with a growing base of Bitcoin developers came a yearning for a
better programming system. Developers wished for a system that was much
more powerful and simpler to use. Some developers even wished to harness
the benefits of blockchains beyond currencies. Bitcoin conceptualized the
blockchain to store transactions of a digital currency. Any new transaction
would change the state of the blockchain ledger. But, was the blockchain
only useful to store transactional data?
The idea of storing data decentrally could be used by many other
applications. For example, imagine a use case for storing the ownership of
websites on a blockchain. If I buy a website from someone, they could
digitally sign the transfer of ownership to me. The blockchain could then
list my masked identity as the owner. Anyone could verify that I own the
website, but no one could steal the claims to its ownership. This application
would clearly benefit from blockchains to record ownership claims.
Crypto-developer Vitalik Buterin envisioned a world where others could
easily build such applications. He came up with the idea of creating a
"scripting system married to a blockchain".[9] The goal was simple: create
an easy-to-use system for writing programs that can run on a blockchain
instead of a regular computer. What resulted was Ethereum, a scripting
system with its own blockchain and native cryptocurrency called Ether (or
ETH).
Buterin built Ethereum’s first version on the same rewarding principles as
Bitcoin. He used Bitcoin’s Proof of Work algorithm to choose and reward
miners for validating new transactions. Ethereum rewards miners for their
effort via transaction or "gas" fees paid out in Ether. This currency also
allows people to exchange financial value, similar to Bitcoin.[10]
Anyone can own an account to send and receive Ether. These are external
accounts owned by people. Another type of account is a contract account, a
special Ethereum account containing snippets of code. When executed, this
contract code can carry out instructions like transferring Ether to other
accounts.
The beauty of these code snippets is that the account they’re stored in also
has its own Ether balance. The account thus acts like a self-operating
computer with its own bank balance. We cover this topic in depth in
Chapter 7 , but the big picture here is that Ethereum houses both people-
operated and code-operated accounts. Each of these accounts can hold their
own Ether balance and transact with other accounts, as shown in Figure 7 :

Figure 7: Types of Ethereum accounts

Introducing accounts that are operated by code has vast implications.
Developers can write programs and put them into contract accounts to
spawn wonderful applications. Let's take a deeper look at one such
application which allows a user to create their own “tokens”.
A token is anything discrete that represents some sort of value. Banknotes
are tokens that represent monetary value. Concert tickets are tokens that
represent the value of entering a concert area. Bitcoin, Ether and all other
cryptocurrencies are also tokens.
To ensure correct usage of its programming system, Ethereum specifies
various formats and standards for developers to follow. One such standard
is the ERC-20 Standard. ERC-20 empowers developers to create
applications with their own crypto token. Through this standard, you can
mint your own token, distribute it to people and let them exchange it.
If these exchanges are monetary, the token effectively becomes a
cryptocurrency. Many leading cryptocurrencies, including the
aforementioned Tether and USD Coin, are built on Ethereum’s ERC-20
standard. It is a convenient way for anyone to create their own
cryptocurrencies. By sharing their infrastructure and standards, Ethereum
makes this creation process much easier.
Tokens created through ERC-20 are fungible, or interchangeable, because
they all have the same value. Pennies, dollar notes, gold bars, etc. also work
in the same way: you can exchange them with anyone and walk out with the
same value in your pocket. This allows for a free exchange of tokens
between all of the holders.
Ethereum also offers another standard, known as the ERC-721 standard, to
create non-interchangeable or unique tokens. A token created through this
standard is one-of-a-kind and cannot be duplicated. Think of it as a colored
coin, except only one person has that exact color. These types of tokens are
called non-fungible tokens, or NFTs. We will leaf through their technology
and applications in Chapter 8 .
Let’s recap. Ethereum allows developers to build their own on-blockchain
applications. It divides accounts into two types: externally owned (operated
by people) and contract (operated by code). Developers can write code and
publish it onto contract accounts to launch applications on Ethereum’s
blockchain.
Two of these code standards, ERC-20 and ERC-721, help developers to
launch their own tokens and use them in any application they wish. Such an
ability is amazing because tokens allow all sorts of exchanges and stores of
value. Creating one is the crypto-equivalent of launching your own website
on the Internet.
Token-creation is one example of writing a code script that lives on the
blockchain. These scripts are formally known as “smart contracts”, and they
form the building blocks for more than just tokens. They enable developers
to build any decentralized application and in fact have the potential to
revolutionize entire industries.
In the next chapter, we will consider how smart contracts work and look at
some applications.

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 Chapter 7. The Magic of Smart Contracts

We started with Bitcoin and then took a step back to consider Ethereum's
impact. Ethereum's extension on Bitcoin is comparable to a smartphone's
extension on a pocket calculator. Bitcoin is great at solving one particular
problem of conducting financial transactions without banks and
governments. Ethereum, on the other hand, is extensible and can be used to
solve many problems. People can leverage its blockchain and standards for
all kinds of decentralized applications.
In the previous chapter, we discussed contract accounts - Ethereum
accounts housing “smart contract” code that can conduct transactions with
other accounts. We will now define what a smart contract is by first taking a
look at regular contracts.
We're used to interacting with contracts every day. Employees sign a
contract to agree on employment terms, such as hours and compensation. A
bride and bridegroom agree on a verbal contract of marriage, which is then
legalized through a written contract. A middle-man or an intermediary often
creates these contracts and enforces them. In legal systems, lawyers act as
the intermediary. In financial systems, brokers take up this role.
A regular, real-world contract is just an enforceable agreement between
parties. Smart contracts, however, are a bit different. They're not an
agreement that is meant to be "fulfilled". Rather, they are a mechanism to
distribute assets between parties under some agreement.
A vending machine is a common analogy that is used to understand smart
contracts. If someone wishes to buy soda from a vendor at a shop, they tell
the vendor what they want and give them the required cash. A vending
machine removes the need for this middle-man. It takes the cash and a
selection of items as its input and dispenses an item.
In a way, a vending machine is simply redistributing assets. It is moving
cash from the buyer to the seller and distributing products in the other
direction. The great thing about a vending machine is that it does not
require human interference. Once programmed, it can vend items repeatedly
as long as someone inserts cash to trigger it.
Let's consider a different example where a freelance developer offers their
programming services in exchange for Ether, the Ethereum-powered
cryptocurrency. Clients can specify what work they want completed, and
agree to pay some Ether if their expectations are met. To enter this
agreement, they can "lock up" or transfer their Ether into an escrow
account. If they're satisfied, they can release the funds into the
programmer's Ethereum account. Otherwise, they can recall their locked
funds back to their own account.
Let's say that this escrow account was controlled by a program that the
developer himself wrote. The program automatically takes up the client's
funds and locks it into the account. It also handles the releasing of funds to
the correct party, depending on the output. If the program was released
openly, anyone could read through it beforehand and trust it to do the job.
Plus, the program could run over and over, redistributing Ether for multiple
clients at very little extra cost.
The program in this example is comparable to our vending machine. It
redistributes digital assets (Ether and the freelancer's code) between parties.
Smart contracts work similarly. They are programs on the Ethereum
blockchain that distribute digital assets, as long as an agreement is met.
Users can trigger them indefinitely by paying Ether, just like vending
machines with fiat money.
Why wouldn't the programmer just use a freelancing website instead?
Because smart contracts benefit from blockchains. There are no third-
parties locking up funds in escrow accounts. Assets can be distributed
anywhere instantly, avoiding delays and transfer fees. The smart contracts
and transactions are also published on the blockchain and are hence
irreversible and available for inspection.
Anyone who knows how to write a smart contract could program one and
deploy it onto the blockchain for a tiny fee. The only prerequisite is
knowing a smart contract programming language like Solidity or Vyper .
Once deployed, the contract can execute repeatedly. This makes it much
more efficient than relying on human intermediaries.
A more accurate analogy for a smart contract would be a supercharged
vending machine. In reality, smart contracts are much more flexible with
their use. Recall that smart contracts can interact with other accounts,
including other contracts. They can, for example, read balances and transfer
currency between accounts owned by people. With two simple functions -
minting tokens and distributing them - a smart contract can replace the
essence of any bank.
We've mentioned that the ERC-20 standard helps developers to create their
own tokens. The standard is just a format for writing smart contracts. It
specifies what to include in the script to correctly mint tokens, distribute
them, etc. These contracts serve as the backbone for creating new
cryptocurrencies on Ethereum.
Contracts can also call other smart contracts. For example, a contract to
transfer currencies can call a contract that defines a new token. Thus, smart
contracts can redistribute not just Ether but any ERC-20 or ERC-721
tokens.
Let’s list some more examples to realize how widely applicable smart
contracts are. Smart contracts can be used in the real estate industry for
transferring property right “tokens”. They can also be used to release
payments to insurance holders. Or, employers can use them to automate
salary distribution.
On Ethereum, smart contracts are used to develop a wide variety of
decentralized applications or “dApps”, such as games, social apps, and
more. A large chunk of these dApps deal with financial services and are
bucketed under the decentralized finance or “DeFi” industry.
DeFi offers considerable advantages over traditional, centralized finance
applications. It makes financial services permissionless. Anyone with an
Internet connection can borrow or lend crypto, regardless of gender, race, or
other demographics. DeFi also makes financial services more efficient.
Transactions are instantaneous and services are available 24/7/365 because
they’re not reliant on humans. By nature, DeFi is also collaborative:
developers can use each other’s building blocks to launch complex apps on
the same blockchain.
DeFi apps have gained considerable traction because they offer traditional
financial services on modern infrastructure. For example, as of 2022,
lending platform Compound has billions of dollars' worth of currency
deposited into its protocols.[11] Similarly, decentralized exchange Uniswap
processes billions of dollars' worth of currency exchanges per week.[12]
This discussion sheds light on how disruptive smart contracts can be. Users
can call simple code snippets over and over to receive the same financial
services that large banking institutions provide. But, smart contracts have
the potential to realize much grander visions. They can manage large sums
of capital and even the treasury of an entire organization.
An entire wave of organizations is being built on this premise.
Decentralized Autonomous Organizations, or DAOs, use smart contracts for
operation. They are owned by people but use smart contracts to manage
capital and make decisions. DAOs have no CEOs, headquarters, or other
form of centralization.
This concept might sound weird but it is becoming increasingly successful.
MakerDAO is one example of a DAO. It is an organization whose
"product" is a stablecoin called DAI. Anyone can become a shareholder of
MakerDAO by purchasing another token called MKR. This grants them the
right to vote on changes for DAI. Smart contracts then act on the voting by
making changes to DAI's protocol.[13]
In simpler terms, you can buy MakerDAO's "shares", a token called MKR,
to vote on decisions for its main "product", a token called DAI. It seems
complicated, but the bigger picture is that MakerDAO runs by itself. Its
shareholders vote on decisions that are executed by code. DAOs offer a
radical alternative to the traditional organization model, where C-level
executives make decisions from company headquarters.
The magic of smart contracts should now start to settle in. They combine
tokens with the beauty of automation. Adapting them into our daily lives
might take a while because we are hardwired to trust humans more than
technology, especially when it comes to law or money. You might even feel
skeptical of smart contract technology at first. Keep in mind, though, that
all of the blockchain nodes validate contracts and their actions. If you're
convinced by how robust blockchains are, you'll find it easier to weed out
any skepticism.

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 Chapter 8. NFTs in Action

Explaining NFTs
Remember yellow page directories - the thick books that listed telephone
numbers for people or businesses? Millions of people receive copies of the
same directory every year. If someone lost their copy, they could order
another one and receive a book with the same phone number listings.
Because of this property, a single year's directory is “fungible” or
replaceable with other copies of that year.
Now consider any of the phone numbers that are listed in the directory. If
someone called the number, they'd probably be talking to the person who
owns that phone number. No one else has a claim over that particular
sequence of digits, at least as per telephone service companies. Phone
numbers are “non-fungible” or non-replaceable. Their ownership can
change hands, but only one person can own them at a time.
If you think carefully, you’ll see that you don’t own the number itself. The
phone number just represents an agreement between you and the telephone
company. This agreement stipulates that anyone who dials that sequence of
digits will be routed to you. Certain phone numbers might be more
expensive to purchase than others. For example, repeated digits and
numbers spelling a word are more valuable to certain people, which creates
a marketplace opportunity for the numbers.
An NFT is like a phone number in this analogy. It is an acronym for a non-
fungible token, a type of digital asset that is non-replaceable. It is a token
because owning it gives you certain rights, just like owning a phone number
gives you the right to receive calls on it. In our case, the rights are an
exclusive ownership over the digital asset.
Because NFTs are one-of-a-kind, people place monetary value on the rights
of owning one. NFTs crop up in industries where you can create and collect
unique assets that can be digitized. Digital artwork and digital collectibles
like NBA Top Shots are good examples. Here's an example of a digital
artwork sold by the artist Beeple as an NFT for $69 million:

Figure 8: “Everydays: the First 5000 Days”, a digital artwork sold as an

NFT [14]
In simple terms, NFTs are unique digital assets, like artwork and
collectibles, that can be owned and traded with others using
cryptocurrencies. How does everything we've learnt so far fit into this
picture?
Underlying the digital asset is a smart contract written via the ERC-721
standard. The contract code gives life to an NFT’s properties, such as its
uniqueness, ability to be transacted, etc. We've seen many ways in which
smart contracts automate tasks requiring a third-party. With NFTs, a smart
contract automates tasks that an auctioneer might have performed. For
example, the contract handles transferring currency between the old and
new owner.
The properties of the asset itself, such as its name, description and image,
are captured as metadata in the contract. Smart contracts often embed other
terms too, like paying out royalties to the creator upon any resale.
In auction houses, legal agreements prove the ownership of an item.
Blockchains take up this role with NFTs. Any changes in ownership of an
NFT is recorded as a blockchain transaction between the old and new
owner. Like any other blockchain transaction, this transaction is also
validated by nodes. Thus, it is impractical to steal or forge the ownership of
an NFT.
By recording NFT transactions on the blockchain, you are broadcasting
your ownership globally. Of course, public keys mask your real identity.
The blockchain is somewhat akin to yellow page directories here. It is a
public way of keeping track of who owns what digital asset.
Since these assets are digital, you might think you can keep a copy of an
NFT instead of buying one. What stops you from taking a screenshot of the
artwork above, for example? The difference is that you're still not the legal
owner of the NFT ("legal" as per the blockchain). NFTs rely on consensus-
based ownership rather than material-based. It doesn't matter if you have a
copy of the digital asset because that doesn't make you the owner. In fact,
even the real owner isn't actually "storing" a digital asset on a computer or
other device!
A common question that can crop up, then, is why exactly would you want
to own an NFT. There are several answers. In many cases, people cherish
unique assets because of their intrinsic value. For example, the Mona Lisa
is valuable because it is a beautiful work of art. People might be willing to
pay hefty prices for NFTs because they see intrinsic value, or they
appreciate the artist's work or what it represents.
In other cases, people cherish an NFT because of the rights that owning it
grants. Many people value the exclusive ownership of something even if
they find no value in it. This is why people might pay high prices for trendy
artwork or even phone numbers.
The asset might also grant other rights. For example, owning an NFT in a
video game might grant you rights to some power-up, collectible, or
property. As long as there's a market for a unique digital asset, people will
trade it. NFTs chime in to provide a decentralized way of doing that.
Applying NFTs
The NFT community is divided into three parts: creators, marketplaces and
collectors. Each has a simple business model. Creators earn through initial
sales and commissions on resales of their NFTs. Marketplaces earn through
commissions on each NFT they sell. Collectors usually benefit through
appraisals of their NFT's value. They could monetize this appraisal at any
time by selling the NFT at a higher price. Collectors can also buy NFTs
with no intention of reaping monetary benefits.
You can create your own NFT by learning how to write smart contracts.
Follow the ERC-721 standard once you've learnt a smart contract language
like Solidity. There are many online guides on how to do this. An easier
alternative is to use a marketplace that handles the heavy-lifting by
providing a make-your-own-NFT platform. You can then list your NFT on
their marketplace to sell it.
To get started with make-your-own-NFT platforms, you need a crypto
wallet and some Ether. Then, all you have to do is to choose a file you own
that you want to list as an NFT. The file could be an image, a GIF, a video,
a document, a music file, etc. For more inspiration, try searching for
examples of NFTs. People have sold domain names, essays and much more.
After you've selected a file, pick a platform and follow its steps to create
and list the NFT. Three popular platforms are OpenSea , Mintable and
Rarible . The interface to create an NFT on these platforms is easy to use.
All you need to do is upload your file, specify details like the price and title,
and connect your account to a crypto wallet.
These platforms also let you browse and purchase NFTs. Check them out if
you're interested in buying one. You'll still need a wallet and enough Ether
in it to buy any NFT. Before resolving to buy one, make sure you're clear on
your intentions. If you're hoping to make money, keep in mind that NFT
prices are much more volatile than cryptocurrencies.
Regardless of how trendy they stay, NFTs do offer something revolutionary.
They give you the chance to tokenize anything that is unique. Through
blockchains, you can sell these tokens to anyone, verify their ownership and
prevent forgery. Artwork and collectibles may only be the tip of the iceberg.
Wider adoption could result in people tokenizing licenses, certificates and
so much more.

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 Chapter 9. Earn Without Gambling

We now step out of the Ethereum ecosystem and return to a discussion on

earning and investing in crypto. So far, we've looked at a few frameworks
that allow you to invest in cryptocurrencies. We’ve noted that people who
invest in them hope for an appreciation of the asset's value. If this happens,
they can then sell the asset at a higher price and pocket the difference. This
is a simple example of the "buy low, sell high" strategy.
We've also discussed the importance of having a long-term investment
horizon. Looking past day-to-day volatility prevents you from making rash
decisions with regards to buying/selling. You'll find this easier to practice if
you understand the technology behind crypto.
Besides these, however, the book does not delve into any other investment
frameworks. It also does not answer questions such as "What asset should I
buy" and "When should I buy/sell". Such questions are beyond the scope of
this book and there are many other resources that you can look into to find
their answers.
Crypto tokens tend to be unpredictably volatile. Investing in them is akin to
gambling. There are, however, safer systems that reward you for buying a
token and locking it up for a given period of time.
You can leverage these systems with fiat currencies too. Banks offer interest
for locking up money in a savings account, and borrowers do the same for
any money you lend to them. Such systems are mutually beneficial and are
passive ways of earning money.
The crypto industry has two systems that follow this model: lending and
staking. Below, we explain how these two systems work and suggest
resources to get started. It is important to note that these discussions are
included to inform the reader and not to offer any financial advice.
Lending
Crypto lending and borrowing works in a similar fashion to fiat currencies.
There are three parties involved: the borrower, the lender and the lending
platform.
The borrower usually needs a fiat currency, so they deposit a
cryptocurrency as collateral against the borrowed fiat. Over time, they
repay their borrowed amount with interest and get their collateralized
crypto back after the entire amount is repaid.
The lending platform matches borrowers and lenders. It pools
cryptocurrencies from lenders and exchanges them into fiat currencies to
fund borrowers. For its own services, the platform retains a slice of the
borrower's repaid interest, and for the lender's services, it distributes
rewards as a percentage of the amount lent.
You can fit into this picture by becoming a crypto lender. For lending any
unused cryptocurrency, you can yield returns over the period lent. The only
requirement is to lock a certain amount of currency into an account for a
certain period of time. Lending can thus act as a passive source of earning
cryptocurrencies.
Lending, as a system, is an option with fiat currencies too, but for many
people, cryptocurrencies might be preferable. With crypto lending, you
don't need a bank account to get started. Hence, your returns are
independent of factors like credit score or income. If you plan to HODL
(“Hold On for Dear Life”) to a cryptocurrency, lending can help accrue
interest as the currency appreciates.
The most enticing aspect of crypto lending is the interest rate. Expect lower
borrowing and higher lending rates compared to those for fiat currencies.
As a lender, you can expect to earn around 4-8% APY (Annual Percentage
Yield) in interest.[15] For example, if the rate is 5%, you can expect to earn
about $5 on every $100 lent over one year. Some cryptocurrencies even
boast interest rates in low double-digits.
To start lending, choose a platform that provides the service and sign up for
an interest account. The only prerequisite is a crypto wallet to transfer
money from. Usually, you need to complete a Know Your Customer (KYC)
procedure upon sign-up. This helps the platform follow regulations to verify
your identity.
Three popular lending platforms are BlockFi , Celsius and Nexo . You can
choose between platforms based on convenience, trustworthiness and
interest rates. Note that interest rates vary depending on the cryptocurrency
you lend. Usually, lenders receive higher interest for lending stablecoins
like Tether and USDC. To compare interest rates for different lending
platforms, visit https://www.cryptostudio.com/lending-interest-rates/ .
After you've picked a platform, go through the FAQs page to assure
yourself of the process. Remember, lending is much safer than "buy low,
sell high" for generating financial gains. If you lend a stablecoin, you're
minimizing volatility whilst guaranteeing good returns. Even if crypto
lending isn't for you, check out how it works to compare it with the
traditional fiat model.

Staking
In Chapter 3 , we discussed how Bitcoin determines the next block's
validator. Proof of Work challenges all nodes to solve a mathematical
puzzle through brute force. Whoever solves the puzzle first, validates and
pushes the next block onto the blockchain.
The problem with Proof of Work is that it is too energy-intensive.
Computers expend a lot of electricity to try random solutions to the puzzle,
which makes the mechanism unscalable and environmentally unfriendly.
Realizing this, the crypto community developed other ways of picking the
next validator. One of these mechanisms is called "Proof of Stake", which
chooses the next validator based on how much monetary "stake" they've put
into the network. This is different from Proof of Work, which makes the
choice by how much computational "work" a node has put in.
The concept behind Proof of Stake is as follows. Nodes agree to deposit a
certain amount of tokens as a stake to become "validators". This process is
called staking. Validators agree to secure the network by validating and
adding blocks to the blockchain. In return, they reap the rewards of the
block's transaction fees, as well as newly minted tokens.
The network picks the next block's validator randomly. The choice is based
on the amount staked; the more you stake, the more likely you are to be
chosen. Over a long period, this translates to higher rewards.
You might find this process similar to Bitcoin's consensus mechanism.
Instead of computational effort, nodes show loyalty to the network through
monetary stake. The stake acts as collateral that validators must lock in for a
fixed period. Any malicious activity or underperformance results in a loss
of part of the stake, which incentivizes validators to stay honest.
How is any of this relevant from an earning perspective? Mining Bitcoin
through Proof of Work is a great way of earning cryptocurrency.
Unfortunately, it comes with technically high barriers to entry. With Proof
of Stake, anyone can become a validator. You don't need to expend any
electricity or buy special computer hardware. The only requirement is to
deposit a minimum stake in the network.
In simpler words, all you need to do is to buy and hold enough of any asset
that uses Proof of Stake. As soon as you buy the asset, you start earning
rewards. The amount you earn depends on what asset you stake and how
much you buy. In general, the rewards tend to be in single or low-double-
digit percentages.
If you don't have enough tokens for the minimum stake, you can join a
staking pool. These platforms act as a validator by pooling people's stakes
together. They then distribute any staking rewards back to them. Another
option is to use a third-party that offers staking services in exchange for a
small fee. Examples of these platforms are MyCointainer , Stake Capital
and Staked .
The most convenient way to start staking is through crypto exchanges. If
you already have an account with an exchange, all you need to do is to buy
any asset using Proof of Stake. Most exchanges act as a staking pool, so
there’s no minimum amount that you need to buy. Here are links to
Coinbase and Binance's staking policies.
Some examples of assets that use Proof of Stake are Ethereum 2.0, Tezos,
Cosmos and Cardano. You can compare staking rewards for different assets
at https://www.stakingrewards.com/calculator. To learn more about a
particular asset, search "[asset] staking".
Staking is complicated, but it is more environmentally friendly than Proof
of Work. It is growing in popularity because it paves a much more scalable
path for blockchains to achieve consensus. If you want to earn returns while
contributing to an asset's future, staking might be a good choice for you.
Besides lending and staking, you can also save your crypto asset in a
savings account. Crypto savings accounts tend to offer higher interest rates
than fiat alternatives. Rates are flexible but tend to be in low single-digit-
percentages. For example, Donut and BlockFi offer up to 4% for saving
assets in their high-yield accounts.
Lending, staking and saving are safe ways of generating returns by locking
a crypto asset. If you seek returns without the risk of volatility, you should
consider one of these options.

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 Chapter 10. Arbitrage, Airdrops and More

This is the last chapter that explores new crypto concepts. We wrap up our
discussion on earning by looking at three budding areas: arbitrage, faucets
and airdrops. These methods are niche, but still offer promising alternatives
for earning crypto.

Arbitrage
Arbitrage is a technique where you can profit from price differences for the
same asset across markets. It can apply to any priced commodity, including
crypto assets. Let's look at a hypothetical example for a cryptocurrency:

Exchange X allows you to buy a cryptocurrency for $100/coin

Exchange Y allows you to sell a cryptocurrency for $105/coin
The simplest arbitrage strategy that you can devise is to buy one coin from
X at $100, sell it on Y at $105, and pocket the difference of $5. You could
even scale this strategy by conducting many large trades at the same time.
Opportunities for arbitrage are present wherever there are price
discrepancies. These differences occur because of inefficiencies in different
markets. For example, different exchanges might have different volumes of
an asset traded at any particular time.
What's the catch? Opportunities can disappear quickly because of market
forces. As more people pocket the $5 from the example above, demand for
the coin would increase on X and decrease on Y. Prices would then
converge between $100 and $105 until both exchanges offer the coin at the
same price.
Another problem is that trading, transfer and withdrawal fees can easily
diminish profits. With excessive trading, most, if not all of your profits will
be absorbed as fees on crypto exchanges. You can expect to lose at least 1-
2% of the trading amount in fees. Arbitrage is thus profitable only when the
price difference or “spread” for a currency is higher than the fee percentage.
These two problems make crypto arbitrage quite obscure. Finding large
price differences consistently is difficult. Luckily, though, there are tools
that list the best buying and selling prices of an asset across exchanges. One
example of such a tool is https://cryptoradar.co/ .
While the spreads might seem low, remember that they yield an
instantaneous profit. Unlike lending or staking, you gain returns as soon as
all of your trades are executed. Spreads listed online don't account for
exchange fees though, so keep an eye out for differences above 3%.
If you arbitrage crypto assets, exercise caution with your timing. Crypto
asset prices can be more volatile than other assets. Trades can also take up
to 10 minutes to execute. In that tiny timeframe, prices can fluctuate enough
to kill your entire spread. Limit your exposure to arbitrage only to what you
can afford to lose in a single trade.

Faucets
Another growing area associated with earning crypto are faucets. Some
online applications pay you to perform tasks in exchange for monetary
rewards. This is different from freelancing in that the tasks aren't skill-
based. Instead, you're expending time on simple tasks like playing a game
or verifying CAPTCHAs. Crypto faucets are applications that reward you in
cryptocurrencies for completing these microtasks.
The name "faucet" comes from the low value of rewards that these
platforms “leak” to users. Usually, the returns on your invested time aren't
high enough to make a reasonable amount of money. For the simplest tasks,
you can expect to make about $5 in a few hours.
Some platforms, however, improvise on faucets’ drawbacks by integrating
the task into your daily life or offering personal utility from completing it.
Here are a few examples of such platforms that reward you with crypto
tokens:

Presearch (search engine that rewards you per search)

 Brave Browser (web browser that rewards you for usage)
Coinbase Earn (platform that rewards you for learning about
crypto)
Publish0x (platform that rewards you for reading/writing about
crypto)
1729 (newsletter that rewards you for learning skills)
If you're researching crypto faucets, beware of scams that pose tasks as
clickbait. Faucet scams usually lure you into depositing money from your
wallet before you can complete their tasks. Watch out for that. In general, to
protect yourself from any crypto scam, make sure you’re not revealing
personal information or depositing money for a service that you don’t trust.
Going through forum threads can help you keep an eye out for common
crypto scams.
Another alternative to faucets and microtasks allows you to earn by
bringing new business to crypto companies. You can do this through these
companies’ affiliate or referral programs. Pick a crypto service you use and
search for "[service name] affiliate programs" to get started.

Airdrops
In the crypto industry, the term "airdrop" takes its name from real-life
parachute supply drops. An airdrop is a distribution of free tokens to certain
individuals. New token networks use it as a way to generate PR or to
increase their awareness.
To receive an airdrop, you usually have to complete some tasks. Examples
include sharing a social media post and reading documentation. In
exchange, the network "airdrops" a fixed amount of the token directly into
your wallet.
Airdrops can be a great way for new tokens to expand their base of
evangelists. While the tokens may be of little value during the airdrop, their
price could appreciate a lot over time. The only catch is that most tokens are
doomed to drop in value over the years, so your efforts in completing the
task might go to waste.
Note that airdrops are not the first time that a token is offered to the public.
The first issuance of a token is known as an Initial Coin Offering, or an
ICO. It involves buying the new token instead of receiving it for free.
Airdrops are just fixed bounties that you receive from a new network after it
has issued an ICO.
There are very few prerequisites to receive an airdrop. Many tasks involve
social media and thus require active accounts on Facebook, Twitter, etc.
You may also need the Telegram app to join the network's discussion group.
Once you've completed the task, you send in proof of completion. This is
done through a forum or Google form, where you list the proof and your
wallet address to receive the drop.
Some forms ask you to share personal information, like your email address.
Beware of such airdrops. In any case, do not share your private key or other
sensitive information. If you're looking for legitimate airdrops, try going
through an aggregator platform like Airdrops.io .
Arbitrage, faucets and airdrops are not as glamorized in the crypto
community. This is partly because they aren't as profitable and partly
because they have minor hitches. However, it is still helpful to understand
how their rewarding mechanisms work. It might even spark inspiration for
further reading or research!
The next section wraps up everything we’ve covered so far. It also lists
further steps to deepen your interest in crypto.

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 Conclusion

We've tracked the crypto industry all the way from its beginnings to its
latest developments. The industry was born through Bitcoin, a digital
currency using cryptography and a decentralized ledger for recording
transactions. It has come a long way since. Blockchains have unlocked new
applications in tokens and all sorts of value exchanges. Smart contracts
meld into this picture by modernizing lending, art and even corporations.
The crypto industry has held a strong and growing base of evangelists and
HODLers. These users choose to trust a group of computers rather than
banks and governments. On the other hand, there are those who deem
cryptocurrencies to be volatile, untrustworthy assets.
The debate between both sides is never-ending. One thing, though, seems
inevitable: crypto will not simply die away. By design, crypto tokens are
meant to be decentralized and maintained by their proponents. They cannot
be "shut down” because they aren’t controlled or owned by any central
party. They are based on a protocol that will operate as long as there are
people using it.
The fact is that there will always be people who desire decentralized
transactions. Part of technology's nature is to replace old centralized
systems. We’ve already seen this through the Internet. The point is that
crypto isn’t something to be debated over but rather something to be
accepted as one of many new technologies that are likely to persist.
Acceptance doesn’t mean replacing fiat currencies altogether. Rather,
crypto should be considered as a supplement to your lifestyle.
Right now, the industry is still in a nascent position. Blockchains are being
scaled and products iterated, like the early days of the Internet. In a decade,
the crypto industry may take on a very different shape. This book aimed at
explaining the foundations that future applications will build upon.
In its current stage, the industry has a multitude of tokens and decentralized
applications. It is very likely that only a few of these tokens and
applications will emerge as long-term "winners". The contents of this book
should help you make smarter decisions on what winners to bet on, whether
that’s as a user, investor, or even as a creator.
There are many paths that you can follow from here. You can dip your toes
into currencies by getting a wallet and opening an account with a crypto
exchange. You can also try out NFTs, lending, or any of the other amazing
applications discussed in previous chapters. If you're curious about other
topics like taxation and trading, there is plenty of literature to browse
through online.
Finally, if you're aiming for a more technical insight, go straight to the
source. The Bitcoin and Ethereum whitepapers provide good introductions
to their namesake ecosystems. You can also browse through whitepapers
written for other tokens that you find interesting.
The crypto game is a long one to play, so don’t think of it as a “get rich
quick” scheme. Instead, treat it like any new technology: with caution
alongside curiosity. Follow it over a long period of time, use it with low
amounts of exposure and make sure you keep learning throughout.

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 Author’s Note

This book started off as a haphazard collection of notes that I wrote to teach
myself the basics of crypto. When I first dug deeper into blockchains and
cryptocurrencies, I was amazed by how revolutionary they were. My
intentions behind writing this book were to share this amazement with as
many people as I can.
I believe that there is a huge knowledge gap between those who understand
crypto and those who don't. Part of the reason this gap exists is that there
aren’t enough free resources that explain the technology in simple terms.
My hope with Fundamentals of Crypto is to bridge this gap.
I released this book at a minimal charge and I plan to keep it that way. All I
ask in return is that you share it with those who would benefit from its
learnings. If you enjoyed this book, please consider writing a review on
Amazon or other platforms. It really makes a difference. You can also share
your feedback with me at [email protected] . I hope you
enjoyed reading this book as much as I did writing it.
Aryan Bhasin

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 References

[1] “The History of Money.” PBS , Public Broadcasting Service, 26 Oct.

1996, https://www.pbs.org/wgbh/nova/article/history-money/ .
[2] Nakamoto, Satoshi. Bitcoin: A Peer-to-Peer Electronic Cash System .
https://bitcoin.org/bitcoin.pdf .
[3] http://blockchain.com
[4] “r/Bitcoin.” Reddit , https://www.reddit.com/r/Bitcoin/ .
[5] Global Findex . The World Bank, https://globalfindex.worldbank.org/ .
[6] “Money Laundering.” United Nations : Office on Drugs and Crime ,
https://www.unodc.org/unodc/en/money-laundering/overview.html .
[7] WeWork Starts Utilizing Cryptocurrency as Form of Payment .
WeWork, https://www.wework.com/ideas/newsroom-landing-
page/newsroom/posts/wework-starts-utilizing-cryptocurrency-as-
form-of-payment .
[8] “Bitcoin Terms & Conditions.” Expedia ,
https://www.expedia.com/Checkout/BitcoinTermsAndConditions .
[9] [ANN] Ethereum: Welcome to the Beginning ,
https://bitcointalk.org/index.php?topic=428589.0 .
[10] https://ethereum.org/en/whitepaper/
[12] Compound , https://compound.finance/ .
[13] Uniswap Info . https://info.uniswap.org/ .
[13] MakerDAO Documentation , https://docs.makerdao.com/ .
[14] Beeple's Masterwork: The First Purely Digital Artwork Offered at
Christie's . Christies, 11 Mar. 2021,
 https://www.christies.com/features/Monumental-collage-by-Beeple-is-
first-purely-digital-artwork-NFT-to-come-to-auction-11510-7.aspx .
[15] “Crypto Lending Rates.” DeFi Rate , https://defirate.com/lend/ .

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 Links and Resources

Chapter 5
Wallets
● https://metamask.io/ (software crypto wallet)
● https://www.exodus.com/ (software crypto wallet)
● https://bitcoin.org/en/choose-your-wallet (quiz for choosing
Bitcoin wallet)
● https://trezor.io/ (hardware crypto wallet)
● https://www.ledger.com/ (hardware crypto wallet)
● https://www.cryptowisser.com/wallets (wallet comparisons)
Exchanges
● https://www.coinbase.com/ (crypto exchange)
● https://www.binance.com/en (crypto exchange)
● https://www.gemini.com/ (crypto exchange)
● https://cryptoradar.co/ (compare crypto exchanges)
● https://www.cryptofeesaver.com/ (compare crypto exchange fees)

Chapter 7
 ● https://docs.soliditylang.org/ (smart contract programming
language)
● https://vyper.readthedocs.io/ (smart contract programming
language)
● https://compound.finance/ (decentralized lending/borrowing
platform)
● https://app.uniswap.org/ (decentralized crypto exchange)

Chapter 8
● https://opensea.io/ (NFT marketplace)
● https://mintable.app/ (NFT marketplace)
● https://rarible.com/ (NFT marketplace)

Chapter 9
Lending

● https://blockfi.com/ (crypto lending platform)

● https://celsius.network/ (crypto lending platform)
● https://nexo.io/ (crypto lending platform)
● https://www.cryptostudio.com/lending-interest-rates/
(comparison of crypto lending interest rates)
Staking
● https://www.mycointainer.com/ (staking service platform)
● https://www.stake.capital/ (staking service platform)
● https://staked.us/ (staking service platform)
● https://www.stakingrewards.com/calculator/ (staking rewards
calculator)
Saving
● https://www.donut.app/ (crypto savings platform)
Chapter 10
● https://airdrops.io/ (list of crypto airdrops)

Conclusion
● https://bitcoin.org/bitcoin.pdf (Bitcoin whitepaper)
● https://ethereum.org/en/whitepaper (Ethereum whitepaper)

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 Glossary

51% attack An attack where a computer takes control of

more than 50% of the crypto network's
computing power

airdrop A distribution of free crypto tokens to people,

usually after they complete a promotional task

arbitrage A technique of profiting from price differences of

an asset across different markets

Bitcoin A cryptocurrency invented by Satoshi Nakamoto

blockchain A collection of transaction blocks ordered

chronologically

centralized controlled by a single party

contract A type of Ethereum account with its own

account balance, typically containing smart contracts

crypto A platform that allows you to exchange crypto

exchange assets and fiat currencies with each other

crypto faucets An application that distributes small crypto

rewards in exchange for completing simple tasks

DAO An organization with no central authority that

uses smart contracts to execute decisions

dApp An application built on another blockchain

(usually referring to the Ethereum blockchain)
database A collection of information stored in a computer
system

decentralized distributed across several computers

DeFi A financial application built on another

blockchain

digital A mechanism used to prove the legitimacy of

signature transactions (or any message in general)

double A problem where the same digital token or coin

spending is spent more than once

ERC-20 A technical standard on Ethereum used to create

your own crypto tokens

ERC-721 A technical standard on Ethereum used to create

non-fungible tokens (NFTs)

Ether The cryptocurrency native to Ethereum

Ethereum A scripting system with its own blockchain to

support other decentralized applications

fungible Replaceable or interchangeable

gas The fees paid on the Ethereum network to conduct

transactions

hash A string of random characters used to identify some

longer piece of data

HODL Acronym for "Hold On for Dear Life"

ICO The first issuance of a new crypto token, used for

raising funds
key A piece of information used in cryptography and
generally represented as random characters

ledger A collection of accounts and their transaction

records

miner A maintainer of a crypto network that validates

transactions in exchange for rewards

NFT A unique digital asset that can be traded on

blockchains through its underlying smart contract

node A computer system participating in a network

peer-to-peer A network of computers that share files and

information with each other

private key One of two keys used in public-key cryptography.

This key is known only to the user

Proof of A mechanism to choose who validates transactions

Stake based on monetary stake

Proof of A mechanism to choose who validates transactions

Work based on computational effort

public key The other key used in public-key cryptography. This

key is known to everyone
smart A mechanism for distributing digital assets between
contract parties under some agreement

stablecoin A type of cryptocurrency whose value stays fixed

because it is pegged to stable assets

token A discrete object that represents some sort of value

transaction A transfer of monetary value from one account to

 another

wallet A place to store your private keys safely and send

and receive crypto assets

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