What Bitcoin is
Back in 2008, the Bitcoin whitepaper was penned by the anonymous Satoshi Nakamoto. Since then, Bitcoin has become a cultural zeitgeist and climbed its way to over $50,000. But what is Bitcoin, and how does it work? Bitcoin is digital money that was created as a solution for peer-to-peer (P2P) transactions - a decentralized solution with no middlemen, bank fees and waiting for funds. Bitcoin is backed by the blockchain, which is a term that describes an immutable public database holding the history of every Bitcoin transaction - forever. If one wished, they could go through the blockchain and view the very first transaction that used Bitcoin, although this might take a long time to find. Since Bitcoin’s inception, its price has risen a tremendous amount, mainly due to speculation on cryptocurrency exchanges. However, more recently investors have decided Bitcoin can serve as a digital store of value, similar to how gold is a store of value for many nations. As this information has spread, more investors have taken a liking to Bitcoin and cryptocurrencies as a whole, something early adopters might have never imagined. While Bitcoin was first hailed as a P2P solution, many have run with this store of value thesis and consider it to be the digital gold. Bitcoin was the very first cryptocurrency, and many have tried and failed to replicate its success. While there is only one true Bitcoin on the market - 21 million, to be exact - Bitcoin has led the way for thousands of other coins to come after it. The entire cryptocurrency market cap is over $2.5 trillion, all thanks to Bitcoin.
What Eth is
Ethereum is a blockchain that utilizes Proof of stake (PoS) algorithms to validate transactions. Created in 2013 by Vitalik Buterin, Ethereum was made out of a need for decentralization. Buterin had found himself feeling disgusted by the evils of centralized entities, and wanted to create something after connecting to the idea of Bitcoin. Many refer to the cryptocurrency as Ethereum, yet the proper name is ‘Ether’ as the network is named Ethereum and Ether powers the network. Ethereum can be viewed as a decentralized network of computers that run the Ethereum Virtual Machine (EVM) - the engine behind the whole Ethereum network. While Bitcoin is seen as a digital store of value similar to gold, Ether is a token that provides utility to users. To approve transactions and interact with the Ethereum network, users must spend Ether to pay for fees, which keep the machine churning. There are a variety of actions users can take on the network, thanks to smart contracts - blockchain programs that perform a series of actions. As the cryptocurrency ecosystem has grown, so has the number of users. Ethereum processes over a million transactions a day - the most of any blockchain. Due to the increasing number of users, alternative Layer 1 blockchains have popped up, hoping to capture Ethereum’s vast market share. As the competition has heated up, Ethereum developers have been working on a solution known as Ethereum 2.0. This series of changes seeks to “fix” the high fees and free up space for more transactions to go through, therefore resulting in a positive experience for users. Ethereum aims to be the money of the internet, providing a decentralized solution for a world overrun with centralization and toxic monetary policy.
What DAI is
In the cryptocurrency world, a stablecoin is a unique type of token that has its value pegged to the dollar. Created by MakerDAO, DAI is a stablecoin that is decentralized, as opposed to stables like Tether (USDT) and USDC. What is DAI, and how is it different from other stablecoins? DAI strives to be one of the few stablecoins that is actually backed, with various crypto assets locked to ensure this 1:1 ratio remains backed by some intrinsic aspect. As DAI is a stablecoin that lives on the Ethereum blockchain, its collateral is denominated in Ether and used to determine the ratio DAI is currently sitting on. Because DAI is decentralized, there is no one entity that can change the supply in any manner - only smart contracts have this capability. The benefits of a decentralized stablecoin may largely go unnoticed, mainly because all stables are the same price. However, in the event of some form of large scale bank run, collateralized stablecoins would win out and ultimately keep their investors’ (holders’) money safe and secure. There are various crypto stablecoins, but few operate as DAI does. This first of its kind decentralized stable has made its way to the top 25 crypto currencies by market cap while becoming one of the most reputable stablecoins on the market.
How to add and withdraw money from an exchange
There are tons of different ways to buy cryptocurrency, and thousands of different coins to choose from. If you don’t know anything about crypto and want to dive in, things can be pretty overwhelming. Let’s jump in. Exchanges like Binance and Coinbase make it easy to deposit money. You can use your bank account, PayPal or even a wire transfer. For most, using a bank account will probably be the easiest and fastest way to send money to an exchange. Centralized exchanges make the process easier, as most of their users will be entirely new to the crypto space, and won’t have any existing crypto on a wallet to mess around with. Once you’re ready to get started, you can verify your personal info with an exchange and wait for an approval, which could take less than an hour or up to a week - it really just depends on where you’re at and what exchange you’re using. After this, you can add your bank account info to allow for deposits and withdrawals. Most - if not all - banks are supported, but it might take time for an approval. Once you’re ready, you can deposit whatever amount you feel comfortable investing onto the exchange. From here, your exchange will show you a USD balance (assuming you’re in the United States) and allow you to trade crypto freely. It’s that simple. Once you’ve had enough and want to take some profits back into USD, you can withdraw just as easily. Just make sure to sell your tokens back into USD and specify the withdrawal amount, then wait a few business days. Voila! Just like that, you have interacted with a centralized exchange, and hopefully made some profits in the process. Happy trading!
Difference in forms of basic trading (e.g. spot and margin)
Crypto traders often get a lot of flack for their levels of risk tolerance, if they even possess any. While the cryptocurrency market is arguably the most volatile in the world, of course this community of degenerates figured out ways to introduce more risk - and even more gains. In trading terms, a spot position is one that refers to the direct purchase of assets. Whatever you buy is the most you can lose. Say you wish to buy $100 of Bitcoin with your new wallet. To do so, you could head over to an exchange like Binance and purchase this and receive the coins within minutes or less - easy as that. On the other hand, margin trading is a bit different - think of it as a means of increasing your risk in order to boost your upside, which can also lead to an increased downside. Margin offers speculators the ability to borrow funds in order to artificially increase a position size. Many exchanges offer leveraged trading up to as much as 25-50x, although levels that high can be very dangerous to the portfolio of an inexperienced investor. When a margin position goes up, traders can experience big gains very fast. After all, if you’re on 10x leverage and something goes up a lot, you’re going to make much more money had you stayed with spot trading. However, the opposite is also true. When a margin position goes down, a trader can get liquidated, losing their principal investment. These are just some of the ups and downs of margin trading - it’s important to gauge how this strategy might fit into your portfolio and investment thesis before you dive in with all of your money. Despite crypto’s volatility, traders can’t seem to get enough. Margin trading doesn’t usually work out for inexperienced traders over the long term, despite how easy it can be to 10x a smaller amount on your first or second try. Just like with any risky investment, something like margin should be utilized with only a small portion of funds and typically remain under 5x leverage. There are benefits to both strategies, as holding spot can often assist investors in downturns due to the minimal risk involved by comparison. You can’t get liquidated holding Bitcoin in a hardware wallet.
What the definition of a ‘shit coin’ is
In the world of crypto, it can be very difficult keeping up with every new coin or protocol that pops up everyday. Due to the ‘wild west’ atmosphere of crypto, a term has been crafted to describe a coin with very little - if any - purpose: the ‘shit coin.’ In the simplest of definitions, a shit coin can be described as a coin that possesses no inherent value and is ultimately a vehicle for pure speculation. Shit coins are created everyday, and there are far too many of them to create a comprehensive list. Shit coins typically relate to a popular topic at the time (like Elon Musk or Doge) and hold a very low price due to exorbitant supply, often having too many digits to count. Shit coins usually see a very brief pump, rising in price some exorbitant amount whether it be from a paid YouTube video or some influencer shilling it. There is no rhyme or reason to shit coins, which has made them such an odd occurrence in the now well-known crypto space. 2021 saw Dogecoin rise in price to nearly a dollar, becoming one of the top ten cryptocurrencies by market cap. Another shit coin that has done extremely well is the Shiba Inu coin, which saw gains that eclipsed Doge. Because of these projects’ immense successes, many spin offs were created in attempts to replicate the price appreciation of these basically worthless assets. In the traditional financial markets, companies must go through serious auditing to get listed on the market. Because of the innovations of blockchain technology and smart contracts, shit coins are able to be created at the drop of a hat - it’s that easy. While most (if not all) shit coins ultimately fail on a long enough time horizon, they’re still very interesting and fun to speculate on. Due to their low liquidity on exchanges, it’s often difficult for anyone to make a profit on it, and shit coin creators regularly rug pull their “investors,” sometimes for millions of dollars. Because of the challenges that come with speculating on shit coins, those who are thinking of buying should do their due diligence and avoid putting in large sums of money. There are many opportunities for making gains in the crypto market, and shit coins should generally be avoided unless you really know what you’re doing.
How to send crypto currency peer-to-peer
Bitcoin was created as a solution to solve the issues involving peer-to-peer (p2p) transactions. Due to the innovative blockchain technology, anyone from around the world can utilize the speed and efficiency of crypto to make payments or send money to a friend. In the world of traditional finance, transactions can take 5-7 business days - sometimes longer - and involve a multitude of hoops to jump through. Crypto fixes this. Curious to know how you can send money to family or friends? Let’s dive in. Because of the innovation that’s occurred in crypto since its inception in 2008, there are now a ton of ways to accomplish these p2p transactions. Some of the easier ways to do this involve linking a bank account to a centralized exchange like Binance or Coinbase and depositing funds. After you’ve done this, you’re free to choose whatever coin you wish to buy, as long as it’s available on the exchange you’re using. Before sending cryptocurrencies to other addresses (the identifier of a crypto wallet) it’s important to make sure you’re sending money to the right one. For example, Ethereum addresses - which have 64 characters - are different from Bitcoin addresses, which only have 26-35 characters. When it’s time to send your money, you can ask the recipient of the crypto to send you their address. Websites typically make it easy for you to simply copy the series of letters and digits to your keyboard, that way you don’t make a mistake and type the wrong address. On centralized exchanges there can be small fees associated with this, or transaction fees depending on what blockchain you’re using. After a short amount of time to allow the blockchain to approve the transaction, you’re all set! Just to be sure, ask the recipient if they see the balance in their wallet. On applications like Metamask, they might need to add that specific token to their wallet to view the balance. If they’re unable to do this, they can use a block explorer like Etherscan to view their token balances.
What a .eth address is and how to set one up
If you’ve spent any time on Crypto Twitter, you have probably seen an account with a ‘.eth’ at the end of their username. But what is this odd suffix, and how is it of any use to you in a web3 world? Just as web domains are unique on the internet, the Ethereum Name Service came up with a product that could provide the same utility for crypto users and fans. Based on the Ethereum blockchain, the team set out to create a way to map human identity or personality to an Ethereum address. An address is a series of 64 characters, and belongs to anyone who has interacted with the Ethereum blockchain before. Some examples of a .eth address could be ‘Sarah.eth’, ‘Adidas.eth’ or even something completely random, like ‘eyfjsiwrh.eth’ - the possibilities are almost endless. ENS domains allow for users to market themselves in a newly forming Web3 world, all while possessing ownership over the domain for as long as they’ve paid for. So, how can you get your hands on one of these .eth addresses, and how can you share it with those in the crypto world? To start out, you’ll need some Ethereum. You can either purchase this from a centralized exchange like Coinbase or buy some off of a decentralized exchange like Uniswap. After this, you can set up a wallet. Many blockchain enthusiasts use the Metamask wallet, which has its own Google Chrome extension. Depending on what blockchain you’re using, you’ll have to choose your network. By default, Metamask starts on the Ethereum mainnet. After this, you can navigate to the ENS website and search for one you want. Once you find what you’re looking for, feel free to register the name for as long as you want. It’s that simple. You can use a website like Etherscan to assist you while the transaction processes, and your address will be marked as the owner of the domain. That’s it! As more users and corporations flock to Crypto, ENS domains could be a way to stake a claim in the Web3 landscape. Just as DNS names took off in the earlier days of the internet, owning an ENS could prove to be a solid decision in the years to come.
What DeFi insurance is
Insurance is a way for people to protect themselves from potential risks. You buy insurance from an insurance company for some fee, and if an accident occurs, the company compensates you. Insurance companies are essentially a way for people to socialise their risks (e.g. illness, by pooling their money together. In DeFi, just as there are decentralised protocols built for people to lend out and/or exchange their tokens, there are insurance protocols where one can buy insurance against accidents on the blockchain — or put their funds in the insurance pools to cover others from losses in exchange for rewards. Insurance is still a nascent and fairly niche sector in crypto. DeFi insurance products typically give cover for smart contract failures (exploited bugs). While this is certainly a considerable risk when using DeFi in general, the cost of buying DeFi insurance on top of (for example) a DeFi loan is simply not worth the extra work for many people. As the industry evolves, we may see a broader use of insurance contracts issued on blockchains. Ironically, decentralised insurance applications may be exploitable themselves.
What a token is
The cryptocurrency market is filled with thousands (if not tens of thousands) of coins. With everything from dog coins to lending protocol based coins, there’s something for every kind of investor. These coins can often be referred to as tokens, but there are some major differences between the two concepts - let’s dive in. While a coin is something that is often used as a medium of exchange. Whether this be a peer-to-peer (p2p) transaction at a coffee shop or something more complicated like receiving a paycheck, currencies are everywhere and a major part of our lives. Bitcoin - the most renowned cryptocurrency - was created as a solution for digital p2p payments. While this hasn’t caught on a global scale (partially due to the vast innovations in crypto as a whole), Bitcoin was able to provide a new way to exchange money. Other examples of coins include Ethereum, Litecoin and Monero, each possessing different functionality and capabilities. A token is something that’s a little different, with the definition changing over time as crypto has evolved. Primarily, a token is an asset that has been built overtop an existing blockchain. Tokens can be used with decentralized apps (dApps) like Uniswap or Compound and their respective tokens, UNI and COMP. These tokens possess unique functionality, some of these being governance and yield generation. Where coins are sometimes limited in functionality - see Dogecoin - a token is something much more interesting or engaging to the web3 native. The burgeoning landscape of dApps has changed finance forever, sparking the movement known as decentralized finance (commonly referred to as DeFi). There are even non-fungible tokens (NFTs) which represent digital ownership on the blockchain - whether this be something as simple as a picture of your dog or a new song from an artist. Hopefully you’re seeing the vast differences between these assets and all that is possible with the innovations in crypto. Despite the relative youth of the crypto space as a whole, recent DeFi protocols have been able to change the perception of what tokens can do. Just look at the recent shift in interest towards Curve Finance, thanks to their vote escrow tokenomics which provide significant value to token holders. Tokens can even serve as in-game currencies, especially in games like DeFi Kingdoms and The Sandbox. As more users flock to crypto to experience these play-to-earn games, expect more unique token uses in crypto. While most of us might be in crypto to see coins go up in price, there is no shortage of impressive tokens to get your hands on in the meantime. So get out there and interact with different ecosystems - you might be surprised with all the unique tokens you find!
How to swap tokens on a DEX
There are currently a variety of ways to buy cryptocurrencies for the average user. One could turn to a centralized exchange (CEX) - like Binance or FTX - or choose to dive into the murky waters of decentralized finance (DeFi) and check out a decentralized exchange (DEX). Simply put, an exchange is a place where buyers and sellers of tokens can meet up to perform an exchange (no pun intended). However, there are some big differences between a DEX and a CEX, so let’s break down some of the key differentiators. Whereas a CEX typically consists of a centralized power structure (think of SBF running FTX or CZ running Binance), a DEX can be composed of an entirely anonymous team. Heck, nobody to this day knows the identity of Sushiswap’s Chef Nomi. While a CEX might have more going on behind the scenes, in an office or board room, a DEX is stationed on the blockchain, operating under a true peer-to-peer system. Uniswap and Sushiwap are two examples of popular decentralized exchanges, offering a vast selection of coins often unavailable on a CEX and an easy to use frontend. While a DEX operates based on smart contracts created by the team, they are fairly intuitive to the crypto-native individual. On a DEX, users can choose to trade how they wish, with functionality to adjust settings like slippage or gas fees for your swaps. Another huge benefit of using a DEX is the ability to operate cross-chain. While a CEX offers a simple frontend that shows you all of the possible coins to buy, there isn’t an option to operate on a specific blockchain you desire. There are fees that come with transacting on a CEX, and while they can vary, are often pretty straightforward and subject to little variation. On a DEX, the possibilities are much more vast. If you’re on Uniswap, you can choose to trade on Ethereum, Avalanche, Binance Smart Chain and more networks, offering even more coins and trading opportunities. While both types of exchanges operate in similar ways, there are more ways to interact on a DEX, which is often the go-to place to trade for the crypto-native. Sure, it’s easier for someone new to crypto to hop onto a CEX, verify their identity and buy some coins, but in the long term many would like to see DEX volume make up the entire market. It’s important to have options when it comes to trading, which is why you should weigh the pros and cons of these exchanges before you try them. Even if you make the wrong decision, you can always send money from one to the other pretty easily - that’s just one of the benefits of blockchain tech. Happy trading!
Traditional digital markets, like the NASDAQ stock exchange (as well as centralized crypto exchanges) work with matching engines built for so-called Limit Order Books: buyers and sellers have to offer up their goods at a certain price in a certain quantity, and wait to be matched with someone else to conduct a trade. This may sound simple in principle, but these orderbooks are a very competitive landscape where professional market makers compete with each other at split second speeds — it has been practically impossible to replicate this model on today's decentralized blockchains such as Ethereum.
The loss produced by providing tokens as liquidity to an AMM instead of just holding them, if the tokens diverge in price. Divergence loss is the difference between the value of an LP position vs the same account holding fixed amounts of those same tokens
Starting with Bitcoin, cryptocurrencies have introduced a truly novel form of money (and more) to the world. The thing which unites and makes this asset class special is the technology referred to as blockchain; a set of algorithms and rules that constitute a distributed digital network where each participant (e.g. holder of a cryptocurrency) can be sure that their balances are correct and accessible — without trusting a central intermediary, like a bank. Ethereum, the second biggest cryptocurrency today, proved that blockchains are useful for more than just simple money transfers; it allows people to build decentralized apps, which, in less than a decade, has resulted in an explosion of Decentralized Financial (DeFi) protocols, and tokens of all kind, including NFTs. There are thousands of cryptocurrencies today with many created each day — it is important to understand the purpose and background of a token before buying it.
The simple acts of Lending and Borrowing are prominent financial primitives that form the basis of many more complex financial products. Just as there are DEXes operated by Automated Market Makers that allow people to swap their coins seamlessly with each other, there are numerous lending platforms in DeFi.
Broadly speaking, leverage in finance refers to using borrowed funds to purchase something, with the expectation that the profits on the purchase exceed the borrowing costs. Leverage can come in various forms: financial derivatives like futures and options, mortgages for private persons. There are numerous platforms that give people access to leverage, both centralised and decentralised.
Liquidity is basically the abundance of a coin in a market. DEXes typically rely on liquidity pools, managed by AMMs, as opposed to the Limit Order Book system prevalent in centralized digital exchanges where professional market makers sell and buy from people with proprietary algorithms.
Staking crypto essentially means locking it up for future rewards — much like a savings account. The complexity of staking one's crypto, as well as the risks and rewards can vary depending on the coin and the place where it is staked.Bitcoin's blockchain relies on a consensus mechanism called Proof of Work, where the validity of the network is maintained by having people use their computers for solving math problems, roughly speaking. Proof of Stake is an alternative consensus mechanism that aims to alleviate the computational burden from a blockchain network via having people put their coins on the line instead. PoS networks include Solana, Avalanche and ETH2.0, amongst others. Setting up a Proof of Stake client can be quite technical and does not fit in the scope of this explainer. However, staking in the broader sense has been widely utilized by DeFi apps for various purposes, in which case it is as easy as clicking a button and paying some fees; like a savings account in the bank, but more transparent!
An option is a financial contract that give its buyer the right, but not the obligation, to buy or sell an underlying asset for a specific price (called _strike price_) on (or possibly before) a specific time. The most widely used exchange for trading crypto options is Deribit. They offer European style options for Bitcoin and Ethereum. There are also several DeFi protocols that allow people to buy or sell options of smaller cryptocurrencies, as well as protocols that automatically execute various options strategies in order to generate yield on people's deposits.