Table of Contents
There are 3 worlds right now.
- The legacy world.
- The new decentralized world.
- Folks being left behind.
It was incredibly hard for 3s to become 1s. It’s much easier to become 2s.
We tend to hyperbolize everything these days. But I really do believe we’re living through a once in a lifetime transition. And everyone can participate, at least theoretically.
But the world of crypto and decentralized finance is super confusing. I’ve given presentations to my own team, and organizations at Kellogg, and to the employees of companies of my friends. These are incredibly smart people, and even for them it’s hard to wrap their minds around.
There is a window of opportunity to help level the economic playing field, at least a bit. It requires some new knowledge and new skills, and a healthy dose of personal information security. But it’s possible. Even with a small amount of money.
We need more 3s to become 2s. And I’d like to help.
This is a small course walking folks step by step through the process of getting into crypto and decentralized finance.
I believe in order for crypto to fully realize its potential it needs to be demystified. It's too hard to learn how to get a wallet, get tokens, and participate in the broader decentralized finance ecosystem. This is my humble attempt to help.
The course is free. There's no upsell to a private Discord. No shilling some NFT project. Just my attempt to level the playing field.
A couple notes and disclaimers:
- This is NOT financial advice. I'm not recommending you do anything. Please do your own research before investing.
- Crypto is super volatile. Only invest with money you're willing to lose, and don't be surprised if/when things suddenly increase or drop in value by 50% or more.
- As you go through this, quiet that part of your brain that says "but what's the point?" Think 10 years into the future, and try to envision what a financial world centered on crypto might theoretically look like. It's still super early, and many of the tools we discuss will be replaced by new and better ones.
- If you find this helpful, please let others know about it.
Let's get started!
Lesson 1: What is Bitcoin?
In this first lesson, we're going to talk about Bitcoin.
It is the granddaddy of all crypto, and in talking about it we’ll discuss a bunch of concepts around cryptocurrency in general and the mechanics of how they work.
Bitcoin has had a lot of attention. They they talked about it in front of oversight committees. Banks and government institutions have alternated between being enthusiastic about it and very much against it.
If you've been in conversations with your family members or with friends over dinner, it can sometimes be a little bit hard to wrap your head around what exactly Bitcoin is and how it works.
Bitcoin started in 2009. There was a white paper submitted on a forum by someone named Satoshi Nakamoto who was anonymous. Sitoshi Nakamoto is the largest holder of Bitcoin to this day, which arguably makes them the wealthiest person in the world. But nobody knows who Satoshi is.
Satoshi has never sold any of their Bitcoin (at least the wallet that we know about). Which is pretty interesting. Some people think that's because Satoshi is dead. Some think Satoshi is multiple people. There have been various people that have claimed to be Sitoshi over the years, but the reality is, that we don't really know.
Satoshi’s white paper talks about a bunch of things. It says that Bitcoin:
- Is pure, electronic cash.
- You can send directly from one party to another, without using a financial institution.
- It uses something called a digital signature to prevent double spending
- It hashes them onto a chain using proof of work.
So what does all that stuff mean?
The best explanation I've ever heard is to imagine you have a ledger with a bunch of your friends. You're sending money back and forth to each other, and you want keep track of all of that, in an authoritative ledger.
An obvious question arises. How do you prevent somebody from just saying that one person paid another one? The easy answer is that we’re all buddies so it won’t be an issue. But what if you don’t know each other? And imagine these transactions actually trigger the transfer of that money. How do you prevent something like that?
That's where this idea of a digital signature comes in. With every Bitcoin transaction, the sender of the BTC has to sign the transaction to authenticate it. To say yeah, I did actually want to send $20 here.
Your digital signature takes a combination of a public key and a private key. Your public key is like your address. It's something that everybody has access to. It’s uniquely identified with you, or with your wallet.
But the signature gets coupled with a private key. Your private key is something that only you have. You should never share your private key with anyone for any reason, because that is how you maintain control of your wallet.
There's a phrase in crypto called "not your keys, not your tokens." Many people have lost money with crypto because they entered their private key or their seed phrase, which is a representation of their private key, in some place where they weren't supposed to. And the person behind that took their coins. We'll talk more about how you prevent that from happening in a future lesson.
Bitcoin tasks your public key and private key and combines them, and uses encryption on top of that. It basically takes the message - Brandon's sending Dan $20 - and couples that with your private key to creates your signature. And then it encrypts it using something called SHA 256, which outputs a bunch of random numbers. And there are 2 to the 250th possibilities. So it’s basically be impossible to guess. And it is why we call this cryptocurrency.
So now we have digital signatures and they’re encrypted. But there are other problems.
Let's say that Dan deposits a hundred dollars into his wallet. And then Dan pays Coriyon $40, and Brandon $50, and Phyllis $30. Dan is spending more money than he actually has.
That's a very easy problem to avoid with physical currency because I either have a dollar in my hand or I don't. But with electronic money, that can be a lot more difficult. Because two people could theoretically try to spend the same dollar (or Bitcoin).
How do you make sure that money isn't spent twice?
Historically, the way that we've prevented that is through centralized institutions. So Chase maintains that ledger of transactions and says, “You've already spent that dollar. You can't spend that dollar again.”
How do you do that in a decentralized world where there are no institutions
Bitcoin is the token BTC, but it is also that ledger of transactions. And that ledger has the entire record of transactions that have taken place. So it has every transaction and everyone’s balances.
The bitcoin blockchain runs on hundreds of thousands of people's computers. They all have a copy of that ledger. So when a transaction happens, it propagates throughout the network and gets added to all of the different ledgers. So thousands of computers collectively maintain the authoritative copy of the ledger.
Proof of Work and Blockchain
But what prevents Dan from trying to do something shady and trying to manipulate that ledger? What prevents him from adding fake transactions and having it propogate to all those computers?
That's where this idea of proof of work comes in.
Bitcoin takes all of these transactions and it bundles them into what it calls a block. That's the first part of blockchain. It applies that same SHA 256 encryption on the block which spits out a 256 character string of ones and zeros. That string is unique to that specific set of blocks. Change any transaction in the block, and that string changes.
For any block, there is a special set of numbers that, when added to the block, results in the encrypted block starting with a bunch of zeroes. And there are again 2 to the 256 possibilities for what that special set of numbers could be. You would have to try lots and lots of numbers in order to figure out which one that is.
And that's exactly what a Bitcoin miner is doing when they do proof of work. They run on these very expensive computers that try all different numbers until they find the special number that makes the block start with a bunch of zeroes.
Bitcoin wants a new block to be solved every 10 minutes. And so it changes the number of zeros it wants the block to start with depending on how much computing power is being put toward solving the problem to make sure that happens. So if a lot of computers are doing proof ot work, it starts with more zeroes.
When a block gets solved, they give a reward to the miner (or miners) that solve it. And that’s how new Bitcoin enters the money supply.
So a miner solves a block. That special number gets appended to the end. And then it starts a new block. Only this time, they take the hash from the old block and append it to the new block. It creates a chain of blocks, connected by those hashes - which is why we call it a blockchain.
Which means, if you change a transaction from a previous transaction or block, it would generate a new hash. Which would not match the hash on the block that followed it. It breaks the chain.
That is what makes Bitcoin so tamper resistant. If you change any aspect of the chain, it breaks all future transactions.
There is theoretically a way to do this. In order for your manipulated chain to become the authoritative version, you would have to have more computers in the network agree that your chain is correct. Otherwise the computing power of the correct chain quickly overwhelms your chain and starts to ignore it.
This is incredibly difficult to do. You’d have to have control of 51% or more of the computing power in the network to do this. It’s called a 51% attack for that reason. Really only nation states are the actors that could theoretically do this. It's never happened before. That’s what they mean when they say Bitcoin has never been hacked.
You've probably heard about Bitcoin being very expensive to maintain. This is the reason why, because you have all of these computers that are doing proof of work to secure the network. It is incredibly energy intensive (although it’s debatable whether it’s more energy intensive than the current financial system.)
There are some other tokens that are experimenting with different versions of this, to accomplish the same goal, but in a much less energy intensive way, which we'll talk about in a future lesson.
The reward that miners get for solving blocks changes over time. Many of the Bitcoin millionaires you hear about were people that got in early and were running mining machines. They would get very large rewards for doing that - in the beginning the block reward was 50 BTC.
But every four years it gets cut in half. This is called “the halvening”. Eventually there will be no reward for miners because all the Bitcoin will have been mined. There will be a different type of incentive for maintaining the Bitcoin network.
It also is much more computationally expensive to earn these rewards because there are more, a lot more computers so the algorithm is harder to maintain that 10 minute block reward rate. You used to be able to use simple hardware. But now you have to buy specialized machines that have a lot of processing power, and are very expensive.
Bitcoin has a Fixed Supply
Only 21 million Bitcoin will ever exist.
This is one reason why Bitcoin had a lot of adoption early on with what is called the Austrian school of economics.
All of the main currencies in the world are called Fiat currencies. They are not backed by anything, and they have no fixed supply.
The government is able to print more dollars whenever it wants to. Depending on who you ask there's nothing wrong with that. But some believe that having a static supply is a good thing.
That's one reason why the price of Bitcoin continues to go up. More people get interested and learn how to buy it. And yet there is a fixed supply.
Bitcoin is Super Volatile
But it is incredibly volatile. In 2018 it rapidly shot up to $20,000 per BTC, only to plummet to $3,000 within 90 days. Then in 2021 it shot up to $70,000, only to get cut in half within a few months.
But this is by design. The goal of Bitcoin is to ultimately become the new version of money. To do that people have to adopt it. And the best way to get people to adopt it is to reward them for doing so.
And so people get into it, hoping to make some money on appreciation. You see this run-up as more and more people do it. And then it plummets. And some people wash out, but some people stay. They're now believers. And then the next run-up happens and there's more people. and then it crashes and then the next run up happens. But each time there are more people who stick it out.
Eventually the price should stablize. But it will have a way to go before that happens, considering how relatively few people have Bitcoin still. A lot more people would have to adopt it.
You Don’t Have To Buy a Full Bitcoin
There is a common misconception that you have to buy whole Bitcoin. You don't. You can buy a fraction of it.
A dollar is divisible by a hundred. The smallest unit you can buy is a penny.
You can buy a hundred millionth of a Bitcoin, called a Satoshi. If the vision of Bitcoin materializes and Bitcoin replaces traditional money, people won't really be transacting in Bitcoins. There'll be transacting in Satoshi's.
So that’s how Bitcoin works. And a lot of the ideas around BTC are applicable to many other crypto protocols, which we’ll get into in future lessons.
Lesson 2: How to buy your first BTC
In this lesson, we are going to buy our first Bitcoin.
The product I recommend using for this is still Coinbase. The fees are a little bit higher than other platforms you might use, but the ease of use is great to get started.
Know Your Customer
The signup process is fairly involved. Most centralized exchanges follow what's called “Know Your Customer” or KYC.
When people say your Bitcoin is anonymous, that's only partially true. The transactions that you purchase through Coinbase or other centralized exchanges, you should consider to be known transactions.
If the IRS wanted to find out how much Bitcoin you owned or other tokens that you have, going to Coinbase would be a really great place to find out that information. So you should consider it to be pseudo anonymous at best.
The first step is you're going to be creating an account. First name, last name, password. I recommend choosing a very strong password and a using a password manager, like 1password or Lastpass. Finally they’ll ask what state that you live in, and they obviously want you to be 18 years old.
Once you hit create account, they're going to have you verify your email address. They're going to send you an email that you click on. They will also ask you to add a phone number, which you will also verify via SMS.
And then the fourth step is to add your personal information. They’ll ask your date of birth and your physical address. They'll ask what you plan on using Coinbase for where you're going to get what your source of funds will be. And they’ll ask your job and employer, and the last four digits of your social security.
You will have to do an ID verification process. They will have you take a picture of your state ID, driver's license, or passport. Front and back. And then they'll have you take a picture of yourself to match to the ID.
Once you've done that, the last step is to link up a checking account or a bank account.
Optionally, they have you set up a two-step verification. I use Google Authenticator for this, and this is just another layer of protection in general, with your crypto. You want to be as protected as possible. Tools like Google Authenticator change the code every couple seconds. So someone would have to physically have your device to log in.
Purchasing your first token.
Once you've done all those steps, the process of actually purchasing something is actually relatively straightforward. You find the token you want to buy, in this case Bitcoin, and you enter the amount you want, either denominated in dollars or in BTC. Again, you can purchase fractions of a BTC if you want. Then you just hit submit and you have the BTC.
Coinbase won’t allow you to immediately transfer your Bitcoin when you start out - it will stay here. But as soon as you’re able, you’ll want to move it to a proper wallet, which we’ll discuss in the next lesson.
As I mentioned, the fees are relatively high - if you but $100 worth you pay $2.99 as of the time of this writing. But again, the ease of use is great. What people will often do is buy a stablecoin, which we’ll talk about in a future lesson, and then get into another token for less money.
Congrats - you now have your first BTC! Now let’s learn how to secure it.
Lesson 3: Crypto wallets and why you need one.
In this lesson we’re talking about wallets, why you need one, and how to maximize the security of your tokens.
What is a wallet?
A wallet is what it sounds like. It's a place to store your money. But crypto wallets have some nuances to them.
A wallet acts as your form of authentication for many of these platforms. It’s your unique identify so to speak. You don’t log in with your email address (at least to many of the sites), but rather by connecting your wallet.
Your wallet is where you authorize transactions of various kinds. Decentralized exchanges like Coinbase let you buy tokens. But they aren’t wallets. You can’t connect them to apps directly, and you can’t facilitate transactions with them.
Coinbase actually does have a wallet of its own, called Coinbase Wallet. This can be confusing for a lot of people. But that’s basically why. Coinbase is the exchange, and Coinbase Wallet is the wallet. It’s not actually the wallet I recommend though.
Of course, you can keep your tokens in the Coinbase exchange, behind your log in. But I don’t recommend it. I recommend moving it into a wallet, so you can do some cooler stuff with it (and to keep it more secure, which we will discuss shortly.)
There are two main types of wallets - software wallets and hardware wallets. Coinbase Wallet is an example of a software wallet. These are wallets that are connected to the internet, either through an online site or a browser extension.
The wallet I use the most is called Metamask. It has an iOS app, an Android app, and a Chrome extension. It’s important to note that Metamask is an Ethereum-based wallet. This means you can’t hold Bitcoin on it. You’ll see why this is generally okay later.
In addition to doing all the sorts of things you’ll want to do in DeFi, you can also buy tokens on Metamask, although I don’t recommend it as the fees are even more expensive than Coinbase. The main reason you’ll use your wallet though is to perform operations. Buying NFTs, participating in liquidity pools, etc. We’ll talk about these in future lessons.
You can also set up multiple accounts with your wallet, allowing you to segment the different apps you interact with, and reducing your risk of loss if someone got access to any one address for some reason.
When you create a new wallet, it will generate a “seed phrase”. This is an incredibly important phrase. It’s basically your key to get back into the wallet if you lose it. You never, ever, for any reason, share your seed phrase with anyone. You write it down, and you keep it someplace safe and secure where no one can access it but you or someone you implicitly trust.
If you have any meaningful amount of money, you will want to upgrade to a hardware wallet. A hardware wallet is a physical device that is not connected to the internet. It’s very tightly encrypted and it has its own seed phrase. When you want to approve a transaction you plug it into your computer briefly, approve the transaction, and then unplug it.
Some people even buy what are called Faraday cages, which is a bag that prevents Bluetooth or other signals from reaching the wallet.
A hardware wallet is MUCH more secure than a software wallet that’s connected to the internet. As long as you protect your private keys (your seed phrase), no one will be able to access your money but you.
You can actually connect your hardware wallet with your Metamask wallet to get the best of both worlds. You get the user experience of Metamask, allowing you to view your tokens and various apps, but connect your hardware wallet whenever you need to approve a transaction.
Not Your Keys, Not Your Tokens
Again - I can’t emphasize this enough - it is critical you protect your seed phrase. You will see sites from Google Ads, for example, where they clone the site you’re trying to go to, and have a fake modal pop up that looks like Metamask, but asks for your seed phrase instead of a password. I had a good friend lose nearly $50,000 doing this. You have to be careful - if it asks you to type in your seed phrase, don’t do it.
The only exception would be if you lose your wallet. For example, your hardware wallet gets lost or destroyed. You can purchase a new wallet, enter your seed phrase in, and your tokens will appear there immediately. That’s one reason crypto is so neat - you can take your money with you anywhere. But it’s also why you and you alone need to control your seed phrase. Because if you can do that, so can anyone else who has your phrase. Not your keys, not your tokens.
Now you have a wallet. In the next lesson we’ll learn about Ethereum, and why it unlocks a whole world of opportunity for you.
Lesson 4: What is Ethereum?
In this lesson we talk about what Ethereum is, why it's compelling, and what it enables in terms of the broader decentralized finance ecosystem.
Bitcoin taught us that you can program money and create decentralized money. Ethereum asked the question, “What else can you enable through programmable money? What else can you decentralize?”
Ethereum set out to create what the founder called an “Internet Computer.” It is basically a combination of the blockchain and a programming language. It allows you to take money and program it to do different things. To enable different kinds of transactions.
The code that executes and defines those transactions are called “smart contracts.” And these smart contracts can enable all kinds of things.
Of course you can just send money from one wallet address to another, which doesn’t require a smart contract. That doesn’t require a contract at all. But more complicated operations are possible as well.
For example, let's say Phyllis wants to borrow some money and Brandon has money to loan. You can create a smart contract that handles a loan transaction. It could handle all the rules around interest rate, what happens in the event of default, what needs to be put up for collateral, and so on. It all can be programmable. So now you don't need to rely on a central institution or a third-party. The code enforces all of the rules.
You can also do things like governance. You may have heard of something called a Decentralized Autonomous Organization, or a DAO. Basically what that is is a combination of a ledger for handling voting, and a treasury of pooled tokens from different people. So people can put their money into the DAO, and use the blockchain to handle voting about how that money gets spent.
We’ll talk more about NFTs, but they are made possible with smart contracts. Liquidity pools are possible. Insurance is possible.
Some people believe you can theoretically move the entire financial system onto the blockchain because of what smart contracts enable.
Ethereum’s Two Big Innovations
Ethereum did two really smart things. The first is creating that programming language for writing smart contracts, called Solidity. If I were 21 and I was wanting to learn a programming language, that's probably where I would start. It’s likely going to be increasingly important in the coming years, and not a whole lot of people that know how to do it yet.
The other big innovation was creating a standard around tokens called ERC 20. It’s a lot like open source software. With open source, once someone has solved a programming problem and made it open source, other developers can use it to speed up what they do. No use redesigning the wheel to handle how to log in users, for example, If someone solved that problem, just use their open source library.
ERC20 is basically the same thing. It effectively open-sourced the creation of smart contracts. As a result, most of the protocols that make up the decentralized finance or DeFi ecosystem that we're going to talk about in future lessons are built on top of Ethereum, using the ERC 20 protocol.
Other chains have sprung up in recent years, for reasons we’ll discuss later. But those chains themselves use many of the same design patterns from Ethereum. And ERC 20 has really unlocked a lot of innovation because now developers don’t have to start from scratch every time. It also means tokens built using the ERC 20 standard are likely safer, because that code has been audited over and over again.
Proof of Stake
In the Bitcoin lesson we talked about how energy intensive it is because of the proof of work mechanism. Ethereum currently operates the same way, using miners to do the same type of activity.
But they are in the process of moving to another way of securing the network, which is called proof of stake.
Imagine you have a blockchain, a lot like the Bitcoin blockchain. The blocks store various transactions - you sent a file, you voted for a proposal, you lent some money, etc. Right now, miners get rewarded the same way as Bitcoin, for solving algorithms and getting block rewards.
With proof of stake, they secure the network by you “staking”, or locking up, your Ethereum. You have to have a minimum of 32 ETH to become a staker. And you’re basically putting it into a vault.
In exchange, Ethereum randomly will reward users who stake their Etherum with block rewards for validating the transactions. And the way they prevent you from trying to manipulate the system and approving fraudulent transactions is by burning your staked ETH if you get caught. So theoretically the incentive for approving a block isn’t worth it (except to the party who is trying to cheat the system). It’s an interesting approach, and removes the need for all the miners and heavy processing power that causes so much energy expenditure.
Proponents of proof of stake argue that it’s more decentralized as well. Currently many of the miners for Bitcoin are organized into mining pools. They’ve aggregated their processing power to increase the likelihood of earning rewards, and then distributing it to the participants in the pool. Theoretically, if a bunch of those mining pools decided to collude, a 51% might be possible.
With proof of stake, even, though you could stake a billion Ethereum tokens, the algorithm is still assigning it randomly. So you can't ultimately control whether or not you get rewards directly. There’s a randomness to it that more coins can’t overcome.
So now you can not only store money and exchange it with crypto, but with Ethereum you
Can do all kinds of new things, some of which we’ll discuss in future lessons. Because of this, depending on who you ask, some people believe Ethereum will overtake Bitcoin as the most important token in the crypto ecosystem. If you actually manage to replace traditional finance with decentralized finance, and if many or most of those solutions are built on top of Ethereum, it stands to reason that Ethereum will be very valuable long term.
Even if you don’t want to dig deeper into the crypto world, many passive investors simply buy and hold BTC and ETH, giving them exposure to much of the DeFI landscape.
Lesson 5: What are Stablecoins?
In this lesson we talk about what Stablecoins are, why you would use them, and some examples of the types of transactions you can engage in with them.
Stablecoins are relatively easy to wrap one’s mind around. Stablecoins are tokens that have a fixed exchange rate relative to another currency.
Typically that is relative to the dollar. This means one stablecoin is equal to $1.
There are several different approaches they will use to try to accomplish this. One approach is just by having those assets collateralized. Coinbase for example, has a stablecoin called USDC. And supposedly every stablecoin is backed by a dollar of US currency. That's how they maintain that peg.
Tether supposedly works the same way, although there has been speculation in the past as to what degree they actually have those assets under custody.
There are other stable coins that use algorithms to try to maintain their peg. DAI is an example of that. Their price will sometimes fluctuate a little bit up and down. But roughly it's designed to maintain that peg.
Why Stablecoins are useful
The basic idea is stablecoins make it much easier to get in and out of tokens and protect yourself during times of volatility.
If you feel like crypto markets are about to crash, like they just did in December 2021, and you want to get out of those tokens to minimize your volatility, rather than getting into dollars and paying all those fees, you can just convert to stablecoins.
But you can also do some other stuff with stablecoins. You can actually earn interest on them as well and participate in other parts of the defined ecosystem. In fact, with many sites stablecoins offer you the highest interest rates relative to ETH or BTC or other tokens. You can participate in liquidity pools, which we'll talk about in a future episode.
Coinbase incentivizes you to purchase USDC by having no fees on the purchase, which is an attractive reasons to purchase USDC. But there are others as well. One that I think is interesting is UST, which is created by Terra. They are the fourth largest stablecoin, and let you earn a stable 20% interest by using the Anchor protocol. Compared to a normal savings account, it’s a huge difference.
It’s important to keep in mind with Anchor and any other crypto protocol that you have to keep your tokens safe. It also is riskier than keeping your money in a bank like Chase, which has FDIC protection if anything bad were to happen.
So stablecoins are a useful tool in your toolkit, making it easy and cheap to get into crypto, and then once you have them to get in and out of various other protocols. In the next lesson we’ll start to talk about what some of those protocols are.
Lesson 6: Decentralized Exchanges 101
In this lesson we talk about what decentralized exchanges are, why you would use them, and how you can generate additional yield on your tokens by participating in liquidity pools.
We've already talked about what a centralized exchange is. Coinbase is an example. A centralized exchange needs to provide what we call “liquidity” for all of these tokens.
So if I want to buy a Bitcoin, Coinbase literally has Bitcoin that they're selling me. People are constantly buying and selling on an exchange, and Coinbase has to provide sufficient liquidity - meaning they have to have the tokens available - to facilitate those trades. It’s one reason they have a lockup period where you can’t withdraw.
In exchange for providing that liquidity, Coinbase and other centralized exchanges charge a fee. Lots of transactions, lots of fees.
So that leads us to what we call a decentralized exchange. When we say “decentralized”, we mean there is no centralized party. Just like Bitcoin is decentralizing money, a decentralized exchanges tries to decentralize the providing of that liquidity.
So if you have USDC and you want to get another token like Solana or vice versa, the exchange has to have both token available. Rather than the exchange holding those tokens directly, they allow users to provide that liquidity by contributing to what they call a liquidity pool.
A liquidity pool is basically a pool of pairs of tokens. So USDC/SOL would be a liquidity pool. The people who want to participate in that pool have to contribute to the pool in equal amounts (not equal number of tokens, but equal value).
In exchange for providing liquidity to that pool, you receive a percentage of all of the transaction fees that accrue on the exchange for people trading those pairs of tokens. Instead of the exchange getting the fees, the community gets the fees.
Lots of Tokens
The other big benefit of decentralized exchanges is the number of tokens available. Coinbase has several dozen tokens, and is adding to that list all the time. But they can’t (and don’t want) to provide liquidity for every possible token out there. CoinGecko says there are over 5000 ERC20 tokens currently. It would be difficult for Coinbase or a centralized exchange to provide liquidity for all of them.
But with decentralized exchanges, you can access many more tokens. This allows you to speculate in much earlier tokens than you can on Coinbase or other centralized exchanges. The potential for upside is much greater (although so is the risk, as many of these tokens don’t have much of a market cap and can fluctuate WILDLY.) You can even import tokens that aren’t on the official lists for the decentralized exchanges and trade them, if there is sufficient liquidity.
The two major decentralized exchanges (on the Ethereum network) are Uniswap and Sushiswap. And even if you don’t plan on contributing to a liquidity pool and earning fees, you will likely find yourself interacting with these two platforms to swap tokens when you want to invest in other parts of the DeFi ecosystem.
Exchanging is straightforward. You connect your Metamask wallet (or other wallet), enter the token you want to swap out and the token you want in exchange, hit submit, and wait a minute or so.
One thing to keep in mind are “gas fees”. Whenever you execute a transaction on the Ethereum blockchain, for example, getting out of this token and into this other token, you pay a gas fee. Since these tokens are ERC20 tokens, they’re built on top of Ethereum. So you pay ETH gas whenever you transact.
Those are different than the exchange fees, as they are paid to the Ethereum network and not the exchange. Those can sometimes be quite high - if it’s too high relative to the amount of money you’re trying to exchange you might want to wait until fees are lower, or batch it in a larger transaction.
Lesson 7: What is Decentralized Lending
In this lesson we talk about decentralized lending, how you can earn governance tokens in exchange for locking up your tokens, how you can use your tokens as collateral to take out loans, liquidation risk, and more.
In the previous lesson we talked about liquidity pools, how they are a mechanism for people to provide liquidity on exchanges to earn a percentage of the fees that typically a market maker on a centralized exchange would earn.
That's one example of this world of decentralized finance. There are solutions popping up all over the place that are picking off each aspect of the traditional financial system. And another one of those is lending.
Typically when you want to take out a loan, you go to a bank and the bank charges you an interest rate in exchange for letting you borrow that money.
Decentralized lending accomplishes the same goal, except instead of a centralized institution offering you the loan it’s an aggregate of users that are collectively again pooling their tokens, and offering them to other users. So you come and you want to borrow ETH, and other users want to lend ETH, and they get to collect the interest rate rather than a bank.
There are nuances. For example, you could participate both as a lender and a borrower. And there are different rules around how they work, encapsulated in the smart contracts. So you want to make sure how they work. But the APYs can be great.
One of the big platforms is Compound. They're backed by Andreessen Horowitz, a lot of money in their protocol. And they allow you to loan or borrow a variety of coins, each of which has its own interest rate. Stablecoins tend to be the highest.
In addition, by acting as a lender in the marketplace, you also earn COMP, which is an example of what is called the “governance token” for this protocol. These tokens get distributed each day to lenders. And these tokens have their own price.
So you can take a stablecoin, for example, which is pegged to the dollar, and earn say 3% on it - better than your savings account. Then in addition to that you can earn compound tokens which also have an underlying value.
The other thing you can do with lending platforms like compound is actually use your tokens as collateral to borrow in the marketplace. For example you could provide supply in the form of ETH, and borrow up to 75% of the value that you've locked up. So if I loaned a hundred dollars worth of ETH, I could borrow say $75 worth of DAI. Which you could then take and do other things with. So now you’re earning the interest on the ETH, you’re earning COMP tokens, and you have DAI to do other things with.
Now, keep in mind that this is using leverage. And leverage is much riskier. Specifically you have to pay attention to the collateralization rate. If the ratio between the money you’re lending and the money you’re borrowing drops below a certain percentage, the smart contract liquidates your locked up collateral.
So you want to be very careful in terms of how you use leverage. I personally never use leverage. But or folks that do, yo almost never want to borrow that full amount. The numbers I’ve typically heard are closer to 25% to 50%. This provides much more wiggle room in the event your collateral drops in value.
But as you can see, this is another example of the kinds of things one can do in the ecosystem. If you think ETH is going to go up, for example, you can loan it, earn on the gains, earn interest on your ETH, earn COMP governance tokens, and then if you wanted to use leverage, borrow other token and use that to do something else.
There’s a reason why so many people are excited about these platforms, despite the risks. But as always, do your own research, and please don’t use money you can’t afford to lose. And under no circumstances use leverage with that money if you’re afraid of loss.
Lesson 8: What are NFTs
In this lesson we talk about non-fungible tokens (or NFTs), why people are excited about them, how to acquire them, what the future might be and more.
You've probably heard about NFTs, especially in the last six months or so. But what are they?
The whole crypto space is relatively controversial, but NFTs are probably the most controversial within it in terms of their usefulness, their utility, etc. Hopefully by the end of this lesson, you'll at least understand what they are and why people think that they are potentially interesting.
NFT stands for ”non-fungible token”. It is a 1-of-1 digital artifact stored on the blockchain.
If you think about Bitcoin, one BTC is no different than any other BTC. That’s what it means to be fungible. So BTC is a fungible token. Every single BTC is the same.
A non-fungible token has uniqueness. It could be a level of rarity. Either only one is produced, or several are produced but they have different characteristics.
“Fake” basketball cards.
People make fun of NFTs, saying “it’s just a picture I can save on my computer.”
The light bulb moment for me was when something came out called NBA Top Shot. They set out to create NFT basketball cards.
When you think about a basketball card, what is it really? It’s basically a piece of cardboard they printed a picture on. The cost of production was maybe a penny. But because they only print a certain number of them, they introduce a rarity component. And because of your affinity with a player or a team, coupled with the rarity, a value gets ascribed to that card that is completely non commensurate with its actual practical utility.
And so now there’s an entire ecosystem. Some cards are incredibly valuable. You can send in your card to get graded by Panini, wait months, and pay a lot of money to find out what condition your card is in.
There are limitations to this ecosystem. You don’t actually know how many Michael Jordan rookie cards are out there. Many of them probably got destroyed or lost. There’s also a lack of price transparency. You don’t have a record of all the transactions. You just know what a price guide says they are worth. Ebay and other seller platforms have provided more transparency, but it’s relatively opaque.
Now compare that to NBA top shot. They’ve basically created the digital equivalent. They’ve taken video clips - yes, the same clips you can get on Youtube - and put them in a digital “card” and minted a certain number of them on the blockchain.
So for example there are 800 copites of a Lebron James card. But what’s interesting is you know exactly how many there are. You know that they’re all in perfect condition. You know exactly how much every single one of them has sold for, and when.
You can go into analytics tools that have sprung up (again, because all of this is on chain anyone that wants to can look it up) and see exactly what cards I own, what I paid for them, what they’re worth today, etc.
NFTs as Organizations
NFTs have taken off in the digital art world, mainly around what we call PFPs or profile pictures. Two of the most famous are Crypto Punks and Bored Ape Yacht Club (BAYC).
In the case of BAYC they’re starting to experiment with using NFTs as a token for entry into a new version of a social club. They're organizing events that are in real life for people who own the NFTs and they can authenticate them, again because they're on the chain. They give them access to online platforms that are private only to members.‘
People envision a world where an NFT could be used to authenticate the ownership of all kinds of things. Physical art. Wine. One company is using the money from minting NFTs to try and buy a golf course, which owners of the NFT will be members to.
Artists Benefit from NFTs in New Ways
Previously if I created a painting and sold it, once it’s sold that’s the end of the transaction. If I become famous later and you invested in an early piece of art, you benefit and I don’t (at least from that piece of art.)
NFTs actually allow you to benefit from future transactions. The smart contract can dictate that not only does the creator earn the proceeds from the original sale, but they can also earn a percentage from all future sales as well.
How to buy NFTs.
The main marketplace is Opensea. It hosts NFTs from the Ethereum blockchai. Other sites have sprung up for other chains, like MagicEden for Solana. But this is the way to purchase secondary sales of NFTs.
The other way is to get in on minting of NFTs. To do this you have to be pretty active. You have to find out about them on Twitter, or from friends, although there are sites like rarity which show you upcoming mintings. Typically you join the Discord server for a project, get white listed by getting in early, get to participate in the pre-sale mint, and can mint an NFT to then hold or resell yourself. This tends to be the way that people do the best, because the mint price is usually relatively low.
That said, this is art. It’s subjective. A lot of projects end up failing, and knowing which ones are going to work is difficult. It’s also time intensive. Participating in various Discord servers can quickly become overwhelming. So if you’re looking to win by speculating or flipping NFTs, I wish you luck. I personally don’t have the time or taste to win that game. But I still think NFTs are fascinating and have a lot of promising use cases. If you have good taste, it might be worth looking into. And if you’re an artist, it might be worth experimenting with your own mint.
It’s Early for NFTs.
We still don't know what NFTs are ultimately going to be. Most of the innovation has been around art. But there’s a lot of interesting experiments being done. I think it’s naive to just chalk NFTs up as frivolous. When you fast forward 5 or 10 years I think we’ll have a much better sense for what some of the killer use cases are.
Lesson 9: How to Go Cross-Chain
In this lesson we talk about some alternative blockchains, why you might want to use them to minimize gas fees, and the (somewhat convoluted) process of migrating from one chain to another.
One of the big complaints about Ethereum as it has gained in adoption has been those gas fees we mentioned in a previous lesson. Many of the decentralized finance protocols and apps are built on top of Ethereum. And in order to transact with those platforms you have to pay ETH gas fees. As more people have adopted Ethereum and started to transact, the gas fees have gotten progressively more expensive.
That became particularly true when NFTs exploded in popularity in 2021. People would want to mint a new NFT for, say, 0.1 ETH (around $300 at the time). And the cost of gass would be $150. That became frustrating for many people.
Cheaper Gas with Alternative Blockchains
Some other blockchains have sprung up to try to address that. Solana, Avalanche, and Polygon are a couple of the major ones. They each have their own nuances, but what they have in common, and what I think has largely driven their adoption, has been their gas fees are dramatically lower than ETH-based transactions.
So what you’re starting to see is a cloning of the ETH-based DeFi ecosystem on these chains. You have a decentralized exchange like TraderJoe. You have an NFT marketplace like MagicEden. You have special purpose wallets like Phantom.
Today many of the more exciting developments in DeFi are starting to happen on these chains, because the gas fees are so much cheaper.
The trick is getting onto these chains.
How to go cross-chain.
Let’s say I want to buy an NFT on the Solana blockchain. I can’t store my NFT in my norma Ethereum wallet, like Metamask. So I need a special purpose wallet like Phantom.
I also have to buy Solana on Coinbase, and then send it to my Metamask Wallet, and then send it from the Ethereum network to the Solana network using a bridge.
Another example. Let’s say I want to participate in a liquidity pool on Avalance. I have to buy AVAX on Coinbase, send it to an AVAX wallet, convert it from the Ethereum AVAX chain to the native AVAX chain. Then I need to add the Avax network to my Metamask wallet, send my AVAX-native AVAX to my metamask wallet on the AVAX network, swap some of it for the AVAX-native tokens I want to put into the liquidity pool, and then finally put them in the pool.
I won’t lie - going cross-chain isn’t for the faint of heart. It’s super easy to get confused. But once you make it cross chain, getting in and out of various protocols native to that chain are considerably less expensive.
I do believe it’s worth doing, because a lot of the energy in the DeFi space is moving this direction. I’m sure it’s going to get easier over time.
I would recommend going through the process with a relatively small amount of money to start. Even if you end up paying a lot in ETH fees to do it (because you have to pay ETH gas to bridge it over to the other network), it’s worth doing a run-through so you understand how it works.
Lesson 10: What are Rebasing DAOs?
In this lesson we talk about decentralized autonomous organizations, and in particular "rebasing DAOs", which have attracted a tremendous amount of interest in the crypto community due to their extremely high APYs. We talk about how they work, the steps required to bond or stake inside of one, and more.
In this final lesson, we are going to talk about DAOs and specifically rebasing DAOs. There's a lot to cover here. It's a little bit complex.
What is a DAO?
As we discussed briefly in a previous lesson, a DAO stands for a Decentralized Autonomous Organization. It’s a big treasury of pooled tokens that a bunch of people have contributed to, along with a governance mechanism for voting on how to use that money.
A DAO is a way for people to invest or make decisions in aggregate and to use blockchain based technology to track those decisions..
One of the most common use cases right now for DAOs has been to pool money to purchase NFTs.
We mentioned blue-chip NFTs like crypto punks or BAYC. The price of these blue chip NFTs has gotten very high. In most cases they are prohibitively expensive. And so people started to pool their recourses to purchase NFTs they might not actually be able to own themselves.
Olympus - the first rebasing DAO.
Other organizations are starting to spring up that are actually using DAOs to run the organization. One of the most famous is called Olympus. Everybody that is part of Olympus is able to vote on proposals that shape the future of the protocol, how money gets spent from the treasury, etc.
But Olympus also innovated in a whole bunch of ways and created the first “Rebasing DAO”. There have been many, many clones that have sprung up in the latter half of 2021 trying to do what Olympus did.
The reason they got so much attention was because of the APY they could theoretically provide people. At the time of this writing, the APY was 3823%, which is just insane.
So how in the world do they do that? Before we explain that, it’s helpful to explain what Olympus is trying to become.
Olympus wants to be a stable coin, but not a “pegged” stablecoins. If you remember lesson on stablecoins, most are pegged to the dollar.,
OHM is trying to envision a future post-dollar. If crypto replaces the dollar as the standard for transactions, it no longer makes sense to peg it to the dollar. So what do you peg it to instead?
They, believe that a stable coin in crypto world should not be pegged to a Fiat token at all. And so rather than being pegged, they’re trying to create a “backed” stablecoin.
What they have is basically a basket of assets in their treasury. That includes OHM, but also includes DAI, FRAX, ETH, etc. At the time of this writing, they have around $600M in their treasury.
What this means is that there is technically a floor price, below which the token should not go. And that floor price is basically the total treasury assets (excluding OHM), divided by the circulating supply.
So if you have $600 million in assets and you have 8.1 million tokens in the circulating supply, that gives you a backing of $74. So the price should not go below $74 or that floor price. Obviously that floor price fluctuates, as both the assets in the treasury can go up or down, and as the circulating supply goes up or down (mainly up.)
Bonding and Protocol-Owned Liquidity
But how do they offer those ridiculous APYs? There are couple of things that they do. One is you bonding. Basically you buy OHM tokens from the treasury at a discount, by using another token. DAI, FRAX, and ETH are the typical ones you would see. And you buy OHM using your ETH, wait 5 days, and receive the OHM.
But the other thing you can do is use liquidity pool tokens. If you remember from our lesson on decentralized exchanges, you remember that people provide liquidity by contributing two tokens in equal dollar amounts, and they earn fees from the transactions in that pool.
When you contribute those tokens you technically are given a token that represents the pair of those two tokens you put in. Olympus lets you take those tokens and sell them to Olympus in exchange for a discount on OHM. Which means Olympus is effectively buying up the liquidity you are providing on the decentralized exchange.
And their goal is to buy up all the liquidity for their protocol. In the case of Olympus, at the time of this writing they own 99.7% of the liquidity from this bonding process.
Why do they do this? So they can make money. All those liquidity fees that traditionally get distributed across all the people contributing to the liquidity pools, are now going to OHM because they own nearly all the liquidity. In the event of a price crash, Olympus has a plan to buy back and to use this massive treasury that they have to purchase back OHM and keep the price relatively stable.
So unlike many crypto protocols, Olympus makes money every single day by owning their liquidity. This is a technique they pioneered, which they call “protocol-owned liquidity.
Most people don’t bond though. Most people who participate in the Olympus ecosystem do what is called staking. You basically lock up your OHM. And when you do that they give you more OHM, based on that APY, three times per day.
I mentioned that their long-term goal is to be a stablecoin. And while they don’t want to be pegged to the dollar, they do want to get to a place where one OHM equals one DAI. so when they sell OHM for, at the time of this writing $218, they technically are “making” $217. And they use that profit to mint more OHM and distribute it to the people who are staking.
So if you purchase OHM and then you agree to stake it, you passively earn more OHM each day. You aren’t necessarily earning more dollars - as with many protocols, OHM continues to be quite volatile. But you do earn more tokens.
It’s important to note that, because drawdowns are super likely. It’s happened at last twice in Olympus’ short time. So you should not invest if you would be surprised to see a drawdown of 80-90%. This is definitely on the riskier end of the continuum.
Because of these crazy APYs, there has been a lot of interest in rebasing DAOs. And just like other parts of the DeFi ecosystem, clones have sprung up on other chains to mimic the mechanics of Olympus while having better gas fees (since Olympus is Ethereum based).
Time Wonderland is one of the most popular ones. At the time of this writing, Wonderland has an 85000% APY and their treasury balance is a billion dollars. Time is on the AVAX network, which means you’d have to go through all those steps discussed in the last lesson.
That’s It! (for now)
That’s it. I hope you found this course helpful.
As I mentioned in the intro, please do your own research. Crypto is definitely riskier than investing in the stock market or keeping your money in your bank. But I hope you've gotten at least a glimmer of why people are excited by the promise of the DeFi ecosystem.
I'll try to keep this guide updated over time as things change. But they change incredbily fast, so updates will likely happen annually or so.
If you have any feedback, please don't hesitate to reach out to me. You can follow me on Twitter.
Thanks for reading!
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