GSR Digital: The Ultimate Starter Guide — Understand All Core Crypto Concepts in One Article
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GSR Digital: The Ultimate Starter Guide — Understand All Core Crypto Concepts in One Article
This article can serve as a reference for experienced individuals and an introductory guide for newcomers to the field.
Navigating Web3 tides with focused insightsBy: GSR Digital
Translation: TechFlow
With recent developments such as the approval of U.S. spot Bitcoin ETFs, the rise of Solana, new experiments in blockchain architecture, and innovation within the Bitcoin ecosystem, cryptocurrencies are heating up. As a result, GSR Digital provides an overview of various digital asset themes and sub-industries, serving both experienced participants and newcomers entering the space.
Blockchain-Related Concepts
Bridges
Different blockchains have different rules, consensus mechanisms, and token standards, making it impossible to simply send tokens from one blockchain to another. Bridges transfer tokens and data from a source chain to a destination chain and must perform three key tasks: data transmission, validation, and interpretation. Bridges can be built in multiple ways, each involving trade-offs between trustlessness (whether the bridge inherits the security of the connected chains), scalability (how easily multiple chains can be connected or if each path requires custom implementation), and generality (whether the bridge can send arbitrary data/messages or only enable cross-chain swaps). Bridges also represent a significant attack vector and are typically assessed for security based on the number of supported chains, daily active users, and total value locked.
The three primary methods bridges use to execute cross-chain transactions are:
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Lock-and-Mint: These bridges lock native tokens in a smart contract on the original chain and issue an equivalent amount of wrapped tokens on the destination chain. Wrapped tokens act as IOUs that can later be burned to retrieve the original tokens on the source chain. This method is capital-efficient since it does not require additional staking or liquidity, but it fragments liquidity across chains by creating multiple wrapped versions of assets and poses systemic risks to the destination chain if attacked.
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Cross-Chain Liquidity: These bridges function as cross-chain automated market makers (AMMs) by relying on liquidity providers (LPs) to supply liquidity for low-slippage swaps. They are inefficient in terms of liquidity usage but handle only native tokens, limiting risk exposure to LPs.
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Burn-and-Mint: These bridges burn native tokens on the source chain and mint an equivalent amount on the destination chain. Since they do not wrap tokens or use AMMs, they avoid liquidity fragmentation and slippage. However, the bridge must have the authority to mint native tokens across multiple chains—a capability usually limited to real-world assets (RWA). Circle’s CCTP is an example.
Before minting on the destination chain, the bridge must reach consensus that the asset has been locked or burned on the source chain. This is achieved in three ways:
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Native Validation: The bridge runs a light client of the source chain as a smart contract on the destination chain to verify transactions. This inherits the security of the connected chain, but the light client must be custom-built for each unidirectional bridge.
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External Validation: The bridge uses its own set of validators—potentially a centralized entity, multisig, or decentralized group of stakers (often using PoA or PoS)—to reach consensus. These bridges are less secure, essentially functioning as their own blockchain without social consensus.
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Native Validation: Native-validated bridges act as peer-to-peer matching platforms based on central limit order books, where parties cryptographically verify each other through direct interaction. They are secure and easy to deploy across multiple chains but support only asset swaps.
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Optimistic Validation: A hybrid of the above methods, similar to optimistic rollups, which assumes submitted block headers on the destination chain are valid unless challenged during a dispute window.
Cryptography
Cryptography is the study of techniques for securing communication and data integrity in the presence of adversaries. Together with cryptanalysis, it forms the broader discipline of cryptology.
Cryptography employs various encryption algorithms (called ciphers) to protect communications, where keys transform input data (plaintext) into encrypted output (ciphertext). Cryptography is categorized into symmetric cryptography, asymmetric cryptography, and cryptographic hash functions.
Symmetric cryptography uses the same key for encrypting plaintext and decrypting ciphertext. It is generally simpler and computationally lighter than asymmetric cryptography but requires a secure method for sharing the key, and every pair of users in the network needs a separate key. Examples include various ciphers (e.g., Caesar cipher) and the Data Encryption Standard (DES).
Asymmetric cryptography (also known as public-key cryptography): Uses mathematically linked public and private keys, eliminating the need to share a secret key and making it suitable for large, expanding, or active networks. Public keys can be freely shared and are derived from private keys, acting as a single-factor authentication mechanism that should remain strictly confidential. While deriving the public key from the private key is easy, the reverse is nearly impossible. This allows proving knowledge of the private key without revealing it and enables encrypting messages to a recipient's public key, which can only be decrypted by their private key (providing confidentiality). Additionally, a sender's public key can verify that they hold the corresponding private key without exposing it (providing authentication). Examples include DH, RSA, and elliptic curve cryptography (used by Bitcoin, Ethereum, etc.).
Cryptographic hash functions process data by breaking it into chunks and performing multiple rounds of local operations, losing information and ultimately converting the data into a fixed-length string of numbers—an irreversible "digital fingerprint" for any input. Hash functions are one-way (output cannot reveal input) and deterministic (same input always produces same output). Bitcoin uses the SHA-256 hash function in its protocol.
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Custody
Digital asset custodians store and protect owners' private encryption keys, enabling holders to sign transactions involving digital assets. Keys are stored in encrypted wallets, either hot wallets (connected to the internet; sacrificing security for speed, liquidity, automation) or cold wallets (disconnected from the internet; more secure but slower and requiring manual access).
Custodians hold keys on behalf of users, while custody technology providers offer technical solutions enabling end-users to self-custody securely and efficiently. Custodians assume greater risk, face more regulation, and provide higher customer service levels but offer fewer assets/features, introduce counterparty risk, and respond more slowly.
Core custody technology solutions include:
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Hardware Security Modules (HSM): Tamper-proof, government-certified physical devices that secure cryptographic processes and are disconnected from the internet. HSMs are hard to crack but create a single point of failure.
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Multi-Signature: Requires multiple keys to authorize digital asset transactions, typically mandating that most associated keys sign off (e.g., 3 out of 5). Multi-sig mitigates HSM's single-point-of-failure issue but may not be supported by all blockchains, could increase transaction fees or reduce privacy, and introduces smart contract risk.
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Multi-Party Computation (MPC): Splits a private key into shares distributed across multiple devices. MPC is flexible, supports complex signing rules, allows changing or revoking shares later, enables hybrid hot/cold wallet setups, and generates standard signatures. However, it is newer, less battle-tested, and incompatible with HSMs.
Custody solutions are managed by various providers (e.g., crypto-native specialists, traditional financial institutions, cryptocurrency exchanges, prime brokers), may focus on retail or institutional investors, and often offer additional services like trading, lending, staking, governance participation, and/or secure client networking.
Decentralized Autonomous Organizations (DAOs)
Decentralized autonomous organizations (DAOs) are blockchain-based organizations governed by automatically executable rules, allowing bottom-up decision-making and community coordination around shared goals. DAOs are collectively owned and managed by members without hierarchical structure, with governance encoded in smart contracts. DAOs are fundamentally coordination mechanisms offering trustless management, organizational transparency, participatory decision-making, borderless collaboration, and novel funding and ownership models. They are used to govern protocols, fund grants, distribute creative works, guide investments, unite communities, and serve other DAOs.
DAO membership is typically determined by ownership of a DAO token, often obtainable freely, allowing any holder to propose and vote on governance proposals (e.g., treasury fund usage). Additionally, numerous DAO frameworks have emerged to automate DAO creation, including Aragon, DAOstack, Moloch, and Colony.
The most famous DAO was The DAO, a community-directed venture fund launched in 2016 that invested funds according to member votes. The DAO held 14% of all circulating ETH at its peak, and after $60 million was stolen from its treasury, disagreement over whether to recover the funds led to a network split into Ethereum and Ethereum Classic (ETC).
DAOs are widely relied upon for DeFi protocol governance, such as Uniswap, Compound, and Aave. Recently, DAOs have been formed as art collectives (PleasrDAO), social communities (Friends With Benefits), and purchasing consortia (ConstitutionDAO). The largest DAOs include Optimism, Arbitrum, Mantle, and Uniswap.
DAOs have the potential to improve civic engagement, streamline business creation and fundraising, pave the way for shared financial and social capital, enable unconstrained and customizable work, better align products/services with demand, and enhance meritocracy, contribution-driven ownership, and rewards. However, so far, DAOs have failed to meet initial expectations and are frequently criticized for low voter participation, susceptibility to coercion, lack of privacy, and disproportionate influence by large token holders.
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Decentralized Finance (DeFi)
Decentralized finance (DeFi) is a form of finance that uses blockchain technology, smart contracts, and decentralized applications to deliver traditional financial services—such as lending, trading, and investing—in an open and transparent manner without intermediaries.
Protocol developers typically release their DApps as smart contract code deployed on blockchains like Ethereum. DApps often start centralized but gradually decentralize, eventually coming under control of a decentralized autonomous organization (DAO). DApps commonly issue tokens to coordinate and incentivize user behavior and reward value contributions.
By leveraging smart contracts deployed on decentralized public blockchains and creating peer-to-peer networks, DeFi is both trustless (programs execute automatically) and rent-free (no centralized intermediaries). DeFi also inherits blockchain properties such as transparency, openness, and immutability, introducing new paradigms around ownership, governance, and incentives.
DeFi activity can be measured by active users, number of DApps, or total value locked (TVL)—the total amount of assets locked in DeFi smart contracts over a given period. Most DeFi activity occurs on Ethereum or its Layer 2 networks due to strong network effects, although other blockchains like Solana and Avalanche have active DeFi ecosystems and offer advantages over Ethereum in areas such as speed/scalability. Popular DApps include Uniswap (spot DEX), dYdX (perpetual DEX), Aave/Compound (lending), Lido (liquid staking), and Maker (collateralized debt positions / DAI stablecoin).
DeFi began flourishing in the summer of 2020—known as DeFi Summer—when the lending platform Compound started incentivizing activity on its DApp via its COMP governance token, a process called liquidity mining.
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Derivatives
Derivatives are financial contracts whose value depends on an underlying asset or basket of assets, used for hedging risk or speculation. Derivative prices fluctuate based on changes in the underlying asset and can be traded on exchanges with standardized terms or bilaterally in over-the-counter (OTC) markets with more customized terms.
While derivatives in traditional finance also include forwards and swaps, the most common derivatives in crypto include calendar futures, perpetual futures, and options.
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Futures Contracts: Futures are financial contracts obligating the buyer to purchase and the seller to sell an underlying asset at a predetermined price on a specified future date. Futures are standardized and exchange-traded, settled physically or in cash. Standard crypto futures mainly consist of CME's offerings and account for less than 5% of all futures volume if perpetuals are excluded (most futures trading actually occurs via perpetuals).
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Perpetual Contracts: Similar to futures but with no expiration date. While futures converge to spot price near expiry, perpetuals use a funding mechanism to tether the contract price to the underlying spot price. Specifically, when the perpetual price exceeds spot, funding rates are positive (longs pay shorts); when below, they are negative (shorts pay longs). Funding rates scale with the gap size, incentivizing traders to balance demand and keep perpetuals aligned with spot. By consolidating liquidity from various expiries into a single instrument, perpetuals improve market efficiency. Binance dominates perpetuals market share, with OKX and Bybit as major players. Only 2% of perpetual volume occurs on-chain, where dYdX stands out.
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Options: Options give the holder the right—but not the obligation—to buy (call option) or sell (put option) an asset at a specific price (strike price) before or on a predetermined future date. Option prices depend on underlying price, strike price, time to expiry, volatility, and interest rates. Traders often monitor Greek-letter risk metrics measuring sensitivity to variable changes: Delta (price sensitivity), Gamma (Delta change rate), Vega (volatility sensitivity), and Theta (time decay). Crypto options adoption lags behind perpetuals and liquid options markets. Deribit controls 80–90% of crypto options volume, while Paradigm handles about a third of Deribit’s volume as an OTC quoting network. Decentralized exchanges (DEXs) account for just 1% of total options volume, with Ribbon/Aevo, Lyra, and Dopex leading DEX options platforms.
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Market Makers
Market making refers to providing bid and ask quotes along with quote sizes for an asset on an exchange. It increases liquidity for buyers and sellers who might otherwise face worse pricing and lower market depth.
Market makers use proprietary software—called engines or bots—to display two-sided quotes, dynamically adjusting bids and asks based on price movements and changing volumes.
Traditionally, market makers profit from the bid-ask spread (e.g., buying at $100, selling at $101), bearing price risk as global prices move against their inventory. Given the prevalence of trending markets and one-sided order flow, crypto market making is typically conducted via loan+options or margin models.
Differences among market makers include provided liquidity, technology and software, history and experience, transparency and reporting, reputation, exchange integration, ability to provide liquidity on centralized and decentralized exchanges, and value-added services.
Specific key performance indicators for market makers include bid-ask spread, percentage of volume, percentage of best bid/ask (time spent at top of book), and uptime.
Market makers benefit projects and exchanges by improving liquidity and market depth, reducing price volatility, enhancing price discovery, and significantly lowering slippage. Perhaps most importantly, tokens play crucial roles in decentralized applications, making liquidity essential for technological functionality.
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Market Structure
Crypto market structure has many unique characteristics compared to traditional finance, including 24/7 trading, self-custody capabilities, centralized exchanges playing multiple roles (broker/exchange/custodian), instant settlement, mixed regulatory oversight, stablecoins as base assets, evolving derivatives markets, on-chain and off-chain trading capabilities, and enhanced transparency (for on-chain activity).
Compared to traditional finance, crypto markets offer several key advantages: fewer intermediaries, instant settlement, lower costs, higher efficiency, and greater accessibility.
Crypto market structure presents some key challenges and risks. First, legal and regulatory oversight is fragmented, with many regimes still developing. Second, risks related to security (smart contract risk, hacks, scams), custody (lost keys, poor access control), and counterparty (misappropriation, anonymous teams) are heightened. Finally, capital inefficiency is widespread due to fragmented liquidity across venues and on/off-chain silos, lack of full-service crypto prime brokers, limited cross-margining, and pre-funding requirements.
Trading can occur on centralized or decentralized exchanges or via OTC markets. While some spot trading occurs via DEXs (~15% of total volume), derivatives trading rarely happens on-chain (~2–3%). Perpetuals are the most popular instrument, followed by spot trading, with relatively little options or futures volume.
Although crypto assets exhibit low correlation with traditional assets, crypto prices show high volatility due to their nascent nature and structural factors. Bitcoin correlates strongly with global liquidity flows and moves short-term with macro and crypto-specific catalysts and risks. Long-term, we expect Bitcoin’s price to evolve with fundamentals including adoption, usage, development, talent, and capital.
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Maximal Extractable Value (MEV)
Maximal extractable value (MEV) measures the profit miners or validators can extract from block production beyond block rewards and transaction fees by including, excluding, or reordering transactions within a block.
Transaction data—including base fee and priority fee (gas)—are typically broadcast to the blockchain network and placed in a pending transaction queue called the txpool or mempool. Miners/validators choose which transactions to include in their proposed block and their ordering. Historically, they selected highest-gas-price transactions from the mempool, sorting them by gas expenditure. However, pending transaction data can be exploited maliciously, as bots quickly realized that simple gas-based ordering isn't profit-maximizing compared to more sophisticated strategies. For example, miners or independent third parties called searchers might use complex, bot-driven strategies to arbitrage price differences across DEXs (sandwich attacks), or execute liquidations for decentralized lending protocols.
Although validators are best positioned to exploit such opportunities due to control over transaction inclusion and ordering, the vast majority of MEV is extracted by highly sophisticated external actors (though much flows back to validators). The Ethereum validator role is designed to be as simple as possible, avoiding specialization. But maximizing fees in this MEV paradigm is computationally complex compared to early miners simply ordering transactions by paid fees. Thus, validators now typically don’t build their own blocks (though they can) and instead receive blocks from trusted relays that sit between block builders and proposers (validators). Flashbots’ MEV-Boost software facilitates this handoff. In this setup, block production is outsourced to a specialized market of block builders aiming to maximize MEV, who bid to have their blocks proposed by validators. The validator’s role becomes very simple—just picking the highest-bidding block. Due to competitive bidding, most MEV revenue is paid by builders/searchers and returned to validators, who effectively have the power to propose the block that captures it.
While certain types of MEV—like CEX/DEX arbitrage ensuring users pay consistent global prices and exchange liquidations ensuring loan repayment—are beneficial, MEV creates several negative externalities. These include worse execution prices and higher slippage for sandwiched traders and broader concerns about network centralization due to the competitive advantage of specialized infrastructure.
Two critical vectors in MEV competition are private order flow and latency. All else equal, more trades are better from a searcher’s perspective, so any searcher/generator receiving private order flow—not routed through the mempool—has an edge. Additionally, CEX/DEX arbitrage is currently the largest MEV source. Since most DEX prices adjust only between blocks (~12 seconds), while CEX prices fluctuate continuously, having the lowest latency to submit the most competitive bid before auction close is advantageous—especially when an asset’s true market price shifts sharply within a 12-second window.
Various companies and strategies aim to reduce MEV’s negative externalities, most notably Flashbots—a research group seeking to expose and democratize MEV access. After launching products like Flashbots Auction and MEV-Boost, Flashbots is now developing SUAVE to decentralize block building itself.
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Mining
The Bitcoin blockchain is a network of unrelated computer nodes running cryptography and consensus mechanisms to agree on and record valid transactions. Special nodes called miners organize pending transactions into blocks and compete to be the first to solve the mining puzzle, adding their block to the blockchain and receiving a block reward (plus transaction fees). By requiring miners to expend something valuable (computational and energy resources) to solve the puzzle, Bitcoin encourages honest participation despite potential bad actors.
Miners organize pending transactions into a proposed block, include a random number called a nonce, hash the block proposal, and aim to produce a hash output below a target value (a hash function is a deterministic one-way algorithm converting any input into a fixed-length numeric output). If the hash is below target, the miner broadcasts the winning block to the network, where other miners validate and add it to the blockchain, and the winning miner receives the block reward and transaction fees. If unsuccessful, the miner changes the nonce (and/or transactions) and hashes again, repeating until someone solves it—then the process restarts. Miners typically use mining rigs with dedicated circuits, each model having its own hash rate (number of hashes per second, e.g., Bitmain S19J Pro ~100 TH/s or 10^14 H/s) and efficiency (power consumption per hash).
Bitcoin’s maximum supply is 21 million BTC, achieved by halving the block reward roughly every four years (current reward: 6.25 BTC, to halve in April 2024). Additionally, the network adjusts the mining difficulty target approximately every two weeks to maintain an average ten-minute interval for solving the puzzle regardless of current hash rate. Thus, the Bitcoin network generates a new block roughly every ten minutes, combining with the 6.25 BTC block reward to distribute ~900 new BTC daily (6.25 * 6 blocks/hour * 24 hours).
Any miner’s chance of solving the puzzle is proportional to their hash rate share (miner’s hash rate relative to network total). For example, a miner producing 4 EH/s (4×10¹⁸ H/s) on a 400 EH/s network has a 1% hash rate share and would expect ~1% of all block rewards (~9 BTC/day). This setup fuels hash rate competition. Note that to smooth income and reduce luck impact, miners join pools, combining hash rates and sharing block rewards proportionally (minus a small fee).
Mining occurs globally, with miners gravitating toward regions with strong rule of law and cheap electricity. China once dominated due to inexpensive hydropower until banned in May 2021; the U.S. is now the leading jurisdiction. Bitcoin mining is often criticized for high power consumption, though critics conflate usage with emissions (mining often relies heavily on renewables, typically the cheapest power source). In fact, mining can promote renewable energy by providing flexible baseload demand for otherwise uneconomical projects.
Top miners include Marathon (26 EH/s), Core Scientific (16 EH/s), CleanSpark (10 EH/s), RIOT (9 EH/s), Bitdeer (8 EH/s), and Cipher (7 EH/s).
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Modularity
Blockchains have four fundamental functions: execution, consensus, settlement, and data availability. Traditionally, all four were performed by Layer 1 blockchains, known as monolithic architecture. This leads to the blockchain trilemma—the idea that blockchains cannot simultaneously optimize decentralization, security, and scalability (e.g., increasing block size improves speed but makes the chain larger, preventing some nodes from keeping full copies, thus reducing decentralization). However, a new class of protocols is separating and optimizing each function, enabling modular stacks where each component can be optimized for greater decentralization, security, and speed. This concept is known as modular blockchains or modular architecture.
More specifically, the four blockchain functions are:
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Execution: Performing computation. Involves starting from an initial state, running transactions, and transitioning to an end state.
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Consensus: Reaching agreement on transactions and their ordering.
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Settlement: Validating transactions and providing finality guarantees. For modular chains, this includes verification/arbitration proofs and coordinating cross-chain messaging.
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Data Availability: Ensuring transaction data is published so anyone can reconstruct the state.
Examples include Ethereum outsourcing execution to Layer 2s to improve scalability. While Ethereum can still operate monolithically, it is moving toward handling consensus, settlement, and data availability while leveraging Layer 2 scaling solutions for off-chain execution. Celestia is another example, using data availability sampling and erasure coding to provide transaction ordering and data availability, proving sufficient data exists to replicate the blockchain state and allowing other modular components to connect rapidly, creating interoperable, customizable, high-performance blockchains. Other examples include Fuel (modular execution layer), Tezos (Layer 1 with rollup capabilities), Avail, and EigenDA (data availability layers).
Different design approaches can be used to build modular chains, with different solutions for different functions. For example, Solana performs all four blockchain functions and is a monolithic chain. In contrast, smart contract rollups use Ethereum for consensus, settlement, and data availability, while using rollups for execution. A validium (scaling solution) can use Ethereum for consensus and settlement, off-chain data availability via a data availability committee (DAC), and execution on the validium. Sovereign rollups can use Ethereum for data availability and consensus, with execution and settlement occurring on the sovereign rollup.
Modular chains face several challenges: development is ongoing, rollup sequencers remain centralized (each rollup currently determines its own transaction ordering and could censor), and liquidity is fragmented across different execution layers.
Non-Fungible Tokens (NFTs)
Fungibility means two items are identical and interchangeable, like dollars or airline miles, while non-fungibility means items are unique and not freely interchangeable, like original paintings or land. NFTs are non-fungible (entirely unique) digital assets stored on a blockchain, acting as blockchain-based digital representations of ownership. Note that for cost reasons, only an ID number is stored on-chain, pointing to a URL hosting JSON metadata (Autoglyphs being a rare exception). Also note that blockchains define standards for fungible tokens (e.g., Ethereum’s ERC-20) and non-fungible ones (e.g., Ethereum’s ERC-721).
NFTs offer typical crypto advantages: immutability, provable scarcity and provenance, standardization and interoperability, and programmability—making digital assets feel as real and permanent as physical-world objects. NFTs can represent ownership of uniquely valuable digital items such as digital art, domain names, intellectual property, event tickets, and apply to use cases including collectibles, gaming, media, music, and finance.
Notable NFT examples include: Colored Coins on Bitcoin (2012); CryptoPunks (first NFTs on Ethereum, 2017); CryptoKitties (digital cat collecting/breeding game, 2017); Beeple’s Everydays NFT auction ($69 million sale); and NBA Top Shot (digital NBA cards, 2021).
Historically, NFTs traded on various NFT marketplaces, some specializing in niches, with OpenSea dominating ~95% of market share during the late-2021 bull run. Recently, Blur displaced OpenSea as the dominant marketplace by using token incentives and enhanced trading features. Overall, NFT trading volume—much of it “PFP” (profile picture NFTs)—has declined ~95%, with prices down >80% from peaks.
Despite severe volume and price declines, many believe NFTs remain profoundly important and will eventually become ubiquitous as new features (improved programmability/composability), new use cases (continued growth in tokenization and gaming), new ownership and business models emerge, and the world becomes increasingly digital.
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Staking
Blockchains consist of transaction blocks created and validated according to predefined, coded rules. However, since participants could be malicious, blockchains require block producers to stake value to prevent bad behavior. Proof-of-stake (PoS) blockchains like Ethereum require block producers (called validators in PoS) to lock cryptocurrency into a smart contract—a process called staking.
In addition to extra balancing mechanisms, validators are randomly selected based on their staked proportion to produce a block and earn staking rewards from transaction fees and protocol issuance, compensating them for work like proposing and validating blocks. However, if validators perform poorly—intentionally or not—a portion of their stake may be slashed. Thus, staking is crucial to the proof-of-stake process and serves as a means of securing the network.
To stake, individuals can run a validator node or delegate tokens to a validator in exchange for a share of staking rewards. Rewards vary by protocol design, staking participation rate, network activity, lock-up duration, and chosen validator (for delegators). Risks include lock-up periods (staked tokens usually can’t be withdrawn immediately), slashing due to poor performance, and opportunity cost (staked tokens can’t be used elsewhere).
To mitigate high opportunity costs, many staking providers issue liquid staking tokens (LSTs)—derivative assets representing staked tokens that accrue yield and can be used in DeFi protocols (e.g., as loan collateral or liquidity on DEXs). Lido’s staked ETH (stETH) is the largest example.
Many decentralized applications and centralized digital asset service providers offer staking services, where users deposit tokens into smart contracts or centralized modules to earn rewards, boost yields, gain governance rights, etc. Though also called staking, this differs significantly from blockchain consensus protocol staking and is more commonly used to reduce token supply, increase demand, and reward users.
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Real-World Assets (RWA)
Overview: Tokenization is the process of bringing off-chain assets (commonly called real-world assets or RWAs) on-chain to enable tracking, trading, programming, and managing them on-chain. Many asset types can be tokenized, including commodities, collectibles, financial instruments, intellectual property, and real estate. Due to its benefits, businesses, crypto natives, and regulators show strong interest. According to The Block, the global tokenized market is projected to reach $16 trillion by 2030.
Benefits: Tokenization offers several advantages:
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Asset Management & Administration: Streamlines operations, reduces administrative burden, automates and ensures transparent recordkeeping
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Market Efficiency & Liquidity: Lowers administrative costs, improves standardization, shortens settlement times, reduces reliance on intermediaries, enhances asset efficiency through composability
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Financial Inclusion: Lowers minimum investment thresholds, expands access to capital sources
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Economic Growth: Improves access to capital and financing through broader, more diverse participant bases
Process: Real-world assets are brought on-chain via tokenization. According to The Block, the process includes:
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Identification: Select the real-world asset to bring on-chain
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Verification: Confirm asset ownership and value via legal documents or appraisals. Trusted third parties (lawyers, auditors) can verify authenticity, ownership, and valuation
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Tokenization: Create a digital token or set of tokens representing the asset on the blockchain. Each token usually represents fractional ownership or a specific claim, with smart contracts defining token attributes and functions
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Issuance: Verified asset information and created tokens are recorded on the blockchain and issued via ICO, STO, or direct listing
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Custody/Management: Asset management and custody ensure secure storage of physical assets and management of their on-chain representations, typically involving traditional custodians and blockchain-based custody solutions.
Examples: Stablecoins are the most well-known tokenization example, typically tokenizing USD but also including other assets like gold (e.g., KAU, PAXG, XAUT). The U.S. Treasury tokenization market is growing rapidly, led by Franklin Templeton ($300M), Ondo’s OUSG ($130M), and Matrixdock’s STBT ($85M). Beyond Treasuries, other debt instruments are being tokenized, including private credit (Defyca), structured debt (Intain), and debt securities (Obligate). Some protocols tokenize or act as markets for less liquid tokenized products, such as Centrifuge, Goldfinch, Maple, RealT, BSOS, and Re, while others tokenize stocks and indices (Backed, Swarm). Finally, tokenization extends to carbon credits (Ecowatt, Flowcarbon), physical collectibles (Collector, Tangible), and even data indexing (The Graph), KYC (Shyft Network), and job markets (Human Protocol), though the latter often fall outside current RWA narratives.
Challenges: Despite these benefits, tokenization/RWA must overcome various challenges to fulfill its potential. First, robust and clear legal and regulatory frameworks must be established. Second, standardization is needed in asset representation, ownership determination, and user identity. Third, interoperability must improve to consolidate users and liquidity across chains and applications. Finally, data, custody, and auditing processes need enhancement.
Tokenomics
Tokenomics refers to the economics of a protocol token, encompassing various supply and demand characteristics.
Tokens play vital roles in decentralized entities by coordinating and incentivizing behavior, rewarding value contributions, and facilitating exchange. Thus, strong tokenomics can support protocol objectives, create/enhance sustainable economic models, and accelerate long-term protocol growth and value creation.
Tokenomic design starts with protocol goals, then examines how tokens help achieve them. Tokenomics is less about reducing supply to raise price and more about aligning supply and demand. Many tokenomic frameworks exist, but analyzing supply and demand is perhaps the most popular.
Supply: Token supply is usually encoded in smart contracts and is more formulaic than demand. Key considerations include:
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Supply Definitions: Token supply has various definitions: circulating supply is the amount currently in circulation and immediately sellable; total supply is created tokens minus burned tokens (including those locked in smart contracts); maximum supply is the hard-coded cap on total tokens, indicating remaining inflation.
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Supply Metrics: A token’s current and future supply is influenced by many components, including issuance schedules (many protocols have mechanisms to increase circulating supply to incentivize activity), allocation (tokens may be created/fair-launched or pre-mined), vesting (pre-mined tokens may be subject to vesting schedules to prevent massive supply dumps), distribution (who holds tokens and how much—concentration poses risks).
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Generally, a token tends to absorb demand well over time if most of its maximum supply is already used or if it has stable, predictable inflation encouraging usage, fair launch or pre-mine, gradual long-term vesting, high community allocation, and broad distribution without oversized holders.
Demand: Token demand stems from fundamental and speculative drivers, motivated by benefits the token provides.
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Demand Creation Mechanisms: Demand may arise from various sources, such as internal protocol use (value exchange, governance, fee discounts), revenue sharing with token holders, monetary properties, and speculative demand.
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Not all demand drivers are equal. Governance rights are often low-value due to low voter participation. Speculative demand is double-edged—it can boost but also harm token price. Revenue-sharing with token holders is a strong potential benefit and demand driver but difficult to implement under current regulations. Ultimately, protocols should focus on creating and growing genuine utility/use cases for their tokens to drive demand, then match that demand with appropriate supply.
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Zero-Knowledge Proofs (ZKP)
A zero-knowledge proof (ZKP) is a method allowing one party (the prover) to prove to another (the verifier) that a statement is true without revealing any other information. For example, suppose your friend wears a blindfold and holds a green ball and a red ball. You want to prove the balls differ in color without revealing anything else. You ask your friend to hide the balls behind their back, swap hands or not, then show them again. You tell them whether they swapped. One round with a correct answer may make your friend believe you, but not fully—you had a 50% chance of guessing correctly. But with each correct round, the probability you’re guessing approaches zero, convincing your friend the balls differ in color, while you revealed nothing about the balls or anything else.
ZKPs in blockchain are primarily used for privacy and scalability. Privacy examples include hiding transaction details and minimizing data sharing. Scalability examples include ZK-rollups, which process transactions off Ethereum mainnet, batch and compress state data, post it to Layer 1, and provide a zero-knowledge proof (validity proof) that computations were
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