# Bankless Academy: full content (English)
> Free, open-source Web3 education for beginners: 11 interactive lessons and 8 handbooks on Bitcoin, Ethereum, wallets, security, DeFi and staking, published in 28 languages. English is the canonical version; every translation is derived from it.
Index: https://app.banklessacademy.com/llms.txt. This file inlines the 19 documents listed there (11 lessons, 8 handbooks) in their source Markdown. Knowledge-check options are `- [ ]` / `- [x]` (correct); the `> ℹ️` line under each option is the feedback learners see for it.
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# Bitcoin Basics
What is Bitcoin? Explore the first successful cryptocurrency and rethink money.
- Page: https://app.banklessacademy.com/lessons/bitcoin-basics
- Markdown: https://app.banklessacademy.com/lessons/bitcoin-basics.md
- Format: Lesson
- Duration: 15 minutes
- Writers: Tetranome
## Welcome to Bankless Academy
Welcome, bold Explorer, to the frontier of digital innovation.
At Bankless Academy, our mission is to provide Explorers such as yourself with the best tools and knowledge to navigate the blockchain universe and “go bankless!”
Today, we’re looking at the `cryptocurrency` that started it all: Bitcoin.
Bitcoin is a new type of money, designed to resist `inflation`: its supply is fixed in code, so no one can print more of it. Its price still swings in the short term, but its rules never change.
## Bitcoin’s Story
Launched in 2009 by the mysterious “`Satoshi Nakamoto`,” Bitcoin marked the beginning of a new economic era.
As the first successful `cryptocurrency`, Bitcoin began a powerful conversation: should the control and power of money continue to rest within traditional banking systems? Or does it belong in the hands of the citizens who earn and use it every day? If you’re unsure of what exactly this means, you’re in the right place!
The reality is that today, we aren’t in control of our money in the way we think we are. This has very real consequences.
It’s time to learn how Bitcoin is revolutionizing finance.
**It’s time to rethink money.**
## A Brief History of Money
Money has been an integral part of society since our earliest days when beads, shells, and stones were used to exchange goods & services.
Yet early currencies had a problem: it was too easy for someone to find/create new money. The more of something there is, the less value it has, and so everyone’s money would slowly become worth less. If currency was to hold its value, it needed to be harder to find.
Materials like gold & silver were eventually adopted to solve this problem. The key advantage of these materials was their scarcity – there wasn't an endless supply, making it hard for anyone to increase the amount of money in circulation significantly. This `scarcity` helped maintain the value of money.
As societies grew, a government’s central bank would issue standardized coins made of gold & silver. Such currency made money recognizable and measurable while serving as a strong store of value.
## Knowledge Check 1
What happens to existing money when lots of new money is added to a monetary system?
- [x] It becomes worth less.
> ℹ️ Correct! The more money there is, the less each unit is worth.
- [ ] It becomes worth more.
> ℹ️ Try again! A bigger supply makes each unit worth less, not more.
- [ ] Its value stays the same.
> ℹ️ Try again! New money dilutes the value of the money people already hold.
## A Brief History of Money (Part 2)
With the introduction of paper money, currencies shifted to being 'backed' by gold. Money’s value was directly linked to a specific amount of the precious metal held in storage.
Then, in the 20th century, came the fall of this “`Gold Standard`”.
Precious metals were slowly disconnected from currencies worldwide, an effort that would allow any country’s economy to grow beyond its supply of gold. As a central bank no longer needed gold to create currency, they could create as much new money as they deemed necessary for their country’s economy. By firmly controlling the money supply, they could also control its value.
Moving into the digital age, electronic currency has vastly replaced physical currency. Storing our money with commercial banks has given us the convenience of credit cards and payment apps. While easy and secure, it also puts for-profit businesses between people and their money.
## The Problem
The problem with our current financial system is the lack of control we have over our money, and how this lowers our ability to freely decide what to save and what to spend.
`Central banks`, the bank managing a country’s `monetary policy`, can introduce any amount of new money. This lack of `scarcity` often makes our money worth less and less each year. Money with an unpredictable, decreasing value often forces us to spend it: **“If my money is going to be worth less every year, why save? I might as well spend it now.”** 💸
`Commercial banks`, those used for everyday saving and spending, also influence our spending habits. As a `custodian`, they can block transactions or confiscate our funds. Some banks have blocked their clients from buying cryptocurrency! **If your bank can freeze your life savings at any time… do you truly own your money?** 💸
---
For money to once again support financial freedom, it must regain the two key properties it has lost over time:
- 💎 **Value:** Money must reliably store its worth over time.
- ✊ **Ownership:** Money must be easy to store and protect ourselves.
Only these qualities can restore our ability to freely save and spend our money.
## Enter Bitcoin
`Satoshi Nakamoto` thought that money was too important to be controlled by just a few people. They wanted to create a type of money that could be fair and reliable for everyone.
Enter Bitcoin (`BTC`): a digital currency that operates beyond the traditional banking system.
- ⛓️ It’s `peer-to-peer`: It connects people directly to each other. Automated using `blockchain technology`, it removes need for institutions to facilitate storage or transactions. Advocates call it “a set of rules with no rulers”.
- 💎 It’s `scarce`: With no central bank issuing unlimited new money, Bitcoin has a stable, predictable monetary policy that honors long-term saving.
- ✊ It’s `self-custodial`: It can be held without institutions hosting transfers or storage. The network records who owns what, and your `private keys` prove it: only the key holder can move the coins.
For its qualities, Bitcoin has earned the nickname “digital gold”.
## Digital Gold: Scarcity
📉 Do you find it difficult to keep up with rising costs?
Scarcity in Bitcoin refers to there being a cap on how many Bitcoins can ever exist: a maximum of 21 million. This `max supply` is embedded in its code, making Bitcoin rare, much like gold.
New currency still enters the `circulating supply` through a laborious process called `cryptocurrency mining`. Roughly every four years, this new issuance is cut in half (the `halving`), shrinking toward zero as the cap approaches, so miners rely more on transaction fees over time.
Bitcoin's fixed `monetary policy` makes it attractive for preserving value in the long term. Since 2024, regulated funds (`spot ETFs`) have let traditional investors hold Bitcoin, strengthening its “digital gold” role.
Its short term value remains volatile due to market speculation.
## Knowledge Check 2
How does Bitcoin promote value preservation in the long term?
- [x] Using a max supply cap.
> ℹ️ Correct! Bitcoin's fixed supply creates scarcity similar to precious metals. This aids value retention.
- [ ] By removing custodians.
> ℹ️ Try again! Custody relates to ownership, rather than value.
- [ ] By keeping its price stable.
> ℹ️ Try again! Bitcoin’s price is volatile in the short term; its fixed supply supports long-term value.
- [ ] By letting a central bank manage supply.
> ℹ️ Try again! Bitcoin has no central bank; its supply rules are fixed in code.
## Digital Gold: Self-Custody
🧊 Has your bank frozen your funds without notice because you performed a transfer that they didn’t like?
---
In democracies, ownership is a protected human right because it gives citizens increased control and freedom over their lives. We cannot act freely when our means of survival are conditional, judged by businesses or institutions.
As our assets are increasingly digitized (i.e. your money, your property, and even your identity), our lives are taking on a digital quality that we must learn to protect.
Bitcoin’s `self-custody` offers true digital ownership, beyond reach of `custodians`. Your coins aren’t stored in an app or website: the network records your ownership, and your `private keys` prove it. Keep those keys to yourself, and you alone hold the key to your vault of digital gold.
This system of ownership gives you total control of your digital wealth: anywhere in the world, any time.
## Knowledge Check 3
How does self-custody enable true ownership?
- [x] By giving you sole access to your assets.
> ℹ️ Correct! Anyone with access to our assets has the ability to confiscate them.
- [ ] By allowing custodians to access to your assets.
> ℹ️ Try again! Self-custody means there is no custodian (third party) that can access our assets.
## Bitcoin: It’s like Emailing Money!
⌛ Have you ever had to wait several working days to send money internationally, while paying 3-5% in fees?
Email simplified sending letters by removing the need for a post office. In a similar way, Bitcoin has streamlined sending money by removing the need for banks.
- ⚡ Send money globally, 24/7. No paperwork, no bank approval, no downtime.
- ⚙️ Confirmation takes minutes to an hour; a fast-payments layer, the `Lightning Network`, handles instant everyday payments.
- 📡 Access Bitcoin from anywhere with an internet connection.
Like an email address, a Bitcoin address is all you need to receive bitcoin. It looks like this: _bc1qw508d6qejxtdg4y5r3zarvary0c5xw7kv8f3t4_
You’ll manage your funds with `cryptocurrency wallet` software on your phone or computer. No appointment or ID required!
## Knowledge Check 4
How is Bitcoin similar to email?
- [ ] Both are online 24/7.
> ℹ️ True, but so are the other options. Pick the answer that covers them all.
- [ ] Both are digital technologies.
> ℹ️ True, but so are the other options. Pick the answer that covers them all.
- [ ] Both can be accessed with a phone.
> ℹ️ True, but so are the other options. Pick the answer that covers them all.
- [x] All of the above.
> ℹ️ Correct! Both Bitcoin and email innovate on the services that came before them.
## The Bitcoin Network
Let’s switch gears and look at the engine behind Bitcoin:
**The Bitcoin Network**.
Bitcoin runs on a shared network hosted across thousands of computers worldwide. Every computer in the network plays a role in maintaining its operations; the network exists through these computers! If one computer processes a fraudulent transaction, the others are there to correct it.
This also means there’s no single point to apply pressure in attempted hacks. In order for the network to be controlled, a majority of the computers would need to be compromised.
This defense strategy is called `decentralization`: the shifting of control from one central group to many smaller ones. It’s what makes cryptocurrency networks virtually unstoppable.
## Bitcoin Mining
With the Bitcoin Network having no central bank, the network relies on its `decentralized` participants. Known as `miners`, these participants are constantly checking transactions and adding them to a “database”: the `blockchain`.
It’s important that these miners are motivated to be active and honest, to protect the network from fraud. Miners frequently double-check each other’s results, but are also rewarded for the work they do. When we submit Bitcoin transactions, we pay a small fee that goes to the miner of our transaction. Miners also earn new Bitcoin, known as “block rewards”, for their work.
These rewards slowly increase Bitcoin’s `circulating supply` within the `max supply` cap of 21 million `BTC`.
It’s the slow, predictable introduction of new coins that separates Bitcoin from traditional currencies. Everything is managed by community-approved computer code (“rules with no rulers”) and decentralized participants, rather than small groups of people at the `central bank`.
## Sending a Bitcoin Transaction
Understanding the exact mechanisms that power Bitcoin transactions and mining can get quite complicated. That said, using and sending Bitcoin is simple!
We’ll take a simplified view of the process for today:
1. You submit a transaction using your `cryptocurrency wallet`, sending 0.1 `BTC` to your friend’s wallet address.
2. A miner checks your transaction for errors. Other miners double-check their results.
3. If approved, your transaction is added to the `blockchain` “database”.
4. Your friend receives 0.1 BTC in their wallet.
[embed](https://app.banklessacademy.com/animation/bitcoin)
## Knowledge Check 5
What is decentralization?
- [ ] Increased scarcity.
> ℹ️ Try again! Scarcity means an asset is in low supply.
- [x] Distribution of control across multiple participants.
> ℹ️ Correct! This distribution protects the network and its users.
- [ ] The rewards earned by miners.
> ℹ️ Try again! Miners are rewarded with transaction fees and block rewards.
## Knowledge Check 6
How does mining protect the Bitcoin Network from fraud?
- [x] By rewarding miners for checking transactions.
> ℹ️ Correct! Bitcoin rewards attract miners and incentivize them to act honestly.
- [ ] By increasing the circulating supply of Bitcoin.
> ℹ️ Try again! Supply increases don’t help to prevent fraud.
- [ ] Both of the above.
> ℹ️ Try again! Only one of the above helps to prevent fraud.
## The Innovation of Money
In this lesson, we’ve looked at how Bitcoin’s scarcity helps it retain value, and how institutional management of our assets means giving up full ownership.
However Bitcoin has evolved beyond a simple monetary tool. It has become a catalyst for a `decentralized money` revolution. This movement reimagines the traditional financial system by distributing monetary power and control to those who use it.
By decentralizing money and removing `custodians` we can:
- 💵 Host a 24/7 global marketplace, secured by citizens around the world.
- 🛠️ Offer financial tools to the unbanked regions of the globe.
- 🤝 Use `peer-to-peer` technology to avoid the inefficiencies of middleman institutions.
- 🔎 Reduce institutional inequality, fraud and market manipulation.
- ⚖️ Build `equality of opportunity` into monetary systems.
- 🌐 Establish true ownership for the digital age.
The new era of money is championing the fundamental values of democracy to increase quality of everyday life for citizens around the globe. And you’re invited.
”Democracy provides an environment that respects human rights and fundamental freedoms, and in which the freely expressed will of people is exercised.” — United Nations.
## Your Bitcoin Quest
It’s time to simulate your first Bitcoin transaction and practice your freedom in the digital age.
Your transaction will include the following details:
📫 The wallet address of the person you’re sending to.
💰 The amount of Bitcoin to send.
It will also include a transaction fee given to the `miners`.
Remember to make sure all details are accurate.
Once a Bitcoin transaction is confirmed, you cannot reverse it.
---
# Ethereum Basics
What is Ethereum? Unlock the “new internet” and your digital freedom.
- Page: https://app.banklessacademy.com/lessons/ethereum-basics
- Markdown: https://app.banklessacademy.com/lessons/ethereum-basics.md
- Format: Lesson
- Duration: 15 minutes
- Writers: Tetranome
## Ethereum Basics
Welcome, Explorer, to one of the most important lessons at Bankless Academy.
Today we’re looking at Ethereum: the next era of the internet. It’s a revolutionary platform powering a world of new internet `apps` and digital currencies.
A simple way to think of Ethereum is like the Google or Apple `app store`, but with some key differences:
- 💸 It uses `cryptocurrency` instead of `fiat` currency (the US dollar, the euro, or the Chinese yuan).
- 📡 It’s a layer added directly to your internet browser, unlocking new functionality on websites.
- ⚖️ The store rules are agreed on by users and app builders. There’s no central corporation in charge.
To understand why millions of people are using Ethereum across the world, we need to look at its core mission…
## A Global Town Square
Over the last forty years, the internet has become the world’s town square.
Here, total strangers connect, exchange ideas, goods and services, and even ignite global movements together. It's humanity's most powerful intersection of connection, creativity, and innovation.
**But it has one big problem…**
## Centralized Services
**The internet relies on a small group of corporations that don’t always have our best interests at heart.**
`Centralized services` have more control over the internet than ever before, acting as `intermediaries` for almost everything you do online.
Think of how big banks manage your purchases, Facebook and Instagram connect your social interactions, and Apple or Google control the apps you can have on your phone. Through their rules, fees, and corporate motives, they have an incredible influence over your digital exchanges.
## One-sided Trades
We call them `centralized services` because all the power is in one place. It’s often like being stuck under the rule of a king who knows exactly how to get what he wants from you. You might be surprised at the reality of your trades…
💸 Banks charge you fees and invest your money for their own profit.
💳 Payment networks, like Visa & Mastercard, sell your purchase data to advertisers.
📞 Social platforms, like Instagram, can view your private conversations.
🪓 Content platforms, like YouTube, can freely delete creators’ entire careers, with no fair trial.
These shady rules and fees are often hidden away in the ‘Terms & Conditions’, and tend to get worse over time. Take a closer look at your favorite service agreements here: [https://tosdr.org/](https://tosdr.org/) 👀
## Knowledge Check 1
True or False: Most online services place an intermediary between you and the people you interact with.
- [x] True
> ℹ️ Correct! Banks, social platforms, and app stores all sit in the middle, setting the rules and fees.
- [ ] False
> ℹ️ Try again! Centralized services act as intermediaries for almost everything you do online.
## An Open Internet
😤 **Had enough of platforms that don’t respect your needs?**
---
This is the `value-extractive` internet we’ve become used to.
Called “walled gardens” for how restrictive these services are and how difficult they make it to leave, finding better alternatives can be time consuming and expensive. It often feels easier to just put up with the high fees, lack of transparency, and one-sided trades.
We need a fairer, more reliable internet, beyond intermediaries and their walled gardens. We need an online space where power is held by the user, the way the internet was initially built to be.
## Peer-to-Peer Trades
The solution starts with changing how the internet is connected.
In traditional internet services, information or money from one `peer` goes through an `intermediary` checkpoint before arriving at its destination. In theory, intermediaries can do whatever they want before the trade completes.
**Peer → Intermediary → Peer**
But there’s a second model, called `peer-to-peer` networking. It replaces intermediary services with automated, transparent computer code.
**Peer → Automation → Peer**
It’s like replacing your intermediary with a self-service kiosk. Services become more predictable, fees go down, and users regain control.
As we’ll see, a peer-to-peer internet changes everything.
## Knowledge Check 2
How can automation improve your online experiences?
- [ ] By increasing the reach of intermediaries.
> ℹ️ Try again.
- [x] By giving participants more control.
> ℹ️ Correct!
## Ethereum: The Open Internet
⚖️ **Wouldn’t the internet be a better place if the same rules applied to everyone?**
Think of Ethereum as a digital city, where everything (from businesses to public services) is run by self-service, transparent systems. There are no intermediaries, and anyone can inspect how each system works.
Transactions in the city are noted on a public record called the `Ethereum blockchain`. The blockchain tracks and stores digital property in the city, removing the need for another classic intermediary: the bank!
Every transaction pays a small fee. Most of that fee is destroyed, which can make the city’s currency, `ether`, scarcer as the city gets busier. A small tip rewards the computer that processes your transaction.
The city’s rules aren’t set by any company: changes are agreed on openly by builders, researchers, and users. Transparent code has replaced kings, and nobody is above the rules.
## The Decentralized Economy
To access Ethereum you’ll use your computer or mobile device’s web browser. With just one account you can log into the entirety of this new internet: a single login called a `crypto wallet`. This universal account makes it easier to change services and escape “walled gardens”.
When you enable the Ethereum app layer, you can access new websites known as `dApps`. These are the self-service systems we mentioned earlier. dApps offer digital goods and services like:
- 🤝 sending or trading currencies, stocks and other digital goods, but with **low fees and 24/7 service**.
- 📻 connection with your favorite creators, but you can **unlock unique perks and opportunities** while ensuring your money goes directly to the artist.
- 👪 social media, but if you dislike the platform you can **easily transfer your social circle** to a new one.
- 🗳️ donating to your favorite projects, but even a $1 donation receives **a large matching bonus, meaning greater impact**.
- ⚙️ renting out your computer’s processing power for **passive income**.
By removing intermediaries, banks, and individual accounts for each service, Ethereum has made its economy `decentralized` (this is the “d” in “dApp”). dApps get better and better as they compete on quality, not unclear business practices and control.
## Using a dApp
Using a `dApp` is similar to using regular apps and internet services.
Let’s simulate using a dApp for swapping `crypto` online. In this simulation we’ll swap USDC, an `onchain` US dollar issued by the company Circle (meaning Circle can freeze it), for `ETH`, Ethereum’s native currency.
1. Connect your `crypto wallet` to the dApp’s website.
2. Confirm that you want to allow this dApp to interact with your Ethereum wallet.
3. Swap all of your USDC to ETH by clicking “Maximum”.
4. Initiate the swap.
5. In your wallet, check the terms of your trade, and then sign.
6. Great! Ethereum has processed your crypto swap!
Plugging your wallet into a dApp and swapping crypto is that easy. Now you can send it to friends, use it to make purchases, or try other financial service dApps.
[embed](https://app.banklessacademy.com/animation/swap)
## Knowledge Check 3
On Ethereum, services get better and better because…
- [ ] Business practices are more transparent.
> ℹ️ Try again.
- [ ] You can easily change service providers.
> ℹ️ Try again.
- [x] Both of the above.
> ℹ️ Correct!
## A Global Banking System
⌛ **Do you want a faster, cheaper way to transfer money internationally?**
---
Ethereum makes it possible for you to send and store `crypto` without intermediaries, with better services at lower costs.
⚡ With crypto, you can send money anywhere in the world in seconds. Most everyday activity now happens on `Layer 2` networks, faster and cheaper lanes built on top of Ethereum, where a transfer can cost as little as one cent. Compare this to sending money through a bank, where they can charge you 3-4% in fees, and take 1-5 days.
🔐 You’re the only person with access to your Ethereum account. There’s no intermediary loaning out your savings or controlling what you do with your money. Funds are stored in your personal `crypto wallet`, the same one you used to connect to a dApp earlier.
On Ethereum, you’re your own bank, and you feel like it!
## Sending a Payment
Let’s use another simulation to practice sending cryptocurrency. Try sending your 0.015 `ETH` to the Bankless Academy `crypto wallet`.
1. Unlock your wallet.
2. Inside of your wallet, select send.
3. Adjust the amount to 0.015 ETH by clicking “Maximum”.
4. Confirm the currency and amount.
5. In contacts, select banklessacademy.eth.
6. That’s it! Your international transfer was done in seconds, and no intermediary could stop you.
With Ethereum wallets, you can own and send more than just cryptocurrency. Transferable assets include any digital property that can be stored `onchain`. Digital art, club memberships, show tickets, stocks, website address ownership, and even real-world property rights have made their way onto Ethereum.
[embed](https://app.banklessacademy.com/animation/send)
## Knowledge Check 4
True or False: On Ethereum, your funds are stored in your own crypto wallet, not held by an intermediary.
- [x] True
> ℹ️ Correct. You can go “Bankless”! You hold your own funds, with lower fees and more control.
- [ ] False
> ℹ️ Try again. Only you can access your crypto wallet, so no bank sits between you and your money.
## How it Works
Let’s bring everything together by taking a quick look at how Ethereum makes it all possible.
As a `peer-to-peer` network, Ethereum is made up of thousands of computers, called `nodes`, spread across the world. Anyone can run one. Some operators lock up (`stake`) their own ether to act as `validator nodes`: their software processes transactions and double-checks others’ results to prevent fraud, earning `ether` rewards in return. Most people join in through [staking services](https://app.banklessacademy.com/lessons/staking-on-ethereum) rather than running their own computer.
## How it Works (Pt. II)
The transaction you submitted earlier was processed by these Ethereum network `validator nodes`.
1. Your ETH transaction was submitted to the Ethereum Network.
2. A `validator` checked your transaction for errors. Other validators double-checked their results.
3. Your transaction was added to the network’s public ledger, the `Ethereum blockchain`.
4. We received your transferred ETH in our account.
You might be wondering why these validators don’t just run off with your funds. The short answer is because Ethereum makes this virtually impossible. Your upcoming lesson, “Blockchain Basics”, will help you understand more.
[embed](https://app.banklessacademy.com/animation/ethereum)
## Common Questions
How was Ethereum created?
Ethereum launched in 2015, with the Ethereum Foundation coordinating its early development, a role it still plays today. Upgrades are agreed through an open, public process among developers, researchers, and the wider community; there is no company or token vote. This openness supports the network’s founding vision of an open internet.
Is Ethereum safe?
Your digital property on Ethereum can't be stolen directly. However, scammers can trick you into giving them access to your assets. Our “Web3 Security” lesson will teach you the basics of staying safe and avoiding simple mistakes that can cost you money.
Is Ethereum widely used?
Yes. In 2024, US regulators [approved spot ETH investment funds (ETFs)](https://www.forbes.com/sites/lawrencewintermeyer/2024/07/25/ethereum-on-the-brink-of-market-transformation-as-etfs-get-green-light/), letting people invest in Ethereum through the traditional stock market. Businesses, such as [Sony](https://www.bankless.com/sony-introduces-soneium-its-ethereum-l2-network) and [Visa](https://caribbean.visa.com/about-visa/newsroom/press-releases/visa-network-to-settle-transactions-in-usd-coin-usdc.html), are even building on it.
Is Ethereum used for criminal activity?
[Industry research by Chainalysis](https://www.chainalysis.com/blog/2026-crypto-crime-report-introduction/) consistently estimates that less than 1% of cryptocurrency transaction volume is linked to criminal activity. This is far below the [estimated 2-5% of global GDP](https://www.forbes.com/sites/haileylennon/2021/01/19/the-false-narrative-of-bitcoins-role-in-illicit-activity/) suspected to be involved in criminal activity. Ethereum’s high transparency also makes it easy for investigators to track and prosecute criminals acting `onchain`.
Is Ethereum energy efficient?
As Ethereum’s daily usage grew the community identified a growing environmental impact. A major network upgrade, called 'The Merge', [reduced Ethereum's energy consumption by 99.9%](https://www.newscientist.com/article/2369304-cryptocurrency-ethereum-has-slashed-its-energy-use-by-99-99-per-cent/). This achievement showcases Ethereum's adaptability to the needs of its users!
How can I invest in Ethereum?
To invest in Ethereum, you’ll want to own `ETH`, the network’s native cryptocurrency. ETH can be bought through your `crypto wallet`; we’ll be helping you create yours in the next lesson. You can also buy ETH on a `centralized exchange` like Coinbase or Binance, but you won’t be able to use it on Ethereum until you transfer it to a wallet.
## Joining the Movement
💪 **It’s time to take control of your digital life.**
---
Ethereum is eroding the walls that intermediaries have put up around their corners of the internet, transforming an economy of `value-extraction` into one of `value-creation`. It’s time for powerful yet fair online services, true ownership over your digital assets, bold new communities, transformative work opportunities, and more.
Ready to make your mark?
To start your journey you’ll need to create your `crypto wallet`. This is your passport to the world of Ethereum. We’ll set up yours in your next lesson, “Wallet Basics”.
## Knowledge Check 5
How do you imagine yourself using Ethereum? (Check all that apply)
- [ ] Exploring new digital goods and services.
- [ ] Sending money internationally.
- [ ] Investing in Ethereum projects.
- [ ] Connecting with the artists I love.
- [ ] Contributing to powerful community projects.
- [ ] Building innovative dApps.
---
# Creating a Crypto Wallet
Set up your first crypto wallet with our step-by-step walkthrough.
- Page: https://app.banklessacademy.com/lessons/creating-a-crypto-wallet
- Markdown: https://app.banklessacademy.com/lessons/creating-a-crypto-wallet.md
- Format: Handbook
- Duration: 5 minutes
- Writers: Tetranome
This is a summary of our [Wallet Basics](https://app.banklessacademy.com/lessons/wallet-basics) lesson, along with a walkthrough for the quest. Check out [the full lesson](https://app.banklessacademy.com/lessons/wallet-basics) to **level up your knowledge and claim your badge!**
---
### Key Takeaways
> * You’ll need a `crypto wallet` to access the world of blockchains!
>
> * A wallet is like a `blockchain` account.
>
> * Wallets are used to store `cryptocurrency`, log into blockchain apps, and more.
>
> * These wallets work on both computers and phones.
>
> * Creating a wallet is easy and takes around 5 minutes. We’ll show you how, in our video below!
### What is a Crypto Wallet?
Crypto wallets are an essential piece of web3 equipment, allowing you to use `cryptocurrency` on your computer or phone. Wallets are accessed using software called a `wallet app`: a web browser extension for your computer, or an app on your phone.
It gets better. Wallets are more than accounts for holding cryptocurrency: they’re our connection to the blockchain. We can use them to exchange cryptocurrency with others, log into blockchain applications, **and even collect digital items like Bankless Academy badges.** The more we explore, the more our wallets become, with some viewing them as the beginning of digital identity.
Wallets come with two core pieces of account information:
* A `public key`, which creates your wallet’s `address`. The address works like your *username*: you’ll share it publicly to receive cryptocurrency.
* A `private key`, acting as your *password*. This should always be kept private, and cannot be changed.
Protecting your private key is critical because this key grants instant access to your wallet. You should never share your private key. You can learn more by taking [the full lesson](https://app.banklessacademy.com/lessons/wallet-basics).
Today we will set up our first wallet, using our recommended crypto wallet: Zerion!
### Walkthrough
Set up your first wallet on your computer, using the walkthrough below, or keep scrolling for our phone wallet walkthrough.
#### Computer Wallet
[youtube-embed](https://www.youtube-nocookie.com/embed/czL_qQ39AH0)
#### Phone Wallet
[youtube-embed](https://www.youtube-nocookie.com/embed/SFbo9QsO2t4)
---
**It’s time to join the blockchain multiverse!**
Don’t forget to collect this handbook entry for easy reference on your travels, and to support Bankless Academy.
Safe travels, Explorer!
---
### FAQ
#### What is a cryptocurrency?
Cryptocurrencies are a form of digital money, secured by `cryptography`. These currencies can run without the need for centralized authorities and banks, reducing possibility for fraud while increasing the financial freedom of the holder.
Learn more about cryptocurrency through our **[Bitcoin Basics](https://app.banklessacademy.com/lessons/bitcoin-basics)** lesson, and see how these digital currencies are revolutionizing the financial world!
#### What are public and private keys?
Public/private key `encryption` allows your wallet to make some information public, like the address where others can send cryptocurrency to you, while keeping access to your cryptocurrency private. Your wallet’s address, created from the public key, is like your house address, and the private key unlocks the front door.
You can share your address with anyone you trust to send you cryptocurrency, but your private key is for your eyes only, because it grants access to all assets inside the wallet. Never share it, even if your contact claims to be from Bankless Academy or Zerion.
Learn more and get rewarded for creating your first wallet, in our [Wallet Basics](https://app.banklessacademy.com/lessons/wallet-basics) lesson.
#### What happens if I lose my recovery phrase?
Your recovery phrase, also known as a “secret phrase” or “seed phrase”, is your only backup if you lose access to your wallet on your device. If you lose your recovery phrase, your wallet’s holdings will be lost forever. This is why it’s important to store it somewhere safe, from not only theft or loss, but fire or water damage too.
#### Can Ethereum wallets hold Bitcoin?
Ethereum wallets can hold Bitcoin, but in a “wrapped” form, such as Coinbase’s cbBTC token. If you want to hold original Bitcoin, you’ll have to create a wallet that runs on the Bitcoin network, like [Exodus](https://www.exodus.com/) or [BlueWallet](https://bluewallet.io/).
---
**Author**
[Tetranome](https://twitter.com/Tetranome) is the Content & Design Lead at Bankless Academy, focusing on the learning journey, user interface & experience, and platform artwork.
**Patron**
This walkthrough is powered by Zerion.
---
# Wallet Basics
What is a crypto wallet? Learn how wallets work and create your first one today!
- Page: https://app.banklessacademy.com/lessons/wallet-basics
- Markdown: https://app.banklessacademy.com/lessons/wallet-basics.md
- Format: Lesson
- Duration: 15 minutes
- Writers: Ap0ll0517, Jordy, Tetranome
## Wallet Intro
**Greetings Bankless Explorer!**
It’s time to dive deeper on your journey into the blockchain multiverse. Every Explorer in this space eventually needs to create a crypto wallet.
Wallets are kind of like the accounts from the `web2` internet that you’re used to. You’ll use a wallet to log into the blockchain ecosystem, also known as `web3`, where you’ll be able to use `cryptocurrency` and connect to `blockchain apps`!
In this lesson, we’ll introduce you to wallets, how they work, and how to keep your cryptocurrency secure. We’ll end with a guide on how to set one up and access **the Ethereum blockchain, the home of Bankless Academy.**
## Wallet Definition
What exactly is a crypto wallet?
The short definition is: an account on a `blockchain`, used to store digital assets and log into blockchain apps.
It’s like having your own personal safe on the internet, and you hold the only key for unlocking it. At the same time, this safe is similar to a regular website account. You can use it to make purchases, send or receive `cryptocurrency`, and interact with a blockchain.
However, unlike the `web2` accounts you’re used to, a single wallet can access an entire blockchain, and a large number of blockchain apps. It’s like having one account for the entire internet.
## Is creating a wallet difficult?
It used to be difficult, but these days anyone can create a wallet quite easily.
If you are comfortable with downloading and installing software on your computer (or apps on your phone), then you’ll have no trouble creating your first wallet.
The trickier part of managing a wallet involves keeping it secure, which we’ll dive into shortly!
Choosing your `wallet app` may also feel intimidating. This is the app that you will install on your device to access your wallet on the blockchain. We recommend starting with the Zerion wallet app: it’s user friendly and has access to many popular blockchains. As you get more comfortable in the `web3` space, you will likely explore other providers and create multiple wallets.
## Knowledge Check 1
What is a wallet?
- [ ] A blockchain
> ℹ️ Try again! Your wallet is hosted on a blockchain.
- [ ] A cryptocurrency
> ℹ️ Try again! Cryptocurrencies are something you hold in your wallet.
- [ ] A digital collectible
> ℹ️ Try again! Digital collectibles are something you hold in your wallet.
- [x] A blockchain account
> ℹ️ Correct! Wallets are accounts used to interact with blockchains.
## Wallets & Password Recovery
Here is one of the most important things to understand about `web3` wallets:
**There are no “password resets” or “password changes”.**
Most of us are used to these features. If we forget a password, we click a button, do a few things, and get a new password. Easy.
Not so with crypto wallets. Because of how blockchains work, wallets are assigned an “address” and a complex “password” when they’re created, and you do not choose these.
This address and password combination cannot be changed, although you can always create a new wallet if you need to. Some newer wallets add recovery features, but never rely on that. Let’s learn a bit more about these special addresses and passwords, so that we can feel confident using them!
## Your wallet’s public key
Your wallet’s `address` is created from its `public key`. Think of the address as your username: it often looks like a random series of letters and numbers.
Example: _0xe1887fF140BfA9D3b45D0B2077b7471124acD242_
It is possible to create easier to remember versions of this with some `web3` services, but that’s a lesson for another time.
You can also think of your address like a house address. It is public, anyone can see it, and it tells others where they can send you crypto assets, without revealing anything personal about you.
It is perfectly safe to share your wallet’s **address**.
**Note:** A single wallet app can hold multiple public/`private key` pairs.
## Your wallet’s private key
If your address is like a house address, then the `private key` is like the key to the front door. It’s the “password” to your funds and assets.
Example: _eceac283e04f121cbd40b69e16ab9dec0220df80bf092a4c72b53e69cf74d215_
**It’s never safe to share this key: you could lose your wallet and everything in it.**
Most people recommend that you do not even save it digitally. Whoever has access to a private key has access to whatever is in the `wallet`.
This is more than just a password. You cannot reset it if you lose access to it.
Luckily, most `blockchain apps` do not require you to type a long, complicated string of characters every time you need to send funds or sign a blockchain transaction. The private key usually operates quietly in the background.
## Knowledge Check 2
Your wallet address is like your _____ and your private key is like your _____ .
- [ ] Routing Number / Account Number
> ℹ️ Try again! Unlike a bank account number, your private key shouldn’t be shared with others.
- [ ] Email address / Zip code
> ℹ️ Try again! Unlike a zip code, your private key shouldn’t be shared with others.
- [x] House address / House key
> ℹ️ Correct! Your address lets others find you, while only your private key lets you in.
- [ ] Phone Number / Passport Number
> ℹ️ Try again! These are examples of public & private information, but they’re unrelated.
## Recovery Phrase
When you set up a new wallet, your wallet app will provide you with a `recovery phrase`.
Also called a “seed phrase” or “secret phrase”, this string of words can be used to access your wallet and crypto assets if:
- Your `wallet app` or device fails unexpectedly or is damaged.
- Your device has been lost or stolen.
- You want to access your wallet on multiple devices.
Most recovery phrases are a list of 12 to 24 words that represent a unique piece of data. This data is used to generate both the `public key` and `private key` for your wallet.
Wallet recovery does **not** change or reset the keys.
Your recovery phrase is like a master key: it can recreate every key pair in your wallet. **Never share your recovery phrase.**
## Knowledge Check 3
Can you access your wallet with a recovery phrase if your device gets damaged or lost?
- [ ] No
> ℹ️ Try again!
- [x] Yes
> ℹ️ Correct! Recovery phrases grant access to your wallet, even on multiple devices.
## Types of Wallet
Just as there are many types of computer software, there many types of wallet. Let’s look at the four main categories:
- 🏦 **Custodial wallets:** where a third party is responsible for your private keys.
- 👤 **Self-custody (non-custodial) wallets:** where you are responsible for your private keys.
There are two styles of `self-custody wallet`:
- 🔥 **Hot wallets:** software on your desktop or phone.
- 🧊 **Cold wallets:** a piece of hardware (like a memory stick) you store somewhere safe.
You may also hear about `smart wallets`: an emerging type that runs code, enabling extras like passkey logins and account recovery.
Each wallet serves a different use-case. Don’t worry, we’ll only be creating one wallet today.
## Custodial Wallets
Since your `private key` unlocks access to your `wallet`, keeping it safe and secure is very important!
`Custodial wallet` services include cryptocurrency exchanges such as Coinbase and Kraken. **They are your wallet custodian**: they look after your private keys for you. You access their services like any other website (with an email login and resettable password).
This may be all some people need, but it requires you to trust these third parties to secure your crypto assets and give you access when you want to trade them or send them somewhere. Also, your access to some `blockchain apps` may be limited.
## Knowledge Check 4
Do you control your private key with a custodial wallet?
- [ ] Yes
> ℹ️ Try again!
- [x] No
> ℹ️ Correct! Custodial wallets require trust in a third party (custodian) to control your private keys.
## Non-custodial Wallet
A `self-custody wallet` (like Zerion or Trezor) is when you fully control your `private key`. You have **no custodian**, and you alone are responsible for keeping your private key safe.
These wallets offer the widest range of access and freedom within the world of `web3`. You never have to worry about a third party freezing or mishandling your funds.
The trade-off is in risk: if you lose access to your `recovery phrase`, or your private key is compromised, there is often very little you can do to restore access to the wallet.
Whichever route you choose, it pays to be familiar and comfortable with wallet security. We’ll give you some tips before you complete this lesson.
## Knowledge Check 5
Are you responsible for your private key with a self-custody wallet?
- [x] Yes
> ℹ️ Correct! With a self-custody wallet you are solely responsible for your private keys.
- [ ] No
> ℹ️ Try again!
## Hot Wallets
You will hear the terms “hot” and “cold wallet” quite a bit in `web3`.
A `hot wallet` is a wallet accessed via an app on your device, the Zerion app for example. Similar to many `web2` apps, a wallet app is consistently connected to the internet.
Your `private key` is encrypted and stored inside the wallet app, and is only accessed when you interact with the blockchain. These wallets are named ‘hot wallets’ for this “hot” connection between the internet and your private key.
Hot wallets are convenient for small day-to-day interactions, much like a physical wallet you keep in your pocket. We’ll be creating a hot wallet today!
## Cold Wallets
As you dive deeper into your `web3` journey, you will come to know a landscape full of interesting tech trade-offs.
`Cold wallets` grant higher security at the cost of convenience. A cold wallet is one where your `private key` is stored on a dedicated hardware device (like a memory stick or external hard drive). You must physically connect the hardware wallet to your computer to access your wallet on the blockchain. Your private key is never directly connected to the internet. Cold wallets are named after this “cold” internet connection.
They are widely considered to be more secure than `hot wallets`, because your `private key` is stored offline, out of reach of digital attackers.
Ledger and Trezor are examples of `cold wallets`.
## Knowledge Check 6
Which of the following wallet types is considered the most secure?
- [ ] All wallets are about the same
> ℹ️ Try again! There are various trade-offs for each wallet type, with level of security being one of them.
- [ ] A hot wallet
> ℹ️ Try again! A hot wallet has an active internet connection which makes it more susceptible to digital attack.
- [ ] A custodial wallet
> ℹ️ Try again! The third party holding the private keys can get hacked or go bankrupt.
- [x] A cold wallet
> ℹ️ Correct! Cold wallets aren’t actively connected to the internet, making them more attack-resistant.
## Wallet Security
Regardless if your `self-custody wallet` is hot or cold, there are many smart security practices you should develop.
🖊️ Record your `recovery phrase` on durable physical material (laminated paper, or even steel) and store it somewhere very safe. Never share it or your `private key` with anyone. **It’s more than just a password.**
🔍 Double-check the details whenever you send funds or sign, even for small amounts: mistakes cannot be undone.
🔭 Research any `blockchain apps` you plan to use before connecting your wallet or signing their transactions.
💰 Use wallets with low amounts of funds to try new things and explore web3, and consider storing high value assets across multiple wallet accounts.
🛡️ Watch out for scams that trick you into signing harmful transactions or approvals: our [Web3 Security](https://app.banklessacademy.com/lessons/web3-security) lesson shows how to spot them.
## Knowledge Check 7
What is the safest way to protect your recovery phrase?
- [x] Write it on a durable material and store it in a safe place.
> ℹ️ Correct! A safely stored physical backup with no digital traces is the safest storage option.
- [ ] Save it on your computer and print it out.
> ℹ️ Try again! If your computer is hacked, your recovery phrase could be found. Printing also opens many attack opportunities.
- [ ] Take a screenshot and save it on your phone.
> ℹ️ Try again! If your phone is hacked, you could lose all assets in your wallet.
- [ ] Save it in your password manager.
> ℹ️ Try again! A single password manager breach could expose it. Keep your phrase offline.
## You’re ready to create your first wallet!
In fact, you’ll need one if you want to claim proof of completing this quest!
There are several `self-custody`, `hot wallet` apps available today. We will explore the Zerion wallet for the rest of this lesson as:
- ⚙️ It’s compatible with most `blockchain apps`.
- ⚡ The interface is incredibly smooth and easy to use.
- 💻 It has a browser extension for Chrome, Brave, Edge, Opera, and Firefox internet browsers.
- 📱 It is also available as a mobile app for Android and iOS users.
- 🗣️ Zerion supports a variety of languages.
The end of the lesson is right around the corner, where we will share your instructions for setting up your wallet with Zerion!
## Knowledge Check 8
Is Zerion a custodial wallet app?
- [ ] Yes
> ℹ️ Try again! Your Zerion wallet isn’t controlled by a custodian.
- [x] No
> ℹ️ Correct! Zerion wallets are self-custody wallets, controlled by you, and you alone.
---
# Blockchain Basics
Learn about the fundamental architecture of blockchain technology.
- Page: https://app.banklessacademy.com/lessons/blockchain-basics
- Markdown: https://app.banklessacademy.com/lessons/blockchain-basics.md
- Format: Lesson
- Duration: 15 minutes
- Writers: iSpeakNerd
## Introduction
`Blockchain` technology is a revolutionary way of storing and tracking data, while also making that data accessible to anyone. It is a way of organizing data in a single public list of all historical transactions that anyone can view but cannot edit. This public list of transactions is collectively known as the blockchain `ledger`.
After examining the layers of a blockchain, you will understand the structure that a blockchain tool called a `block explorer` displays: the **list** of blocks, the **transactions** within those blocks, and the **details** of each individual transaction. To see it in action, try [Etherscan](https://etherscan.io/), a popular block explorer for Ethereum.
## Blockchain Structure
The term blockchain can be used as a noun (the Bitcoin blockchain) or as an adjective (blockchain technology). Either way, `blockchain` refers to the entire structure cryptocurrencies are built on.
Zooming in from the outside, there are 3 levels of structure in a blockchain:
1. The overall `blockchain` is made up of blocks that are linked together in order
2. `Blocks` are made up of groups of transactions put together
3. `Transactions` are transfers of value, or instructions to programs, between `addresses` on the network
This three-tiered structure comes together to create a cryptographic ledger - an unalterable history of all transactions performed on the network.
## Knowledge Check 1
What is a blockchain?
- [ ] Organized groups of transactions called blocks
> ℹ️ Try again! Blocks are part of the structure, but they aren’t the only correct answer.
- [ ] A shared record anyone can view but no one can edit
> ℹ️ Try again! This is true, but it isn’t the only correct answer.
- [ ] Blocks linked together in sequence
> ℹ️ Try again! This describes the chain of blocks, but it isn’t the only correct answer.
- [x] All of the above
> ℹ️ Correct! All three are true: a blockchain is a shared, uneditable record of transactions grouped into blocks, linked in sequence.
## Examining the Ledger
In typical money systems, we trust third parties like banks to keep track of how much money each person has. But, to be truly Bankless, we want a system that doesn’t require us to trust one entity to manage the ledger.
The `ledger` is the list of ALL transactions ever made on a blockchain, and anyone can see it for `public` blockchains. Discrete groups of transactions from the ledger form the blocks that together make the blockchain.
When new transactions are added to the ledger, balances stored at each `address` get updated; past transactions cannot be altered. It’s like letting anyone look at everyone’s all-time bank account transaction history, at any time.
## Transactions on the Ledger
Let’s look at some example transactions:
- Alice sends 5 ETH to Bob
- Bob sends 2 ETH to Charlie
Individual transactions show the _change_ in the amount of cryptocurrency for each address so the total result of all transactions IS the amount of cryptocurrency each address has.
---
⇒ Alice has lost 5 ETH
⇒ Bob has gained 3 ETH total (received 5, sent 2)
⇒ Charlie has gained 2 ETH
## Knowledge Check 2
Which of the following is true for public blockchain ledgers?
- [ ] All transactions are public and past transactions are unchangeable
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] The ledger tracks how much cryptocurrency each address currently has
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] The ledger grows as new transactions are added to it
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [x] All of the above
> ℹ️ Correct! The ledger is public, unchangeable, keeps address balances up to date, and grows with every new transaction.
## Decentralization
Not only are transactions included on a `blockchain` ledger unchangeable, they are also shared and distributed amongst a large network of computers. To make sure that no single entity has the power to change the data, copies of the blockchain ledger are stored on many computers, called `nodes`, across the network.
This shared data is what makes the blockchain ledger `decentralized`. No single authority or entity controls the data. Blockchains like Ethereum are also `public` because the ledger can be viewed by anyone.
For this lesson, just remember that the ledger data is shared across the many computers running the Ethereum network.
## Knowledge Check 3
What makes a blockchain decentralized?
- [ ] Only one entity can write to the blockchain
> ℹ️ Try again! A single entity in control is the opposite of decentralization.
- [ ] It meets decentralization requirements set by the government
> ℹ️ Try again! Decentralization comes from the network’s design, not from government approval.
- [x] No single entity controls the ledger, stored on many computers
> ℹ️ Correct! Storing copies of the ledger on many nodes means no single entity has the power to control or change the data.
- [ ] The ledger is stored on a single secure server
> ℹ️ Try again! A single server would be a central point of control. Copies of the ledger are stored on many nodes.
## Block Anatomy
An important feature of blockchains is that past transaction data cannot be changed after it has been included in a block. This is because each block has a unique `block hash`, like a fingerprint, that is used to link the blocks together one after another. No one can change past transactions without changing that fingerprint and the fingerprint of EVERY block that follows it because each fingerprint depends on the previous one.
So each `block` is simply a group of transactions, plus a unique fingerprint (its `block hash`) computed from the block’s contents. The blocks are chained together because each one references the previous block’s unique fingerprint to form one connected block**chain**.
## Knowledge Check 4
What is the purpose of a block hash?
- [ ] To encrypt block data so no one can read it
> ℹ️ Try again! Block data stays publicly readable. The hash is a fingerprint, not encryption.
- [x] To link blocks together and keep past transaction data unchangeable
> ℹ️ Correct! Each block references the previous block’s fingerprint, so changing past data would break every block that follows.
- [ ] To ensure transactions are sent to the correct address
> ℹ️ Try again! Addresses handle where funds go. The block hash links blocks together.
- [ ] To ensure the blockchain stays decentralized
> ℹ️ Try again! Decentralization comes from distributing the ledger across many nodes, not from the block hash.
## Inside a Block
Remember, `block` data is just a group of transactions put together. Looking within a single block, we see a list of transactions and some data about who created the block.
From our example earlier when discussing the blockchain ledger, both of those transactions might be grouped within one block, or spread out into multiple blocks over time. But no matter what block they are included in, they are all added to the overall blockchain ledger eventually.
- Alice sends 5 ETH to Bob
- Bob sends 2 ETH to Charlie
Recall that each block must also reference the past block’s `block hash` to link the blockchain together.
## Knowledge Check 5
What information is contained in a block?
- [ ] All the information contained in previous blocks
> ℹ️ Try again! A block only references the previous block’s hash. It doesn’t copy all past data.
- [ ] Anything relevant to the blockchain as block size is unlimited
> ℹ️ Try again! A block is a discrete group of transactions, not an unlimited container.
- [x] Transaction data and a reference to the previous block
> ℹ️ Correct! A block is a group of transactions plus the previous block’s hash, which chains the blocks together.
- [ ] All transaction data generated within a fixed timeframe
> ℹ️ Try again! Transactions can be grouped into one block or spread across multiple blocks over time.
## Individual Transactions
The data on any blockchain is simply a list of `transactions`, records of currency moved between users. Each transaction must be signed by the sender’s `digital signature` to be valid.
This is what you do when you confirm a transaction with a wallet, you are signing with your digital signature to authorize a transaction. You can think of it as the digital equivalent of physically signing a check, receipt, or credit card transaction.
Transactions can be simple, like sending crypto assets, or more complex, such as swapping crypto assets or even deploying special code that executes when triggered, called `smart contracts`.
Finally, each transaction has a unique digital identifier, called its `transaction hash`, that no other transaction has. This makes it easy to refer to any single transaction later on and ensures that the details of that transaction can’t be changed afterward.
## Knowledge Check 6
Data on a blockchain is simply a list of transactions grouped into blocks. Examples of such transactions might include:
- [x] Sending or receiving crypto assets
> ℹ️ Correct! Transactions record currency moving between users, from simple transfers to smart contract interactions.
- [ ] Changing the size of the block
> ℹ️ Try again! Block size isn’t something a transaction can change.
- [ ] Editing past blockchain data
> ℹ️ Try again! Past blockchain data cannot be changed. That’s a core feature of blockchains.
- [ ] All of the above
> ℹ️ Try again! Only one of the above is a valid blockchain transaction.
## User Addresses
An `address` is a public identifier that anyone can look up on the blockchain. Like an email address, anyone can send funds to it but only someone who controls the `private key` can unlock and use the funds at that address.
On Ethereum, an address always starts with \_0x\_\_\_\_\_\_\_\_\_\_ and is 42 characters of numbers and letters derived from the `public key` of that address.
When looking at a single transaction in a block explorer, we can see the From: and To: addresses. This doesn’t tell us who the _people_ are who control those addresses but allows any user to track the movement of cryptocurrency throughout the blockchain ledger.
## Knowledge Check 7
What is true about blockchain addresses?
- [ ] They are the public identifiers of different entities on a blockchain
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] They always start with _0x_ on Ethereum
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] Whoever controls the private key can use the funds at that address
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [x] All of the above
> ℹ️ Correct! Addresses are public identifiers, start with 0x on Ethereum, and their funds are unlocked by the private key.
---
# Web3 Security
Protect yourself and your wallet from the most common scams in web3.
- Page: https://app.banklessacademy.com/lessons/web3-security
- Markdown: https://app.banklessacademy.com/lessons/web3-security.md
- Format: Lesson
- Duration: 15 minutes
## Introduction
Digital ownership is the new feature of web3. Using blockchains, cryptocurrencies, and NFTs, web3 gives ownership and power back to users. This online ownership of digital financial products is new for many, and that lack of experience gives opportunities for predatory people to scam and steal the assets of others. These scams work so well because most people aren’t aware of how they work.
But, it's not just web3 that suffers from scams, web2 services like email and social media are full of scams as well. In addition, many web3 tools are still tied to web2 services like bank accounts or centralized exchanges so protecting those is important too. So congratulations, Academy Explorer, on taking the time to arm yourself with the knowledge that will protect you as you venture out into `web3`!
This lesson will cover:
- Web2 & web3 security.
- The most common ways people lose their funds and how to protect oneself from them.
- A general strategy for wallet security.
- How one can recover if they are the victim of a scam.
## Money in Web2
In web2, the institutions hold money on behalf of people. A user must prove their identity to an institution in order to access and use their money. It’s the same as a bank account or a `centralized exchange` (CEX); one needs a login ID and a password.
For a scammer to gain access to your money, they need this ID + password combination. Because the institutions are charged with protecting your money, fraudulent transactions can be reversed - like a credit card transaction dispute.
## Money in Web3
In web3, money works differently. It’s more like a locked cash wallet; once money is spent, it’s gone. Your `seed phrase` (that special set of secret words) unlocks your `private keys`, so anyone who obtains it controls your wallet. _**Never**_ give it to anyone, and never store it digitally; photos and notes apps can get compromised.
But your seed phrase isn’t the only target: one malicious signature (a transaction or message you approve) can let a scammer drain your tokens without ever seeing your seed phrase. Protect your **seed phrase** _and_ your **signature**.
## Knowledge Check 1
True or false? Scammers can drain tokens from your wallet by tricking you into signing a malicious transaction or approval, without ever knowing your seed phrase.
- [x] True
> ℹ️ Correct! A malicious signature or token approval can hand over your funds on its own. Protect what you sign as carefully as your seed phrase.
- [ ] False
> ℹ️ Try again! Your seed phrase isn’t the only target; a single malicious approval or signature can drain your tokens too.
## Secure Seed Storage
There are many methods for storing seed phrases securely, but a good start is to keep it on physical media (laminated paper or similar) and store it in a water- and fire-proof safe in your own home. **Do not** store a `seed phrase` as a photo or other digital methods - even in a password manager.
Bad places to store seed phrases include:
- In a filing cabinet
- Digital notes application
- At your workplace
- Digital photo
Wherever you store your seed phrase, you should ensure that only you have access to it and that it is protected from loss and destruction. You never know what might happen in the future!
## Protect your Passwords
Healthy password usage and management is an important piece of everyday internet exploration.
Passwords should be different for each and every web2 service used online. This includes services like email, centralized exchanges, and other service accounts. It’s problematic if someone manages to get the ID + password for one account, but it’s far worse if that combination unlocks all of your accounts!
`Password manager` applications like 1Password, Bitwarden, and KeePass securely store and encrypt multiple passwords; they can even generate new high-security passwords and store them automatically. The user just has to remember a single master password.
Do **not** store a web3 `seed phrase` in a password manager; it takes just one password breach to obtain all of your web3 assets and there is no one to recover your assets for you.
## Knowledge Check 2
Why are password managers helpful?
- [ ] People only have to remember their master password to use them.
> ℹ️ Try again! This is true, but it isn’t the only benefit.
- [ ] They generate and store strong, unique passwords.
> ℹ️ Try again! This is true, but it isn’t the only benefit.
- [ ] They encrypt passwords to keep them secure.
> ℹ️ Try again! This is true, but it isn’t the only benefit.
- [x] All of the above
> ℹ️ Correct! Password managers generate, encrypt, and store unique passwords for every account. You only remember the master password.
## Two Factor Authentication
`Two Factor Authentication`, also known as 2FA, is a secondary layer of web2 security.
Many people have had their accounts hacked or credentials stolen despite strong passwords. Web2 websites (and even `password managers`) often support 2FA as a second layer: proof from another device or app, in addition to your normal password.
Not all 2FA is equal:
🥉 **SMS codes** are the weakest option: scammers use `social engineering` to “SIM-swap” your phone number onto their own device and receive your codes. Still, SMS beats having no 2FA.
🥈 **Authenticator apps** (like Google Authenticator, 2FAS, or Aegis) generate codes on your device, a solid choice for most accounts.
🥇 **Passkeys and hardware security keys** (like a YubiKey) are the phishing-resistant gold standard: tied to the real website, they simply won’t log in on a fake look-alike.
## Knowledge Check 3
Why is two-factor authentication strongly recommended?
- [ ] It’s impossible to hack an account when the user has 2FA enabled.
> ℹ️ Try again! 2FA greatly improves security, but no method makes an account impossible to hack. SIM-swaps can defeat SMS codes, for example.
- [x] It adds another layer of security to web2 accounts.
> ℹ️ Correct! 2FA requires proof from another device or app on top of your password, so a stolen password alone isn’t enough.
- [ ] It makes passwords stronger.
> ℹ️ Try again! 2FA doesn’t change your password. It adds a second layer of proof on top of it.
- [ ] All of the above
> ℹ️ Try again! Only one of these statements is true.
## Social Engineering Scams
In both web2 and web3, scammers use `phishing` tactics to trick people into giving up their passwords and seed phrases, or signing a malicious transaction. Often they’ll pretend to be product support staff offering help, “Hello this is Metamask support”, or pretend to be an admin of a community, “New NFT mint, exclusive for our community”.
They use `social engineering` to pressure people. Examples include:
- “Time is running out!” - making you feel rushed.
- “Congratulations you won our giveaway!” - making things feel exclusive.
- ”Get early access to our pre-mint!” - generating `FOMO` in the person being scammed.
## Fear Of Missing Out
`FOMO` stands for the ‘Fear Of Missing Out’, it’s the stressful feeling that you’re not going to get a great benefit or opportunity unless you do something **right now**.
The best defense against FOMO is to simply take a step back from your computer and take a break. People don’t think clearly when they’re stressed, that’s why FOMO is such an effective scamming tool. By stepping away from the situation, it becomes much easier to spot the scams for what they are.
## Knowledge Check 4
How do scammers use social engineering?
- [ ] Pretending to be an authority in a community.
> ℹ️ Try again! This is one tactic, but it isn’t the only one.
- [ ] Pressuring people with short amounts of time.
> ℹ️ Try again! This is one tactic, but it isn’t the only one.
- [ ] Offering giveaways or free NFTs to generate FOMO.
> ℹ️ Try again! This is one tactic, but it isn’t the only one.
- [x] All of the above
> ℹ️ Correct! Scammers impersonate authority figures, create time pressure, and generate FOMO, all to stop you from thinking clearly.
## Social Media Safety
Scammers love to engage on social media and in the Discord servers of crypto projects, typically moving conversations into direct messages to avoid being spotted by experienced members. Talk in public areas, and _**never**_ give your `seed phrase` to anyone, or sign anything from a link sent in a DM.
Social media `red flags`:
🚩 **Language and grammar errors:** They’re/their/there, etc.
🚩 **FOMO:** “Don’t miss out!”
🚩 **Impersonation:** an admin, support desk, Vitalik Buterin, Elon Musk, etc.
🚩 **Guaranteed returns:** Nothing is guaranteed in crypto.
🚩 **Unrequested links and offers,** _especially in direct messages_.
## Social Media Best Practices
Practices for staying safe:
✅ If they have to direct message you to sell their product, you probably don’t want it.
✅ Check the project follower and member count - though these do not guarantee project legitimacy, quality, or stability.
✅ Verify everything with an outside source, like another official project account.
✅ If you’re ever uncertain, check with reputable members from a large community you trust - and ask in public.
## Scam-Tokens & Address Poisoning
Random tokens or NFTs appearing in your wallet? `Scam-tokens` are transferred to thousands of wallets at once, hoping someone tries to move or sell them, triggering malicious code hidden in the token’s smart contract, or luring victims to a `phishing` website that asks for a `seed phrase` or a malicious signature. The best response: don’t interact with them at all; leave them alone or hide them in your wallet.
A related trick is **address poisoning**: scammers send tiny transfers from an address crafted to look almost identical to one you use, matching its first and last characters. Copy an address from your transaction history later, and you may grab the scammer’s look-alike instead.
Protect yourself:
- Don’t copy addresses from your transaction history.
- Verify more than the first and last few characters.
- Send a small test amount before large transfers.
## Malicious Approvals & Blind Signing
Today, most funds are lost not to stolen seed phrases but to signatures given away. “Wallet drainer” phishing kits present a transaction or message that looks routine, but isn’t:
- **Malicious approvals:** a single approval transaction can give a scammer’s contract unlimited `token allowance` to spend your tokens or NFTs.
- **Signature phishing:** gasless signature approvals (like Permit2) can authorize token transfers, no transaction required.
- **Delegation drains:** a newer wallet feature (EIP-7702) lets one signature install code on your account; drainers abuse this to auto-sweep wallets.
Signing what you don’t understand is called **blind signing**, and even professionals get burned: in February 2025, the Bybit exchange lost roughly $1.5 billion approving a transaction whose display had been tampered with.
Your defenses: slow down, read every signature request, treat “verify your wallet” prompts as hostile, and use a wallet that simulates transactions before you sign.
## Knowledge Check 5
You receive a DM: “Your wallet needs migrating: connect at metamask-upgrade.app and sign to verify your assets.” The site asks you to sign a gasless approval. What’s wrong here?
- [ ] Nothing: signatures are free and can’t move funds.
> ℹ️ Try again! Gasless approval signatures can authorize token transfers all by themselves.
- [ ] It’s only dangerous if you also type in your seed phrase.
> ℹ️ Try again! No seed phrase is needed. The signature itself can grant spending power over your tokens.
- [ ] It’s safe because support teams contact users by direct message.
> ℹ️ Try again! Legitimate support will never DM you first. That’s a classic red flag.
- [x] It’s signature phishing: the signature could drain your tokens.
> ℹ️ Correct! An unrequested DM, urgency, a look-alike URL, and a signature request: this is a wallet drainer.
## Hardware Wallets
If you remember from our [Wallet Basics](https://app.banklessacademy.com/lessons/wallet-basics) lesson, a `hardware wallet` keeps your `private keys` on a dedicated device, away from your internet-connected computer. This makes your funds much safer: malware can’t read your keys, and a thief would have to physically steal the device and break into it. Popular options include Ledger, Trezor, and Keystone. Always buy directly from the manufacturer.
You can even use a hardware wallet through browser extension wallets like MetaMask, combining convenience with hardware security. Ledger has [written their own guide](https://www.ledger.com/academy/security/the-safest-way-to-use-metamask) on setting this up.
One limit: a hardware wallet signs whatever you approve, so blind-signing a malicious transaction still loses your funds. Always verify the details on the device’s own screen before confirming.
## Knowledge Check 6
True or false? A hardware wallet only keeps your funds safe if you verify each transaction before approving it.
- [x] True
> ℹ️ Correct! A hardware wallet protects your keys, but only verifying what you sign protects your funds.
- [ ] False
> ℹ️ Try again! A hardware wallet signs whatever you approve. Blind signing can still drain it.
## Wallet Strategies
After adding a hardware wallet to your setup, one of the best ways to secure your funds is to keep them spread between multiple `wallets`. Here is a compartmentalized strategy using three separate wallets:
1. **Social Wallet:** A `hot wallet` holding little to no funds, used for logins, minting, and trying out new dapps. Assume anything in it could be lost.
2. **Trading Wallet:** A `hot wallet` for trading and other activities involving funds that may need to be moved on short notice.
3. **HODL Wallet:** A `hardware wallet` for the long-term `HODL`: these are funds intended to hold for a long time. _**Never**_ use this wallet to interact with smart contracts or unfamiliar websites.
👍 **PROs:** Separation ensures that scams only threaten funds in _that particular wallet_ rather than _everything_.
👎 **CONs:** It’s more complicated to keep track of, but many wallet applications allow you to name your wallets.
## Knowledge Check 7
We recommend keeping your funds _______________ for higher security.
- [ ] stored in multiple airdrops
> ℹ️ Try again! Airdrops are token giveaways, not a place to store funds.
- [ ] locked in multiple NFTs
> ℹ️ Try again! NFTs are assets themselves, not a security strategy for your funds.
- [x] separated in multiple wallets
> ℹ️ Correct! Compartmentalizing funds across separate wallets means a scam only threatens the funds in that particular wallet.
- [ ] liquid in multiple addresses
> ℹ️ Try again! It’s not about liquidity. Separating funds between distinct wallets is what limits the damage a scam can do.
## Recovering from Web2 Scams
Hopefully you have not already fallen victim to a scammer. If you have, there are some steps you should take to secure your accounts once more.
For a scam involving a web2 service, like Gmail or Discord, you should:
- Change your password on the affected account.
- Where it’s available, use the “sign out everywhere else” button to kick the scammers off your account.
- Enable `2FA`: ideally a passkey or hardware security key, otherwise an authenticator app.
- Report the scam to the service involved.
- Ensure your email account is also secure.
- Discuss the scam with friends or trusted community members.
## Recovering from Web3 Scams
Contracts must be given explicit permission to spend tokens on Ethereum. The token `allowance` is how much you’ve allowed a specific contract to spend. Keeping allowances low reduces the risk to your assets.
Web3 doesn’t have anyone in charge of protocols to report scammers to, but you can still take action:
- Immediately move any funds still in the compromised wallet to a different wallet address, **make sure the new address has a different seed phrase.**
- Review and revoke your token `allowances` with [revoke.cash](https://revoke.cash) (works across many networks) or [etherscan.io/tokenapprovalchecker](https://etherscan.io/tokenapprovalchecker). Revoking costs gas; revoke.cash has a [walkthrough guide](https://revoke.cash/learn/approvals/how-to-revoke-token-approvals).
- Also check revoke.cash’s “Delegations” tab for any wallet delegation you don’t recognize, and remove it from inside your wallet app.
- Use a `hardware wallet` in the future, and verify everything you sign.
- Warn others by reporting the scam to the affected community.
- Discuss the scam process with friends or trusted community members to see how you can protect yourself and others in the future.
---
# Layer 1 Blockchains
Understand how Layer 1 blockchains work and learn their limitations!
- Page: https://app.banklessacademy.com/lessons/layer-1-blockchains
- Markdown: https://app.banklessacademy.com/lessons/layer-1-blockchains.md
- Format: Lesson
- Duration: 15 minutes
- Writers: iSpeakNerd
## Introduction
Problems emerge when more users want to use a `blockchain` network than it can handle. Large demand for `blockspace` can be temporary or can last as long as users continue to have a strong desire to use the blockchain. In times of high demand, users bid against each other to have their transactions processed quickly, and fees rise, pricing out users with less capital.
This lesson explores why Ethereum and other blockchains are subject to the `Blockchain Trilemma`, how the Trilemma is the root cause of the problems described above, and how the Trilemma affects Ethereum’s plans for serving the needs of all its users. We will look at the tradeoffs several blockchains have made concerning the Blockchain Trilemma, and what those tradeoffs mean for Academy Explorers.
## Blockchain Trilemma
As implied by the word **tri**lemma, there are three qualities of blockchains that compete with each other and prevent optimizing for all three at once.
These are: `Security`, `Scalability`, and `Decentralization`.
For a blockchain to serve as an unbiased foundation for a monetary system at a global scale, it should excel in all three aspects. A monetary system needs to be secure from fraud, safe from attacks by censors through decentralization, and scalable to meet the needs of over 8 billion humans in a global society.
## Knowledge Check 1
The Blockchain Trilemma describes the relationship between:
- [ ] ethereum, bitcoin, and altcoins
> ℹ️ Try again! The Trilemma is about competing qualities within a blockchain, not competing blockchains.
- [ ] security, censorship, and fraud
> ℹ️ Try again! Security is one of the three, but censorship and fraud are threats blockchains defend against, not Trilemma qualities.
- [x] decentralization, scalability, and security
> ℹ️ Correct! These three qualities compete with each other, preventing a blockchain from optimizing all three at once.
- [ ] security, speed, and low fees
> ℹ️ Try again! Speed and fees relate to scalability, which is just one of the three qualities: security, scalability, and decentralization.
## Security and Consensus
Security is the most foundational requirement for a public blockchain. Computers within a network (such as a blockchain network) must agree on what transactions have truly happened to work together; this agreement is called `consensus`. A blockchain is secure if attackers cannot disrupt the network from agreeing on that truth. Consensus algorithms are designed to resist these attacks.
Chains like Bitcoin that use `Proof of Work` consensus protect this agreement by making block production highly competitive; each block producer races to solve a math problem. The first to do so wins the right to create the next block and receives the monetary `block reward` that comes with it. Rewriting the chain’s recent history would require massive investments in computing power and energy, so an attacker would likely spend more than they’d gain.
## Knowledge Check 2
Blockchain consensus for cryptocurrencies is:
- [ ] The process where nodes agree on what has happened on-chain
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] Important for everyone in that chain’s ecosystem to prevent fraud
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] Secured through economic incentives
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [x] All of the above
> ℹ️ Correct! Consensus is how nodes agree on the truth, and economic incentives make attacking that agreement cost more than it would gain.
## Security and Attacks
One potential form of attack on blockchain consensus is a `51% attack`; an attacker controlling the majority of a network’s consensus power can reverse recent transactions to spend the same coins twice, or censor new ones. They cannot fake signatures or spend anyone else’s funds. This majority means 51% of the computing power in Proof of Work consensus and 51% of the `stake` in Proof of Stake consensus, a massive capital investment. And in Proof of Stake, provable cheating such as signing two conflicting blocks gets that stake destroyed (called `slashing`); an attacker would likely lose more than they’d gain.
In `Proof of Stake` consensus, the block producer isn’t chosen through competition but is randomly assigned instead. Like with Proof of Work, the consensus algorithm ensures that any single entity cannot regularly “win” the right to create a new `block`.
## Knowledge Check 3
The end-goal of a 51% attack is to:
- [ ] Disrupt mining operations
> ℹ️ Try again! The attack targets consensus itself: reversing or censoring transactions, not disrupting miners.
- [x] Double-spend coins or censor transactions
> ℹ️ Correct! Majority consensus power lets an attacker reverse recent transactions to spend coins twice, or block new ones.
- [ ] Create a new cryptocurrency
> ℹ️ Try again! Anyone can create a new cryptocurrency without attacking an existing network.
- [ ] Eliminate the other 49%
> ℹ️ Try again! The other participants aren’t removed. Majority power is used to reverse or censor transactions.
## Scalability - Throughput
`Scalability` refers to a blockchain’s ability to process many transactions quickly. Two parts determine a blockchain’s scalability: throughput and finality.
1) `Transaction throughput`: How many transactions a blockchain can process at once, usually measured in transactions per second (`TPS`).
Imagine many people waiting at a bus stop with more arriving every minute, they all want to travel. But there are only so many people that can travel by bus. To clear the bus stop of people faster, you’d have to use bigger buses (more people) or make the buses run more often (less time). It works the same way with trying to fit many transactions into the small amount of `block space` available for each block. You can see this visualization with live data at [https://txstreet.com/v/eth-btc](https://txstreet.com/v/eth-btc).
## Knowledge Check 4
Which of the following is true for the bus stop analogy for blockchain transactions?
- [ ] People (transactions) are grouped together into buses (blocks)
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] Each bus (block) fits a limited number of people (transactions)
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] Moving more people (transactions) needs bigger or more buses (blocks)
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [x] All of the above
> ℹ️ Correct! Transactions fill limited block space just like passengers fill buses. Clearing the queue faster needs bigger or more frequent blocks.
## Scalability - Finality
The second aspect of blockchain scalability is:
2) `Finality`: When can we be reasonably sure a transaction won’t get changed or reversed?
In Proof of Work chains like Bitcoin, finality is measured in blocks: the more blocks added to the chain after your transaction, the more sure you can be it won’t get reverted. Remember, a secure consensus algorithm makes it very expensive to change past blocks, and the expense grows the farther back someone tries to change. Bitcoin produces a new `block` roughly every 10 minutes, so waiting for several confirmations takes about an hour. Ethereum’s Proof of Stake takes a different route: `validators` vote to finalize blocks, and after about 13 minutes (two `epochs` of votes) a transaction is final.
## Decentralization distributes power
`Decentralization` is the final basis of the blockchain trilemma: the process of transferring control and decision-making from a single entity to a distributed network of many. Decentralization is the fundamental principle that enables blockchains to be `permissionless` and `censorship-resistant`; anyone can use decentralized blockchains, and anyone can build software using them.
Centralized platforms like Facebook and Twitter can deactivate anyone’s account at any time. Many influential streamers on Twitch or Tiktok have found themselves removed from their platforms without cause. Even if social media users can reinstate their accounts, it can be a long and painful process. Without decentralization, a blockchain `ledger` is just a financial spreadsheet on a bank computer; the bankers decide who gets to create an account with them. A `permissionless` network means authority is sufficiently decentralized; there is no way to remove a person or entity’s access.
## Knowledge Check 5
Which of these statements is NOT true for decentralization?
- [ ] Decentralization makes blockchains censorship-resistant
> ℹ️ Try again! This statement is true: with no single controlling entity, no one can censor the network.
- [ ] Decentralization makes blockchains permissionless
> ℹ️ Try again! This statement is true: decentralized authority means no one can remove a person’s access.
- [x] Decentralization helps authoritarian powers to maintain control
> ℹ️ Correct! This is NOT true: decentralization does the opposite by distributing control away from any single entity.
- [ ] Anyone anywhere can use permissionless systems
> ℹ️ Try again! This statement is true: permissionless means no one can be denied access.
## Is it decentralized?
But whether something is decentralized isn’t just a yes or no answer. Are 10 controlling entities decentralized? How about 1000? One million? There isn’t a standard cutoff for something being sufficiently decentralized, so it makes sense to think of decentralization as a spectrum. Rather than the only choices being black and white, there are also many greys between them.
So we can say something is “more or less decentralized than something else” rather than “centralized or decentralized.” A high degree of decentralization is required for a neutral monetary system to resist state-level censorship. Newer blockchains often trade decentralization for scalability, but they leave themselves vulnerable to the same pressures from societies and governments that fully centralized platforms feel. They may end up engaging in the same censorship seen on centralized social media networks.
## Knowledge Check 6
Different blockchains use different amounts of decentralization.
- [x] True
> ℹ️ Correct! Decentralization is a spectrum: each blockchain chooses how much to trade for scalability or other goals.
- [ ] False
> ℹ️ Try again! Decentralization is a spectrum, and each blockchain makes its own tradeoff along it.
## Some Examples
Each blockchain has its own approach to the trilemma, and each has made tradeoffs to focus on its goals. Bitcoin and Ethereum prioritize security and decentralization over scalability, leading to long transaction `finality time` for Bitcoin and limited `block space` on Ethereum. When demand to use `smart contracts` spikes, especially for DeFi, Ethereum fees rise; during peak demand in 2021, a single transaction could cost tens of dollars.
Rising fees provided an opening for `alternative Layer 1`’s like BNB Chain, which prioritized scalability over decentralization for higher `transaction throughput` and cheaper fees. Third-generation chains like Solana use novel methods to solve the trilemma, but all blockchains are still subject to these basic constraints. Each chain’s choice defines its ecosystem through the foundational effects that come from that choice.
## So what can be done?
So if Ethereum has prioritized high security and decentralization, how can it scale to serve the needs of all users as the global financial network it aims to become? The Ethereum roadmap explored two answers: `Layer 2`s and blockchain `sharding`.
`Layer 2`s increase Ethereum scalability without compromising on the other two parts of the blockchain trilemma. They are an additional layer sitting on top of the main blockchain, relying on the main chain for security but allowing users to benefit from reduced fees and faster transactions. We will explore them in more detail in our Layer 2 lesson.
`Sharding` would have split the blockchain into multiple parallel chains, like adding more lanes to a road. Ethereum set that plan aside for a simpler one: making block data cheaper for Layer 2s to use (added in 2024) and raising capacity step by step, without sacrificing security or decentralization.
## Knowledge Check 7
Layer 2s:
- [ ] Provide their own security
> ℹ️ Try again! Layer 2s rely on the main blockchain for their security.
- [x] Increase scalability for the main blockchain
> ℹ️ Correct! Layer 2s sit on top of the main chain, adding scalability without compromising security or decentralization.
- [ ] Increase fees for users
> ℹ️ Try again! Layer 2s do the opposite: users benefit from reduced fees.
- [ ] Increase finality time for users
> ℹ️ Try again! Layer 2s offer faster transactions, not slower ones.
## The future of Ethereum
The Ethereum network keeps evolving its scalability without sacrificing the other aspects of the trilemma. The Merge to `Proof of Stake` consensus (2022) cut the network’s energy use by over 99%, and cheap block data for Layer 2s arrived in 2024. **Scaling is continuous work: each upgrade makes Ethereum faster and cheaper to use while maintaining security and decentralization as core tenets.** The Ethereum Foundation has an excellent webpage on the [Ethereum roadmap](https://ethereum.org/roadmap/).
Meanwhile, many `Layer 2` protocols build on top of Ethereum to help meet user demand without requiring updates to the Ethereum protocol itself. These Layer 2 protocols rely on Layer 1 Ethereum to provide decentralized security while they provide scalability; the diversity of Layer 2s makes a decentralized ecosystem! Leading `rollup`s include Arbitrum, OP Mainnet, and Base; Polygon PoS is a popular `sidechain` with its own separate security.
## Knowledge Check 8
Ethereum upgrades include:
- [ ] Using Layer 2s and cheaper block data to increase scalability
> ℹ️ Try again! This is part of the upgrades, but it isn’t the only one.
- [ ] Maintaining decentralization and security as core principles
> ℹ️ Try again! This is part of the upgrades, but it isn’t the only one.
- [ ] Reducing energy consumption with Proof of Stake consensus
> ℹ️ Try again! This is part of the upgrades, but it isn’t the only one.
- [x] All of the above
> ℹ️ Correct! Layer 2s and cheaper block data add scale, Proof of Stake cut energy use, and security and decentralization stay core tenets.
## What does it mean for Explorers?
Users need low fees to learn and explore the technology with low barriers to entry and low costs from mistakes, even more so at the beginning of their journey. The Ethereum blockchain is not ideal yet, but its values make it one of the best candidates for fulfilling the dream of a global financial computing system. Explorers can learn to interact and use Ethereum without paying massive fees; using Layer 2s allows Explorers to have the security and decentralization benefits of Ethereum combined with the higher scalability.
The next lesson will explain `Layer 2` solutions and how to get started. Onward explorers!
---
# Layer 2 Blockchains
Join the Layer 2 ecosystem to boost your transaction speed & reduce fees.
- Page: https://app.banklessacademy.com/lessons/layer-2-blockchains
- Markdown: https://app.banklessacademy.com/lessons/layer-2-blockchains.md
- Format: Lesson
- Duration: 15 minutes
- Writers: HiroKennelly, Tetranome
## Introduction
The desired operational state for any blockchain is to be as decentralized, secure, and scalable as possible. Building a blockchain that handles all three aspects well has proven to be a challenge, as yet unsolved. This challenge has been given a name: the `Blockchain Trilemma`.
Bitcoin and Ethereum are both fairly decentralized and secure, but they don’t scale well, as is evident from the high transaction fees and long transaction queues when the network is busy. To circumvent these issues, Explorers can make use of various technologies which drastically reduce transaction costs and increase transaction speed. These are collectively known as Layer 2 (L2) scaling solutions.
The `Lightning Network` is Bitcoin’s best-known scaling solution, and it relies on a technology called `payment channels` to scale payments between parties. Ethereum eases the Blockchain Trilemma by relying on various L2 solutions to handle transactions, supported by cheap, temporary `blob` storage added to Mainnet in 2024 (a light form of the “sharding” once planned).
## Payment Channels
On the Bitcoin blockchain, the Lightning Network relies on bidirectional payment channels, which enables multiple parties to exchange BTC without transacting on the main chain.
The architecture enables two users to open a payment channel between themselves. Each channel is strictly two-party, though payments can be routed across a network of connected channels to reach users further away. Between the opening and closing of a channel, parties can shift funds among themselves. Each participant’s micro-ledger entry is updated after both users sign for the transaction, which generally requires both parties’ nodes to be reachable.
A channel can be closed at any time by either party broadcasting the most recent version of the micro-ledger to the blockchain.
Payment channels don’t support advanced `smart contract` interactions, only basic peer-to-peer transactions.
## Knowledge Check 1
You must be online to transact using the Bitcoin Lightning Network.
- [x] True
> ℹ️ Correct! Updating a payment channel requires both users to sign, which generally means both parties’ nodes must be reachable.
- [ ] False
> ℹ️ Try again! Channel updates need signatures from both parties, so their nodes generally need to be online.
## Ethereum Scaling Solutions
Ethereum developers have been working on Ethereum-native scaling solutions for nearly as long as that network has been live.
Most Ethereum community members argue that in order to be an “Ethereum scaling solution”, a project must address Ethereum’s `scalability` shortcomings without sacrificing `security` or `decentralization`. For users, the most practical needs are faster transactions and cheaper `gas` than Ethereum Mainnet. To compete, some scaling solutions are willing to make greater trade-offs on the Trilemma than others.
Ethereum is defined by its smart contract capabilities, so it is also important that its scaling solutions inherit this support. There’s no use having fast, cheap transactions if users can’t access their favorite `dApps` from a Layer 2.
## Knowledge Check 2
Ethereum scaling solutions:
- [ ] use payment channels to scale the network.
> ℹ️ Try again! Payment channels are Bitcoin’s Lightning Network approach. Ethereum scales through solutions like Rollups.
- [ ] can’t support smart contract interactions.
> ℹ️ Try again! Smart contract support is essential. Users need access to their favorite dApps from a Layer 2.
- [x] should boost scalability without weakening other trilemma qualities.
> ℹ️ Correct! A true Ethereum scaling solution addresses scalability without sacrificing security or decentralization.
- [ ] allow faster transaction speeds at the cost of higher gas.
> ℹ️ Try again! Scaling solutions aim for both faster transactions AND cheaper gas than Ethereum Mainnet.
## Bridging Layer 1 and Layer 2
As we learned in [Blockchain Basics](https://app.banklessacademy.com/lessons/blockchain-basics), blockchains are databases known as `ledgers`, that record a cryptographically secured, chronological list of transactions. L1 blockchains and L2 scaling solutions are each blockchains in their own right, with their own databases of addresses and data.
Infrastructure called `bridges` is used to transfer information between different blockchain databases. For example, if you think of the Ethereum Mainnet (or any other `L1` blockchain) as one island, and a different blockchain or your preferred scaling solution as another, a crypto bridge is the generic term for the networked highway connecting these two digital islands.
The technology is very complex, but from the end user perspective this process is as simple as choosing a destination.
## Sidechains
A `sidechain` is a separate blockchain that runs independently to Ethereum, but is connected to Ethereum Mainnet by a `bridge`. To migrate tokens, you lock them in a bridge contract on Mainnet, and equivalent tokens are minted on the sidechain. Importantly, this does NOT give your funds Ethereum’s security: the bridge and sidechain rely on the sidechain’s own validators. If either is compromised (like the $625M Ronin bridge hack of 2022), the locked funds can be stolen.
Sidechains are still subject to the Blockchain Trilemma. Their lower `gas` fees and faster transactions come from a smaller but more powerful validator set, trading some decentralization and security for scalability.
Sidechains like Polygon PoS regularly publish snapshots (“checkpoints”) to Ethereum. These give their history a form of finality and let users prove balances when exiting the bridge, but they don’t make sidechain funds as secure as Mainnet.
## Knowledge Check 3
Sidechains:
- [ ] lock bridged tokens in a contract on Mainnet.
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] have cheaper gas fees than Mainnet.
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [ ] have greater centralization risks than Mainnet.
> ℹ️ Try again! This is true, but it isn’t the only true statement.
- [x] All the above.
> ℹ️ Correct! Sidechains lock bridged tokens on Mainnet and offer cheaper fees, but their smaller validator set trades decentralization for that speed.
## Rollups
Layer 2 protocols that use Rollup technology maintain closer alignment with the security level of Ethereum Mainnet.
Like sidechains, Rollups permit on-chain transactions to execute away from Ethereum Mainnet. These transactions are then ‘rolled up’ into a single batch, and the batch data is posted to Ethereum in cheap, temporary data packets called `blobs`, introduced in the Dencun upgrade of March 2024. Blobs are the main reason typical L2 fees have dropped to a few cents or less.
In order for the Rollup to prove itself secure enough to process transactions on behalf of Mainnet, it must provide “convincing evidence” that the transactions in each submitted batch are secure and valid. This evidence is included in the transaction rollup and verified by the bridge contract on Ethereum Mainnet.
There are currently two Rollup methods that can provide this evidence: `Optimistic Rollups`, and `ZK Rollups`. Let’s take a closer look at these two processes.
## Optimistic Rollups
L2 protocols like Optimism, Base and Arbitrum, all use `Optimistic Rollups` as their scaling solution architecture. Optimistic Rollups are so-called because the information in the Rollup batch is considered to be valid unless proven otherwise: an optimistic assumption is made.
To mitigate against any abuse of this technique, there is typically a multi-day delay once a user requests to move funds off of the L2 back to Mainnet. During this time, bridge validators can publish a `fraud proof` seeking to cancel the withdrawal. This fraud-proof mechanism is similar to the banking industry’s clearance processes, but is decentralized.
Note: Third-party bridging services, like Across and Relay, help users bridge funds in mere minutes rather than days. These fast bridges front you the money from their own pool of funds, so you take on the risk of the bridge’s smart contracts and its fund providers, an added layer of trust compared to the rollup’s own bridge.
## Knowledge Check 4
With Optimistic Rollups, transactions are considered valid until proven otherwise.
- [x] True
> ℹ️ Correct! The optimistic assumption is that batches are valid, with a challenge period during which fraud proofs can cancel bad withdrawals.
- [ ] False
> ℹ️ Try again! That optimistic assumption is exactly where these Rollups get their name.
## ZK Rollups
`ZK Rollups` are a type of Rollup that relies on Zero-Knowledge technology. Unlike `Optimistic Rollups`, ZK Rollups confirm the legitimacy of the batched transactions without reliance on certain users to look for evidence of fraud. Instead, these Rollups submit a mathematical proof, known as a `validity proof`, that lets Ethereum check an entire batch is correct without redoing the work.
The major upside to ZK Rollups is the `settlement time`, also known as `transaction finality`. Rather than a multi-day challenge period, ZK Rollups enable users to access their funds on Mainnet typically within a few hours, as soon as the next validity proof is submitted. Despite the name, Zero-Knowledge technology isn’t used here for privacy: transactions on major ZK Rollups are just as public as on Ethereum Mainnet.
There are some major protocols using ZK Rollup technology to build their Ethereum scaling solutions, including ZKsync, Starknet, and Linea. It’s still early in terms of development, but has great future potential.
## Knowledge Check 5
Compared to Optimistic Rollups, ZK Rollups:
- [ ] keep user transactions private on Mainnet.
> ℹ️ Despite the “Zero-Knowledge” name, major ZK Rollups are just as transparent as Ethereum Mainnet: the proofs are used for validity, not privacy.
- [x] use validity proofs, avoiding a multi-day challenge period.
> ℹ️ Correct! A mathematical validity proof confirms each batch, so finality on Mainnet doesn’t require waiting out a fraud-proof window.
- [ ] rely on watchers to submit fraud proofs during a challenge window.
> ℹ️ That’s how Optimistic Rollups work. ZK Rollups prove validity up front instead.
## Cross-chain dApp Compatibility
When comparing `Optimistic Rollups` and `ZK Rollups`, the main focus for most users is withdrawal times. However, since these withdrawal-lag issues can be resolved by third-party bridges, it shouldn’t be a major consideration when deciding which scaling solution to explore.
Many Optimistic Rollups are “EVM equivalent”, meaning the L2 natively supports any dApp that can run on the `Ethereum Virtual Machine` (EVM). EVM equivalence enables deployment of any smart contracts previously deployed on Mainnet - thus allowing L2 users to access their favorite dApps.
Sidechains like Polygon PoS also run the EVM natively, and most modern ZK Rollups (such as ZKsync, Linea, and Scroll) are also EVM equivalent or very close to it. As a result, your favorite Ethereum dApps are available across most of the L2 ecosystem.
## Knowledge Check 6
EVM equivalent scaling solutions are able to easily reuse smart contracts deployed on Mainnet.
- [x] True
> ℹ️ Correct! EVM equivalence means any smart contract that runs on Mainnet can be deployed on the L2, bringing familiar dApps along.
- [ ] False
> ℹ️ Try again! Reusing Mainnet smart contracts is the whole point of EVM equivalence.
## Lesson Recap
L1 blockchains like Bitcoin and Ethereum are currently constrained by the `Blockchain Trilemma`. `Payment channels` on the Bitcoin network, or sidechains and Rollups on Ethereum, help these networks to scale and ease the Trilemma.
`Bridges` connect L1 blockchains with `sidechains` and `Rollups`, and the way in which the bridge contract functions influences the properties of the connected network.
Sidechain funds do not inherit the `security` of Ethereum: bridged tokens are locked in a contract on Mainnet, but their safety depends on the sidechain’s own validators and bridge contract. These chains have a small but powerful validator set that allows them to increase transaction speed and lower gas fees, at the cost of decentralization and security.
Rollups, like sidechains, also validate and process their own transactions, but their bridge contract requires them to provide “convincing evidence” of transaction validity before the data is considered valid. This allows them to uphold a level of `security` and `decentralization` in alignment with Ethereum values. There are two methods for providing this “convincing evidence”: Optimistic Rollups and ZK Rollups. `Optimistic Rollups` maintain a multi-day delay before settling their transaction rollups on Mainnet, during which time bridge validators detect and report fraud. `ZK Rollups` provide mathematical assurance of transaction legitimacy, thanks to `Zero-Knowledge` technology.
Presently, both Optimistic Rollups and modern ZK Rollups offer a high level of smart contract compatibility with Ethereum Mainnet, enabling dApps from Ethereum Mainnet to easily deploy on their networks. Many believe ZK Rollups will become the scaling solution of the future, thanks to their fast finality and strong validity guarantees.
## Start Your Layer 2 Journey With Optimism or Base 🙂
Optimism and Base, both EVM-equivalent Optimistic Rollups, are great L2s for Explorers to begin with. Using dApps on either chain feels similar to L1, just cheaper and faster, and both use ETH as gas. Your upcoming quest is the first step of your journey on Optimism or Base!
Both ecosystems are deeply influenced by Ethereum values, with Optimism known for [funding public goods](https://optimism.mirror.xyz/wqk1Yeyn2OhV9paDzbRXvQ0m0JYDu2npbSkMClwk1rY) that add value to the ecosystem, such as free education from Bankless Academy.
Optimism and Base aren’t just platforms relying on Optimistic Rollups: they show how blockchains can solve real problems and open new ways of transacting and coordinating together. And that should make us all optimistic. 🙂
---
# Funding a Wallet on Layer 2
Learn how to fund your wallet on L2 via CEXs, third-party onramps, and bridges.
- Page: https://app.banklessacademy.com/lessons/funding-a-wallet-on-layer-2
- Markdown: https://app.banklessacademy.com/lessons/funding-a-wallet-on-layer-2.md
- Format: Handbook
- Duration: 8 minutes
- Writers: HiroKennelly
### Key Takeaways
> * There are a number of ways to fund your wallet on an Ethereum scaling solution like Base, Optimism, or Arbitrum.
>
> * Centralized exchanges often provide a direct Layer 2 `onramp`.
>
> * Third-party payment apps enable users to fund a wallet on Layer 2 from a bank account or a debit or credit card.
>
> * Protocol bridges let users send funds from `Ethereum Mainnet` to Layer 2.
If you’re new to crypto, all the talk about the importance of `Layer 2` (or L2) must seem a bit odd, confusing really. In contrast to [Layer 1](https://app.banklessacademy.com/lessons/layer-1-blockchains), which often refers to [Ethereum Mainnet](https://ethereum.org/), Layer 2 is a term for a specific type of Ethereum scaling solution that enables users to inherit the security of Ethereum but enjoy low transaction fees and fast `block` inclusion times. If you’ve ever heard of [Optimism](https://www.optimism.io/), [Arbitrum](https://arbitrum.io/), or [Base](https://www.base.org/), those are Layer 2 scaling solutions. [Polygon](https://polygon.technology/) is often grouped with them too (it’s really a `sidechain`, but let’s not worry about that here).
Every Ethereum transaction pays a fee, known as `gas`. Gas is priced in `gwei`, a tiny unit of ETH. Fees rise and fall with demand: at peak demand in 2021, a simple `token swap` on Mainnet could cost tens of dollars, and hyped NFT mints pushed fees far higher. Today, a typical Mainnet transaction costs well under a dollar, and the same action on a Layer 2 costs cents or less.
Because transactions on Layer 2 confirm quickly and are inexpensive to execute, many of the most innovative protocols are building on L2s. Unless you’ve been in the ecosystem for a while, however, it’s not intuitive to know how to start using Layer 2s. But there is a clear place to begin your journey into Ethereum scaling solutions: funding your `wallet` on Layer 2.
There are three main ways to fund an L2 wallet: moving your crypto from a `centralized exchange` straight to a Layer 2 network, using a third-party crypto payment service to fund an L2 wallet, or sending your digital assets from Mainnet to L2 via a bridging protocol.
> Please note, you’ll need to have a cryptocurrency wallet, like [Zerion](https://zerion.io/), [MetaMask](https://metamask.io/), or [Taho](https://taho.xyz/), and an Ethereum wallet `address` to proceed. If you haven’t yet created a `non-custodial wallet`, please [take this lesson first](https://app.banklessacademy.com/lessons/wallet-basics)!
>
> After you have a non-custodial Ethereum wallet address, you’ll be ready to continue on your crypto journey.
### Funding From CEXs
Funding your wallet directly from a centralized exchange (CEX) is perhaps the simplest way to move digital assets to an L2, particularly if you already hold cryptocurrency on the exchange. Most major CEXs offer users this option, although it isn’t always clear to the user.
On [Coinbase](https://www.coinbase.com/), for example, users can send their funds directly to networks like Optimism, Polygon, or Base (Coinbase’s own Layer 2) in just a few steps:
1\. Go to [Coinbase](https://www.coinbase.com/).
2\. [Purchase](https://help.coinbase.com/en/coinbase/trading-and-funding/buying-selling-or-converting-crypto/how-do-i-buy-digital-currency) or hold ETH on Coinbase.
3\. Select ‘Send & Receive’, located at the top of the website.
4\. Enter the amount in fiat or ETH you wish to send (you can toggle between fiat and crypto to the right of the amount), select ‘Pay with’ and choose Ethereum, and in the ‘To’ field, enter the wallet address where the funds will be sent. Select ‘Continue’.
5\. On the next screen, select ‘Network’ and change the network from Ethereum to Optimism (the list also includes other Layer 2s, like Base).
6\. Review, and if accurate, select ‘Send Now’.
Most major exchanges offer users the ability to send their crypto directly to an L2. [Coinbase](https://www.coinbase.com/), [Binance](https://www.binance.com/), and [Kraken](https://www.kraken.com/) all support withdrawals to major Layer 2s such as Base, Optimism, and Arbitrum. Pro Tip: Always check the withdrawal network list on your exchange to see which L2s it supports before you send.
### Third-Party Onramps
Another simple way to fund your L2 wallet is to take advantage of direct-to-L2 services offered by many third-party crypto payment companies. [MoonPay](https://www.moonpay.com/), [Ramp](https://ramp.network/buy/), and [Transak](https://global.transak.com/) are three of the most popular options to fund crypto wallets without having to use a centralized exchange.
Like most exchanges, these third-party `onramps` will require you to provide `Know-Your-Customer` information. However, once you get past those basic hurdles, these payment options are an easy way to buy crypto across the ecosystem and transfer it to Layer 2.
For MoonPay, the steps are:
1\. Go to [MoonPay](https://www.moonpay.com/).
2\. Select ‘Buy crypto’, located at the top or middle of the website.
3\. Enter the amount of fiat you wish to send and the proper denomination.
4\. Select a digital asset, in this case ETH. Type in “ETH” and you will see different networks on which you can purchase ETH (you may need to scroll down); choose the Layer 2 you want to use. Click ‘Continue’.
5\. Next, you will be prompted to enter personal verification and payment data.
6\. Once complete, enter your Ethereum wallet address. You’ll be asked to make sure the wallet is safe to use.
7\. Complete, confirm the information is correct, and select ‘Pay’.
As with CEXs, most major third-party payment onramps provide direct-to-L2 functionality. Take advantage of these innovations to save on transaction fees and increase the range of your `blockchain` explorations.
### Funding Via Bridges
If you already have funds on `Ethereum Mainnet`, by far the easiest way to get your crypto on to L2 is to use a bridging protocol. Bridges are the name we’ve given to protocols designed to help us move our funds around the cryptoverse, and there are a number of bridges designed to move crypto from Ethereum Mainnet to Layer 2s.
#### Native Bridges
Native bridges are those designed by the Layer 2 protocols themselves. On an `optimistic rollup` like Arbitrum, Optimism, or Base, deposits usually arrive on L2 within a few minutes, but moving crypto back to Mainnet takes about one week. The [Arbitrum Bridge](https://bridge.arbitrum.io/) and the [Optimism Bridge](https://app.optimism.io/bridge/) both work this way: the waiting period gives the network time to catch invalid withdrawals before they settle.
#### Third-Party Bridges
Because no one likes to wait, a number of third-party bridging services exist to help us move our funds instantly to and from L2s. Among the most popular options are [Across Protocol](https://across.to/bridge) and [Relay](https://relay.link/bridge), but you can use [Bungee](https://bungee.exchange/) to compare bridging fees across a number of protocols. To use Across, for example, all you need to do is:
1\. Go to the [Across Protocol](https://across.to/bridge) bridge and connect your wallet.
2\. To bridge funds to L2, select Ethereum under ‘From’.
3\. Choose your asset and the amount you wish to bridge (Pro Tip: only bridge a blockchain’s native `coin`, in this case ETH).
4\. Next, select your L2 solution in ‘To’.
5\. Review the transaction, and if all looks correct, select ‘Send’.
Moving funds from Mainnet to L2 is really that simple, and nearly all bridges work the same way. Select a blockchain to send funds from, choose a destination like Base or Optimism, pick an asset and amount, and across the blockchain crevice you go. Pro Tip: As with sending from a CEX, you can use [L2BEAT](https://l2beat.com/bridges/summary) to find a compatible bridge for your L2 destination.
### The Road to L2
Layer 2s offer users of all experience levels the opportunity to experiment with decentralized finance in a way that is often prohibitive on Mainnet. Because it costs mere pennies to transact on these networks (you can compare costs [here](https://www.growthepie.com/)), it’s a great place to become familiar with the basic building blocks of decentralized finance, such as swaps, `liquidity pools`, or `yield farms`.
Using a CEX or a bridge to move funds to L2 is a necessary step in your journey from crypto novice to crypto competency. Remember, to see your funds displayed in your wallet, you may need to add the network in your wallet settings, which can be done at [Chainlist](https://chainlist.org/). If you just want to check that the funds made it safely to your L2 wallet, you can look up your address on a `block explorer` like [Blockscan](https://blockscan.com/), which searches many networks at once, or go to a DEX, like [Uniswap](https://app.uniswap.org/), and select the L2 network and the asset to see your balance.
As you scale up your skills, you’ll need to figure out how to scale down your transaction fees. Learning how to fund an L2 wallet is the first step, but the next steps on your crypto journey are up to you. Welcome, explorer, a new world awaits.
---
Let’s get moving, Layer 2 Ethereum awaits! We hope you’ve enjoyed this entry in the Explorer’s Handbook: ‘Funding a Wallet on Layer 2’.
Don’t forget to collect this entry if you want to own a copy for easy reference on your travels, or to support future content at Bankless Academy. Safe travels, Explorer!
***
**Author**
**[Hiro Kennelly](https://twitter.com/HiroKennelly)** is a writer, editor, and coordinator at BanklessDAO and the Editor-in-Chief at Good Morning News. He is also helping to build a grants-focused organization at DAOpunks.
**Editor**
**[Trewkat](https://twitter.com/trewkat)** is a writer and editor at BanklessDAO. She’s interested in learning as much as possible about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
**Patron**
This article was funded by **[Optimism](https://www.optimism.io/)**.
---
# Registering Your Web3 Username
Customize your wallet address with ENS, start building your digital identity.
- Page: https://app.banklessacademy.com/lessons/registering-your-web3-username
- Markdown: https://app.banklessacademy.com/lessons/registering-your-web3-username.md
- Format: Handbook
- Duration: 8 minutes
- Writers: estmcmxci, Tetranome
### Key Takeaways
> * Using the Ethereum Name Service (ENS), you can create a single username that represents you across multiple blockchains.
>
> * ENS names simplify sending and receiving `cryptocurrency` by replacing your lengthy wallet address with a memorable label like *web3explorer.eth*
>
> * Your ENS names become associated with your online presence: your cryptocurrency portfolio, your blockchain interactions, social media pages, avatars, websites, and emails, forming a single `onchain identity`.
>
> * Registering an ENS name is similar to registering a .com website address. It requires a `cryptocurrency wallet` and 10 minutes.
### Introducing Universal Usernames
Imagine having a single username for the entire internet. One account for your entire online presence: an account that you own and plug into other apps across the internet. This username would serve as your digital personality, allowing you to be recognized across the internet, making you a unique, memorable member of the online community.
Projects like the [Ethereum Name Service (ENS)](https://ens.domains) are building this single username reality, leveraging the powers of cryptocurrency wallets. Using ENS, your `non-custodial wallet` address can be transformed into a personalized address of your choosing, with a `.eth` extension.
*0xB00e26E79352882391604E24b371A3F3c8658e8c* → *web3explorer.eth*
Just like a .com website address, it’s easy to read, memorable, and personalized to you. No matter where on the internet you are, your name will be consistent and recognizable. Sending `cryptocurrency` to your wallet no longer requires saving, copying and pasting a lengthy address. Similar naming systems exist on other networks, like [Basenames](https://www.base.org/names) on Base, but ENS .eth names remain the most widely used standard.
And this is just the beginning.
> *Originally we envisioned ENS as a naming system to name crypto addresses.. (but) as web3 users, the meaning of an address is so much more, it can be your Farcaster id, your crypto payment address, a DAO contract and more.*
>
> *The use cases of web3 are expanding and if we want the next billion people to be onboarded onto web3, it needs to be usable. When all these things are properly named, web3 becomes usable, it becomes human.*
>
> *ENS makes web3 human.*
>
> *- Jefflau.eth, Core Developer at ENS Labs*
By linking your wallet address to a unique .eth username, you’ve actually created a web3 personality with the ownership powers of a non-custodial wallet. ENS names can support wallets across multiple networks. One universal name is now linked to your digital property across blockchains, your blockchain history, and more. This includes any special credentials you may have unlocked, **like your Bankless Academy badges.**
### Onchain Identity
The capabilities of ENS extend beyond labelling wallet addresses; ENS can label almost any entity or asset on the blockchain, like a `smart contract`, and point to any location on the `web2` internet. Your website, social media profiles, and email can all be associated with this single username.
Picture ENS as **your onchain passport**. A physical passport contains your name, photo, birth date, and passport number, linking to extensive information in your government’s identity database. ENS maps your .eth domain (`yourname.eth`) with an Ethereum address, a profile picture, `onchain` data like trades and governance votes, and `offchain` data like your website.
Here’s the key difference: You own and control all aspects of this onchain passport.
ENS names are represented as NFT tokens (`ERC-721` tokens) on the Ethereum blockchain, which are owned by and managed through your non-custodial wallet, **just like cryptocurrency.** In web3, you can truly own your online identity and carry it with you around the internet. Your account (its data, content, followers etc.) can’t be erased by the platforms you use. We’re moving beyond the control of YouTube, Instagram, and the other web2 giants managing the internet community.
Let’s take a look at how our ENS names plug into onchain apps, starting with the Bankless Academy ‘Explorer Profile’ feature. As a Bankless Academy user with an ENS name, you will automatically find your ENS name and profile picture represented on [your profile](https://app.banklessacademy.com/explorer/my-profile). This information is displayed alongside your Academy achievements, like lesson badges and collected content.
Another example is Farcaster, a decentralized social network. Like many web3 apps, it lets you connect your wallet and display your ENS name and profile picture instead of starting your identity from zero. One onchain identity travels with you between apps.
> **Fun fact:** Since launching in 2017, ENS has registered millions of .eth names. 🐂
It's time to become an onchain citizen and shape our decentralized future. It’s time to register your ENS name. We'll guide you through the process, helping you to unlock its key features, including assigning your profile picture for visibility across numerous onchain apps like Bankless Academy.
The process is very similar to registering a .com website address on a platform like GoDaddy or Namecheap. It’s as simple as choosing a unique name and submitting two blockchain transactions.
### Prerequisites
**1\. Create a Crypto Wallet**
To buy and hold your ENS name, you'll need to set up a wallet if you haven't already done so. Check out our quick guide, [‘Creating a Crypto Wallet’](https://app.banklessacademy.com/lessons/creating-a-crypto-wallet), and create your wallet in 5 minutes.
**2\. Ensure You Have ETH in Your Wallet on the Ethereum Mainnet**
You can fund your wallet by sending cryptocurrency from a Centralized Exchange, or by using services like [MoonPay](https://www.moonpay.com/) or [Transak](https://global.transak.com/). The registration fee is paid in ETH.
### Walkthrough
**1\. Open the [ENS Manager App](https://app.ens.domains/)** **and connect your wallet.**
**2\. Search for and select your desired name.**
**3\. Choose the duration of your registration.**
You’ll need to periodically renew your ENS name. Be sure to set a reminder in your personal calendar to notify you before it expires.
**4\. Review your payment details.**
The registration fee and gas are paid with the ETH balance in your wallet.
**Optional:** Set your domain as your `primary name` during this phase. This means your ENS name and profile picture will be displayed instead of your lengthy wallet address on Bankless Academy, Farcaster and other ENS-supported platforms.
**5\. Review the upcoming registration steps.**
**6\. Start the 60 second timer by signing the first transaction.**
This first transaction prevents others from `front-running` your registration process.
**7\. Wait for the timer to finish.**
**8\. Sign the second transaction.**
This is the transaction that will secure ownership of your new ENS name, and send it to your wallet.
**9\. Success!**
Your ENS name will now be represented as an `ERC-721` token in your wallet.
You can verify that your ENS name redirects to your wallet address by visiting and entering your ENS name in the address search bar; note that this process might take a few minutes. Once this is working, your ENS name is ready to be shared with your friends and plugged into Ethereum apps.
For more ways to utilize your new ENS name, don't forget to check out the ‘Frequently Asked Questions’ section below!
---
### Conclusion
By registering your web3 username, you are embracing self-sovereignty on the decentralized web, moving towards a future where you alone own your onchain identity. ENS serves as both your web3 username and wallet address, marking your presence in the digital realm. It integrates seamlessly with onchain apps, reflecting and building your identity with every transaction.
Your onchain identity, once established, is solely under your custody, and it is your responsibility to ensure its renewal. The adoption of ENS is key in shaping a user-empowered internet, free from abuses of authority. With ENS, each interaction on the decentralized web is a testament to your unique onchain persona.
---
It’s time to take control of your onchain identity, with ENS. We hope you’ve enjoyed this entry in the Explorer’s Handbook: ‘Registering Your Web3 Username’.
Don’t forget to collect this entry if you want to own a copy for easy reference on your travels, or to support future content at Bankless Academy. Safe travels, Explorer!
---
### Frequently Asked Questions
#### **What is a Primary Name?**
Your `primary name` functions as a nickname for your onchain wallet address, simplifying your complex Ethereum wallet address. By assigning a primary name, you allow various apps to use and display it, along with your profile picture. [Learn more here](https://support.ens.domains/en/articles/7890756-the-primary-name#)!
#### **Can I link my email, website, or social media to my ENS name?**
Yes, absolutely! Just as your passport can hold different details about you, your ENS name can link to a variety of personal data. This includes your email, personal website, profile picture, and social media handles.
These `standard records` allow you to publicly share your contact information in a decentralized way. They’re stored onchain and accessible via any application that recognizes ENS names.
For a beginner-friendly guide on setting records for your ENS name and what each type of record could be used for, please refer to this [article](https://support.ens.domains/en/articles/8868504-how-to-edit-profile).
#### **How much does it cost to register an ENS Name?**
Currently, the registration costs for ENS names are set at the following prices:
* Names with 5 or more characters: $5 in ETH per year.
* Names with 4 characters: $160 in ETH per year.
* Names with 3 characters: $640 in ETH per year.
This doesn’t include transaction `gas fees` for interacting with the Ethereum Network, which are roughly estimated in the [ENS Manager App](https://app.ens.domains/). Additional gas fees are required for onchain data updates like setting `custom records`. Prices for shorter names are higher due to scarcity. Fees deter speculative registrations and support the DAO's development of ENS.
#### Can I connect multiple wallet addresses with a single ENS name?
Absolutely! Your ENS name can either map several wallet addresses to a single ENS name, like 'yourname.eth', or you can sort your addresses into separate subnames to identify the type of cryptocurrency associated with each, like 'ethereum.yourname.eth' or 'bitcoin.yourname.eth'.
You can set up either option using the [ENS Manager App](https://app.ens.domains). For more details, [refer to this guide for step-by-step instructions](https://support.ens.domains/en/articles/7900302-ens-use-cases)
#### Can I use my existing website address as my ENS name?
Yes, if you own a website like web3explorer.com, you can use this instead of web3explorer.eth. This is thanks to infrastructure co-built by ENS and GoDaddy.
To learn more, check out ENS Labs’ [blog post](https://ens.domains/blog/post/godaddy-partners-with-ens).
---
**Authors**
**[Marcus](https://twitter.com/estmcmxci)** publishes the ENS DAO Newsletter. He researches how surplus revenue generated from protocol fees can subsidize application layer development and other open source infrastructure.
**[Tetranome](https://twitter.com/Tetranome)** is the Content & Design Lead at Bankless Academy, focusing on the learning journey, user interface & experience, and platform artwork.
**Patron**
This walkthrough is powered by Bankless Academy.
---
# Intro to DeFi
Understand the basics of decentralized finance.
- Page: https://app.banklessacademy.com/lessons/intro-to-defi
- Markdown: https://app.banklessacademy.com/lessons/intro-to-defi.md
- Format: Lesson
- Duration: 10 minutes
- Writers: Ap0ll0
## DeFi Defined
DeFi, short for `decentralized` finance, is the ecosystem of financial products, protocols, and applications that run on public `blockchain` networks.
DeFi is an established, open alternative to traditional financial services, with a range of tools for putting crypto assets to work. It offers opportunities beyond simply buying crypto on a centralized exchange, and lets anyone build a decentralized, Bankless lifestyle.
## Why DeFi?
DeFi gives anyone with an internet connection access to sophisticated financial tools: investing, trading, lending and borrowing, and staking.
DeFi offers these tools to users transparently and openly. Anyone can look at the code and verify that the contract does what it says it does, unlike what banks do with your money behind closed doors.
And there is no institution in the middle deciding who gets in: no one can turn you away, freeze your account, or close it down.
## Knowledge Check 1
What does DeFi stand for?
- [ ] Digital finance
> ℹ️ Try again! DeFi is digital, but the “De” stands for decentralized.
- [x] Decentralized finance
> ℹ️ Correct! DeFi is the ecosystem of financial products and applications running on public blockchains.
- [ ] Deregulation field
> ℹ️ Try again! DeFi is about removing middlemen through decentralization, not about deregulation.
- [ ] Decentralized funding
> ℹ️ Try again! Close, but the “Fi” stands for finance, not funding.
## Earning Yield
Many `DeFi` protocols let you earn interest and other rewards by putting your crypto assets to work. You get access to financial products that would normally require a bank or financial services firm, without the paperwork, approval process, and other hassles of traditional finance.
DeFi is not free: you pay a small network fee for each transaction, and many protocols charge fees too. But these costs are typically lower and fully transparent, there is no bank overhead, and no institution can gatekeep your access or your earnings. This is why DeFi is popular.
## Knowledge Check 2
How can you earn yield with crypto?
- [ ] Earning interest by depositing into a DeFi protocol
> ℹ️ Try again! This is one way to earn yield, but it isn’t the only one.
- [ ] Earning rewards by depositing into a DeFi protocol
> ℹ️ Try again! This is one way to earn yield, but it isn’t the only one.
- [x] Both of the above
> ℹ️ Correct! DeFi protocols let you earn both interest and other rewards by putting your crypto assets to work.
- [ ] You can’t earn yield on crypto
> ℹ️ Try again! Earning yield on crypto assets is one of the main reasons DeFi is popular.
## What You Can Do With DeFi
`DeFi` transactions are `permissionless`. This refers to a public `blockchain` that anyone can use to buy, sell, or trade assets. No third party controls or oversees activity. These transactions are carried out by decentralized applications, known as DApps.
`DApps` and DeFi platforms operate 24/7, all over the world. Many run on `stablecoins`, tokens designed to hold a steady dollar value (see our [Understanding Stablecoins](https://app.banklessacademy.com/lessons/understanding-stablecoins) lesson). We will introduce four of the most common activities in DeFi: investing, trading, lending and borrowing, and staking.
## Knowledge Check 3
Fill in the blank: DeFi transactions are ____.
- [ ] Free
> ℹ️ Try again! DeFi transactions still cost network fees. What makes them special is that no one can block them.
- [ ] Controlled
> ℹ️ Try again! No third party controls or oversees DeFi activity.
- [x] Permissionless
> ℹ️ Correct! Anyone can buy, sell, or trade on a public blockchain without needing approval from a third party.
- [ ] Centralized
> ℹ️ Try again! DeFi is the opposite: it runs on decentralized applications with no central authority.
## Investing
The most common `DeFi` transaction is to purchase some cryptocurrency with the expectation that it will be worth more in the future. This is known as investing.
HODL is a term used for keeping crypto assets for a long time. Depending on who you ask, the HODL meme either comes from a typo of HOLD or it stands for **H**old **O**n for **D**ear **L**ife.
DeFi can give early access to new coins and tokens before they are listed on centralized exchanges (CEX).
## Knowledge Check 4
What does HODL mean?
- [ ] It’s a misspelling of HOLD
> ℹ️ Try again! This is one origin story, but it isn’t the only correct answer.
- [ ] Hold On for Dear Life
> ℹ️ Try again! This is one meaning, but it isn’t the only correct answer.
- [ ] Keeping crypto for a long time
> ℹ️ Try again! This is what HODLing means in practice, but it isn’t the only correct answer.
- [x] All of the above
> ℹ️ Correct! HODL started as a typo of HOLD, doubles as “Hold On for Dear Life”, and means keeping crypto assets for a long time.
## Trading
A decentralized exchange (DEX) shows current exchange rates between different crypto tokens and coins and serves as a digital marketplace that facilitates trading one currency for another by bringing together buyers and sellers.
The parties involved in a DEX trade don’t need to know or trust each other. In fact, it may appear that you are trading with the DEX. However, in most cases, the DEX creates `liquidity pools` that facilitate the trade between two traders’ `wallets` in a `permissionless` fashion.
## So What?
Anyone can trade and participate in markets regardless of your net asset worth. Anyone can enter or exit a position via on-chain protocols.
## Knowledge Check 5
What is a DEX?
- [x] A decentralized exchange
> ℹ️ Correct! A DEX is a digital marketplace that brings buyers and sellers together to trade tokens without a middleman.
- [ ] A derivatives exchange
> ℹ️ Try again! The “D” stands for decentralized, not derivatives: a DEX is a decentralized exchange.
- [ ] A crypto index fund
> ℹ️ Try again! A DEX is a marketplace for trading tokens, not an investment fund.
- [ ] None of the above
> ℹ️ Try again! One of the above is exactly what a DEX is.
## Lending & Borrowing
DeFi lending and borrowing offers loans without the need for a bank or intermediary institution. Instead, lending is done on a `peer-to-peer` level: `DApps` connect lenders and borrowers directly. The lender earns interest, and the borrower pays back the loan plus interest.
To borrow, you first deposit crypto worth more than the loan as `collateral`. If your collateral's value falls too far, it is automatically sold to repay the loan. This is called `liquidation`, and it is how DeFi loans stay safe without credit checks.
## Knowledge Check 6
Fill in the blank: DeFi lending is done on a _____ level.
- [ ] income to debt
> ℹ️ Try again! DeFi doesn't check your income: loans are secured by collateral instead.
- [x] peer-to-peer
> ℹ️ Correct! DeFi lending happens directly between two parties, with no bank or middleman in between.
- [ ] banks to customers
> ℹ️ Try again! DeFi removes the bank entirely: lending happens directly between users.
- [ ] income to interest
> ℹ️ Try again! Lenders do earn interest, but the lending itself happens directly between peers.
## Staking
`Staking` is often grouped with lending, but it is different: there is no borrower. You lock your `ether` to help keep the Ethereum network secure, and the network pays you rewards in return.
Staked funds can be locked for a period of time, and `validators` who misbehave lose part of their stake, so honesty pays. Centralized exchanges offer staking too, but DeFi gives you more options while you stay in control of your assets. Learn more in our [Staking on Ethereum](https://app.banklessacademy.com/lessons/staking-on-ethereum) lesson.
## Knowledge Check 7
Locking your crypto to help secure a network, in exchange for rewards, is an example of?
- [ ] Trading
> ℹ️ Try again! Trading is exchanging one token for another, not locking it to secure a network.
- [x] Staking
> ℹ️ Correct! Staking means locking your crypto to help secure a network, and earning rewards in return.
- [ ] Borrowing
> ℹ️ Try again! Borrowing is taking out a loan against collateral, not helping secure a network.
- [ ] HODLing
> ℹ️ Try again! HODLing is simply keeping your crypto for a long time, not putting it to work.
## DeFi Downsides
**Hackers**
Where there is money and technology, there are people looking for ways to hack the system. DeFi protocols and their users are frequent targets, so security habits matter.
**Risk**
DeFi runs on code: `smart contracts`. An error or loophole in that code can be exploited to drain funds. Markets bring risk too: loans can be liquidated when prices fall, and `stablecoins` can lose their steady value.
**No recourse**
There is no customer support line, and no company or government agency to appeal to if something goes wrong. Lost or stolen funds usually cannot be reversed or refunded.
## Knowledge Check 8
What is a risk in DeFi?
- [ ] There are no risks
> ℹ️ Try again! DeFi has real risks, like hackers and code exploits, and no one to appeal to if something goes wrong.
- [ ] The bank might turn down your loan
> ℹ️ Try again! There are no banks in DeFi: lending is peer-to-peer and permissionless.
- [ ] A central authority could freeze your funds
> ℹ️ Try again! DeFi has no central authority that can freeze your funds. The real risks lie elsewhere, like errors in code.
- [x] There may be an error in the code
> ℹ️ Correct! DeFi runs on code, and an error or loophole in that code can be exploited.
---
# Understanding Stablecoins
Use dollars, euros, and more on the blockchain.
- Page: https://app.banklessacademy.com/lessons/understanding-stablecoins
- Markdown: https://app.banklessacademy.com/lessons/understanding-stablecoins.md
- Format: Handbook
- Duration: 10 minutes
- Writers: Tetranome
### Key Takeaways
> * Stablecoins are the blockchain equivalent of fiat currency, like the dollar or euro.
>
> * Stablecoins are typically issued as tokens (for example, `ERC-20` tokens on Ethereum) and now circulate across many blockchains. They allow DeFi users to quickly move between fiat value, and crypto value, while staying on the blockchain.
>
> * There are several categories of stablecoin, each with their own trade-offs and risk profile.
>
> * Stablecoins can generate more annual interest than holding fiat in a traditional bank, though regulation now shapes who is allowed to offer that yield, and how.
### Why Hold Stablecoins?
Stablecoins have become a cornerstone of the DeFi ecosystem. After reaching roughly $140 billion USD in supply at their 2022 peak (pictured below), total supply passed $300 billion in 2026, and stablecoins settled over $30 trillion in transaction value in 2025, more than Visa processed that year.
Here’s why they’re in demand:
* **Stability:** Holding stablecoins in your self-custody wallet is like holding fiat currency, but on the blockchain. When holding a stablecoin like USD Coin (USDC), issued by Circle, you can expect it to maintain 1:1 value with the U.S. dollar while the prices of assets like ether and bitcoin fluctuate.
* **Flexibility:** Because this pegged value exists as a token on the blockchain, it’s easy to move between fiat value and crypto value.
* **Access:** Stablecoins provide access to a range of decentralized financial services, like permissionless borrowing or lending to earn interest.
* **Security:** Cryptography makes it extremely difficult for attackers to capture or forge transactions.
The way a stablecoin maintains a 1:1 equivalence, or `peg`, to its fiat counterpart is its most important property. Just as fiat currency is only worth the fundamentals that underlie it, a stablecoin peg mechanism dictates the value of your holdings.
### Stablecoin Categories
There are three common strategies for a stablecoin to maintain its price peg:
* 💵 **Fiat-backed:** 1:1 collateralized by real-world fiat reserves.
* 🔗 **Crypto-collateralized:** overcollateralized by crypto deposits into DeFi protocols.
* 🔃 **Algorithmic:** supply-balancing algorithms in place of full collateral, a design with a troubled history.
#### 1\. Fiat-backed Stablecoins
Fiat-backed stablecoins maintain value by issuing a fixed token supply matched by real-world currency reserves. Their on-chain price is maintained via supply/demand economics: few people want to pay more than one real-world dollar for a dollar of on-chain value, so they simply take their trade elsewhere. To meet increased demand, the `stablecoin issuer` locks up additional fiat and increases the token supply by the same amount.
Notable fiat-backed stablecoins include Tether’s USDT and Circle’s USD Coin (USDC). Circle also issues a euro-pegged equivalent, EURC.
Stablecoin issuers generate revenue through various methods. These methods include investing a portion of their fiat reserves in short-term US Treasuries and cash equivalents, as well as employing a mixed revenue model that involves collecting transaction fees and offering lending services.
> **Innovation & Philanthropy through Fiat-Backed Stablecoins: Glo Dollar**
>
> The Glo Foundation takes an innovative approach to reserve revenue with [Glo Dollar](https://www.glodollar.org/) (USDGLO), its US dollar-backed stablecoin: the interest earned on its reserves funds basic income programs for people in extreme poverty. Simply by holding USDGLO, users practice embedded philanthropy. Learn how Glo Dollar works, [here](https://www.glodollar.org/articles/how-glo-works).
Considerations when using fiat-backed stablecoins:
* **Reserve Reporting:** Holders need assurance that their stablecoin tokens are matched one-to-one by fiat reserves. Most issuers publish `attestations` (an independent accountant confirms the reserves existed on a given date), which is weaker than a full audit of the issuer’s finances; no major issuer currently publishes one. Circle releases monthly USDC attestations (by Deloitte), and Tether, historically opaque about its backing, now publishes quarterly attestations (by BDO).
* **Regulation:** In the US, the GENIUS Act (signed July 2025) requires payment stablecoin issuers to hold 1:1 reserves in cash and short-term US Treasuries, and prohibits them from paying interest to holders. In the EU, the MiCA framework led major exchanges to delist non-compliant stablecoins like USDT for European users.
* **Censorship Risk:** With both USDC and USDT subject to government investigation, these tokens’ `smart contracts` include a freeze function whereby a user’s on-chain holdings can be locked in cases of disagreeable activity. This freeze function also applies to tokens held in `non-custodial wallets`.
The high degree of centralization in the fiat-backed stablecoin sector leaves great room for improvement in holding fiat-pegged value in a crypto-native way.
#### 2\. Crypto-collateralized Stablecoins
Crypto-collateralized stablecoins are a more transparent, decentralized option, and these qualities help eliminate certain risks. They maintain a fiat peg through crypto asset reserves. As crypto market volatility influences the total value of these reserves, these stablecoins are overcollateralized, sometimes up to 200%! All collateralized assets are viewable on chain, giving users 24/7 access to the real composition of their stablecoins.
The most notable example in this category is Sky’s USDS, the successor to MakerDAO’s Dai (DAI), the original crypto-collateralized stablecoin, after MakerDAO rebranded to Sky in 2024. For a purer take on decentralization, Liquity’s LUSD is backed exclusively by overcollateralized ETH deposits.
Considerations:
* **Collateral Valuation:** A stablecoin’s reserves typically consist of crypto, other stablecoins, and even other asset classes. For example, USDS is backed by ETH, stablecoins, real-world assets like US Treasuries, and several other minor components. To mitigate the risks of this diverse range of assets, USDS is overcollateralized (at the time of writing). Even if the ETH price was to crash by 20%, USDS would still have [enough collateral](https://defillama.com/stablecoins) to cover its tokens. However, further price volatility across its range of assets could begin to erode the peg.
* `Counterparty Risk`: Reliance on multiple asset classes means there’s a higher chance one of the assets will experience difficulty and affect the value of your holdings. However, you only have fractional exposure to the impact of each individual risk.
* **Governance Risk:** This type of stablecoin and its treasury are managed by a decentralized group of governance voters. This means there are risks of human error, or possible governance capture.
#### 3\. Algorithmic Stablecoins
These tokens attempt to maintain their peg by automatically balancing their own supply instead of holding full collateral: an onchain algorithm removes tokens from circulation when the market price falls below the peg, and mints new ones when it rises above. On paper, this promises a stablecoin free of banks and collateral. In practice, the pure version of this design has failed, catastrophically.
The defining example is Terra’s UST, whose algorithm let holders always swap 1 UST for $1 worth of Terra’s volatile LUNA token. In May 2022, mass UST selling forced the algorithm to mint enormous amounts of LUNA, crashing its price and triggering yet more selling: a `death spiral` that erased around $40 billion in a matter of days. UST never recovered its peg.
Surviving projects have abandoned the pure model. Frax, once partly algorithmic, moved to 100% collateralization in 2023; its current stablecoin, frxUSD, is backed by reserves including tokenized US Treasury funds, while FRAX now serves as the protocol’s governance token.
A distinct modern category has emerged from the rubble: hybrid or ‘synthetic dollar’ designs like Ethena’s USDe, which holds crypto collateral plus offsetting trading positions that cancel out price moves (a ‘delta-neutral’ hedge). These are collateralized, but in a novel way, with their own risks, such as reliance on the exchanges holding those positions, and on market conditions that keep the hedge profitable.
Considerations:
* **Death Spiral Risk:** A pure algorithmic peg depends on continued market confidence. When confidence breaks, the supply mechanism can amplify the crash instead of stopping it, with no collateral left to redeem.
* **Highly Technical:** You need to understand what actually backs the token (and under what conditions that backing could fail) to build confidence and risk/reward awareness.
* **Emergent Tech Risk:** Hybrid and synthetic designs are largely untested through a full market cycle. Only use tokens with several smart contract audits by top-level auditors, and remember that audits can’t protect against a flawed economic design.
### Choosing a Stablecoin
What is the best stablecoin to hold? As with everything DeFi, the answer to that question depends on your **needs**, **values**, and **risk tolerance**.
Here’s a quick refresher on each category:
* 💵 **Fiat-backed:** The traditional approach, the closest you’ll come to holding fiat on chain.
* Values: Conventionality, institutional trust.
* Risks: Opaque collateral backing, ability for provider to freeze funds.
* 🔗 **Crypto-collateralized:** A balanced, crypto-native approach, spreading collateral risk across multiple asset classes.
* Values: Diversification, transparency, progression.
* Risks: Crypto market volatility, dependence on other assets.
* 🔃 **Algorithmic:** The experimental frontier: pure designs have failed catastrophically, and modern hybrids are still unproven.
* Values: Innovation, capital efficiency, progression.
* Risks: Death spirals, flawed economic designs, smart contract bugs.
As always, the best way to learn about something is to try it. You might even decide to hold a variety of stablecoins.
And remember, not all stablecoins in each category are created equal! Do your own research before interacting with any new token.
---
We hope you’ve enjoyed this entry in the Explorer’s Handbook: ‘Understanding Stablecoins’.
Don’t forget to collect this entry if you want to own a copy for easy reference on your travels, or to support future content at Bankless Academy. Safe travels, Explorer!
---
### Frequently Asked Questions
#### What are the most popular stablecoins?
Looking at the leading stablecoins by `market cap` gives an idea of the current market preference, but this isn’t guidance on how you should position yourself, or how safe that position would be.
Here’s a realtime list of top stablecoins by market cap:
Cryptocurrency users often refer to the ‘Lindy Effect’ when choosing investment options. This concept says that the longer something has existed, the more we can expect it will continue to exist. Seventeen years of cryptocurrency history have shown this to only be true on occasion.
#### Where can I buy stablecoins?
Centralized Exchanges (CEXs) offer popular fiat-backed stablecoins (and typically their own branded stablecoin), other types of stablecoin are often missing.
Visit a Decentralized Exchange (DEX), or use a direct wallet on-ramp service like ‘MetaMask Buy’, to acquire crypto-collateralized and algorithmic tokens. Check out our lesson on [Decentralized Exchanges](https://app.banklessacademy.com/lessons/decentralized-exchanges) to learn more about peer-2-peer marketplaces.
#### How can I earn interest on stablecoins?
Some CEXs offer yield by just holding stablecoins on their platform, funded by a share of platform profits to incentivize platform use. Note for US readers: under the GENIUS Act, regulated stablecoin issuers themselves may not pay interest to holders: yield comes only from third-party platforms, and availability varies by jurisdiction.
You can also earn interest in DeFi, with trustless lending and borrowing platforms. These platforms connect lenders and borrowers, managing risk through onchain collateral and smart contracts. Stablecoin lenders can earn annual returns far higher than available in the traditional banking sector, but where there’s reward, there’s risk!
The lending and borrowing topic deserves its own Bankless Academy entry. If you’re already interested in learning more you can research platforms like [Aave.com](https://aave.com/) and [Curve.fi](https://curve.fi/).
#### What happens if a stablecoin loses its peg?
The market price of any stablecoin drifts slightly with the ebb and flow of trading. For major stablecoins, this is usually just a few hundredths of a cent above or below $1. These tiny deviations are quickly closed by traders taking advantage of arbitrage opportunities.
However, there are cases where a stablecoin loses its peg beyond safe, temporary ranges. This effect isn’t necessarily permanent (USDC, March 2023), but it can be (Terra, May 2022).
Some fiat-backed stablecoin issuers, like USDC, offer 1:1 redemption from their stablecoin to regular fiat through their website. Whether this remains true during times of crisis is another story.
---
**Author**
**[Tetranome](https://twitter.com/tetranome)** is the Project Champion at Bankless Academy, focusing on user experience, UI, design, and platform curriculum.
**Editor**
**[Trewkat](https://twitter.com/trewkat)** is a writer and editor at BanklessDAO. She’s interested in learning about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
**Patron**
This unsponsored article is part of your free Bankless Academy education. Collect the article to support future content!
---
# Decentralized Exchanges
Discover how smart-contract exchanges enable permissionless token swaps!
- Page: https://app.banklessacademy.com/lessons/decentralized-exchanges
- Markdown: https://app.banklessacademy.com/lessons/decentralized-exchanges.md
- Format: Lesson
- Duration: 15 minutes
- Writers: Tetranome
## What is a Decentralized Exchange?
Decentralized Exchanges (DEXs) are on-chain marketplaces that enable Explorers to securely exchange cryptocurrency with other users while maintaining self-custody of their wallet funds. These peer-to-peer trades are facilitated using publicly accessible smart contracts that connect users with large communal vaults of tokens. These vaults are called `liquidity pools`. DEXs can be found on almost any blockchain, and are present on Ethereum Layer 1 and 2.
Exchanging tokens is an essential part of using `DeFi`. In DeFi you’ll find a greater range of token variety and utility than on any other type of exchange. Some users buy tokens to access on-chain products and services. Others purchase tokens as an investment. Some tokens grant holders voting power used to determine project direction, much like holding shares in a traditional corporation! Regardless of your motivation, you’ll be visiting DEXs on a regular basis in DeFi.
Let's learn how they work and how they can best serve you.
## Centralized and Decentralized Exchanges
Let’s cover the differences between the technology used for a Centralized Exchange (like Coinbase, Binance, Kraken) and that of a Decentralized Exchange (like Uniswap, PancakeSwap).
Centralized Exchanges (`CEXs`) allow users to trade and invest in cryptocurrency, without engaging in the blockchain ecosystem itself. As your account is registered on the CEX, your private keys and funds are in their custody: you are subject to their management, rules, and business model risks.
Decentralized Exchanges (`DEXs`) enable users to trade cryptocurrency entirely in self-custody: the original intended purpose of blockchains. The peer-to-peer model allows you to act as both the consumer and the provider, accessing financial opportunities previously available only to the financial class. The blockchain system is both transparent and censorship-resistant: no one can freeze your access or reverse your trades. Hacks remain a risk, as we'll cover later in this lesson.
## Knowledge Check 1
Which of the following is true regarding cryptocurrency exchanges?
- [ ] There is no team behind a DEX.
> ℹ️ DEXs still have development teams, but their influence on the project is limited.
- [ ] The only way you can lose funds on a CEX is due to a bad trade.
> ℹ️ Even CEXs have their risks. In 2022, the FTX exchange collapsed, with almost all users losing their deposits.
- [x] DEXs let you trade in self-custody, while CEXs do not.
> ℹ️ Unless explicitly stated otherwise, a CEX owns your private keys.
## Decentralized Applications
DEXs are a type of `dApp`, a decentralized application running on a blockchain. For an internet application to be considered ‘decentralized’ it must indiscriminately allow anyone to use it, process their interactions without need for another person, and be written in publicly transparent code.
dApp services are facilitated using smart contracts, lines of code that take a user’s on-chain action and return a predictable on-chain response. The Ethereum Foundation compares smart contracts to vending machines, where the user inputs the number corresponding to the item they’d like to receive, plus the appropriate amount of money, and they receive an expected output (their snack) without the need for another human to facilitate the transaction.
DEX smart contracts handle a variety of commands, like token swapping, voting, or adding and removing `liquidity`.
## Decentralized Applications (continued)
DEXs follow the same logic as the vending machine: they take a user’s input token and output the desired token. Other dApp examples include:
🎟️ **Voting dApps:** allocating a user’s vote to a specified entity.
📦 **Bridge dApps:** transferring a user’s cryptocurrency from one blockchain network to another.
🤝 **Lending/Borrowing dApps:** granting loans to users who meet specified requirements.
Smart contracts are accounts on Ethereum: they have an address and balance, performing automated actions when prompted by a transfer and command. A DEX is a programmed Ethereum account with several available functions.
`dApps` will typically use a website as a visual interface to help users interact with the underlying smart contracts. If the website is down, you can still access the smart contract with some experience!
## Knowledge Check 2
Which properties are needed for a dApp to be considered decentralized?
- [ ] Permissionless: open access to all users.
> ℹ️ This is a quality of a dApp, but it isn’t the only one.
- [ ] Autonomous: user interactions do not need an intermediary.
> ℹ️ This is a quality of a dApp, but it isn’t the only one.
- [ ] Transparent: the smart contract code is publicly available.
> ℹ️ This is a quality of a dApp, but it isn’t the only one.
- [x] All of the above.
> ℹ️ Ethereum dApps are respected for their capacity to be permissionless, autonomous, and transparent.
## Automated Market Makers
In traditional markets and `CEXs`, your custodian uses an `order book`: a database filled with buy and sell offers. The CEX connects your trade offer with another person’s. You are usually charged a base/scaling commission on your trade, and you’re also left wondering if the undisclosed matching method found you the best possible deal.
Most `DEXs` use ‘Automated Market Maker’ (`AMM`) technology, the most common design for token swaps: a system that prices your trade using a public algorithm. Some newer DEXs use order books or intent-based systems instead. As the AMM algorithm is open-source, anyone can understand, clone, and improve it, leading to healthy competition and constant innovation.
AMMs route user trades through `liquidity pools`, rather than directly matching user bids and asks. These communal token vaults accumulate and dispense tokens according to user interactions, with every step visible on the public blockchain.
## Knowledge Check 3
What is a benefit of using AMMs compared to a traditional order book?
- [ ] The AMM trade is faster than an order book trade.
> ℹ️ When we include network confirmation time, this isn’t necessarily true.
- [ ] AMMs connect you directly to the other user.
> ℹ️ AMMs route user trades through communal token vaults, called liquidity pools, rather than directly between users.
- [x] You can detect and prevent other parties creating one-sided trades.
> ℹ️ The transparent nature of AMMs means that it is a lot harder for platforms to hide malicious actions, or for users to be malicious at all!
## Token Swaps
Cryptocurrency trades on the blockchain are called `token swaps`. These smart contract interactions convert one cryptocurrency to another using AMM `liquidity pools`. By forming a `trade route`, a pathway through the appropriate liquidity pools, a DEX smart contract exchanges your input token for your desired output token. Since pools usually hold only two tokens, and not every `token pair` has a pool, a route may pass through several pools to fulfil your swap.
To let a smart contract access our wallet, we grant it permission to withdraw funds up to a specified (or unlimited) amount. These `token allowances` let trusted contracts carry out transactions without our private key. Granting costs gas, so permissions stay open for future use: one reason to trade from one wallet and hold in another. We monitor and revoke allowances in our [Managing Token Allowances](https://app.banklessacademy.com/lessons/managing-token-allowances) lesson!
## Token Swaps (continued)
Let’s take a look at an example swap to understand the permission and exchange process. The example is a swap between USDC to OP on Velodrome, a large DEX on the Optimism network. This trade is often routed through two pools, as the USDC/OP `liquidity pool` isn’t as cost-efficient:
1. First, you grant the appropriate Velodrome smart contract the permission to make USDC withdrawals from your wallet.
2. You submit your swap transaction request to Velodrome.
3. The transaction is accepted: Velodrome withdraws the specified amount of USDC from your wallet, into the USDC/ETH liquidity pool. The equivalent amount of ETH exits this first liquidity pool and is transferred to the ETH/OP liquidity pool. Lastly, OP is transferred from the second liquidity pool to your wallet address.
The swap transaction is complete. Your USDC tokens have been swapped for OP, via ETH!
## Knowledge Check 4
AMMs can route a trade through multiple liquidity pools, all in a single transaction.
- [x] True
> ℹ️ Correct! You might pay a higher network fee, but the actions are bundled into one transaction.
- [ ] False
> ℹ️ Incorrect, check the previous slide to understand why.
## What is Liquidity?
Liquidity in the crypto space refers to a marketplace’s ability to facilitate digital asset buys and sells at fair prices. When liquidity is high, prices are more stable; when liquidity is low, prices are more volatile. As users are generally attracted to fairer prices, `DEXs` aim to have high liquidity across all of their liquidity pools.
High liquidity means there is a high quantity of tokens in the liquidity pool, generally a 50/50 valuation split of the two tokens users are trading in and out of the pool. For example, a USDC/ETH pool facilitates all trades between this `token pair` on the host platform.
When there are more tokens, users making trades through the pool have less impact on the 50/50 asset balance, which helps prices remain stable. The amount by which any trade throws off this balance is known as `price impact`.
As an Explorer, you want the lowest price impact on your trades as possible, in order to receive the best deal! That means you want high, balanced liquidity.
## Liquidity Providers
Optimizing for high `liquidity` is integral to the success of a DEX, but because there’s only so much liquidity in the cryptocurrency ecosystem, each DEX is in competition to capture as much liquidity as possible. So where does this liquidity come from?
In a decentralized ecosystem, DeFi citizens are incentivized to provide liquidity to a given pool to raise the TVL (total value locked) on a platform. Fees gathered from users making trades through the pool are distributed to the LPs (liquidity providers) based on the amount of liquidity provided. You heard that right: by lending your tokens to a DEX liquidity pool, you can generate passive income.
There are a variety of considerations when becoming an `LP`, and we’ll cover this in future content. For now, know that the large APRs (annual percentage rates) displayed across DEX liquidity pools aren’t guaranteed, and there can be losses.
## Knowledge Check 5
Finish the statement: “When liquidity is __________.”
- [ ] high, volatility is high.
> ℹ️ Incorrect, try again.
- [ ] low, volatility is low.
> ℹ️ Incorrect, try again.
- [x] low, volatility is high.
> ℹ️ Right! Liquidity and volatility are generally inversely-correlated.
## Knowledge Check 6
How do DEXs incentivize users to provide liquidity?
- [ ] Insurance for trade losses.
> ℹ️ Neither CEXs or DEXs protect you from losses on a bad investment.
- [x] A share of platform fees and/or bonus tokens.
> ℹ️ The fees charged to use the DEX are often split across various platform stakeholders, including LPs. Some platforms even grant additional bonuses.
- [ ] Access to private liquidity pools.
> ℹ️ There are no private liquidity pools, low traffic would likely not provide adequate returns.
- [ ] All of the above.
> ℹ️ There’s only one correct answer here, can you figure out which one it is?
## Platform Fees
Both CEXs and DEXs charge fees for their services, and interacting with the blockchain is not free either. Here are five common costs to consider when choosing a platform.
🏷️ **Platform fees:** CEXs set their own trading commissions, while DEX pool fees vary by pool (commonly a fraction of a percent). The key difference: DEX fees are visible on-chain for anyone to check.
🌐 **Network fees:** Blockchains charge gas fees on top of the dApp transaction. You can minimize these costs by using the network during quiet periods. Etherscan.io has a real-time gas estimate tool for Ethereum Mainnet: [Etherscan.io](https://etherscan.io/gastracker). On Layer 2s, fees are far cheaper; compare networks at [growthepie](https://www.growthepie.com/).
📦 **Bridge fees:** Both CEXs and blockchain bridges charge for transferring cryptocurrency from one blockchain network to another. For CEXs, refer to their on-site information. Bridge dApps show a fee estimate before you confirm the transfer.
💹 **Exchange rates:** When buying cryptocurrency directly with fiat on a CEX or DEX, be wary of exchange rates that don’t reflect the market rate.
🧊 **Slippage:** Prices move fast, so DEXs leave room for fluctuation on a swap: this is called `slippage` (customizable, usually 0.5-2%). You may lose up to that value on a trade, but too low a setting can get your trade rejected.
Always do your own research before trading, so you understand a platform’s costs and trade-offs.
## DEX Advantages
We’ve covered a lot of theory in this lesson, but you might still be wondering if DEXs are for you. Generally speaking, you are probably going to benefit from Decentralized Exchanges if:
- 🔑 You want to retain custody over your digital assets.
- 🔒 You want to secure your assets on the blockchain, avoiding CEX collapses.
- ⌛ You want 24/7 access to the cryptocurrency market.
- 👛 You want access to a wider range of cryptocurrencies.
- 🤑 You are interested in providing liquidity.
- 🛂 You don’t want to register and `KYC` on every platform you interact with.
- ⚔️ You seek the additional risks and rewards of exploring Decentralized Finance.
With that said, almost every DeFi user has an account on a Centralized Exchange. This is because CEXs have easy on/off ramp features to the traditional banking world; you can easily get money from your bank account onto the blockchain and vice-versa. [Ryan Sean Adams](https://twitter.com/RyanSAdams) compares this to using a public bathroom: _“You go in, you do your business, you get out.”_
This is great because it means you can start with a CEX account and slowly transition to DeFi as you become more confident in navigation.
## DEX Risks
Using a DEX also comes with risk. Here are a few of the most impactful:
🐞 **Smart contract risk:** Audits reduce the chances of smart contract bugs, but they don't eliminate them: in 2025, a major DEX that had been audited by multiple firms lost $128M to a subtle code bug. In a worst-case scenario, you could lose up to your trade amount. Favor trusted, heavily audited smart contracts.
💰 **Self-custody risk:** Sole responsibility for your private keys means you could lose an entire wallet to theft, scams, or a misplaced seed phrase. This is why it is important to mitigate risk with a multi-wallet strategy, and to always keep a copy of your seed phrases backed up in a secure, real-world location.
🥪 **Sandwich attacks:** Setting your swap slippage high increases the likelihood of trade frontrunners coordinating `sandwich attacks` against you. In a sandwich attack, you could lose up to your slippage amount on a trade. We’ll cover how to protect yourself from this style of attack in future content.
With these advantages and risks considered, a CEX might be a better fit for you if:
- 🎓 You’re still early in your cryptocurrency journey, working to understand the risks and rewards.
- ⚖️ Your trade frequency and volume are small, making blockchain fees an unrealistic cost.
- 🏰 You’d prefer to trust an exchange to watch your funds, rather than being responsible for them.
Some users take a hybrid approach to lower their overall risk, using a CEX to buy and sell their cryptocurrency, while storing it on the blockchain itself.
## Knowledge Check 7
Why would you use a Decentralized Exchange over a Centralized Exchange?
- [ ] You want to access tokens not listed on a Centralized Exchange.
> ℹ️ This is a quality of a DEX, but it isn’t the only one.
- [ ] You want to retain full custody over the exchanged funds.
> ℹ️ This is a quality of a DEX, but it isn’t the only one.
- [ ] You want access to tools and opportunities not usually available.
> ℹ️ This is a quality of a DEX, but it isn’t the only one.
- [x] All of the above.
> ℹ️ Right! DEXs offer all of these benefits over CEXs.
## Choosing a DEX
There are many Decentralized Exchanges in DeFi, and some are better than others. Consider these five key factors when deciding on which DEX to use:
🥇 **Legitimacy:** Is the entity well known for its trustworthiness, quality, and longevity?
⛲ **Liquidity:** Is the liquidity pool `TVL` high enough to minimize price impact?
🖱️ **Ease of use:** Is the user interface easy to interact with?
🔐 **Security:** Have the smart contracts been audited by multiple auditors?
🎁 **Rewards and Features:** Are there loyalty rewards for using the exchange or providing liquidity? Can you vote in governance?
Notable names that score highly in these areas include Uniswap, Curve, Velodrome, and PancakeSwap. You can easily move from one DEX to another until you find a few favorites! For the lesson quest, we’re going to use Velodrome, a well-established DEX on the Optimism network. It’s easy to use, and because it’s on a Layer 2 the fees are far more reasonable!
## DEX Best Practices
Before you interact with a dApp, there are some best practices you should follow to keep your funds safe:
👩💻 Verify a dApp’s link via the official project X (Twitter) account (gold check mark) or a trusted third party, then bookmark it. Many DeFi scams begin with a fake link, even on popular search engines.
🔓 When granting on-chain `token allowances`, limit the allowance to your trade amount. Many DEXs now use signature-based approvals covering just your trade: see [Managing Token Allowances](https://app.banklessacademy.com/lessons/managing-token-allowances).
♟️ Don’t interact with dApps from your HODL wallet; use a separate wallet just for dApps. Our [Web3 Security lesson](https://app.banklessacademy.com/lessons/web3-security) covers wallet strategies.
Now you’re ready to interact with a Decentralized Exchange!
## Knowledge Check 8
How can you be sure you’ve chosen a reputable DEX?
- [x] By checking its reputation and only using URLs from trusted sources.
> ℹ️ Right! Independently verify the DEX’s online reputation, and only follow URLs provided by a trusted party.
- [ ] By performing a small test interaction on your first use.
> ℹ️ A single interaction with a bad smart contract can drain your entire wallet.
- [ ] Both of the above.
> ℹ️ Incorrect. A single interaction with a bad smart contract can drain your entire wallet.
---
# Swapping on a Decentralized Exchange
Begin your journey into DeFi with this Decentralized Exchange walkthrough.
- Page: https://app.banklessacademy.com/lessons/swapping-on-a-decentralized-exchange
- Markdown: https://app.banklessacademy.com/lessons/swapping-on-a-decentralized-exchange.md
- Format: Handbook
- Duration: 5 minutes
- Writers: Tetranome
### Key Takeaways
> * Decentralized Exchanges are a type of dApp that facilitate self-custody token swaps.
>
> * There is some practical knowledge required for confidently interacting with a DEX.
>
> * We can use block explorers to inspect our on-chain transactions.
The Decentralized Exchange (DEX) is the most commonly used application in the world of `Decentralized Finance` (DeFi), and for good reason! DEXs enable automated swapping of one cryptocurrency token for another, without need for a mediator. Unlike Centralized Exchanges (CEXs), this type of swap also enables users to swap while retaining full ownership of their assets.
Autonomy, and permissionless protocols, are backbone features of DeFi. They empower DeFi users with true ownership over their digital assets, and open access to fundamental blockchain services 24/7. Anyone with an internet connection can access DeFi, regardless of their personal background, beliefs, or geographical location.
In this handbook entry, we will cover how to use your self-custody wallet to interact with a DEX, with the goal of swapping one token for another. You can learn more about the mechanics, qualities, and risk profile of this technology, and how it compares to CEXs, in our lesson on [Decentralized Exchanges](https://app.banklessacademy.com/lessons/decentralized-exchanges).
### Choosing a DEX
Selecting an affordable and safe platform is the first step in performing a token swap. In this walkthrough we will be using Velodrome, a well-established DEX on the Optimism network. As you become more confident in blockchain navigation, you’ll learn how to evaluate other exchanges and find the best fit for your needs. Our [Decentralized Exchanges](https://app.banklessacademy.com/lessons/decentralized-exchanges) lesson includes a comprehensive list of qualities to look out for.
DEXs are a great start to your web3 journey because most dApps follow a user interface layout similar to DEXs, and use similar interactions with your self-custody wallet.
Let’s begin our token swap.
### Performing a Token Swap
**1\. Load the dApp:**
Open [Velodrome](https://velodrome.finance/swap?from=eth&to=0x4200000000000000000000000000000000000042) in a new browser tab.
**2\. Connect your wallet:**
Use the standard ‘Connect’ button typically located in the top right corner of any dApp.
If you are on desktop, connect with your browser wallet.
If you are on mobile, a wallet-connection prompt will let you link your mobile wallet to the dApp.
**3\. Approve the connection:**
Select ‘Connect’ in your wallet application to confirm the site connection. This allows the dApp to see your wallet address and token balances. You haven’t granted any other permissions yet.
**4\. Check and sign the terms of service (if you accept):**
Many dApps will ask you to sign a message to confirm you have read their terms and conditions. Signing messages doesn’t cost gas, and doesn’t store any information on the blockchain. If you agree with the terms, you can sign the message.
**5\. Switch to the right network:**
For this walkthrough, make sure your wallet is set to the Optimism network.
**6\. Customize your swap:**
It’s time to select your desired input and output tokens. In this example, we will be swapping ETH for OP, but you can swap whatever tokens you like!
**7\. Approve token permissions (token swaps only):**
If you are swapping a token like USDC, your wallet will first ask you to approve permission for Velodrome to access that token. We recommend limiting the approval to your trade size. ETH is the network’s native currency and needs no approval, so in our example the wallet goes straight to the swap confirmation.
**8\. Confirm the transaction:**
Once you’re happy with your swap quote and settings, you can begin the swap. This step includes confirming on the dApp, and again in your wallet.
**9\. Check your balance:**
Your transaction should take a few seconds to confirm, after which you will see your new token balance in your wallet. If your token type is not displayed, make sure you’ve imported the token addresses.
*Optimism token contract address: 0x4200000000000000000000000000000000000042*
**10\. Fetch your transaction hash:**
To complete the quest for our [Decentralized Exchanges](https://app.banklessacademy.com/lessons/decentralized-exchanges) lesson, you’ll need the ***transaction hash of the swap*** (not to be confused with the hash from a token permission transaction, or your wallet address). A block explorer link will usually appear on the DEX interface, letting you view the confirmed transaction details. If you missed it, or it’s missing, you’ll find another link in your wallet activity log, tied directly to your trade.
---
It’s time to explore the world of decentralized trading! We hope you’ve enjoyed this entry in the Explorer’s Handbook: ‘Swapping on a Decentralized Exchange’.
Don’t forget to collect this entry if you want to own a copy for easy reference on your travels, or to support future content at Bankless Academy. Safe travels, Explorer!
---
### Frequently Asked Questions
#### Why does my price quote change a few times every minute?
Price quotes are typically calculated at the time you enter your desired swap into the DEX interface. As time goes by, other users are making swaps and affecting token supply on the exchange. The DEX will regularly refresh your quote to stay up to date.
#### How long does it take for a token swap to execute?
The answer depends on a variety of factors, primarily the block speed of the blockchain and how much you underpay or overpay the gas fee. DEX transactions submitted to Ethereum Mainnet typically take between 12 seconds and a couple of minutes to be confirmed. Layer 2 transactions are usually faster!
#### Why did my transaction fail?
There are a number of reasons why a transaction could fail: insufficient funds to pay gas, gas limit set too low, or slippage set too low. The best way to begin troubleshooting is to look for User Interface error messages. You can also view your transaction on a block explorer, like [Etherscan](https://optimistic.etherscan.io/), to check if there are any on-chain error messages. You can raise your `slippage tolerance` in the DEX swap settings if prices are moving faster than your trade. Many wallets and DEXs also offer protected transaction routing, which shields your swap from `MEV` bots trying to profit from pending trades.
#### Can I change or remove token permissions?
Granting token permissions to a smart contract can leave our wallet vulnerable to unwanted future interactions, in the case of a smart contract hack. It is possible to change or remove token permissions using apps like [Revoke.cash](https://revoke.cash/). As adjusting permissions costs gas, this precaution can quickly become expensive. This is one of the reasons why many users store their digital assets in one wallet (cold wallet), while interacting with dApps on another (trading wallet). Users transfer assets between them only as necessary.
#### Why is the token I'm looking for not available to swap?
If your token isn’t listed by default, you’ll have to paste the token contract address into the list. To find the token contract address, check or the official project website.
**Note:** Token addresses can change for a given token on different networks. For example the [USDC contract on Mainnet](https://etherscan.io/token/0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48) is different than the [USDC contract on Optimism](https://optimistic.etherscan.io/token/0x0b2c639c533813f4aa9d7837caf62653d097ff85). Always verify token addresses before swapping!
---
**Author**
**[Tetranome](https://twitter.com/tetranome)** is the Project Champion at Bankless Academy, focusing on user experience, UI, design, and platform curriculum.
**Editor**
**[Trewkat](https://twitter.com/trewkat)** is a writer and editor at BanklessDAO. She’s interested in learning as much as possible about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
**Patron**
This unsponsored article is part of your free Bankless Academy education. Collect the article to support future content!
---
# Staking on Ethereum
Become a guardian of Ethereum: Secure the network, earn Ether rewards.
- Page: https://app.banklessacademy.com/lessons/staking-on-ethereum
- Markdown: https://app.banklessacademy.com/lessons/staking-on-ethereum.md
- Format: Lesson
- Duration: 15 minutes
- Writers: Tetranome
## Staking on Ethereum
Welcome, Explorer, to your next lesson!
Today, we’ll look at the process of “staking”: one simple way to build digital wealth.
`Staking` is similar to `mining` on the Bitcoin network: they’re both systems for letting participants process transactions on the blockchain in exchange for rewards. They keep our networks `decentralized`.
However, there’s an important difference between mining and staking. Staking on Ethereum doesn’t require a powerful computer to compete against others. Simply locking Ether (ETH) in a network `smart contract` keeps Ethereum running and rewards you.
## Ethereum Wants You!
Think of `staking` like an “internet bond”.
Just like supporting your government through bonds gives financial returns, supporting Ethereum brings rewards! Even better, like government bonds, staking is a way to show financial support for your values and the world you want to live in.
When you stake Ether, it is assigned to a `validator node` working to process transactions on Ethereum. The more Ether staked, the more nodes Ethereum can have. With more nodes, Ethereum becomes more `decentralized` and secure.
As a `staker`, you become a **guardian of Ethereum!**
Now, let's take a deep look into staking mechanics and discover a stress-free and low-cost opportunity to start your staking journey today.
Grab your gear, let’s go!
## Blockchain Security
`Validator nodes` are key to a secure and legitimate economy on Ethereum. They protect the blockchain from `fraud`.
Fraud in the blockchain world looks like a user manipulating balances or creating non-existent crypto. Ethereum’s way of curbing it is ensuring that every transaction is valid and no participant has power over others. This fairness, known as `credible neutrality`, is vital. Why? Nobody wants to be a part of an economy where there's deceit and distrust; it will eventually collapse.
In a healthy blockchain, validator nodes share one goal: **to** **reach decentralized agreement, across the network, on the state of the blockchain.** Nodes scan transactions, check them against the blockchain’s history, and vote on their validity. Transactions that pass node `consensus` as valid are added to the blockchain.
## Knowledge Check 1
How do validator nodes prevent fraud on Ethereum?
- [ ] By overpowering each other.
> ℹ️ Try again! Nodes have no influence over each other. They work together to influence the blockchain.
- [ ] By creating non-existent crypto for certain people.
> ℹ️ Try again! This would be committing fraud.
- [x] By reaching decentralized agreement on valid transactions.
> ℹ️ Correct! Nodes agree on the state of the blockchain.
## Proof-of-Stake
Users who want to run a `validator node` must lock at least 32 ETH, and that’s a lot of money. (Since 2025 a single validator can also hold a larger balance, and stakers can exit anytime through a queue.) In exchange for taking a large financial “stake” in the network, the `node operator` is allowed to propose and review blocks of transactions on Ethereum, and earn rewards. Think of blocks as groups of transactions submitted to the network.
The network’s `consensus mechanism` randomly selects a validator node to propose the next block and its decision is double-checked by other nodes to ensure honesty. When a node successfully proposes a block, its `stake` grows.
## Slashing
When a node provably cheats, like signing two conflicting blocks, its stake is `slashed`: it loses a chunk of its Ether. Being slow or offline is not `slashing`; that only costs a small penalty. This way, staked Ether becomes a security deposit where nodes are incentivized to be honest and keep Ethereum running smoothly.
For an attacker to approve fraud on Ethereum, they must have control over majority of the validator nodes and thus, staked Ether. Fortunately this can't happen if everyday users are involved in staking. `Decentralized` ownership of the network divides the power to make decisions.
## Knowledge Check 2
True or False: Validator nodes caught cheating, like signing two conflicting blocks, lose part of their stake.
- [x] True
> ℹ️ Correct! This “slashing” punishes provable cheating. Being offline only costs a small penalty.
- [ ] False
> ℹ️ Try again! Provable cheating is punished with slashing. Only being slow or offline is not.
## Validating Transactions
Let's get into the step-by-step process of how nodes come to agreement using `Proof-of-Stake` consensus:
1. **Staking:** A `node operator` locks 32 ETH on the network and begins running a `validator node`.
2. **Block Building:** Users submit transactions ordered into `blocks` by `block builders`.
3. **Proposer Selection:** An algorithm selects a validator node to propose the next block to be added to the blockchain.
4. **Block Proposal:** The `block proposer` reviews potential blocks and selects one, granting their `attestation` if valid.
5. **Cross-Verification:** Other validators double-check the block and grant attestation if valid. Invalid blocks are simply ignored and never join the chain.
6. **Block Addition:** The valid block is added to the Ethereum blockchain.
7. **Rewards:** The block proposer earns a `block reward` and transaction tips. The other validators are also rewarded.
[embed](https://app.banklessacademy.com/animation/validating-tx-with-ethereum-staking)
## Knowledge Check 3
What is the name of the validator node selecting the next block to be added to Ethereum?
- [ ] Staker
> ℹ️ Try again! Stakers support validator nodes, but don’t run the node themselves.
- [ ] Block builder
> ℹ️ Try again! Block builders order incoming transactions into potential blocks, but don’t add them to the blockchain.
- [x] Block proposer
> ℹ️ Correct! Block proposers, looking at blocks from block builders, choose one to add to the blockchain.
## Ethernomics
For providing Ether to a validator node, stakers earn a portion of its rewards.
Rewards received by nodes are based on various ecosystem factors and can change. Simply put, the rewards are a portion of transaction fees and a small amount of newly issued Ether added to new blocks.
Annual yield varies over time, historically a few percent on staked Ether. The exact amount is based on two key factors:
- 📈 **Network Activity:** Generally speaking, if traffic is low rewards are lower. If traffic is high, they’re higher.
- 👥 **Number of Validator Nodes:** Rewards get further divided with more participants.
Yields also change depending on how exactly you stake your Ether. Let’s look at our options.
## Types of Staking
You’ll typically need to lock 32 ETH to run a `validator node`, but new staking methods have made guarding Ethereum available to everyone.
So, there are three ways to protect Ethereum:
- 📡 **Solo Staking:** Run a validator node yourself.
- ⛲ **Staking Pools:** Join a group of stakers and run a node together.
- 🏦 **Centralized Exchange Staking:** Join a “crypto bank” node.
Each method requires varying levels of technical knowledge to get set up, along with its own associated risks.
If you’re comfortable holding your `private keys` but don’t have 32 ETH, then consider joining others in a staking pool.
If you’re not yet okay with taking `self-custody` of your crypto, check out Centralized Exchange staking. In the mean time, take our [Wallet Basics](https://app.banklessacademy.com/lessons/wallet-basics) lesson and boldly take ownership of your crypto!
## Types of Staking (Part 2)
**Solo Staking**
🟡 Requires 32 ETH
🟡 Technical Setup
🟢 Decentralizes Ethereum
**Risks:** Lost keys, `slashed` stake, offline penalties.
**Staking Pools**
🟢 Any amount of ETH
🟢 Easy Setup
🟡 Decentralized Options
**Risks:** Pool smart contract bugs, or lost keys.
**Centralized Exchange Staking**
🟢 Any amount of ETH
🟢 Easy Setup
🔴 Centralizes Ethereum
**Risks:** Exchange bankruptcy could take your funds.
## Network Centralization
**Any staking that leads to many nodes under one entity begins to centralize Ethereum.**
Imagine Ethereum as a web of connected `validator nodes`. When nodes are concentrated under one or a few entities, the entire web becomes imbalanced and unsafe. For this not to happen, we need lots of unique connection points.
A single entity gaining control over enough nodes is bad. This forces blocks of transactions through the centralized section of the web. The centralized entity could begin approving fraudulent blocks, or even denying valid ones. This would destroy Ethereum’s `credible neutrality`.
As its guardians, we must focus on staking methods that keep the web balanced and `decentralized`.
You may face many barriers with running your own validator node as a beginner. Instead, let's explore a beginner-friendly option to decentralized staking: `staking pools`.
## Knowledge Check 4
What would happen if a single entity controlled a majority of validator nodes?
- [x] They could approve blocks including fraudulent transactions.
> ℹ️ Correct! Ethereum would lose its credible neutrality.
- [ ] They would gain control of all validator nodes.
> ℹ️ Try again! Other nodes cannot be controlled, but their voice can be overpowered.
- [ ] Ethereum would stop processing transactions altogether.
> ℹ️ Try again! Ethereum wouldn’t stop running during such an attack, but its credible neutrality would be lost.
- [ ] All of the above.
> ℹ️ Try again! Only one of the above answers is correct.
## Staking Pools
The best part about `staking pools` is that they’re entirely run by `smart contracts`. You don’t have to meet the other stakers in person and you don’t have to trust them. You do however have to trust the smart contract.
Staking pools are organized by `staking providers`, digital platforms connecting stakers across the world! In staking pools, a `node operator` stakes a fraction of the full 32 ETH and runs the node, while other participants supply the remaining Ether. The node operator earns extra yield for their service.
The remaining staking participants are given “Liquid Staking Tokens” (LSTs) representing their membership to the pool. These `tokens` stand for a share of a pool’s staked Ether. The holder earns a portion of rewards equal to the represented stake, and can use them to redeem their stake at any time.
By simply holding an LST (like Rocket Pool’s rETH), you own a share of a staking pool. Yep, your Ether is decentralizing Ethereum and earning staking rewards!
## Knowledge Check 5
Which entity hosts the staking pool?
- [ ] The node operator.
> ℹ️ Try again! Node operators run the validator node, but not the pool itself.
- [ ] The remaining staking participants.
> ℹ️ Try again! Stakers provide Ether, but don’t run the pool.
- [x] The staking provider.
> ℹ️ Correct! The pool is hosted through the provider’s smart contracts.
## Liquid Staking Tokens
The best thing about `LSTs` is that even while your Ether is staked and gathering yield, it maintains a `liquid` form.
“Liquid” in this case means that it can still flow throughout the ecosystem. Think of holding a share of a staking pool… but you can use it as money! LSTs can be swapped, used as collateral for loans, or even deposited on `restaking` platforms, an optional strategy that adds extra risk for extra yield.
LSTs are great because they open access to staked Ether. Staking pools often have minimum deposit amounts for adding Ether to the pool (around 0.01 ETH). However, using LSTs, you can buy even smaller increments of staked Ether on your favorite `decentralized exchange`.
## Network Centralization, Again!
Staking pools and LSTs have the same catch as the different staking methods: **they function in different degrees of centralization and decentralization.**
Staking providers like Rocket Pool have made sure that anyone, anywhere can be the `node operator` of a staking pool. This supports new node operators in building their 32 ETH stake, and helps to decentralize Ethereum. However, other providers only allow a small range of their contacts to run their nodes, making the centralization of staked Ether a risk.
If any entity gains over 33% control of all staked Ether, they could cause problems on the network. At 50%, they seriously threaten Ethereum’s `credible neutrality`.
Some large staking providers have come close to that 33% mark. Spreading stake across many providers keeps the network safe.
To guard Ethereum, we need to do our research. Even with `staking pools` we need to make choices that support decentralization.
## Knowledge Check 6
True or False: Supporting new node operators helps to decentralize Ethereum.
- [x] True
> ℹ️ Correct! More node operators means more independent validator nodes detecting fraud.
- [ ] False
> ℹ️ Try again! The more independent nodes, the better.
## rETH - Your Path to Decentralized Staking
It’s time to become a staker: a guardian of Ethereum.
For today’s quest, we’re taking ownership of a `staking pool` at Rocket Pool.
🪙 It’s simple: Mint or buy Rocket Pool’s `liquid staking token`, **rETH**.
As the first step on your staking journey, you’ll be funding a `validator node` to process blocks, in exchange for Ether rewards.
**Note:** With rETH, staking rewards are added to the value of the token. If you hold 1 rETH today, you’ll still own 1 rETH in a year. It will just be worth more.
Good luck on your quest, Explorer! May your commitment to Ethereum’s decentralized future be greatly rewarded.
---
# Staking Ether
Generate yield on your Ether by protecting Ethereum.
- Page: https://app.banklessacademy.com/lessons/staking-ether
- Markdown: https://app.banklessacademy.com/lessons/staking-ether.md
- Format: Handbook
- Duration: 5 minutes
- Writers: Tetranome
This is a summary and walkthrough for our [’Staking on Ethereum’](https://app.banklessacademy.com/lessons/staking-on-ethereum) lesson and quest. Check out [the full lesson](https://app.banklessacademy.com/lessons/staking-on-ethereum) to **level up your knowledge and claim your badge!**
---
### Key Takeaways
> * Staking is essential to decentralization and transaction processing on Ethereum.
>
> * It’s simple: lock Ether on the network, earn rewards.
>
> * Running a `validator node` is the fundamental form of staking on Ethereum, requiring 32 Ether.
>
> * Using the rETH `token`, Explorers can get involved in staking with any amount of Ether.
### What is Staking?
Put simply, staking on Ethereum is an action that allows anyone to help secure the network. You lock a portion of Ether on the network, aiding network validators, and earning rewards.
Staking is an essential part of Ethereum’s `consensus mechanism`: the separation of legitimate transaction and blocks from the fraudulent ones, in a `decentralized` way. This sorting is integral for maintaining a fair economy across the network.
This might sound familiar, because it has the same goal as mining does on the Bitcoin network. Yet there’s a crucial difference between mining and staking: On Ethereum, staking can be accessed by anyone. You don’t need a powerful computer to process transactions, like you would for mining on Bitcoin.
So by simply buying Ether and locking it in a network `smart contract`, you can become a staker. In doing so, you’ll help keep Ethereum running smoothly, and earn rewards in return!
### Start Staking with rETH
Now, the best way to get involved in securing Ethereum is to run a `validator node`. It grants the most rewards, and has the biggest impact on network decentralization. The problem is… it requires 32 ETH, some technical knowledge, and a dedicated computer with 24/7 power and internet access. That’s a tall order for most Explorers. Fortunately, innovators within the Ethereum community have created an easy entry point that anyone can use to get involved: `staking pools` and `liquid staking tokens` (LSTs).
Rocket Pool is one of the best-known decentralized staking protocols, with an approach granting high positive network impact. By locking Ether in one of their staking pools, you’ll `mint` rETH. While minting rETH directly from the Rocket Pool smart contract has the largest impact on network decentralization, you can also buy it on a `decentralized exchange`. In holding this token, you’ll begin earning staking rewards. Returns vary with network activity, historically a few percent per year.
With rETH, staking rewards are added straight to the value of the token: If you hold 1 rETH today, you will still own 1 rETH in a year. It will just be worth more.
### Prerequisites
* You’ll need some regular ETH on one of the following networks: Ethereum, Optimism, Base, Arbitrum or Polygon (POS).
### Walkthrough
#### Option #1: Minting New rETH
Requires >0.01 ETH, and only works on Ethereum Mainnet.
**1\. Head over to and connect your wallet.**
**2\. Enter the amount you’d like to stake, hit ‘Stake’, and then in your wallet hit ‘Submit’.**
Your rETH will land in your wallet once your transaction has been processed. It’s that easy.
#### Option #2: Buying rETH on a Decentralized Exchange
No minimum balance requirements, and works on all networks listed above.
**1\. Jump to and connect your wallet.**
We’re swapping on the Optimism `layer 2` network, because gas fees are a lot lower than on Ethereum mainnet. Learn how to bridge to Optimism, [in our “How to Fund Your Wallet on L2” article](https://app.banklessacademy.com/lessons/funding-a-wallet-on-layer-2).
Before swapping on a smaller network, check the quoted price and `liquidity`: rETH pools there can be shallow, giving you a worse rate.
**2\. Enter the amount you’d like to hold, hit ‘Swap’, and then in your wallet hit ‘Confirm’.**
Your rETH will land in your wallet once your transaction has been processed. It’s that easy.
---
**It’s time to become a guardian of Ethereum!** We hope you’ve enjoyed this entry in the Explorer’s Handbook: ‘’Staking Ether”.
Don’t forget to collect this entry if you want to own a copy for easy reference on your travels, and to support future content at Bankless Academy.
Safe travels, Explorer!
---
### FAQ
#### What are the risks of staking?
It depends on the method used, but the one shared risk is that the validator nodes you’re involved with could get slashed. In most staking pools and centralized exchange staking, these kinds of losses are diluted across the entire platform (everyone shares the loss, diminishing its impact) or even insured.
Other risks include:
* `Solo Staking`: A bug in the validator node’s chosen `validator client` software.
* `Staking Pools`: A bug in the staking pool’s smart contracts, or the validator client software. Audits reduce this risk but never fully remove it.
* `Liquid Staking Tokens`: The market price of an LST like rETH can trade slightly above or below the value of the Ether it represents.
* `Centralized Exchange Staking`: Sudden bankruptcy of the exchange, and loss of any stake in it.
The potential impact of each risk is really difficult to predict, but it’s safe to say that staking Ether is more risky than simply holding it. Where there’s reward, there’s risk! Only invest what you’re willing to lose.
#### Does all staking benefit Ethereum?
Benefit comes in the form of `decentralization`: you want as many independent `node operators` as possible.
* `Solo Staking`: Maximum decentralization, as this typically means just a few nodes under one person.
* `Staking Pools`: It depends on the platform. Some staking providers only allow specific people to act as validator nodes within their pools. That means many nodes under a few people, a centralizing force. Rocket Pool is one of the few providers that allow anyone to become the node operator of a staking pool. This makes their platform one of the best staking options for citizens of Ethereum.
* `Centralized Exchange Staking`: Much like the centralizing forces within staking pools, many nodes under one entity is bad for Ethereum.
#### Do staking rewards change?
Yes, rewards depend on two key factors:
* **Network Activity:** Generally speaking, in times of low traffic rewards are lower, and in high traffic they’re higher.
* **Number of Validator Nodes:** With more participants, rewards are further divided.
Rewards also change based on the staking method chosen. Check out our [“Staking on Ethereum” lesson](https://app.banklessacademy.com/lessons/staking-on-ethereum) to learn more!
#### How do I run a validator node?
If you want to become a `solo staker`, you’ll need the full 32 ETH, as well as your validator hardware. Check out [this great guide by CoinCashew](https://docs.coincashew.com/guides/mainnet).
You can also run a node through a `staking pool` like Rocket Pool with a fraction of that (4 ETH per validator as of 2026), where other participants supply the remaining Ether. Of course, you’ll still need your validator hardware. Check out [the documentation over at Rocket Pool](https://docs.rocketpool.net/guides/) to get started! And no hardware is needed to simply hold rETH: anyone can join with any amount of Ether.
---
**Author**
[Tetranome](https://twitter.com/Tetranome) is the Project Champion at Bankless Academy, focusing on user experience, interface, design, and content.
**Patron**
This article is funded by [Rocket Pool](https://rocketpool.net/).
---
# Managing Token Allowances
Protect your wallet from unwanted smart contract interactions.
- Page: https://app.banklessacademy.com/lessons/managing-token-allowances
- Markdown: https://app.banklessacademy.com/lessons/managing-token-allowances.md
- Format: Handbook
- Duration: 8 minutes
- Writers: estmcmxci, Tetranome
### Key Takeaways
> * Token allowances refer to permissions granted to `smart contracts` to spend tokens from a wallet without further approval.
>
> * They can be exploited by malicious actors if the user is not aware permissions are in place.
>
> * Tools like Revoke.cash allow users to easily inspect and revoke token allowances.
### Introduction
DeFi grants users control over their assets, including their `private keys`, offering unprecedented sovereignty and authority over their funds. However, with great power comes greater responsibility, requiring users to take full charge of the safety and management of their assets.
There are four common categories of scams that DeFi users should be aware of:
* **Seed Phrase Compromise:** Attackers attempt to deceive users into revealing their seed phrases, which would give them unauthorized access to funds. With your seed phrase, an attacker can drain all your funds and continue doing so if you deposit additional funds into the wallet. Unfortunately, there is no way to recover from this situation, and the only solution is to create a completely new wallet with a new `seed phrase`.
* **Direct ETH Transfers:** Scammers can conceal ETH transfers by disguising them as a function call, such as “Security Update.” The raw signature method behind older versions of this scam has been removed from MetaMask; modern phishing kits instead abuse ordinary-looking signature requests, counting on you to sign without reading what your wallet displays. Falling for this scam means you won’t be able to recover your funds, but you can still safely use your wallet for other transactions.
* **NFT Marketplace Listings:** Be cautious of fake listings and malicious contracts that exploit the allowances you grant to marketplaces like OpenSea. Scammers may trick you into signing an `offchain` message that lists your approved `NFTs` for sale, with no actual token transaction taking place.
* **Token Allowances:** Attackers may manipulate permissions to gain access to more funds than initially approved. “Approvals” are on-chain transactions that grant access to your tokens or NFTs. “Permits” offer the same access but only require a gasless offchain signature. Uniswap and most modern trading apps use this system (called Permit2). Permit signatures don’t appear as onchain approvals until they are used, and can carry expiration dates; Revoke.cash’s “Signatures” view lets you check and cancel them.
As smart contracts gain popularity, `token allowances` become necessary to enable trusted contracts to execute transactions without exposing private keys. Token allowances allow dApps to automatically move tokens in your wallet on your behalf. While this convenience boosts efficiency, it also exposes users to potential attack vectors through scams and unauthorized access.
In this article, we’ll discuss ‘Token Allowances’ and introduce a community tool built to help manage your permissions.
### Token Allowances: Understanding, Managing, and Ensuring Safety
Token allowances are permissions given in advance to smart contracts to spend tokens from a wallet. They serve a crucial role in facilitating transactions without requiring explicit permission every time for direct asset transfers from the wallet. When misused, however, token allowances can become an attack vector for the unsuspecting. To address this risk, it’s important that DeFi users exercise caution, educate themselves on the security landscape, and understand how token allowances actually work.
There are two steps involved when granting permissions to a third-party contract:
1. Wallet connection: When connecting your wallet to a dApp, you simply share your wallet `address` with its front-end, letting it display your balances and activity. Connecting grants no onchain permissions by itself.
2. Token approval: To transact with the dApp, you then approve its smart contract to move specific tokens on your behalf. This is the step that grants real spending power.
By proactively managing token allowances, users can ensure that no contract withdraws more than the initially specified amount from their wallet. Luckily, there are community tools built to help give DeFi users confidence and peace of mind.
### Walkthrough: Using Revoke.cash
[Revoke.cash](https://revoke.cash/) empowers users to easily manage their token allowances through a simple website that helps inspect and monitor allowances given to different dApps. Let’s walkthrough how you can use this powerful community tool to help you safeguard your assets and take back control of your wallet.
**1\. Connect your wallet**:
To begin the process of revoking your token allowances, head to [Revoke.cash](http://revoke.cash/) and click on “Connect Wallet” located in the top-right corner. Alternatively, you can manually enter your wallet public address in the search bar. Once the loading is complete, you’ll see a list of all your `token approvals` on that network.
**2\. Inspect your allowances**:
Once you have connected your wallet, you can inspect your existing approvals. You can sort, filter, or search for specific approvals based on the authorized spender address. Sorting by “Newest to Oldest” is particularly useful if you suspect a malicious approval recently. Use the sorting and filtering options provided to gain an overview of the token allowances you have granted. Allowances are granted per chain, so use the network selection to repeat the review on each network you use.
**3\. Revoke undesired allowances:**
Once you identify the approvals you want to revoke, simply click the “Revoke” button next to each of them. Optionally, you can update the approval to a different amount by clicking the pencil icon next to the approved amount if you still require the approval in the future but wish to reduce your risk.
It might be in your best interest to revoke or adjust a token allowance if:
1. A recently deployed smart contract is exploited and creates a vulnerability in a `decentralized exchange` you regularly use.
In April 2023, popular `DEX` SushiSwap suffered a similar exploit, when \~$3.5M was stolen from users. Affected users remained at risk if they hadn’t revoked their token allowance.
2. A malicious governance proposal updates several contracts with the intent of draining users’ funds.
More than $2.5M in assets were compromised when Atlantis Loans, a `DeFi` protocol on a BNB chain, executed a governance proposal that targeted several contracts. Users who managed their approval limit mitigated the risk of their wallets being fully drained by the malicious proposal.
### Don’t Forget Delegations
Since Ethereum’s Pectra upgrade (May 2025), allowances aren’t the only permission worth reviewing. A newer wallet feature (EIP-7702) lets your wallet delegate to extra code, enabling conveniences like transaction batching, but also a new drainer trick: a single malicious signature can install “sweeper” code that instantly forwards anything you deposit to an attacker, without your seed phrase ever being exposed. In 2025, researchers at Wintermute found that over 97% of early wallet delegations pointed to identical sweeper code.
Revoke.cash shows your active delegations under the “Delegations” tab, but because delegations are controlled by your wallet rather than by dApps, you revoke an unwanted delegation from inside your wallet itself. In MetaMask, open the account details and switch the account back to a standard account. If you never chose to upgrade to a `smart account`, treat any delegation you find as hostile.
---
It’s time to strengthen our wallet defenses! We hope you’ve enjoyed this entry in the Explorer’s Handbook: ‘Managing Token Allowances’.
Don’t forget to collect this entry if you want to own a copy for easy reference on your travels, or to support future content at Bankless Academy. Safe travels, Explorer!
---
### FAQ
#### When should I use Revoke.cash?
Use Revoke.cash periodically, especially during periods when you are not actively using a dApp, particularly for NFT marketplaces. Limiting approvals lessens the risk of funds loss due to hacks, exploits, or phishing scams. By sorting your approvals to show the most recent, you can identify the suspicious approvals and revoke them promptly, mitigating further damage.
#### Does disconnecting my wallet protect me from approval exploits?
Disconnecting your wallet from a dApp does not protect you from exploits, approvals or otherwise. The token approvals you previously granted remain active even after disconnecting, because they are stored onchain.
#### How can I avoid token allowance exploits and similar risks?
A proactive approach to token allowances includes:
* granting allowances only to trusted dApps.
* periodically reviewing token allowances.
* removing unnecessary or suspicious allowances.
* checking for wallet delegations you don’t recognize.
* staying informed about dApps’ security updates.
Consider using third-party tools like the Revoke.cash [browser extension](https://revoke.cash): it acts as a proactive measure against potential threats. The extension warns you if you are about to sign something potentially harmful, protecting you from phishing scams or other malicious activities.
#### Can I recover funds with Revoke.cash?
Unfortunately, Revoke.cash cannot recover stolen funds. It serves as a preventive tool to reduce the likelihood of becoming a victim of approval exploits. However, revoking the approvals used to steal your funds can prevent further theft.
#### Why does my wallet keep getting drained each time I top it up?
Your wallet may contain a “sweeper bot,” a script that watches a compromised wallet and rapidly transfers any new deposits out before you can act. One cause is a compromised seed phrase. In that case, revoking approvals won’t help; abandon the wallet and create a new one. But a malicious wallet delegation is an equally likely cause: sweeper code installed through a signature you were tricked into providing, without your seed phrase leaking. Check the “Delegations” tab on Revoke.cash. If you find a delegation you don’t recognize, revoke it from inside your wallet (e.g. via MetaMask’s account details). If there is no delegation and the draining continues, assume your seed phrase is compromised and move to a fresh wallet.
---
**Author**
**[Marcus](https://twitter.com/estmcmxci)** publishes the ENS DAO Newsletter. He researches how surplus revenue generated from protocol fees can subsidize application layer development and other open source infrastructure.
**Editors**
**[Tetranome](https://twitter.com/Tetranome)** is the Project Champion at Bankless Academy, focusing on user experience, interface, design, and content.
**[Trewkat](https://twitter.com/trewkat)** is a writer and editor at BanklessDAO. She’s interested in learning about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
**Patron**
This unsponsored article is part of your free Bankless Academy education. Collect the article to support future content!
---
# DEX Aggregators
Dive into DEX Aggregators, liquidity, and the DeFi exchange landscape.
- Page: https://app.banklessacademy.com/lessons/dex-aggregators
- Markdown: https://app.banklessacademy.com/lessons/dex-aggregators.md
- Format: Lesson
- Duration: 15 minutes
- Writers: iSpeakNerd
## Introduction
`Decentralized Exchanges` (DEXs) eliminate the costs of intermediaries and save Explorers money when trading assets.
But did you know, Explorer, that there’s more ways to save with DeFi technology? Using `DEX aggregators`, you can scan all possible trades on various DEX platforms simultaneously and execute the best trade route, all in one action. They help you get the best deal when doing a token `swap`. Just like airline flight aggregators help you find the cheapest flight, DEX aggregators help you maximize the value of your trade.
This lesson will show:
1. How DEXs split liquidity and how that can result in reduced trading rates.
2. How DEX aggregators enable users to view and use multiple DEXs through one interface.
3. Multiple ways a single aggregator interface can save Explorers time and money.
## How Liquidity Affects Prices
The amount of any token that is available to trade on a single market is called a token’s `liquidity`. The amount of liquidity available strongly influences the `price impact` when making trades in DeFi; a large price impact means the trade will cost more, and a low price impact will cost less. Most people prefer to trade in markets with higher liquidity to reduce their price impact.
You can think of it like a swimming pool; the more water (liquidity) there is, the smaller the _change_ in the water level (price impact) when someone jumps in or leaves. The size of that ‘someone’ (the trade) also affects the _change_ in the water level (price impact).
## An Example of How Liquidity Impacts Prices
Let’s look at an example.
Imagine a token that trades on several DEXs at once. One DEX holds a deep pool with most of the token’s `liquidity`, while another holds a shallow pool with only a small fraction of it.
If an Explorer buys the same amount of the token from each pool, the `price impact` will be higher in the shallow pool. The same trade pulls a much larger percentage of that pool’s total liquidity, so it moves the price more and costs the buyer more.
## Knowledge Check 1
Fill in the blanks: To find the best price, people will want to trade in markets with ________ liquidity to have ________ price impact on their trades.
- [ ] good, maximum
> ℹ️ Try again! A maximum price impact means the trade costs more, not less.
- [x] high, low
> ℹ️ Correct! More liquidity means a smaller price impact, like a bigger pool of water changing less when someone jumps in.
- [ ] low, good
> ℹ️ Try again! Low liquidity increases price impact and makes trades more expensive.
- [ ] thin, large
> ℹ️ Try again! Thin liquidity causes a large price impact, which is exactly what traders want to avoid.
## Shortcomings of Traditional DEXs: Thin Liquidity
DeFi continues to grow, but a problem is emerging for users: As more DEXs launch, the total amount of any individual token gets spread out. This is known as thin liquidity.
Remember the swimming pool: if the available water (`liquidity`) is split between multiple pools, the amount of water will be “thinner” in each pool compared to the total in the single original pool.
In DeFi’s early days, one or two DEXs held most of the liquidity. In 2020, new DEXs began competing for it; one rival pulled over $1B of liquidity away from Uniswap within weeks of launching. Today, liquidity is spread across hundreds of DEXs on many blockchains and `Layer 2` networks, thinning each individual pool.
Thus, any trade has a larger `price impact` than when a single DEX held most of the ecosystem’s liquidity. Without new innovations, it costs Explorers more to trade on any single DEX.
## Knowledge Check 2
Which two factors determine the price impact of a DEX trade?
- [ ] The choice of DEX used to make the trade and size of the trade
> ℹ️ Try again! The DEX itself doesn’t matter. It’s the liquidity available in the pool that counts.
- [ ] Which token is chosen to trade and which DEX is used to make the trade
> ℹ️ Try again! Neither the token nor the DEX brand determines price impact. Liquidity and trade size do.
- [x] The size of the trade and amount of liquidity available
> ℹ️ Correct! Like a swimming pool, the size of the splash depends on how big the jumper is and how much water is in the pool.
- [ ] The amount of liquidity available and which token is chosen to trade
> ℹ️ Try again! Liquidity is one factor, but the other is the size of the trade, not the token chosen.
## Recombining Liquidity With DEX Aggregators
Large amounts of `liquidity` are needed to reduce price impact and save you money. DEX aggregators allow users to run trades through multiple DEXs at once and reduce the price impact; a big trade from an Explorer’s wallet gets broken down into multiple small trades across multiple DEXs.
DEX aggregators can even route trades through an `intermediary token` , or more than one, if that gets a better result for users, like the way a flight aggregator might suggest an extra stop at another airport if it’s cheaper for the passenger. This discovery of the optimal `trade route` is done by sophisticated algorithms searching through all possible paths to find the cheapest trade route at that moment.
## Knowledge Check 3
Trade routing in DEX aggregators means:
- [ ] Trades are routed via special arrangements with specific DEXs
> ℹ️ Try again! Aggregators search all available DEXs algorithmically, not through special arrangements.
- [ ] Trades are always routed through multiple DEXs
> ℹ️ Try again! Aggregators split trades only when it gets a better result. A single DEX may sometimes offer the best route.
- [ ] Trades are routed through a user’s favorite DEX only
> ℹ️ Try again! Sticking to one DEX would defeat the purpose. Aggregators search across many DEXs for the best price.
- [x] Trades can be routed through multiple DEXs and intermediary tokens
> ℹ️ Correct! Algorithms search all possible paths, including extra “stops” through intermediary tokens, to find the cheapest trade route.
## How Gas Cost Is Calculated on Ethereum
Let’s refresh how gas is calculated before seeing how DEX aggregators reduce network fees. These savings matter most on Ethereum Mainnet, where fees can be high; on `Layer 2` networks, fees are usually just cents.
Just like gas for a car, `gas` is the fuel for running blockchain code on Ethereum. The more computations you do, the more gas your code requires. Gas price is measured in very small amounts of Ether called `gwei`, like cents to a dollar. 1 gwei is 1 billionth of an ether (1 gwei = 0.000000001 ETH).
Total gas cost is based on how much gas your transaction uses and the unit price of gas at the time of use. The formula for calculating the price of a transaction is as follows:
_Amount of gas used * Gas price = Total gas cost_
As an example, let’s say gas costs are at 22 gwei per gas unit and the transaction uses 120-thousand units:
_120,000 * 22 gwei = 2,640,000 gwei_ _**or**_ _0.00264 ETH_
## How Aggregators Reduce Gas Costs for Users
Trade splitting would result in more transaction fees from the extra on-chain activity, except that advanced aggregators plan for transaction fees and include them in their calculations of the trade route. They simulate trades off chain, including `gas` costs, to find `trade routes` that leave Explorers with the most value at the end of the interaction.
Some aggregators go even further. 1inch, which pioneered DEX aggregation, now also lets professional fillers compete to execute your trade and pay the gas themselves (a system called Fusion). The user often pays no gas at all.
## Knowledge Check 4
Which of the following is NOT a way DEX aggregators try to reduce transaction costs for users?
- [ ] Simulate transactions off-chain prior to trade execution
> ℹ️ Try again! Aggregators do simulate trades off-chain, including gas costs, to find the best route.
- [x] Ask DEXs to lower network fees for their users
> ℹ️ Correct! Network fees are set by the blockchain, not by DEXs. No one can simply ask for them to be lowered.
- [ ] Account for gas cost in trade routing
> ℹ️ Try again! Advanced aggregators do include transaction fees in their trade route calculations.
- [ ] Let professional fillers execute trades and pay the gas
> ℹ️ Try again! In intent systems like 1inch Fusion, fillers do cover the gas for users.
## Meta-Aggregators
There are even meta-aggregators of DEX aggregators! These platforms search through competing DEX aggregators and serve the best price quotes to users. For example, the built-in swap feature in wallets like MetaMask gathers quotes from multiple providers, including DEX aggregators like 1inch, and adds its own service fee on top.
Note: While convenient, `meta-aggregator` services can add extra costs on top of network transaction fees, increasing the overall cost for users. Explorers: make sure that your trades don’t end up more expensive than you intended.
## Knowledge Check 5
Meta-aggregators cross-reference multiple DEX aggregators to find the best prices for their users.
- [x] True
> ℹ️ Correct! Meta-aggregators search through competing DEX aggregators and serve the best price quotes to users.
- [ ] False
> ℹ️ Try again! Searching across multiple DEX aggregators is exactly what meta-aggregators do.
## Avoiding Sandwich Attacks
Users swapping directly through `DEXs` can lose value up to the limit of their `slippage tolerance` when bots place trades right before and after theirs to move the price. These losses are called `sandwich attacks`; in 2021 alone, they cost users around $235,000,000. Today, protections like `private transaction routing` and intent-based trading shield most everyday trades, but it still pays to keep a low slippage tolerance when swapping tokens.
Fortunately, because of the recombined liquidity offered by DEX aggregators, the price impact of a trade is reduced. Explorers can keep their slippage tolerance low while saving more with DEX aggregators, as opposed to trading directly on a DEX.
## Knowledge Check 6
To protect yourself, you should keep your slippage tolerance:
- [x] low
> ℹ️ Correct! A low slippage tolerance limits how much value a sandwich attack can extract from your trade.
- [ ] high
> ℹ️ Try again! A high slippage tolerance lets sandwich attacks take more value from your trade.
## More Protection From Sandwiches: OTC Trades
Some aggregators like 1inch even offer specialized `OTC` (`Over The Counter`) services that provide total protection against sandwich attacks. These optional services enable direct trading with other users, rather than routing through DeFi `liquidity pools`, giving Explorers another great way to save.
CoW Swap takes a different approach: users sign a trade request (an `intent`), and professional `solvers` compete in `batch auctions` to fill it at the best price. Solvers can even match two users directly, so trades are protected from sandwich attacks by default.
## Knowledge Check 7
Many DEX aggregators offer which tool(s) to save their users money?
- [ ] Routing trades through liquidity from multiple DEXs.
> ℹ️ Try again! Aggregated liquidity reduces price impact, but it isn’t the only way aggregators save users money.
- [ ] OTC trades that fully protect against sandwich attacks.
> ℹ️ Try again! This is one way aggregators save users money, but it isn’t the only one.
- [ ] Account for gas cost when building the best trade routes.
> ℹ️ Try again! This is one way aggregators save users money, but it isn’t the only one.
- [x] All of the above
> ℹ️ Correct! Aggregators combine liquidity, factor in gas costs, and can offer OTC trades, all to leave users with more value.
---
# Understanding Ethereum Token Standards
Learn how Ethereum’s asset templates support both traditional and emerging asset classes.
- Page: https://app.banklessacademy.com/lessons/understanding-ethereum-token-standards
- Markdown: https://app.banklessacademy.com/lessons/understanding-ethereum-token-standards.md
- Format: Handbook
- Duration: 10 minutes
- Writers: Musharef, Tetranome
### **Key Takeaways**
> * Ethereum `token` standards are predefined rules and functions used for deploying tokens on Ethereum.
>
> * The most popular Ethereum token standards are `ERC-20`, `ERC-721`, and `ERC-1155`.
>
> * Each standard enables different levels of `fungibility`, allowing creation of both common and unique onchain assets.
>
> * Token standards enable token interoperability across the Ethereum ecosystem, making it very easy for dApps to integrate new tokens, and for you to have access to them!
### What are Ethereum Token Standards?
Millions of different crypto tokens live across Ethereum and its `Layer 2` networks, each with different properties and use cases. How can the network ensure seamless token support across its dApp ecosystem, without developers having to spend hours integrating each token? How can users of these tokens understand their key properties without scrolling through hours of documentation?
Enter token standards!
These templates and rulesets support token `interoperability` across the Ethereum ecosystem. This means that dApps only need to support a few common token standards rather than thousands of individual tokens. For Explorers like yourself, this means that you can look at a token’s founding standard and understand its basic abilities across Ethereum.
Token standards dictate:
* How a token’s smart contract should be coded.
* The shared set of functions every token of that type must support, so any dApp knows how to work with it.
Currently, Ethereum has three commonly used token standards:
1. **ERC-20**: A standard for easily exchangeable (or fungible) tokens.
e.g. USDC and UNI tokens.
2. **ERC-721**: A standard for unique (or non-fungible) tokens, known as `NFTs`.
e.g. Bored Ape Yacht Club NFTs.
3. **ERC-1155**: A standard used for both fungible and non-fungible tokens in the same contract.
e.g. Items inside a web3 video game.
Now, you are probably wondering: “What exactly is fungibility?”
Let’s take a look at this concept from traditional economics to understand its importance in the Ethereum ecosystem.
### Fungibility vs. Non-Fungibility.
**‘Fungibility’** is a property of an economic asset or good, indicating two key features:
* When the asset is traded, its units are interchangeable without any alteration in value.
($1 USD can be exchanged for another $1 USD, or four 25¢ coins, or twenty 5¢ coins.)
* When the asset is divided, the smaller fractions maintain its fundamental characteristics.
($1 USD, split into four 25¢ coins, still functions as a store of value or is used for making purchases.)
Examples of fungible assets include oil, fiat currency, government bonds, and company shares. These non-unique assets can be easily exchanged and divided.
Conversely, **‘non-fungibility’** indicates:
* The asset has unique properties which make it distinguishable from its counterparts, giving it a unique value.
(A canvas painting by Van Gogh is priced differently to one by an emerging modern artist, because of the appearance, rarity, level of skill, and reputation behind the paintings.)
* The act of division affects its fundamental characteristics.
(A painting cut into four pieces has sections that do not resemble one another, and each section may be valued differently. The initial intention of the painting is also gone.)
Some examples of non-fungible assets are real estate, artwork, digital identities, and certifications. These assets are more difficult to exchange and divide because of their unique properties.
If you’re ever confused about fungibility, just ask yourself: “How easy is it to exchange and divide?” If it’s difficult, it’s likely non-fungible!
Ethereum aims to become “the settlement layer for the world economy”. Fungible and non-fungible asset functionality opens opportunities for traditional asset classes to be represented onchain, and for new ones to be created!
### Standards & Token Functions
When deploying a new token contract on Ethereum, the asset creator will select from one of the existing token standards. This grants it initial properties (called functions) such as the total supply of the asset, whether or not it can be transferred to another wallet, and what information it can hold.
For example, ERC-20 uses functions like these:
**1\. totalSupply:** Defines the total supply of an ERC-20 token.
The total supply of a token informs important qualities like its value and distribution.
**2\. balanceOf:** Checks the token balance of a specified address.
This helps services and platforms check your wallet’s balance before executing your requested transaction.
**3\. transfer:** Transfers tokens from your address to other addresses.
Every time you send a crypto token from your wallet to another wallet, you’re using the transfer function.
**4\. approve:** Allows an address (usually a smart contract) to automatically transact on behalf of your wallet up to a specified amount.
Using this function, you can approve a platform or service to automatically use a defined portion of your funds and execute transactions.
**5\. allowance:** Used to get the amount that a spender can transact from a wallet.
A platform may use this function to check the total amount you’ve approved it to use and if it can execute the transaction without you signing it manually.
Standardizing the token creation process enables `composability` in the Ethereum ecosystem. For instance, a developer building a [decentralized exchange (DEX)](https://app.banklessacademy.com/lessons/decentralized-exchanges) can add support for any token following the ERC-20 standard because they will all behave in a similar way. They will not need to build in individual support for each listed token.
Similarly, someone building an NFT marketplace just needs to make the platform compliant with ERC-721 and ERC-1155 standards to support all NFTs created on Ethereum.
Now that we understand token standards, fungibility, and functions, let’s take a look at the use cases for the three primary standards on Ethereum.
#### ERC-20: Fungible Tokens
[ERC-20](https://eips.ethereum.org/EIPS/eip-20) is a token standard that defines the rules for creating fungible token contracts.
ERC-20 tokens can be anything from a `memecoin` to a mode of payment in a decentralized marketplace. In most cases, they’ll fit into one of these four categories:
**1\. Utility token:** Serves a specific use case within an app/platform ecosystem.
Example: Chainlink (LINK) is used to pay the operators who deliver real-world data, like market prices, to smart contracts.
**2\. Governance token:** Offers holders voting rights in governance decisions of a platform.
Example: Ethereum Name Service (ENS) holders can vote in proposals to update the domain registry protocol.
**3\. Stablecoin:** Designed to maintain a stable value, usually equal to the U.S. dollar.
Examples: Tether (USDT), USD Coin (USDC), and newer entrants like Sky's USDS.
**4\. Security token:** Represents ownership in an underlying asset, like stocks of a company.
Example: tokenized investment funds, like the money-market funds that major asset managers began issuing onchain in 2024.
A single token could fall into more than one category. For example, a governance token can also have certain utility within a platform.
You can easily [buy ERC-20 tokens on a DEX](https://app.banklessacademy.com/lessons/swapping-on-a-decentralized-exchange) like Uniswap or a `centralized exchange` like Binance or Coinbase.
#### ERC-721: Non-fungible Tokens
[ERC-721](https://eips.ethereum.org/EIPS/eip-721) is a standard that defines the rules for Ethereum users to create or use non-fungible tokens. It ensures that each NFT created is provably unique.
What are some use cases of ERC-721 tokens?
**1\. Ownership of assets:** ERC-721 tokens are widely used to represent the ownership of unique digital and real-world assets. For example, this Explorer’s Handbook entry has 100 individually numbered versions available (not just to read, but to own), like a book on your digital bookshelf. (You can `mint` and own it by hitting the gold ‘Collect Entry’ button at the top). Bankless Academy’s ‘Datadisk Collectibles’ work in the same way.
**2\. Subscriptions and memberships:** Creators, artists, clubs, and companies are already using NFTs for subscriptions, event tickets, and memberships. The provable uniqueness of NFTs ensures that each of the fixed supply is tied to an individual user.
**3\. Loyalty rewards:** Starbucks ran a loyalty program called Odyssey until March 2024, where its members could complete quests to obtain NFTs that they could redeem for digital and real-world rewards. Many other brands are offering NFTs as a loyalty reward that users can choose to redeem or sell whenever they want.
**4\. Identity and Certifications:** ERC-721 tokens can be used to create tamper-proof identities and certifications. When your digital identity or certificates are ERC-721 tokens, it is easy for you to prove your ownership and nearly impossible for anyone to forge your documents and misuse them.
To get an ERC-721 token, create an account on an NFT marketplace like [OpenSea](https://opensea.io/) and purchase any listed NFT. Make sure you take our [Web3 Security](https://app.banklessacademy.com/lessons/web3-security) lesson to protect yourself from marketplace scams.
#### ERC-1155: Fungible & Non-fungible Tokens
Often referred to as a `multi-token standard`, [ERC-1155](https://eips.ethereum.org/EIPS/eip-1155) merges the concepts of ERC-20 and ERC-721 and lets builders write contracts that can support both fungible and non-fungible tokens. This doesn’t make a major difference to the user experience but can help to optimize platform features. An example would be deploying both a fungible in-game currency and non-fungible in-game assets under a single contract.
This standard also allows the creation of semi-fungible tokens: tokens that are fungible and non-fungible in specific circumstances. For example, in a trading card collection, all cards that have the same rarity might be fungible (interchangeable) whereas cards with differing rarity levels might be non-fungible (non-interchangeable).
ERC-1155 also enables batch transactions to send multiple token types at once, potentially reducing the `gas` cost for users.
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We commend you for making it through this lengthy entry in the Explorer’s Handbook: ‘Understanding Token Standards’.
Don’t forget to collect this entry if you want to own a copy for easy reference on your travels, or to support future content at Bankless Academy. Safe travels, Explorer!
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### Ethereum Token Standard FAQ
#### How are Ethereum token standards created?
Token standards are proposed and published on Ethereum through a proposal process called Ethereum Improvement Proposals (EIPs). There is no vote: a proposal is refined in public discussion, and once the community broadly agrees it works, editors finalize it as a standard called an Ethereum Request for Comment (ERC). The serial number of the EIP is then appended to complete the standard name, e.g. ERC-20 or ERC-721.
#### Does ether (ETH) follow a token standard?
No. In fact, ETH is known as a ‘coin’ not a ‘token’, meaning it has its own [blockchain](https://app.banklessacademy.com/lessons/blockchain-basics).
#### Can anyone launch a token?
Yes. Ethereum is a permissionless ecosystem and anyone can launch a fungible or non-fungible token. However, you will need technical know-how or access to no-code tools.
#### If two tokens have the same name, how do I know which is the official token?
To identify the original token, you should check the contract address that’s used to publish the tokens you want to use and reference it against official project documentation. This way you’ll ensure that you do not interact with a malicious token contract that could drain your wallet.
#### Are there other token standards on Ethereum apart from ERC-20, 721, and 1155?
Yes. Some are widely used, like [ERC-4626](https://eips.ethereum.org/EIPS/eip-4626), a shared standard for `vault` tokens that represent deposits earning yield in DeFi. Newer standards also cover `smart accounts`, letting a wallet run its own code. Others, like [ERC-223](https://eips.ethereum.org/EIPS/eip-223), [ERC-1462](https://eips.ethereum.org/EIPS/eip-1462), and [ERC-1948](https://eips.ethereum.org/EIPS/eip-1948), never caught on or serve very niche use cases.
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**Authors**
**[Musharraf](https://x.com/musharrafff)** is the co-founder of Unhashed. He helps web3 projects with content strategy and execution.
**[Tetranome](https://twitter.com/Tetranome)** is the Project Champion at Bankless Academy, focusing on user experience, interface, design, and content.
**Editors**
**[Trewkat](https://twitter.com/trewkat)** is a writer and editor at BanklessDAO. She’s interested in learning about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
**Patron**
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