This unit introduces the technology and markets behind cryptocurrency and digital assets. You will watch four short videos and read brief sections on stablecoins, crypto market structure, and DeFi, totaling about 60 minutes. By the end, you should be able to explain how a blockchain works, distinguish proof-of-work from proof-of-stake, describe what smart contracts enable, and compare different types of stablecoins.
These concepts are the foundation for your Digital Asset Evaluation assignment this unit and for the token design project in the final act of the course.
Viewing Order
Work through the required materials in this order. Each builds on the one before it.
- How blockchain and Bitcoin work (26 min video)
- How consensus mechanisms differ (8 min video)
- What smart contracts are and why they matter (12 min video)
- Stablecoins: types, mechanics, and risks (12 min video + reading below)
- Crypto markets and DeFi overview (reading below, ~10 min)
01 Blockchain and Bitcoin
This video answers the question "how would you invent a cryptocurrency from scratch?" It builds the entire concept step by step: digital signatures, hash functions, proof of work, and the block chain structure that ties it all together. By the end, you will understand not just what a blockchain is, but why each design choice exists.
"But how does bitcoin actually work?" Required
What to watch for: Pay attention to why proof of work is needed (not just what it is), and how the ledger stays consistent across a decentralized network. The "computational puzzle" concept comes back in the next video when we compare it to proof of stake.
02 Consensus: Proof of Work vs. Proof of Stake
The 3Blue1Brown video explains proof of work in detail. But most major blockchains today — including Ethereum since its 2022 "Merge" — use a different system called proof of stake. This video explains the difference and why it matters.
"Proof-of-Stake (vs proof-of-work)" Required
What to watch for: The core tradeoff — PoW secures the network through energy expenditure and computational cost; PoS secures it through economic stake at risk. Think about what each approach means for energy use, centralization risk, and who gets to validate transactions. You will need to identify which consensus mechanism your chosen digital asset uses in the evaluation assignment.
Key Comparison
| Dimension | Proof of Work (PoW) | Proof of Stake (PoS) |
|---|---|---|
| Security mechanism | Computational cost (mining) | Economic stake (collateral at risk) |
| Who validates | Miners with specialized hardware | Validators who lock up tokens |
| Energy use | Very high | ~99.9% less than PoW |
| Attack cost | 51% of network computing power | 51% of staked tokens (+ slashing risk) |
| Notable examples | Bitcoin, Litecoin, Dogecoin | Ethereum (post-Merge), Solana, Cardano |
| Centralization risk | Mining pool concentration | Wealth concentration among large stakers |
03 Smart Contracts
A blockchain that only transfers coins is limited. Smart contracts are what make everything else possible — decentralized lending, exchanges, stablecoins, and the ERC-20 tokens you will build later in this course. A smart contract is a program stored on a blockchain that executes automatically when its conditions are met, without any intermediary.
"CODE IS LAW? Smart Contracts Explained (Ethereum, DeFi)" Required
What to watch for: The connection between smart contracts and the financial applications they enable. When the video discusses "code is law," consider both the advantages (trustless execution, no intermediary) and the risks (bugs in code can't easily be reversed). This concept is the bridge between blockchain infrastructure and the digital assets you will evaluate.
04 Stablecoins
Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to $1 USD. They are the connective tissue of the crypto ecosystem — most trading, lending, and payments in crypto flow through stablecoins rather than volatile assets like Bitcoin or Ethereum. Understanding how they maintain their peg (and how they can fail) is essential.
"What is a Stablecoin? (How they work - ANIMATED)" Required
What to watch for: The distinction between collateralized stablecoins (backed by reserves) and algorithmic stablecoins (maintained by smart contract mechanisms). Pay attention to what backs each type and what happens if confidence in the backing erodes.
Stablecoin Types and Risks
The video introduces the main categories. Here is a sharper breakdown with examples and the key risk for each:
| Type | How It Maintains the Peg | Examples | Key Risk |
|---|---|---|---|
| Fiat-collateralized | Each token is backed 1:1 by dollars (or equivalent) held in reserve by a custodian | USDC (Circle), USDT (Tether) | Counterparty risk — you must trust the issuer actually holds the reserves. Tether has faced persistent questions about the composition and sufficiency of its reserves. |
| Crypto-collateralized | Overcollateralized by other crypto assets locked in smart contracts. If collateral value drops, positions are automatically liquidated. | DAI (MakerDAO) | Liquidation cascades — sharp market drops can trigger mass liquidations, which can further depress collateral prices. |
| Algorithmic | No direct collateral. An algorithm expands or contracts token supply to push the price toward $1, often using a paired "absorber" token. | UST/Terra (collapsed May 2022) | Death spiral — if confidence breaks, redemptions accelerate faster than the algorithm can stabilize. In May 2022, Terra's UST lost its peg and collapsed from $18B to near zero in days, taking its paired token LUNA with it. This remains the most significant stablecoin failure to date. |
For more detail, see the Whiteboard Crypto stablecoins article (optional, ~10 min read).
05 Crypto Markets
You already understand how traditional financial markets work — exchanges, brokers, clearing, settlement. Crypto markets serve the same basic functions but are structured differently in ways that matter.
Exchanges
Crypto is traded on two types of exchanges:
- Centralized exchanges (CEXs) like Coinbase, Binance, and Kraken function similarly to traditional brokerages. They hold customer funds (custodial), match buy and sell orders via an order book, and handle settlement internally. They are regulated to varying degrees and require identity verification (KYC). If the exchange fails or is hacked, customers can lose funds — as FTX demonstrated in November 2022.
- Decentralized exchanges (DEXs) like Uniswap and Curve run entirely on smart contracts. There is no company holding your funds. Instead of an order book, most DEXs use automated market makers (AMMs) — liquidity pools where prices are set by a mathematical formula (typically the constant product function x × y = k). Trades execute peer-to-contract rather than peer-to-peer.
Wallets and Custody
In traditional finance, a broker or bank holds your assets on your behalf. In crypto, ownership is determined by who controls the private key — a cryptographic string that authorizes transactions.
- Custodial wallets (e.g., keeping crypto on Coinbase) — the exchange holds your private keys. Convenient but introduces counterparty risk.
- Non-custodial / self-custody wallets (e.g., MetaMask, Ledger hardware wallets) — you hold your own keys. No counterparty risk, but if you lose your keys, there is no recovery mechanism.
- Hot wallets are connected to the internet (software wallets). Cold wallets are offline (hardware devices). Cold storage is more secure but less convenient for frequent trading.
Market Structure Differences
| Feature | Traditional Markets | Crypto Markets |
|---|---|---|
| Trading hours | Market hours (e.g., NYSE 9:30–4:00 ET) | 24/7/365 |
| Settlement | T+1 (stocks), T+2 (bonds) | Minutes to seconds (on-chain) |
| Clearing | Central clearinghouse (DTCC) | Blockchain consensus or exchange internal |
| Custody | Broker or custodian holds assets | Self-custody possible; exchanges also offer custody |
| Regulation | SEC, FINRA, established framework | Evolving; varies significantly by jurisdiction |
| Transparency | Periodic disclosure (10-K, 10-Q) | On-chain transactions are publicly visible in real time |
06 DeFi: A Brief Overview
Decentralized finance (DeFi) refers to financial services built on smart contracts rather than traditional institutions. Instead of a bank making lending decisions or a broker matching trades, these functions are performed by code running on a blockchain. DeFi protocols are open-source, permissionless (anyone can use them), and composable (they can be combined like building blocks).
Major DeFi Categories
| Category | What It Replaces | How It Works | Examples |
|---|---|---|---|
| Lending & borrowing | Bank loans, money markets | Users deposit crypto into a smart contract pool to earn interest. Borrowers put up collateral (typically 150%+ of loan value) and borrow from the pool. Interest rates adjust algorithmically based on supply and demand. No credit checks — the overcollateralization is the underwriting. | Aave, Compound |
| Decentralized exchanges | Stock exchanges, brokerages | Liquidity providers deposit token pairs into pools. A smart contract prices trades using a mathematical formula. No order book, no matching engine, no broker. | Uniswap, Curve, SushiSwap |
| Stablecoins | Dollar-denominated accounts | Tokens pegged to $1 through reserves, overcollateralization, or algorithmic mechanisms (see Section 4 above). | USDC, DAI, USDT |
| Derivatives | Options, futures, swaps | Smart contracts that create synthetic exposure to asset prices without holding the underlying asset. | Synthetix, dYdX, GMX |
Optional Deep Dives
These resources go deeper on specific topics. None are required, but they are recommended if you want additional depth — particularly if you are evaluating a DeFi protocol or plan to build a strong token economics section in your final project.
"Blockchain 101 - A Visual Demo" Optional
A hands-on walkthrough of how hashing, blocks, and distributed consensus work in practice. If you want to see blockchain mechanics in action (not just explained), this walks through a concrete example step by step. You can also try the interactive web demo yourself.
"Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets" Optional
The best academic treatment of DeFi for finance students. Introduces a multi-layered framework (settlement → asset → protocol → application → aggregation) for analyzing DeFi architecture. Published by a Fed bank. Especially useful if you are evaluating a DeFi protocol — the framework maps directly to the "technical architecture" dimension of the evaluation. PDF version.
"Proof of stake vs proof of work" Optional
A detailed written comparison of PoW and PoS with an investment lens. Good supplement if you want more depth than the video provides on consensus tradeoffs.
MIT "Blockchain and Money" — Session 2: Money, Ledgers & Bitcoin Optional
A full MIT graduate lecture on how Bitcoin relates to the history of money, ledgers, and financial systems. Taught by Gary Gensler, who later became SEC Chair. The level is right for this course, but it is a full lecture — consider the first 20–30 minutes if you are short on time. The entire 23-session course is available free on MIT OpenCourseWare.
ERC-20 Token Standard Optional
The official documentation for the ERC-20 token standard you will use in the final project. You do not need this now — it will be assigned in Unit 10 — but if you are curious about what an ERC-20 token actually specifies, this is the primary reference.
Whiteboard Crypto — "What Are Stablecoins?" (article) Optional
Written companion to the stablecoins video. Covers the same concepts in more detail with additional examples.