How to Decide Which Link to Do-Follow or No-Follow ?

If the link points to some reference website, article, news source  etc use do follow.

For ads and affiliate links, use no follow.

Thanks for clarification,Ranjith :)

How do we make a link Do-Follow or No-Follow?

According to what CK taught me, normally the link is Do-Follow link by default.....you can turn it into a No-Follow by selecting the box to do so in the Blogger post while adding it. (When you add the link, the option to select No-Follow link appears automatically). CK, correct me if I am wrong!

As a rule all links used in the blog are do follow unless you specifically make them no follow and all the links in the comments are no follow unless you specifically make them do follow using intensedebate or commentluv.  AV has given a snap of how to make blog links somewhere on the threads

What should I do to sponsor links of contests held on Indiblogger ?

You can make it either do follow or no follow. IB has no problem with it.

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Generally speaking, you can make it no follow or do follow, there are arguments for both.

Do follow - You wrote a post endorsing a product. No follow = endorsement of that site. 

No follow - You wrote the post as you might win the prizes. So, it is something similar to paid advertisements which should be no follow. 

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Toss a coin. If you get head, make it do follow, else make it no follow. Simpler way, keep the default do follow. 

Aila I was going to suggest the same thing Ranjith the coin toss