Digital Assets Flashcards
What is Distributed Ledger Technology (DLT)?
Technology based on a distributed ledger that represents a technological development and offers potential improvements to delivering financing services and financial record keeping. DLT networks are considered as a means to create, exchange, and track ownership of financial assets on a P2P basis.
What are potential benefits of DLT?
Greater accuracy, transparency, and security in record keeping.
Also, faster transfer of ownership and P2P interactions
What is a distributed ledger?
Type of database that can be shared among potentially infinite numbers of entities in a network. In a distributed ledger, entries are recorded, stored and distributed across a network of participants so that each participating entity has a matching copy of the digital database, making each copy of the database a verified record of all current and previous transactions. Basic elements of a DLT network include a digital ledger, a consensus mechanism used to confirm new entries and a participant network.
What is a consensus mechanism?
The process by which the computer entities in a network agree on a common state of the ledger. Consensus generally involves transaction validation and agreement on ledger update by network parties. These updates are unchangeable but transparent and accessible.
What is cryptography?
An algorithmic process to encrypt data, making the data unusable if received by unauthorized parties, which enables a high level of network security and database integrity. DLT uses cryptographic methods of proof to verify network participant identity and for data encryption.
What are smart contracts?
Computer programs that self-execute on the basis of pre-specified terms and conditions agreed to by the parties to a contract.
What is blockchain?
A type of digital ledger in which information, such as changes in ownership, is recorded sequentially within blocks that are then linked or “chained” together and secured using cryptographic methods.
What is the consensus protocol?
A set of rules governing how blocks can join the chain and become the immutable truth. The consensus protocols are designed to resist attempts at malicious manipulation up to a certain level of security. We distinguish between Proof of Work and Proof of Stake.
What is the Proof of Work Protocol?
The proof of work protocol determines which specific block to add through a computationally costly lottery. The PoW consensus mechanism is used to verify a transaction involves a cryptographic problem that must be solved by some computers on the network (miners) each time a transaction takes place.
What are miners?
Miners use powerful computers and significant amounts of energy to solve complex algorithmic puzzles to validate and lock blocks of transactions into the blockchain, earning cryptocurrency for themselves in the process. The PoW consensus process to update the blockchain can require substantial amounts of computing power, making it very difficult and extremely expensive for an individual to manipulate historical data. Therefore, the success of this network relies on broad network participation.
Participants on the network agree that the longest chain of blocks is the only truthful representation of all previous transactions. If a malicious attacker wanted to make a longer chain including fraudulent transactions, it must outperform the entire network’s computational power, which theoretically requires most of the network’s available computational power.
What is the Proof of Stake Protocol?
This protocol requires selected participants on the networks, the validators, to pledge capital to vouch for the block’s validity. This stake signals to the network that a validator is available to verify the veracity of a transaction and propose a block. A majority of the other validators, who similarly staked a digital asset to the network, must then attest to the validity of the proposed block. Validators benefit from both proposing and attesting to the validity of blocks that have been proposed by other participants in a similar staking process.
What are permissioned and permissionless networks?
Permissionless networks are open to any user who wishes to make a transaction, and all users within the network can see all transactions that exist on the blockchain. The main benefit of a permissionless network is that it does not depend on a centralized authority to confirm or deny the validity of transactions, because this takes place through the chosen consensus mechanism.
In permissioned networks, network members might be restricted from participating in certain network activities. Controls or permissions can be used to allow varying levels of access to the ledger, from adding transactions to viewing transactions only.
Bitcoin is a well-known use of an open permissionless network. Bitcoin was created in 2009 to serve as the public ledger for all transactions occurring on its virtual currency.
What are all types of digital assets?
NFTs, Security Tokens, Utility Tokens, Governance Tokens.
Bitcoin, Altcoins, CBDCs
What is a cryptocurrency?
Units used to transfer or store value, which allow near-real-time transactions between parties without the need for an intermediary.
What are CBDCs?
Central Bank Digital Currencies.
Central Banks around the world issue a tokenized version of the currency issued by that central bank, it is essentially a digital bank note or coin.
What are NFTs?
Non-Fungible Token.
An NFT links digital assets to certificates of authenticity using blockchain technology. It differs from fungible tokens, such as cryptocurrencies, because each token represents something unique. It is most commonly used for digital artwork.
What are security tokens?
Security tokens digitize the ownership rights associated with publicly traded securities. The custody of these security tokens can be stored on a blockchain, which increases the efficiency of post-trade processing, settlement, record-keeping, and custody.
What is an ICO?
Initial Coin Offering.
An unregulated process whereby companies sell their crypto-tokens to investors in exchange for money or for another agreed-upon cryptocurrency. An ICO is typically structured to issue digital tokens to investors that can be used to purchase future products or services being developed by the issuer.
What are utility tokens?
Tokens who provide services within a network, such as pay for services and network fees. While security tokens may pay out dividends, utility tokens only compensate for activities on the network.
What are governance tokens?
They serve as votes to determine how particular networks are run. For instance, when there is a technical problem on a permissionless blockchain network, it is the owners of governance tokens who can vote on a solution or any major changes to maintain the stability and integrity of the network.
What are differences between digital assets and traditional financial assets?
Differences in inherent value.
Differences in validating transactions.
Differences in the uses as a medium of exchange.
Differences in legal and regulatory protection.
What is Ether?
The most prominent altcoin, launched in 2015 on its own Ethereum network. Ether involves the added feature of a programmable blockchain that allows users to construct applications using the blockchain to validate or secure transactions or payments for markets or other uses.
