Digital Assets Flashcards
(21 cards)
Distributed Ledger Technology
A means to create, exchange, and track ownership of financial assets on a peer-to-peer (P2P) basis. Potential benefits of using this technology include greater accuracy, transparency, and security in record keeping; faster transfer of ownership & P2P
interactions. However, the technology is not fully secure, and breaches in privacy and
data protection are possible.
Permissioned (Faster as only limited members, cost effective, partially decentralized, limited membership & centralized governance) vs Permissionless network (Slower, costly as many members have to validate each transaction, unlimited membership, decentralized, governance is decentralized coz it is maintained by members)
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 (e.g., a participant) to viewing transactions only (e.g., a regulator) to viewing selective details of the transactions but not the full record VS 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. Open DLT system, any network participant can perform all network functions. 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. This means no single point of failure exists because all transactions are recorded on a single distributed database and every node stores a copy of the database. Once a transaction has been added to the blockchain, it cannot be changed, barring manipulation; the distributed ledger becomes a permanent and immutable record of all previous transactions. Trust between transacting parties is not a requirement
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.
Consensus mechanism
Process by which the computer entities (or nodes) in a network agree on a common state of the ledger. Consensus generally involves two steps: transaction validation and agreement on ledger update by network parties.
Cryptography
An algorithmic process to encrypt data making data unusable if received by unauthorized parties
Smart Contract
Computer program that self execute on basis of pre-specified terms and conditions agreed by parties to contract
Block Chain
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.
Crypto currencies vs tokens
Have their own block chains vs built on an existing block chain. No intermediaries required in both. Bitcoin, Altcoin, Central Bank digital currencies vs NFT (Every token is unique), Security Token (backed by publicly traded securities. Not unique like NFT), Utility Token (Provide service within a network such as pay for service & network fee), Governance Token (Important in permissionless network), Initial Coin offering
Consensus protocol
Set of rules that govern how blocks are cryptographically chained together in a blockchain network for the verification
of the complete and immutable history of transaction records. Proof of work (PoW)
and Proof of stake (PoS).
Decentralized finance (DeFi)
The push for financial decentralized applications based on opensource codes and smart contracts has grown into a movement. DeFi is a marketplace of dApps that are designed to perform various core financial functions, including potentially acting as a medium of exchange, storage of value, tokenization of underlying assets, and immutable record keeping of ownership and transfer of ownership.
Web3
Concept that refers to the third iteration of the internet built on blockchain technologies, decentralization, and token-based economies.
Centralized exchanges
Most popular type of exchange. These privately held exchanges provide trading platforms for cryptocurrencies and offer volume, liquidity, and price transparency.
Decentralized exchanges
Lack a centralized control mechanism and operate on a distributed platform without central coordination or control. This comes with the benefit that should one of the computers on the network be attacked, the exchange remains operational since there are numerous other computers that continue to operate on the network. Difficult to regulate coz no single individual, organization, or group controls the system. So those trading on decentralized exchanges are generally free to transact without any regulatory scrutiny, allowing for potentially illegal activity.
Indirect investment in Crypto
Cryptocurrency coin trusts allow investors to trade shares in trusts holding large pools of a cryptocurrency and that trade over the counter (OTC) and behave like closed-end funds. For an investor in a coin trust, there is no need to create a digital wallet and use encryption keys.
Cryptocurrency futures contracts are agreements to buy or sell a specific quantity of Bitcoin or other cryptocurrency at a specified price on a particular future date. Cash settled. Mkt is less developed & highly volatile compared to established future mkt
Cryptocurrency exchange-traded funds Seek to replicate digital asset investment returns. These ETFs typically do not directly invest in cryptocurrencies and gain exposure to the value of cryptocurrencies using cash and cryptocurrency derivatives.
Cryptocurrency stocks provide indirect exposure due to their activity and relationship to digital assets.
Hedge Funds investing in Crypto
Asset-backed tokens
Increase liquidity by allowing for fractional ownership of high-priced assets, such as houses, art, precious metals, and precious stones, which allows multiple investors to possess a fractional interest of the same asset. The digital representation of the ownership allows for an immutable record of ownership information and ownership transfer, which increases the transparency of these transactions and reduces transaction, intermediation, and record-keeping costs.
ETF
Hedge fund based ETF - Try to replicate return of HF but don’t invest in HF directly.
Digital asset based ETF - Try to replicate digital asset return by investing on cash & crypto derivatives
Commodity ETF - May invest in commodity or commodity future. May use leverage
Building blocks of Dapps
Smart contract
A benefit of distributed ledger technology (DLT) that increases its use by the
investment industry is its
streamlining of current post-trade processes
Historical Bitcoin returns are characterized by
high mean returns and high standard deviation. Despite the high volatility, the return distribution is positively skewed.
Decentralized finance (DeFi)
a marketplace for dApps (or decentralized applications) that allow for financial transactions to take place and to be recorded on the blockchain without a central coordinating mechanism. DeFi seeks to design, combine, and develop various open-source financial applications as
building blocks for sophisticated financial products and services.
Regulatory uncertainty is a
non-trivial risk for investors in cryptocurrencies.
