alt 7: introduction to digital assets

What is distributed ledger technology (DLT)?

database shared across many participants (nodes) in a network

Each participant has:

• an identical copy of the ledger,

• access to transaction history,

• synchronised updates.

What are the three basic elements of a DLT network?

1. Distributed ledger

A shared digital database containing:

• current transactions,

• historical transactions,

• ownership records.

2. Consensus mechanism

The process through which network participants agree on:

• whether transactions are valid,

• how the ledger should be updated.

3. Participant network

The nodes/computers participating in the system.

• stores a copy of the ledger,

• helps verify transactions.

what are the 5 key features of DLT?

1. Transparency

• All participants can view transaction history (depending on permissions).

2. Immutability

• Once validated and added records are extremely difficult to change.

3. Cryptography

DLT uses encryption techniques to:

• secure transactions,

• verify identities,

• protect data integrity.

4. Peer-to-Peer (P2P)

Transactions can occur directly between users without traditional intermediaries.

5. Smart Contracts

Computer programs that self-execute when conditions are met

What is blockchain?

A type of digital ledger where transactions are stored sequentially in linked blocks secured by cryptography

Each block contains:

• transaction data,

• a secure cryptographic link to the previous block. (called a hash)

This creates a secure chain of historical records.

what are the 6 steps to add a transaction to blockchain

1. Transaction initiated.

2. Transaction broadcast to network.

3. Nodes validate transaction.

4. Transaction grouped into block.

5. Consensus mechanism approves block.

6. Block added to chain permanently.

What is Proof of Work (PoW) and how does it work?

A consensus protocol where miners solve computational puzzles to validate transactions.

Miners: Network participants using computing power to validate transactions and add blocks.

• Miners solve difficult mathematical problems.

• First valid solution updates blockchain.

• Miner receives cryptocurrency reward.

3 advantages of PoW

• Highly secure

• Difficult to manipulate

• Strong decentralization

3 disadvantages of PoW

• Extremely energy intensive

• Slow transaction processing

• Expensive computationally

What is Proof of Stake (PoS)?

A consensus protocol where validators stake digital assets to validate transactions.

Validators:

• stake (pledge) digital assets,

• verify transactions,

• earn rewards.

Validation power depends on:

• amount staked,

• participation in network.

3 advantages of PoS

• Lower energy usage

• Faster processing

• More scalable

A disadvantage of PoS

Potential concentration of power among large stakeholders

What is a permissionless blockchain?

An open network where anyone can participate and view transactions.

What is a permissioned blockchain?

A restricted network where access and activities are controlled.

Feature	Permissionless	Permissioned
Access	Open to everyone	Restricted
Governance	Decentralized	Controlled
Speed	Slower	Faster
Cost	Higher (only few needed to validate)	Lower (need many to validate transactions)
Transparency	High	Selective
Validation	Anyone	Authorized participants

What are digital assets?

Assets existing only electronically with rights to use, buy, or sell.

What is cryptocurrency?

A digital medium of exchange operating without centralized intermediaries.

what are the three key features of cryptocurrency

• privately issued,

• not usually backed by central banks,

• highly volatile.

What are CBDCs?

Central Bank Digital Currencies — digital versions of fiat currency issued by central banks.

3 benefits of CBDCs

• faster payments,

• reduced transaction costs,

• financial inclusion.

What is tokenisation?

Representing ownership rights to physical assets on a blockchain.

• real estate,

• commodities,

• securities,

• luxury goods.

3 benefits of tokenisation?

• easier transfer of ownership,

• improved transparency,

• lower verification costs.

What is an NFT?

non-fungible token representing a unique digital asset and certificate of authenticity.

What are security tokens?

Digital representations of ownership rights in securities.

3 benefits of security tokens

• faster settlement,

• lower reconciliation costs,

• improved custody and record keeping.

What is an ICO?

Initial Coin Offering

• raising capital by selling crypto tokens to investors.

Advantages of ICOs over IPOs (Initial Public Offerings)?

• Lower issuance costs

• Faster fundraising

3 main risks of ICOs?

• Fraud

• Limited regulation

• Investor losses

What are utility tokens?

tokens used to access services or pay network fees.

Do NOT usually provide ownership rights.

What are governance tokens?

tokens granting voting rights over blockchain network decisions.

Allow token holders to:

• vote on network decisions,

• participate in protocol governance.

Why are institutional investors interested in digital assets?

• Potential high returns

• Diversification benefits

Main difference between digital assets and traditional financial assets regarding value?

Most digital assets lack intrinsic value or expected cash flows.

their value depends on:

• perceived scarcity,

• expected future demand,

• network usefulness,

• investor sentiment.

how does transaction validation differ between traditional assets and digital assets?

Traditional Assets

Ownership recorded in:

• centralized private ledgers,

• maintained by intermediaries (banks, brokers, custodians).

Digital Assets

Ownership recorded on:

• decentralised distributed ledgers,

• blockchain systems,

• cryptographic networks.

Validation depends on:

• permissioned vs permissionless systems,

• PoW vs PoS protocols.

how do traditional and digital assets differ as a medium of exchange

Traditional Assets

Can easily be exchanged into legal tender,

Digital Assets

Some cryptocurrencies can function as payment systems (Bitcoin)

• acceptance remains limited,

• transaction costs may be high,

• many countries restrict or ban usage

What affects the perceived value of a digital asset network?

• Permissioned vs permissionless structure

• PoW vs PoS validation

differences between tradiaitonal and digital assets

1. intrinsic value

2. transaction system

3. medium of exhcange

4. regulation

5. investor protection

Feature	Digital Assets	Traditional Financial Assets
Intrinsic value	Usually none	Based on cash flows/assets
Transaction system	Decentralized ledger	Centralized intermediaries
Medium of exchange	Limited acceptance	Easily exchanged into fiat
Regulation	Ambiguous/evolving	Well-established
Investor protection	Limited	Stronger legal protections

What was Bitcoin originally designed for?

A peer-to-peer payment network and alternative currency.

1. Medium of exchange

2. Store of value

What are altcoins?

Cryptocurrencies based on technology similar to Bitcoin.

What makes Ether different from Bitcoin?

Ether supports programmable blockchain applications and smart contracts.

What is a smart contract and benefits?

A self-executing agreement coded directly onto a blockchain.

• automation,

• transparency,

• reduced intermediaries.

What are stablecoins?

Cryptocurrencies designed to maintain stable value by linking to another asset.

• fiat currencies,

• commodities,

• other assets.

What are asset backed stablecoins?

Supported by reserves such as:

• cash,

• Treasuries,

• gold,

• other assets.

What are algorithmic stablecoins?

Maintain price stability using:

• algorithms,

• token supply adjustments.

4 stablecoin benefits

Potentially useful for:

• payments,

• cross-border settlement,

• liquidity management,

• tokenized finance.

What is an asset-backed token?

A token that represents the ownership of a physical asset that does not exist on the blockchain and whose value is based on the underlying asset.

What are meme coins?

Cryptocurrencies created mainly for entertainment or internet culture popularity.

What are the two broad ways to invest in digital assets?

1. Direct investment on blockchain/exchanges

2. Indirect investment through ETFs, trusts, futures, hedge funds, or stocks

What is required for direct ownership of cryptocurrencies?

cryptocurrency wallet, which stores:

• Public keys → visible address for transactions

• Private keys → secret codes proving ownership

Loss of private keys = permanent loss of assets.

What is a centralised cryptocurrency exchange?

A privately operated exchange providing crypto trading platforms.

• High liquidity and trading volume

• User-friendly

• Faster execution

4 main advantages of centralised exchanges?

• Convenience

• Better liquidity

• Greater price transparency

• Greater trading volume

4 main disadvantages of centralised exchanges?

• Central point of failure

• Cyberattacks/hacks

• Custodial risk

• Regulatory uncertainty

What is a decentralized exchange (DEX)?

A distributed exchange operating without central control.

• Operate directly on blockchain

• No central operator

• Peer-to-peer trading

3 main advantage of decentralised exchanges?

• Harder to shut down

• No single point of failure

• Greater privacy

4 main disadvantage of decentralised exchanges?

• Difficult to regulate

• Potential illegal activity

• Smart contract vulnerabilities

• Lower investor protections

Common fraud types and descriptions?

Fraud Type	Description
Pump and dump	Artificially inflate prices then sell
Ponzi schemes	Old investors paid using new investor money
Scam ICOs	Fake token offerings
Market manipulation	Coordinated price movement
Wallet theft/phishing	Stolen private keys

What are cryptocurrency coin trusts?

OTC-traded trusts holding pools of cryptocurrencies.

3 main benefits of coin trusts?

• No wallet required

• Easier access

• Traditional brokerage access

2 main disadvantages of coin trusts?

• High fees

• Possible premiums/discounts to NAV

What is a cryptocurrency futures contract?

An agreement to buy/sell crypto at a future date and price.

• Usually cash-settled

• No physical crypto delivery

• Highly leveraged

3 main risks of cryptocurrency futures contract?

• Volatility

• Liquidity risk

• Leverage magnifies losses

How do cryptocurrency ETFs usually gain exposure?

• Futures

• Derivatives

• Cash instruments

3 main advantage of crypto ETFs?

• Easy access through brokerage account

• No wallet needed

• Familiar structure

4 main disadvantages of crypto ETFs?

• Tracking error

• Volatility

• Counterparty risk

• High expenses

What are cryptocurrency stocks?

publicly traded companies linked to crypto activities.

What strategies do crypto hedge funds use?

• Long-only

• Long/short

• Quantitative trading

• Multi-strategy

What are decentralized applications (dApps)?

Blockchain-based applications operating without central coordination.

Uses smart contracts for:

• Lending

• Borrowing

• Trading

• Settlement

• Payments

• Asset transfers

Claimed advantages of DeFi?

• Faster settlement

• Reduced intermediation

• Lower transaction costs

Current limitations of DeFi?

• Still immature

• Smart contract vulnerabilities

• Regulatory uncertainty

• Heavy speculation/leverage

Main sources of cryptocurrency investment risk?

• Price volatility

• Regulatory changes

• Fraud/criminal activity

• Technology risk

• Market sentiment

Main drivers of cryptocurrency prices?

• Market adoption

• Network effects

• Technological development

• Regulation

• Speculation

• Risk appetite