05 Blockchain 04 Flashcards
What are wallets?
Wallets are tools to create and store the keys and addresses
* create a seed phrase of typically 12 or more words used to set up and access the wallet
* From this one seed, infinite number of addresses can be generated
–>all can be accessed and backup by the single seed phrase
What kin of Wallets exist?
Hot Wallets: are connected to the internet and readily available for trading
Cold Wallets: are offllince and suited for long-term storage of funds
Name the two types of exchanges?
Centralized exhanges: operate similar to exchanges of other finanical assets
Decentralized exchanges: are new to cryptocurrencies
–>Transaction on the blokcchian can be used to transfer funds of the same currency between parties.
Explain LImit Order Book Trading (Centralized Exchanges)
–>centralized exchanges typically operates a central limit order book:
* Traders can submit limit and market orders
* The matching enging then matches buy and sell orders
What do users need for centralized exchange?
–>to trade the users need an account at the exchange
* all funds are kept in the exchange´s own wallet, from the blockchain´s perspective the coins are still owned by the exchange
* Only deposits and withdrawals of cryptocurrencies are recorded on the blockchain, and actually moves coins to other addresses
Short Description of decenteralized exchanges
decentralized exchanges (DEX) is a type of on-blockchain exchange that does not require an intermediary but instead relies on smart contracts
Description of Constant Product Market Making (CPMM)?
Deecentralized Exchanges
= trading takes place in liquidity pools where two tokens can be exchanged with each other
* Liquidity provider (LP) add both tokens to the pool in the same ration as tokens are already in the pool
* in return, LP´s receive liquidity tokens that reflect the LP´s share in the pool and can be exchanged for both coins in their share
How does a trade exchanges Tokens in CPMM?
Traders wanting to exchange tokens, deposit one token in the pool and receive the other token in return
–>The price is implied by the current raio of the two tokens in the pool
- LP´s are rewarded by receiving transaction fees
What types of Loans exists in Lending markets for cryptocurrencies?
- Collateralized Loans
- Flash Loans
Describe Collaterialized Loans
–>Similar to bank loans
* Typical application would be to borrow a given amount in a stablecoin and put up another cryptocurrency as collateral
–>Since cryptos are so volatile, the loans have to be overcollateralized
describe Flash loans?
Flash Loans are uncollateralized DeFi Loans
* Funds are borrowed, used, and returned within the same transaction via smart contracts
* If the loan is not repaid within the same transaction, the whole transation is reversed
–>Liquidity is provided via pools similar to DEX (with one token)
—>Flas loans are used for exploiting arbitragre opportunitites or attacking dApps
Describe CBDC?
= DB digital currencies represent a claim on a central bank
What are Retail CBDC?
Retail CBDC is accessible to everyone
* Single-tier retail CBDC: CB directly handles retail payments
* Two-tier CBDC (hybrid or intermediated): Intermediaries handle retail payments
What are whole-sale CBDC?
In Wholesale CBDB, only a few isntitutions have access and use it for settlement
What types of Retail CBDC are there?
Token-based CBDC: are anonymous, may use blockchains (not open or public), and are closer to cryptocurrencies (and pyhsical cash)
Account-based CBDC: users are identifiable and have an account with the CB
Pros of Central Bankd Digital Currencies (CBDC)?
Pros:
* provide new and better ways to implement monetary policy
* can be used for efficient fiscal transfers
* faciliate improved anti money laundering processes
* might be attractive and competitive with other payment systems
* Default risk of CBs is practically zero
* might make cross-border payments more efficient
* Retail implementations decrease the need for commercial bank intermediation
Cons of Central Bankd Digital Currencies (CBDC)?
Cons:
*effects on financial stability still not fully understood
* Privacy concerns compared to physical cash and
* more centralization compared to established banking system
* Security might be an issue if the CB is hacked
* Retail implementations decrease the need for commercial bank intermediation
Further Blockchains Applications?
- Clearing and Settlement (trade)
- Insurance
- Energy markets
- Compliance
- Commerce and Trade
- Logistics and Supply Chain Management
- Healtcare
What do Mixers do?
Mixers pool together funds from multiple sources over some time and then split them acoss multiple addresses at random times
–>They are used to obscure fund flows and to increase anonymity
* can be intermediate mixing steps of pooling and distributing
* operators keep a small fee
* are frequently used for criminal activity
Things to conisder with centralized exchanges?
- are convenient and fast, but introduce a single point of failure and require trust in the exchange
- severall centralized exchanges allow user to buy cryptocurrnecies with fiat currency (contracy to decentralized exchanges)
- several have been shown to report fake volumne to appear more trustworthy
What are the pros of using centralized exchanges?
–>simplifies the process, increases speed, and reduces blockchain congestion and fees
What is the computing layer within Ethereum?
The computing layer is a virtual machine (EVM), which is a Turing complete machine that can execute loops and run all sorts of programs
