Chapter 8 - Crypto

Question 1

What is a smart contract

Answer 1

A protocol that enforces a contract

They ensure distributed ledger technology works

Question 2

What is distributed ledger technology?

Answer 2

Allows recording of data in multiple places at the same time

Question 3

What is the main platform for smart contracts?

Answer 3

Ethereum

Question 4

What is an ICO?

Answer 4

An initial coin offering

Crypto equivalent of an IPO

Question 5

What does an ICO allow a company to do?

Answer 5

Raise capital quickly instead of taking the company public

Question 6

How does an ICO work?

Answer 6

Company mints a token which it then sells to investors.

These tokens do not grant ownership

Question 7

Why are ICOs risky?

Answer 7

The value of the coin is entirely speculative

Question 8

Why did ICOs decline post 2018?

Answer 8

The SEC began to investigate ICOs which killed market confidence

Question 9

What is an IDO?

Answer 9

Initial Dex Offering

Similar to an ICO but done on an decentralised exchange

as opposed to on a recognised crypto exchange

Question 10

How do IDOs differ from ICOs?

Answer 10

1) Listed on a decentralised exchange
2) Do not require a high fee
3) Do not have to wait for approval

Cost effective way of providing liquidity

Question 11

What is a STO?

Answer 11

Security Token Offering

• Tokens created
• Can be used to trade real financial assets
• More compliant as they are regulated as securities

Question 12

Why did STOs gain popularity?

Answer 12

Following the death of ICOs a regulated offering proved popular

Question 13

Even though STOs are growing, why are they still unattractive to investors?

Answer 13

A lack of publicly available data.

Question 14

What is a crypto exchange?

Answer 14

An exchange to buy, sell and trade cryptocurrencies

Question 15

Who do crypto exchanges appeal to?

Answer 15

Less tech-savvy individuals who don’t wish to mine their own crypto

Question 16

How can crypto exchanges vary?

Answer 16

1) Number / range of currencies on offer
2) Frendliness - e.g - Coinbase is friendly and binance is for experienced
3) Opaquness - E.g. binance it is unclear where they are even headquartered.

Question 17

How does regulation of crypto and crypto exchanges vary

Answer 17

1) some places like el salvador have accepted it
2) Switzerland have approved two crypto focused banks
3) China have outright banned it

Question 18

What is bitlicense?

Answer 18

1) A licence issues in New york which is required for any business engaged related to virtual currencies

Question 19

How have the EU regulated crypto?

Answer 19

“Markets in crypto assets regulation”

• Aims to trace crypto transfers
• Prevent money laundering

Question 20

How are Hong Kong regulating cryptocurrencies?

Answer 20

Issues a paper setting out a framework seeking to end the unregulated status of crypto.

Question 21

Other than governments who have tried to regulate the crypto industry?

Answer 21

Self-regulators

1) CryptoUK - Advocatres self regulation and greater transparency
2) Crypto rating council - rates an asset 1-5 to determine if it is a security

Question 22

Give 3 examples of services for institutional crypto trading:

Answer 22

1) Gemini Prime - premium esrvice for OTC trading, algo orders and margin. (named after prime hedge fund services)
2) LMAX is a london MTF
3) State street partnered with Gemini to report consolidating of assets

Question 23

As Crypto does not offer yield, how have some tried to solve this?

Answer 23

DeFi - Securities lending for renumeration

Known as yield farming

Question 24

How is Defi lending different from traditional securities lending

(what are the shortcomings)

Answer 24

1) UNregulated exchanges
2) Underlying code is unaudited - could have vulnerabilities
3) 82% of crypto theft has taken place here.
4) No KYC
5) Do not need to provide a reason for borrowing

Question 25

Why are the yields on offer a De-fi schemes too good to be true?

Answer 25

They often offer double digit yields which cannot actually be achieved.

Question 26

What is an NFT?

Answer 26

• Digital ownership certificate
• Encoded by safe software as crypto
• Used to buy and sell digital artwork

exploded in 2021 to 40bil, lost 50% 1 year later.