LM 7: Introduction to Digital Assets

Question 1

What are the 3 basic elements of a distributed ledger technology (DLT)? DPC

Answer 1

1. digital ledger
2. participant network
3. consensus mechanism to confirm new entries.

Question 2

What is a distributed ledger?

Answer 2

database that can be shared over a network among a potentially unlimited number of network participants (aka nodes).

Question 3

How do you add a new transaction entry to a ledger?

Answer 3

consensus must be reached among participants.

Question 4

What are the 2 parts to a consensus mechanism?

Answer 4

1. the new transaction is validated,
2. this decision is confirmed when network participants agree to accept a common version of the updated ledger.

Question 5

What is cryptography?

Answer 5

process of hiding or coding information so that only the person a message was intended for can read it.

Question 6

What is a blockchain?

Answer 6

type of digital ledger where information (e.g., ownership changes) is recorded sequentially in blocks that are linked (chained) together.

Question 7

What are the 6 steps to add a transaction to the blockchain? BBAVNT

Answer 7

1. Buyer & seller agree to the transaction
2. Block is created to record the transaction information & sent to all of the network’s nodes
3. Authorized members verify the new transaction’s details & identify any related previous transactions
4. Verified data is combined with data from previous transactions in a new block
5. New block is added to the ledger and, using a secure link (known as a hash), it is chained to other blocks containing transaction data
6. Transaction is considered complete and the new block becomes part of the updated ledger

Question 8

What are smart contracts?

Answer 8

contracts that execute automatically when specified terms are met.

Question 9

Why are consensus protocols needed on blockchains?

Answer 9

needed to prevent network participants from acting maliciously to create false records.

Question 10

What are the 2 types of consensus protocols?

Answer 10

1. Proof of Work (PoW)
2. Proof of Stake (PoS).

Question 11

What is proof of work vs proof of stake?

Answer 11

Proof of work: requires miners to solve cryptographic puzzles.

Proof of stake: validators are chosen based on the number of staked coins they have.

Question 12

What is the difference between permissionless networks and permissioned networks?

Answer 12

1. Permissionless: the design of the network is open for anyone to participate
2. Permissioned: limited only to designated participants

Question 13

What are the 2 types of digital assets?

Answer 13

1. cryptocurrencies
2. tokens

Question 14

What is tokenization?

Answer 14

process of representing ownership rights to physical assets on a distributed ledger.

Question 15

What are non-fungible tokens (NFTs)?

Answer 15

blockchain technology to link digital assets to certificates of authenticity

Question 16

What are security tokens?

Answer 16

tokens represent digital ownership rights of publicly traded securities.

Question 17

What are initial coin offering (ICO)?

Answer 17

when companies raise capital by issuing digital tokens

Question 18

What are utility tokens?

Answer 18

tokens used to pay for services within a specific network.

Question 19

What are governance tokens?

Answer 19

tokens that allow voting rights to members.

Question 20

What are alt coins?

Answer 20

cryptocurrencies other than Bitcoin (BTC).

Question 21

What are stablecoins?

Answer 21

a type of cryptocurrency that is designed to maintain a stable value relative to a specific asset or currency. Stablecoins are typically pegged to the value of a fiat currency, such as the U.S. dollar, or a commodity, such as gold.

Question 22

What are meme coins?

Answer 22

coins created purely for entertainment purposes and lack any serious basis like Dodgecoin

Question 23

What is the difference between a centralized exchange and a decentralized exchange?

Answer 23

centralized exchange: controlled by a central authority that manages the exchange’s operations.

decentralized exchanges: operating on a decentralized platform that does not rely on a central authority

Question 24

What are 5 forms of indirect digital asset investment forms?

Answer 24

1. Cryptocurrency coin trusts
2. Cryptocurrency futures contracts
3. Cryptocurrency exchange-traded funds
4. Cryptocurrency stocks
5. Hedge funds investing in cryptocurrencies