Introduction to Digital Assets

A type of database spread across multiple sites, countries, or institutions. Records are stored one after the other in a continuous ledger.

A system used in blockchain technologies to achieve necessary agreement on a single data value or a single state of the network among distributed processes or multi-agent systems, such as cryptocurrencies.

A consensus mechanism that requires a participant node to prove that work of some quantity has been expended towards solving a computationally expensive problem.

A type of consensus mechanism where a person can mine or validate block transactions according to how many coins they hold, promoting mining power based on the percentage of coins held by a miner.

Permissionless networks allow anyone to join and participate in the network while permissioned networks restrict the participants and what each participant can do within the network.

Self-executing contracts with the terms of the agreement directly written into lines of code, which automatically execute when conditions are met.

Assets that exist in a digital format and come with the right of use. They can be cryptocurrencies, tokens, or other types of digital formats.

Unlike traditional financial assets, most digital assets do not have inherent value based on underlying assets or expected cash flows. Their value is driven by market expectations of future price appreciation and scarcity.

Digital assets use decentralized digital ledgers for transaction validation, contrasting with traditional assets that use centralized ledgers maintained by financial intermediaries.

Digital assets, particularly cryptocurrencies, are used as a medium of exchange in certain online transactions and within the Web3 ecosystem, unlike traditional assets which are transacted and converted into widely accepted fiat currencies.

The legal and regulatory environment for digital assets is less developed and more ambiguous compared to traditional financial assets, leading to higher speculative risks and less investor protection.

Investments in digital assets can be direct, using cryptocurrency wallets, or indirect, through exchange-traded products and hedge funds. The exchanges facilitating these investments can be centralized or decentralized.

Direct investments in digital assets occur on digital exchanges with transactions recorded on the blockchain. This includes trading cryptocurrencies directly through wallets and exchanges. Risks include fraud, market manipulation, and the potential loss of access to digital wallets.

Indirect investments do not involve direct ownership of digital assets but provide exposure through other investment vehicles. Examples include cryptocurrency ETFs, futures, and coin trusts, which allow investors to gain exposure to digital assets without the complexities of direct management.

Centralized exchanges are controlled by a single entity and offer liquidity and price transparency but are susceptible to security risks. Decentralized exchanges operate on a distributed platform without central control, offering enhanced security but less regulatory oversight.

These investments use digital tokens to represent ownership of non-digital assets, such as real estate or gold. This method increases liquidity and transparency but is often regulated as securities.

Digital assets like cryptocurrencies are subject to high volatility, regulatory uncertainty, and risks associated with fraud and market manipulation. Their value is primarily driven by market demand and limited supply, rather than underlying cash flows.

Cryptocurrencies have shown high returns since their inception, characterized by rapid price appreciation. However, these returns come with high risk and volatility, making them speculative investments.

Due to their low correlation with traditional asset classes, cryptocurrencies may offer diversification benefits in a broader investment portfolio. However, the extent of these benefits can vary as market dynamics and institutional participation evolve.