84. Blockchain Ownership & Distributed Ledgers

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Ownership Rights and Tokens

• Tokens represent ownership rights to physical assets on a blockchain or distributed ledger technology.
• Smart contracts are computer programs that execute contracts based on pre-agreed upon conditions.

Stablecoins

• Stablecoins maintain price stability by linking their value to a collateralized basket of assets.
• Stablecoins are not designed to be exchanged for fiat currency.
• Stablecoins do not have legal and regulatory backing.

Distributed Ledger Technology

• A distributed ledger is a shared copy of a database.
• Consensus mechanisms determine how new entries are added to the ledger.
• The participation network determines who can perform network functions.
• Proof of Work (PoW) and Proof of Stake (PoS) are consensus protocols for adding blocks to the chain.
• PoW requires solving a complex algorithm to validate and add blocks, earning cryptocurrency.
• PoS requires a validator to verify transactions with a majority of validators attesting to the block's validity.

Initial Coin Offering (ICO)

• An ICO is a sale of cryptocurrency to investors.
• In an ICO investors exchange cash or another cryptocurrency for cryptocurrency.

Decentralized Exchanges

• Centralized exchanges are popular but more vulnerable to attacks.
• Decentralized exchanges lack a central control point, making them difficult to regulate.
• Decentralized exchanges can remain operational even if one computer is attacked.

Value of Digital Assets

• The value of digital assets comes from anticipated price appreciation and blockchain features.
• Digital assets do not typically generate cash flow like interest or dividend income.

Asset-Backed Tokens

• Asset-backed tokens represent ownership of physical assets.
• They can provide more liquidity for higher-priced assets by allowing fractional ownership.
• Tokens allow immutable ownership records and more transaction transparency.

Digital Assets as an Investment Class

• It is inconclusive whether digital assets provide diversification benefits.
• They are a new, highly speculative asset class with high volatility and returns but without legal protections.

Cryptocurrency Investment Vehicles

• Cryptocurrency coin trusts directly invest in cryptocurrencies.
• Cryptocurrency ETFs attempt to mimic returns using cash or derivatives.
• Cryptocurrency futures contracts are based on cryptocurrency prices and are cash-settled.

Cryptocurrency Prices

• Cryptocurrency prices are influenced by market adoption, network effects, technological advancement, regulatory development, speculation, and appetite for market risk.
• Cryptocurrency prices are NOT influenced by projected cash flows.

Initial Coin Offerings (ICOs) vs. Initial Public Offerings (IPOs)

• ICOs typically have lower issuance costs compared to regulated IPOs.
• ICOs have longer capital-raising periods.
• ICOs usually do not have voting rights.

Features of Digital Assets

• Transactions for digital assets are usually recorded on permissionless blockchain networks.
• Digital assets are rarely used as a direct medium of exchange due to transaction costs.
• Legal and regulatory frameworks for digital assets are still evolving.

Risks of Investing in Cryptocurrencies

• "Whales" manipulate the price of smaller cryptocurrencies.
• Major risks include fraud (pump and dump schemes, market manipulation, theft) and loss of access (loss of passkey).

Tokenization

• Tokenization maintains ownership records for physical assets on a distributed ledger.
• Blockchain is a subcategory of distributed ledgers.
• Smart contracts are computerized agreements that automatically carry out actions based on defined conditions.