Digital Assets FAQs

List of FAQs for Cryptocurrencies and Digital Assets: Essential Guide

What is a Crypto DEX?

A decentralised exchange (DEX) is a peer-to-peer marketplace where users can trade cryptocurrencies without the involvement of an intermediary party. DEXs operate on a decentralised network, such as a blockchain, enabling users to maintain self-custody of their assets by keeping sole control of their private keys

Unlike centralised exchanges (CEXs), DEXs do not require a trusted third party or intermediary to facilitate the exchange of crypto assets. This attribute aligns with one of the core tenets of cryptocurrency: the disintermediation of finance

There are several benefits to using a DEX:

• Security: By allowing users to retain control of their private keys, the risk of losing funds to hacks or security breaches at centralised exchanges is greatly reduced.
• Privacy: Since decentralised exchanges do not rely on a central authority, users can trade without disclosing personal information, enabling a higher level of privacy.
• Censorship resistance: Decentralised exchanges are less susceptible to regulation or external interference, as they operate on distributed networks without a single point of control.
• Blockchain compatibility: Many DEXs are built on top of blockchains, making transactions and trades compatible with the respective blockchain's smart contracts and token standards.

However, DEXs do have some limitations as well:

• Lower liquidity: As DEXs are still relatively new, they often experience lower trading volumes and liquidity compared to centralised exchanges, which can result in wide bid-ask spreads.
• Slower transactions: Due to their decentralised nature, transactions on DEXs can sometimes take longer to execute compared to centralised exchanges.
• Limited functionality: DEXs may not currently offer the same advanced trading tools and features available on some centralised platforms.

A decentralised exchange (DEX) is a cryptocurrency trading platform that enables peer-to-peer transactions without the need for a central authority or intermediary. While DEXs provide increased security, privacy, and censorship resistance compared to centralised exchanges, they may also have certain limitations in terms of liquidity, transaction speeds, and trading features.

What is a CEX?

A Centralised Exchange (CEX) is a platform that facilitates the trading of cryptocurrencies and digital assets. These exchanges act as intermediaries between buyers and sellers, using a centralised order book to match trades. CEXs are similar to traditional online brokerages in their business model, making them popular among both new and seasoned crypto investors .

CEXs are called "centralised" because they are operated and controlled by a single entity. This central authority is responsible for overseeing the platform's operations and managing user assets. In contrast to decentralised exchanges that enable peer-to-peer trading, centralised exchanges require users to trust the platform with their funds and personal information .

Some of the advantages of using a CEX include a wider range of trading pairs, access to advanced trading tools, and potentially higher liquidity. Many centralised exchanges also support fiat currency transactions, allowing users to purchase cryptocurrencies using their local currency. This feature is particularly beneficial for newcomers to the crypto market who may not yet own any digital assets.

However, there are some drawbacks to using a CEX as well. One notable concern is the potential for security breaches and hacks. Centralised platforms can be attractive targets for cybercriminals due to the large amounts of user information and assets stored within the exchange. Users must also rely on the transparency and honesty of the platform when it comes to reporting trading volumes and preventing market manipulation.

In summary, centralised exchanges (CEXs) are platforms that enable cryptocurrency trading through a central authority. They offer a range of features that can be appealing to investors, but users should be mindful of the potential risks associated with entrusting their assets to a single entity.

What are the benefits of using a DEX over CEX?

When considering cryptocurrency trading, one must decide between using a decentralised exchange (DEX) or a centralised exchange (CEX). There are several benefits to using a DEX over a CEX:

Firstly, DEXs offer increased security and privacy. Since they allow users to trade directly from their crypto wallets, individuals maintain control of their assets and private keys throughout the trading process. This removes the need to entrust your funds to a centralised custodial wallet, mitigating the risk of theft or loss due to exchange hacks.

Additionally, DEXs promote greater transparency. These exchanges typically operate on blockchain platforms, which enables all transactions to be publicly visible and auditable. This level of transparency ensures that users can trust the trading process, as it eliminates the possibility of manipulation or dishonest practices.

Another advantage of DEXs is that they provide increased accessibility. They are open to anyone with an internet connection and a compatible wallet, regardless of location or citizenship. This is particularly beneficial for individuals in countries with strict regulations or limited access to centralised exchanges.

Furthermore, DEXs have reduced censorship and regulatory risks. Because they are not operated by a centralised entity, it is more difficult for governments or third parties to intervene in their operation. This can be crucial for traders who wish to protect their assets from potential restrictions or seizure.

Lastly, DEXs support a wider variety of cryptocurrencies and tokens. Centralised exchanges often have a limited selection of assets, whereas DEXs are more likely to offer a diverse range, including lesser-known or newly launched tokens.

In summary, decentralised exchanges offer several benefits that can make them an attractive option for traders. These advantages include increased security, privacy, transparency, accessibility, reduced censorship risks, and wider asset variety. However, it is essential for individuals to weigh these benefits against their specific needs and preferences when deciding which type of exchange is best suited for them.

What are the main differences between cryptocurrencies and digital assets?

Cryptocurrencies and digital assets are often used interchangeably, but they have distinct characteristics. In essence, cryptocurrencies are a type of digital asset, but not all digital assets are cryptocurrencies. 

Decentralisation: Cryptocurrencies are based on blockchain technology, which is a decentralised digital ledger. This means that cryptocurrencies are not controlled by a single entity, such as a government or a central bank. On the other hand, digital assets can be either decentralised or centralised, with some being backed by an issuing authority.

Issuance: Another significant difference between cryptocurrencies and digital assets is how they are issued. Cryptocurrencies are usually created through a process called mining or staking, and the supply is often limited to control inflation. Digital assets, however, can be created and controlled by centralised entities like banks or governments.

Utility and use cases: Cryptocurrencies are primarily used as a medium of exchange, store of value, or unit of account, similar to traditional currencies. However, they are not yet widely accepted for everyday transactions. Digital assets, on the other hand, can encompass a broader range of assets, such as non-fungible tokens (NFTs), which represent unique digital items like artwork, digital identities, and other digital collectibles.

Regulation and taxation: Cryptocurrencies are subject to different regulations and taxation rules than traditional digital assets. For example, in the United States, the IRS taxes digital currencies as money and income, while cryptocurrencies are taxed as property. This distinction can affect investors' tax liabilities and legal obligations.

While cryptocurrencies and digital assets share some similarities, their differences in decentralisation, issuance, utility, and regulation set them apart. Understanding these distinctions can help investors and users make informed choices when dealing with these emerging technologies.

How can I safely store my digital assets?

Storing digital assets securely is crucial to protect them from theft or loss. There are several options available for securely storing digital assets like Bitcoin, Ethereum, and other cryptocurrencies. Each option has its advantages and drawbacks, but some methods are generally considered safer than others.

One commonly recommended method for secure storage is using a hardware wallet. Hardware wallets are physical devices that keep digital assets offline, reducing the risk of hacking or unauthorised access. They can securely generate and store private keys, allowing users to sign transactions without exposing their private keys to potentially compromised online environments. Examples of popular hardware wallets include Trezor and Ledger.

Another method for safe storage is using a cold wallet. Cold wallets are digital asset storage solutions that are not connected to the internet. This can involve keeping your private keys on an offline computer or even on paper. Paper wallets can be generated using specialised software that creates unique QR codes representing the public and private keys. However, it is essential to store the paper wallet in a secure location to prevent physical theft or damage.

Digital asset management (DAM) systems can also help ensure security by controlling access to digital files and their metadata through centralised management. Companies frequently adopt shared network drives or cloud folder services, but using a dedicated DAM solution may offer enhanced security features.

When storing digital assets online, it's crucial to choose reputable and secure wallet providers and exchanges. Look for services that offer two-factor authentication (2FA), which adds an extra layer of security to the login process. Also, it is recommended to regularly withdraw a portion of your digital assets to an offline or hardware wallet to minimize the risk associated with holding assets on an online platform.

Finally, it's essential to maintain secure personal habits. Keep your private keys confidential, only share them with trusted individuals if necessary, and ensure the devices used for managing digital assets are up-to-date with the latest security patches. 

What is Total Value Locked?

Total value locked (TVL) is a crucial metric in the realm of decentralized finance (DeFi). It represents the overall value of crypto assets deposited in a DeFi protocol or across DeFi protocols in general. TVL serves as an indicator of the demand for a DeFi project, demonstrating how much market value is currently being staked in a protocol.

TVL is not a measure of outstanding loans; rather, it signifies the total amount of underlying assets secured by a specific application. As an essential measure for evaluating the success and growth of DeFi projects, TVL can give investors an idea of a project's stability and potential.

One reason TVL is so important is that it highlights the confidence that users have in a project by illustrating the amount of assets they are willing to lock up. This also provides insights into the liquidity available within a DeFi protocol, which is vital for enabling smooth and efficient transactions.

Keep in mind that TVL is influenced by multiple factors, including the value of the underlying assets, the number of users participating, and the interest rates offered by the DeFi protocol. Therefore, when assessing TVL, it is essential to consider these factors together to form a comprehensive view of a project's overall health.

Understanding TVL is a fundamental part of evaluating DeFi protocols and their potential. By monitoring this metric, investors can gain valuable insights into which projects are attracting interest and which might be best suited for their investment strategies.

How does Bitcoin Mining work?

Bitcoin mining is the process by which new bitcoins are entered into circulation and is a crucial component of the blockchain ledger. Miners help validate transactions and maintain the security of the Bitcoin network.

Firstly, miners take the data from the previous block, also known as the "block header," which contains critical information such as the timestamp of the block and the hash of the previous block data. Miners then proceed to solve complex mathematical puzzles using this data and their computing power to find a solution, known as the "proof of work". This process requires a significant amount of computer resources, so miners often join together to form mining pools, pooling their resources and sharing the rewards.

Once a miner finds the correct solution, they can broadcast their result to the rest of the network, and if it is accepted, the new block is added to the blockchain. This process also involves incentivizing miners with a block reward, which is currently 6.25 bitcoins per block mined. This reward, along with the transaction fees from the transactions included in the block, encourages miners to continue participating in the mining process.

Interestingly, most cryptocurrencies have a hard limit on the number of coins that can exist. For example, Bitcoin has a cap of 21 million. This scarcity factor plays a critical role in the value proposition of cryptocurrencies like Bitcoin.

Bitcoin mining involves validating new transactions, maintaining the security of the network, and releasing new Bitcoins into circulation. It requires miners to solve complex mathematical puzzles in a resource-intensive and decentralized manner, helping cryptocurrencies maintain their core features and remain sustainable.

What is hashrate in Bitcoin Mining?

Hashrate refers to the overall measurement of computational power utilised by miners in the Bitcoin network. As miners work to verify transactions and create new blocks, they perform complex mathematical calculations. The speed at which these calculations are performed is expressed as the hashrate.

In the Bitcoin network, mining devices encrypt data into hashes and attempt to match them with a nonce, an encrypted piece of data in the new block. When miners find a matching encrypted hash, they successfully solve the block and add it to the blockchain. The hashrate essentially reflects the combined efforts of all miners in their quest to solve blocks and secure the network.

The total hashrate in the Bitcoin network is typically measured in hashes per second (h/s) and can vary over time. Factors such as the introduction of more efficient mining hardware, changes in mining difficulty, and fluctuations in Bitcoin prices can all impact the network's hashrate. In recent years, we have seen the Bitcoin network's hashrate reach record high levels, exemplifying the increased competition and growing participation in the mining ecosystem.

A higher hashrate contributes to the Bitcoin network's overall security, as it makes it more difficult for an individual or group to take control of the majority of the mining power. This, in turn, helps prevent the risk of double-spending attacks and maintains trust in the decentralised system.

The hashrate is a crucial metric for understanding the overall performance and security of the Bitcoin mining network. The higher the total hashrate, the more mining power is at work to solve blocks and secure the network from potential attacks. 

What is a Digital Wallet?

A digital wallet is a secure and convenient method for storing, managing, and using various payment options, such as credit and debit cards. Using a digital wallet allows individuals to make purchases with their smartphones or smartwatches, ultimately reducing the need for physical cards or cash. This innovative technology has gained popularity due to its ease of use, secure transactions, and compatibility with many devices.

Digital wallets leverage smartphone capabilities to store payment information safely, with added security features such as encryption and biometrics. These wallets ensure that sensitive card information remains protected, as losing a physical wallet can expose the individual's card details.

Although digital wallets primarily focus on securely storing payment options, they are now expanding into virtual currencies and cryptocurrencies. These digital assets leverage blockchain technology for added security, creating a decentralized and transparent system for transactions.

A digital wallet is a modern solution for managing payment options, enabling users to conduct transactions securely and conveniently. The adoption of digital wallets is likely to increase as they evolve to accommodate cryptocurrencies and other digital assets, making them an essential tool for the digital age.

What are different types of Custody for Digital Assets?

Digital asset custody refers to the secure storage and management of cryptocurrencies and other digital assets. The need for digital asset custody has grown in tandem with the increasing number of digital asset investors and users. The types of custody services vary, catering to the diverse preferences and risk tolerances of investors. The main types of custody for digital assets include self-custody, third-party custody, and institutional custody.

Self-custody involves investors storing and managing their digital assets through personal wallets, either in the form of software or hardware. This method allows investors to have full control over their assets, without relying on external custodians. It is considered a suitable option for those who are comfortable with the complexities of managing private keys and are willing to take on the security risks associated with self-custody.

Third-party custody entails entrusting the storage and management of digital assets to a service provider, typically a cryptocurrency wallet. These providers offer various levels of security measures, such as multi-signature wallets and cold storage solutions, to protect users' assets from theft or hacking incidents. A notable example of such a custodial service is Fireblocks, which helps investors securely store and manage their digital assets.

Institutional custody is designed for large-scale investors, such as hedge funds, family offices, and asset management firms like Samara Alpha Management, seeking a higher level of security and regulatory compliance compared to the aforementioned custody types.  Institutional custodians often provide additional services, including trade execution, fund administration, and reporting. According to a market overview by Deloitte, the digital assets market's estimated value reached $239 billion in 2020, highlighting the growing need for such institutional custody services.

The choice of digital asset custody depends on the investor's risk profile, security requirements, and preferences. Each type of custody comes with its unique advantages and trade-offs, and investors must carefully evaluate their options before deciding on an optimal custody solution for their digital assets.

What is the Blockchain?

Blockchain is a revolutionary technology that has attracted significant attention in the past decade. It is a distributed, cryptographically-secure database structure that enables network participants to establish a trusted and immutable record of transactional data without the need for intermediaries .

The fundamental concept of blockchain revolves around the growing set of records, which are grouped into 'blocks' and linked together using cryptography. This ensures the security and integrity of the data stored within the blockchain . The technology isn't limited to just transaction settlement; it also supports the execution of various functions such as smart contracts .

One key aspect that sets blockchain apart is its decentralised nature, which eliminates the need for a central authority to control the network. This feature enhances the security and resilience of the system, as it is harder for malicious actors to compromise the data or corrupt the network.

Moreover, blockchain technology is widely adopted in various industries, including finance, supply chain management, and healthcare. It primarily facilitates the creation and management of cryptocurrencies and digital assets, such as tokens that can represent various functions within a platform or ecosystem . Furthermore, blockchain allows for greater transparency in transactions and data storage, promoting trust and accountability within the network.

Blockchain is an innovative and secure database structure that offers numerous applications across multiple sectors. By enabling the creation and management of cryptocurrencies and digital assets, it paves the way for a more decentralised and trustless environment in the digital landscape.