Monetary systems around the world have faced a rather large change in the form of digital assets. In barely a decade, virtual currencies have grown and become embraced around the world in many forms. Here we take a look at what digital assets are and how they are being used on a global scale.
Foundational Concepts of Digital Assets
To understand digital assets it is important to understand a range of foundational concepts and terms such as blockchain, DLT, DeFi, Decentralised Exchanges, Staking, and more. The information in this blog will only provide a brief overview of this information. For more details you can download the full paper on Digital Assets: A Window Into the New Economy, by our Founder John Marcarian.
In very simple terms a blockchain is an online record of transactions. This could include money, exchange of goods, or exchange of information.
Each transaction creates a record that is gathered with further transaction records into blocks. These blocks are linked together with cryptography.
Blockchain stores these records across many locations at the same time. This means that if any of the information in a blockchain is changed, everyone involved in the network has to consent to the changes. Since the information can only be changed if every record is changed at the same time, it is difficult to hack into, and therefore potentially more secure, transparent, and cost effective to hold than traditional databases.
The online record of the data and transactions that comprise blockchains is typically known as a distributed ledger. Any technology that utilises this type of system is collectively known as DLT.
Blockchain is one form of DLT.
As we are only in the early stages of DLT we are still discovering all the potential applications that it could be used for.
Decentralised Finance (DeFi)
DeFi is, simply put, a term that covers a large range of applications within the public blockchain world that are distributing traditional economies. It refers to the financial applications that utilise blockchain technologies. This is in contrast to the centralised financial markets where all the risks and control are with the central system, such as the banks and financial institutions.
Smart contracts are contracts that are automated in programming languages so that they are accessible by anyone using the internet. They allow individuals to engage in financial applications without relying on an intermediary.
DeFi now provides a fully functioning economy that is accessible to users across the globe via the internet. This allows individuals and businesses to buy and sell, lend and borrow, and invest with digital currencies.
One of the central functions of DeFi is decentralised exchanges. This means that users can exchange their assets without needing to rely on a centralised system or intermediary. Two examples of decentralised exchanges are the UniSwap and the Pancake Swap.
The Uniswap allows users to swap their tokens even if there is not a user on the other side of the trade
The Pancake Swap is essentially a newer alternative option to the Uniswap, with a very similar user experience. It is driven by strong marketing strategy that has rapidly built community engagement and dedicated followers.
Binance Smart Chain
In September 2020 a blockchain service was introduced that allows developers to use smart contracts in order to build their own decentralised apps. This is Binance Smart Chain.
It is one example of how DLT is rapidly expanding and increasing in functionality as the world continues to embrace this technology.
A wallet is an app that functions essentially like a virtual wallet for your virtual currency. While you don’t have to have a wallet, it helps keep all your digital assets in one place. Just like a real wallet with physical cash.
Staking is where the owner of cryptocurrencies locks their holdings into their crypto wallet in order to receive rewards.
While blockchains typically rely on the process of mining to add new blocks to the blockchain, staking involves locking up your cryptocurrency coins so that they can be randomly selected to create a block. Larger stakeholders typically have a higher chance of being selected as the next block validator.
Different blockchain networks then reward staking accounts in different ways and using different factors.
Some coin holders also pool their resources in order to create a staking pool and increase their chances of being selected for validating blocks and rewards.
To help reduce volatility around cryptocurrencies, stablecoins offer digital assets that are tied to a stable, physical asset, such as gold or fiat currency. This keeps the value more stable.
To The Future
With rapid growth occurring in digital assets, this complex world gives users around the globe the tools to partake in a decentralised system of finance. We are still watching to see how this economic system will continue to be shaped and how it will influence the economy around it. While there are many potential advantages to the decentralised system, there are also many issues to be addressed.
One of the issues is how these digital assets are taxed. We consider this issue in the blog on International Taxation of Digital Asset Transactions.
Digital Assets: A Window Into the New Economy has been written by our Founder, John Marcarian
John is an Australian Chartered Accountant with over 25 years of experience.
John has a deep understanding of digital assets and the Fourth Industrial Revolution presently underway around the world in the area of blockchain and digital assets.
A recognised tax specialist in digital assets, John has a qualification from the MIT Sloan School of Management in BlockChain technologies.
He has contributed tax expertise to a specialist US publication on international tax and digital assets.
He works regularly with companies issuing tokens and other forms of digital assets. This unique blend of skills gives John a practical day to day knowledge of the business challenges faced by entrepreneurs in the digital asset market.