Virtually Everything | Episode 8 | From Blockchain Basics to Crypto Complexities: A Brief Guide to Virtual Assets

In the final episode in the first series of the Virtually Everything podcast, hosts Lucy Nash and Vyasna Mahadevey are re-joined by William Deeb to delve into the intricacies of certain types of virtual assets, and de-mystify other key terms frequently used in this sector.

This episode of Virtually Everything provides a comprehensive introduction to blockchain and distributed ledger technology (DLT), unpacking its key features and applications. Blockchain is defined as a distributed digital ledger of cryptographically signed transactions, grouped into tamper-resistant blocks that operate within a peer-to-peer network. DLT is characterised by an append-only ledger, cryptographic security ensuring data integrity in trustless environments, shared transparency across participants, and enhanced security through distributed nodes.

The discussion moves on to consensus mechanisms, which are vital for validating transactions and preventing tampering. Two primary mechanisms are explored: Proof of Work (PoW) and Proof of Stake (PoS). PoW relies on computational power to solve complex problems, offering ease of verification and robust security but posing challenges like high energy consumption and limited scalability. PoS, on the other hand, randomly selects validators based on their network stake, providing energy efficiency and scalability while raising concerns about validator influence and philosophical debates within the blockchain community.

Cryptocurrency wallets and keys are another focus area. Wallets come in two main types: non-custodial wallets like MetaMask, where users own their keys, and custodial wallets, where third parties such as exchanges hold the keys. Wallets can also be categorised by their connectivity: hot wallets remain online and are vulnerable to security breaches, cold wallets stay offline and offer higher security at the risk of device loss, and warm wallets keep keys online but require human intervention for transactions.

The episode also delves into tokens, smart contracts, and tokenisation. Tokens represent units of value on a blockchain, while smart contracts are codified agreements that automatically execute when conditions are met. Tokenisation enables the representation of existing assets on a blockchain, enhancing their tradability and transferability.

The history and characteristics of cryptocurrencies are explored next. Cryptocurrencies, which originated with Bitcoin in 2008, are fungible, durable, private, transparent, and extraterritorial. However, their speculative nature and lack of backing by underlying assets make them highly volatile.

Stablecoins are introduced as a special category of cryptocurrency designed to maintain price stability. These include fiat-backed stablecoins pegged to traditional currencies, commodity-backed stablecoins tied to assets like gold, cryptocurrency-backed stablecoins pegged to other digital currencies, and algorithmic stablecoins that use algorithms for price stability.

The episode concludes with a comparison of stablecoins and Central Bank Digital Currencies (CBDCs). While stablecoins typically use public blockchains and are issued by various entities, CBDCs operate on private blockchains and are issued and governed by central banks. CBDCs are primarily intended for domestic use and require proprietary technology, whereas stablecoins offer global usability and leverage open-source blockchains. Additionally, CBDCs are likely to necessitate government-issued wallets, unlike the diverse storage options available for stablecoins.

Conclusion

As we conclude the first series of Virtually Everything, we hope this episode has provided a comprehensive overview of key terms and concepts in the virtual asset space. We've aimed to demystify blockchain technology, consensus mechanisms, cryptocurrency wallets, tokens, and the distinctions between stablecoins and CBDCs. 

Stay tuned for Season 2, where our hosts will continue exploring and unpacking the dynamic world of virtual assets. 

This podcast forms part of the Virtually Everything podcast series. To find out more about the topics discussed in the series, please visit our dedicated Digital Assets and Blockchain page.