Crypto advisory services and solutions

Distributed ledger technologies facilitate an environment where there is

• one copy of golden source, append only: records can only be added, editing of transactions is not allowed and everyone has the same replica of the ledger, eliminating the need for reconciliations.
  
• consensus: transactions have to be verified by a mechanism agreed by participants, eliminating intermediaries.
  
• digital transaction signing: transactions are digitally signed, proving/verifying that the parties to the transaction have access to the underlying private keys.
  

Proof of stake and proof of work are both consensus mechanisms used by blockchain networks to achieve distributed consensus.

Proof of work requires ‘miners’ to solve a complex mathematical problem and then order transactions and create new blocks such that the nodes in the network can agree on the state of the network.

Proof of stake requires users to ‘stake’ their coins to become ‘validators’, which perform the same function as ‘miners’ without the need to solve a complex mathematical problem.

Proof of stake has several advantages over the proof-of-work system, including:

• lower energy requirements
• lower barriers to entry for validators
• reduced hardware requirements
• stronger immunity to centralisation (increased number of nodes in the network)
• support for shard chains, increasing transaction capabilities.

DLT or distributed ledger technology is a database distributed on different nodes or computer devices, which individually participate in the network by replicating and saving a copy of the ledger. There is no central authority and no intermediary, and each node works independently. Data is verified by consensus.

Blockchain is basically a special form of DLT. Like DLT, blockchain is managed by peer-to-peer networks; it can exist without any central authority and instead uses a consensus algorithm to validate transactions before proceeding with an update of the database. But what makes the blockchain unique compared with other DLTs is the grouping and organisation of validated information into blocks. It is the blocks that are connected to each other and protected by encryption. Blocks are continuously added to the chain, with data only allowed to be added to new blocks connected to preceding blocks on the distributed database.

• Asset-referenced token: a type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or more commodities or one or more crypto-assets, or a combination of such assets
  
• Electronic money token: a type of crypto-asset whose main purpose is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency
• Utility token: a type of crypto-asset, which is intended to provide digital access to a good or service available on DLT and is only accepted by the issuer of that token

Smart contracts, sometimes referred to as ‘programmable money’, are self-executable pieces of code built into the coin itself. The simplest case of a smart contract would be the digital replacement of an escrow agent, in this case a smart contract in which payments self-execute based on some predefined criteria (e.g. the transfer of change of ownership to the buyer in a land registry). Smart contracts can also be integrated with the Internet of Things.

The benefits of smart contracts stem from their programmable nature, making them fast, automated and not prone to random errors. Furthermore, their blockchain nature ensures that they are transparent and secure, thereby removing the need for trust between the contracting parties.

The term crypto wallet is something of a misnomer, as crypto wallets do not actually contain crypto currency. Instead, the crypto currency remains on the blockchain and can only be accessed using the private key. It is this private key that is stored in the crypto wallet. Crypto wallets might therefore be more aptly named ‘private keyrings’.

In general, crypto wallets have public and private keys:

• The public key is akin to a bank account number. It can be shared with third parties without jeopardising the security of the wallet and allows tokens to be deposited in the wallet, as it can act as an address.
• Private keys, however, are more akin to log-in credentials for the account’s internet banking portal, as they allow access to the cryptocurrency on the blockchain.