Blockchain, NFT, crypto: we explain the key terms
NFT and cryptocurrencies are digital assets, blockchain is a technology: does this sound complicated? We explain how these concepts relate to each other.
The main points in a nutshell
The main points in a nutshell
- As the name suggests, the term digital asset generally refers to any asset that is stored and used digitally.
- It is often used to describe assets based on distributed-ledger or blockchain technology.
Digital assets are often based on the blockchain, which is a type of decentralized database technology (Distributed Ledger Technology or DLT for short). Digital assets can have associated ownership or usage rights and be stored and transferred electronically. A digital asset can be a digital image, the points in a digital loyalty program like UBS KeyClub, or a conventional financial asset like a company stock. Cryptocurrencies are also digital assets.
How do these terms relate to each other?
How do these terms relate to each other?
The graphic shows that cryptocurrencies are digital assets. These are stored on the blockchain, which is a particular type of Distributed Ledger Technology (DLT).
The key terms explained
The key terms explained
Distributed Ledger Technology (DLT): A ledger is a decentralized and digitally managed account book where transactions are stored. To make it secure and trustworthy, the ledger database uses a network of computers that store copies of the ledger, hence the term “distributed.”
Blockchain: Blockchain is a type of DLT but with an important difference. Not only is the blockchain distributed, it also saves the sequence in which it is modified. This means that historical data like sales and purchases cannot be changed.
Cryptography: This is used to ensure that data is encrypted and can only be accessed by authorized persons. Encryption is used not just for the blockchain but also in E-Banking, for example.
Fungible assets: Digital assets are often categorized as fungible and non-fungible. Fungible means interchangeable. In other words, these are assets that can be interchanged rather than being unique. They include securities, gold or cryptocurrencies like Bitcoin or Ether.
Non-fungible assets: These assets are unique and cannot be interchanged. They include, for example, a work of art or an apartment. They have unique attributes. In the blockchain they are called Non-Fungible Tokens (NFT). Examples include certificates, diplomas or a unique, digital work of art.
The benefits of digital assets
The benefits of digital assets
- Lower transaction costs: Digital assets typically have lower transaction costs than conventional assets like stocks or other securities.
- Fast transactions: Digital assets can be traded any day of the week and at any time of the day or night, giving you more control over the transaction. Conventional stock markets and banks have restricted opening times.
- Independence: Digital assets are often stored and traded on public networks. This gives you freedom regarding your own assets, but also means new risks because of the lack of an intermediary (typically a bank).
The risks of digital assets
The risks of digital assets
- Deregulation: Independence can be beneficial but also means new risks, because public networks are not regulated (i.e., not regulated by law). These risks include criminal activities like money laundering.
- Volatility: The value of digital assets and cryptocurrencies in particular can fluctuate wildly.
- Cybercrime: Users of decentralized networks rarely use their own name. Instead they use pseudonyms, which can facilitate cybercrime.
- Environment: Bitcoin is responsible for 69 million tons of CO2 emissions every year. By comparison, the whole of Switzerland generates around 37 million tons of CO2 a year. Bitcoin needs so much energy because of the huge computing power required by the blockchain.
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Disclaimer
Disclaimer
This publication is for personal information purposes only within Switzerland and is not to be understood as a recommendation, offer or solicitation of an offer for investment or other specific products and services. It is not intended to form investment, legal or tax advice and should not be used as the basis for financial decisions. Before making a decision, you should obtain professional advice.
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