A portfolio manager pitches three "digital asset" positions: Bitcoin, a yield-bearing stablecoin, and a tokenized real estate fund. The exam wants you to recognize these have almost nothing in common beyond running on a blockchain.
A distributed ledger is a database replicated across many nodes that reach consensus on the validity of new entries. A blockchain is one type of DLT where transactions are grouped into blocks, each cryptographically linked to the previous block. Altering any block invalidates every subsequent hash, making the chain immutable.
KEY: All blockchains are DLT, but not all DLT systems are blockchains. Blockchain is a subset.
Five exam-relevant applications:
- Cryptocurrencies as a digital medium of exchange (Bitcoin, Ether).
- Tokenization of real-world assets (real estate, bonds, equities) for fractional ownership and 24/7 settlement.
- Smart contracts: self-executing code that enforces agreement terms automatically when conditions are met.
- Decentralized finance (DeFi): lending, borrowing, and trading replicated through smart contracts without intermediaries.
- Post-trade settlement and clearing: T+0 settlement reduces counterparty exposure and frees collateral.
Common mistakes
- Reversing PoW and PoS. Bitcoin uses miners and energy (PoW). Ethereum uses validators and staked collateral with slashing (PoS). Trap: "Bitcoin validators stake Ether."
- Treating all digital assets as one asset class. A fiat-backed stablecoin and a meme NFT share blockchain technology and nothing else. Trap: "digital assets exhibit high volatility", true for Bitcoin, false for USDC.
- Calling DeFi centralized. DeFi is permissionless and intermediary-free by definition. A centralized exchange is not DeFi regardless of the assets it lists.
Bottom line
- PoW = miners plus energy plus computation (Bitcoin). PoS = validators plus staked collateral with slashing (Ethereum).
- Smart contract risk is the only major risk unique to digital assets with no traditional parallel, and exploits are irreversible.
- Three stablecoin types: fiat-collateralized, crypto-collateralized, algorithmic. Algorithmic has failed catastrophically (TerraUSD, 2022).
- NFTs are non-fungible (unique). Cryptocurrencies, stablecoins, and tokenized securities are fungible.
Exam shortcut
For PoW vs. PoS, remember "Work means work (miners), Stake means stake (validators)." For unique-to-digital risk, the answer is always smart contract risk. For stablecoins, the FCA mnemonic: Fiat, Crypto, Algorithmic.
The full lesson (about 2,376 words, 16 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- introduction to digital assets
Browse all free CFA Level I lessons or jump into free CFA Level I practice questions.