Level 1 CFA® Exam:
Distributed Ledger Technology & Cryptocurrencies

Last updated: October 28, 2022

CFA Exam: Distributed Ledger Technology

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Level 1 CFA Exam: Blockchain

Distributed ledger is a digital database shared among different participants of a network. The database is created in such a way that every participant stores the current version of the database. To achieve this, we need the so-called consensus mechanism that confirms new entries and participants.

Blockchain is a type of digital ledger in which information is recorded sequentially within blocks that are chained together and secured through cryptographic techniques.

There are 2 main consensus mechanisms used by blockchains:

  • proof of work (POW), used by, e.g. Bitcoin; Ethereum before the merge in September 2022,
  • proof of stake (POS), used by, e.g. Ethereum after the merge in September 2022; Algorand (pure proof of stake version).

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Smart contracts are computer programs that self-execute based on predefined conditions and rules agreed by the parties of the contract.

Types of networks:

  • permissionless networks,
  • permissioned networks.
    Permissionless networks (e.g. bitcoin) are open to any participant who wants to join them and all information regarding transactions is available to all participants. In a permissioned network, some activities in a network require additional permission.

CFA Exam: Cryptocurrency

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Cryptocurrency (aka. digital currency) is an electronic currency that allows almost real-time transactions without any intermediary. Cryptocurrencies use distributed ledger technology.

Cryptocurrencies are not only used in buy-sell transactions (e.g. bitcoin) but also to raise capital. A company that needs funding may create its own cryptocurrency and distribute it to potential investors via a process called initial coin offering (ICO).

Level 1 CFA Exam: ICO

Fiat money is "traditional currency" emitted by a government or central bank that is generally accepted and can be exchanged for other currencies, goods, services, etc.

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Level 1 CFA Exam Takeaways: Distributed Ledger Technology & Cryptocurrencies

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  1. Distributed ledger is a digital database shared among different participants of a network.
  2. Blockchain is a type of digital ledger in which information is recorded sequentially within blocks that are chained together and secured through cryptographic techniques.
  3. Smart contracts are computer programs that self-execute based on predefined conditions and rules agreed by the parties of the contract.
  4. Cryptocurrency (aka. digital currency) is an electronic currency that allows almost real-time transactions without any intermediary. Cryptocurrencies use distributed ledger technology.