Blockchain

Daniel Kim
Contents
• Overview
• In-class exercise
• How it works
• Applications
• Diem
• Initial Coin Offering
• Challenges
Overview
The Internet
• The internet lacks trust!
• Rise of fake news!

1993 New Yorker cartoon

The Internet
• The reason is… the internet is not trustworthy without help from
intermediaries
• the internet was originally designed to move information from person to
person
The Internet
• The internet was not designed for us to move assets like money,
land rights, or access to private property, to each other,
• It needs intermediaries such as banks, PayPal, AirBnB, government, agency
or credit card
The Internet
• However, the system is as trustworthy as the intermediaires
• Fintech business without blockchain still relies on the intermediaries

• Are intermediaries trustworthy?

• The public don’t seem to think so
Blockchain
• Anytime we need a consensus about facts, we use a ledger
• Often relies on trusted intermediaries

• Digital, decentralized, distributed ledger!

• Does not rely on trusted intermediaries
• Alternatively called distributed ledger technology (DLT)
In-Class Exercise
In-Class Exercise
• Objective:
• Learn how to receive blockchain coin
• Learn how to send blockchain coin
• Learn how to mine
In-Class Exercise: Prep
1. Generate 10000 bitcoins
In-Class Exercise
1. Go to www.bitcoinsimulator.tk
2. Click on
3. Create a user name
1. E.g. bifintechmorning2021-## where ## is assigned to you
2. bifintechmorning2021-01, bifintechmorning2021-02
4. Click on
5. Type in the blockchain name
6. Receive 100 bitcoins from the instructor
7. Send 50 bitcoins back to the instructor
8. Mine
How It works
Blockchain
• Lets people send assets directly and safely to each other

• Trust is distributed across the network, not vested in any single member

• Relies on the consensus mechanisms

• Proof of work or other ways

• Relies on the incentive structures

• Individuals’ selfish choice benefits the network
Steps 1
• A transaction is born
• Contains a message that is necessary to complete the transaction
• Caveat: there is no way to reverse a transaction
Steps 2
• The transaction is broadcast to a peer-to-
peer network
• The computers connected to the blockchain network
are called nodes or miners
Demo!
• Brownworth, A. (2016). Blockchain Demo. Retrieved from
https://anders.com/blockchain/hash
Steps 3
• The race to create new blocks
• Miners organize valid transactions into list called block
• A block in progress contains a list of recent valid
transactions and a reference to the previous
block
• Race to create new blocks
• Computer intensive mathematical puzzle
• Randomly guess a number called nonce
• No skill involved. You can increase your chances
by using more or better equipment
• The nonce is combined with other data in the block to
create hash
Steps 4
• Completing a new block
• The hash must meet certain conditions
• If invalid, miner tries another random nonce
• It takes an enormous number of tries to find a valid hash
• Deters hackers
Steps 5
• Adding a new block to the chain
• Once a new block creation is completed, it sends
it to the rest of the network to verify!
• It takes very long to create a block but it is
quick to verify!
• Miners get rewarded in the form of a stake in the
blockchain
• è there is more incentive for miners to
work on the network
Comments
• This verification process is called proof of work
• bitcon uses it
• However, there are other verification processes (e.g. proof of
stake used by ethereum)

• Tampering with an earlier block is costly

• requires repeating the proof of work for all the subsequent blocks
in the chain and The total processing power of a blockchain
network is hash rate
Comments
• Permissionless (public) vs. Permissioned (private)
• Persmionless
• Anyone can access
• Truly decentralized
• Example: bitcoin
• Permissioned
• Only selected members can access
• Semi-decentralized
• Example: R3Corda, Libra
• Could be a reason why Libra is in jeopardy!
Comments
• Isn’t bitcoin (permisionless blockchain) anonymous?
• Yes!
• All the participants need to use two forms of keys
• Private key, which should be kept secret
• Public key
• can be generated from private key
• Cannot be used to reverse engineer the private key
• These appear on a permisionless blockchain, not private
keys!
Bitcoin vs. Ethereum
Bitcoin Ethereum
Expandable Limited Less limited
Block time Slow Fast
Purpose Medium of payment A platform that facilitates peer-
transactions to-peer smart contracts and
applications
Example bitcoin ICO
Diem (old name: Libra)
What is ?
“Libra’s mission is to enable a simple global currency and financial
infrastructure that empowers billions of people”

1. Built on a secure, scalable, and reliable blockchain

2. Backed by a reserve of assets designed to give an intrinsic value
3. Governed by the independent Libra Association tasked to evolve the
ecosystem
 Problem statement

5.1 billion users

1 billion of world 4 billion users

population is
unbanked 2.4 billion users

Source: WeAreSocial
Blockchain for Libra
• Permissioned blockchain
• Not as decentralized but faster
• Vetted to be part of the network

• No proof of work
Business Model
• How are they funding their operations?
• Transaction fees
• Funded through member contributions, and interest income from reserves.

• Libra is a non-profit
History
• On June 18, 2019, under name Libra

• On July 15, 2019, Facebook announced the currency will not

launch until all regulatory concerns have been met

• In October 2019 multiple companies left Libra Association:

• PayPal left on 4 October
• eBay, Mastercard, Stripe, Visa and Mercado Pago followed on 11 October
History

• In December 2020, Libra was rebranded as Diem, and Libra

Association renamed Diem Association. As of December
2020, Diem Association has 27 members.
Libra and regulators
• Libra = Facebook – U.S. Regulators seem to think so

• How has the response been from regulators?

• Threatening the monetary sovereignty of nations
• Financial stability
• Consumer – investor protection
• Data protection
• Money-laundering
• Terror-financing
• Cybersecurity
• Tax evasion
Advantages
• The unbanked population
Ø 2 billion of the world population does not have a bank account
• Facebooks user database
Ø Facebook can take advantage of its existing users
• Asset-backed cryptocurrency
Ø Fully backed by deposits and short-term securities
• Energy-efficient
Ø Byzantine Fault Tolerance approach
• Move programming language
Ø Claimed to be safer
• The libra association controls supply
Ø Bitcoin is deflationary
• Transfers between countries
Ø IBAN
Disadvantages
• Regulations
Ø Several problems for the world economy in the eyes of regulators
• Safety of cryptocurrency
Ø The 51% attacks
Ø Safety of smart contracts
• Facebooks reputation
Ø Cambridge Analytica scandal
• Libra’s attractiveness to store value
Ø Interest will go to support growth and founding members
• Transactions per seconds
Ø High TPS compared to other cryptocurrencies but far behind VISA, Mastercard etc.
Initial Coin Offering
Initial Coin Offering
• One form of crowdfunding that uses cryptocurrencies

• Comparison
• Crowdfunding – product launch & produce product
• ICO´s – Blockchain & dependent on individual company
• Create a new crypto currency
• Appreciation in token value – profit for investors
Token

A token is a cryptocurrency and proof of

contribution to crowdfunding that is released to
fund the project. The token has no inherent value
but will represent certain rights to buyers.

Examples of rights:
• Some service in the future
• Access to a platform
• Dividends or underlying assets

Tokens can also be bought and sold, meaning

there is a chance of appreciation in value.
Basically, you create a new currency. The
majority of these are created through Ethereum's
platform.

37
Side note: Ethereum
The blockchain that catalysed the ICO craze
83% of all tokens generated for ICOs are created through Ethereum. The platform provides a
toolkit with code for the creation of tokens, and is credited by some with enabling the ICO trend.

Ethereum's blockchain is favourable to others (Bitcoin's) for three reasons:

• Versatile system: Ethereum's blockchain allows for smart contracts that can calculate the
amount of funds raised, verify and execute transactions and distribute tokens. Bitcoin's blockchain
does not allow for the distribution of new tokens.

• Accurate tracking system: This is essential in an ICO, where the blockchain must be able
to recalculate total contributions after each new investor, close ICO at a certain point and issue
tokens when conditions are met.

• Speed: Bitcoin's blockchain is very slow, meaning transaction in an ICO would have taken ages.
Ethereum's protocol allows for a much faster creation of blocks, speeding up the process.
Smart Contract
• An agreement that self executes without any human intervention
• The idea is to let software determine the legal course of action, whether the
action is between persons, businesses or even countries
 ICO process

Pre- Start of sales in

White paper PR-Campaign
announcement the ICO
1-2 months 2-5 weeks 1-3 months > 1 month
Creation of community and Covers all the nuances of the Presentation and various ICO structures:
announcement of project in project. Is basically a business conferences, Roadshows - Pre-set vs dynamic price
the cryptocurrency investors plan, pitch deck, marketing Gaining trust, establish
forum plan, technical manual. - Limited vs dynamic # of
credibility and convince tokens
- Bitcointalk, Reddit, Slack Specifies what rights the people of the business model
tokens represent: Pay for the coins with fiat or
Purpose is to explain the other cryptocurrencies
essence to investors and - Utility token
receive first reviews to - Security token
improve project

40
Source: Based on Blockcahin Fund, Initial Token/Coin Offering Advisory (ITOSG)
 ICO VS traditional
ICO wayIPOof financing?
VC

Strategy To enter market Long term Investment To enter market

Utility Adoption Dividends Dividends

Regularity Oversight None Comprehensive

Track Record & Weak Strong Strong

Credibility

Duration of Offerings Short Lenghty Short

Access to Offerings Open to all Exclusive Exclusive

Costs (of funds raised) 3% 3-5% + 7% to

underwriters

Consumer protection for Low High High

investors
ICOs allow start-up's fundraise millions of USD within minutes/hours
Challenges with Blockchain
Potential Challenge
• Problems with physical-to-digital transition
• E.g. using blockchain to verify that food is organic
• Blockchain provides gold-standard details of supply chain
• But it cannot tell you the truth if people, who initially determine whether
it is organic or not, lie

• This challenge is exactly why Fintech is a good starting point to

adopt Blockchain
• If you already have assets which are digitally native, then it suffers less from
this challenge.
Potential Challenge: energy (?)
• Very rough calculation
• The cost of electricity in the United States is generally between 8 cents to 43
cents per kilowatt-hour.
• Say average cost is 22 cents per kWh
• In 2012, total energey consumption is 20,900 TWh
• Thus, in 2012, it used 0.25% * 20,900 * 1,000,000,000* 0.22
• Bitcoin related electricity costs 11.5B USD
• Compared to Enron accounting scandal in 2001
• Enron’s shareholders lost 74B USD
Does not Solve Everything
• Can blockchain replace clearing house?
• Izabella Kaminska, Financial Times says no!
• How blockchain takes us back to medieval times
• https://ftalphaville.ft.com/2019/06/14/1560516935000/How-blockchain-
takes-us-back-to-medieval-times/
Situation in Norway
• Norwegian Block Exchange (NBX) is creating a new exchange
for cryptocurrencies

• The airliner Norwegian spends between 500 and 1000 MNOK on

transaction costs to payments processors
• They are looking to bitcoin
References
• FinTech and the Remaking of Financial Institutions by John Hill
• Token Economy by Shermin Voshmgir
• How the Tech Behind Bitcoin will change your life
• https://time.com/4320254/blockchain-tech-behind-bitcoin/
• F.T.C. Approves Facebook Fine of About 5 billion
• https://www.nytimes.com/2019/07/12/technology/facebook-ftc-fine.html
• Blockchain in Fake News- Transforming News Industry
• https://www.leewayhertz.com/blockchain-fake-news/
• Explainer: What is a blockchain?
• https://www.technologyreview.com/s/610833/explainer-what-is-a-blockchain/
• Blockchain explained: what it is and isn’t, and why it matters
• https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/blockchain-explained-what-it-is-and-isnt-and-why-it-matters
• In blockchain we trust
• https://www.technologyreview.com/s/610781/in-blockchain-we-trust/
• The Blockchain Economy: A beginner’s guide to institutional cryptoeconomics
• https://medium.com/cryptoeconomics-australia/the-blockchain-economy-a-beginners-guide-to-institutional-cryptoeconomics-64bf2f2beec4
• Bitcoin is still a total disaster
• https://www.washingtonpost.com/business/2018/08/10/bitcoin-is-still-total-disaster/?noredirect=on&utm_term=.cf8ec3a05fc0
• The economics of blockchains
• https://voxeu.org/article/economics-blockchains
• Bitcoin consumes more energy than Switzerland, according to new estimate
• https://www.theverge.com/2019/7/4/20682109/bitcoin-energy-consumption-annual-calculation-cambridge-index-cbeci-country-comparison
• How blockchain takes us back to medieval times
• https://ftalphaville.ft.com/2019/06/14/1560516935000/How-blockchain-takes-us-back-to-medieval-times/
• Sex, Drugs, and Bitcoin: How much illegal activity is financed through cryptocurrencies? (2018) By Foley, Karlsen, and Putnins, Review of Financial Studies
• Transaction Costs and Tethers: Why I’m a Crypto Skeptic (2018) by Paul Krugman, New York Times
• https://www.nytimes.com/2018/07/31/opinion/transaction-costs-and-tethers-why-im-a-crypto-skeptic.html