UNIT-1

Introduction: Introduction, basic ideas behind block chain, how it is changing the landscape
of
digitalization, introduction to cryptographic concepts required, Block chain or distributed
trust, Currency,
Cryptocurrency, how a Cryptocurrency works, financial services, Bitcoin prediction markets.

1.1 Introduction
Blockchain Definition:
Blockchain is a chain of transactions, contained in blocks, hence the name
blockchain.
Blockchain is a decentralized, digital and distributed ledger that allows peer- to -peer
transactions secured by cryptographic algorithms and consensus mechanisms and are linked
together in a chain of blocks.

1.2 Basic ideas behind blockchain: Increased trust, data security, and data integrity are
some of the key benefits of blockchain. Distributed Ledger, Decentralization, transparency,
immutability, and auditability are the basic ideas behind blockchain which support these
benefits.
Distributed: Distributed ledgers take the advantages of traditional or general ledgers and
make them more resilient. Instead of having a single copy of the master data, a distributed
ledger shares the full data set across several network participants (members); each member
has a complete copy of the data.
When someone creates a spreadsheet in Google Drive, they can share it with multiple people.
In our analogy, this spreadsheet can be compared to a Blockchain.
The spreadsheet is generally shared over a large network of computers when shared with
multiple people. The computers having a copy of the spreadsheet are referred to as nodes in
the Blockchain world.
Every node on the network has access to the same spreadsheet. Whenever someone edits or
modifies the spreadsheet, it gets updated automatically on every computer on the network.
Thus, the spreadsheet is updated in real-time, and a single version of the spreadsheet is
always visible to everyone on the network.
This has various benefits. No single point has the master data file, so no single point can
corrupt the master data file. If you lose one of the end points, the rest of the end points still
maintain all the data. And when someone tries to make an update to the data in a distributed
ledger, all the other end points are involved in the process of accepting or rejecting the update.
In a distributed ledger, any updates must be agreed upon by the others — making it very hard
to hack.
Decentralization:
Decentralization means that “not centralized” which mean there is no central authority.
It is like a ledger that a bank uses to keep track of all customer transactions. However, in a
bank, the ledger is controlled by the bank, and only the bank can see the transactions.
Whereas in blockchain, there is no central authority, and the ledger runs on multiple
computers and doesn’t require any single person to authenticate or settle transactions.
Blockchain changes from a central authority to a decentralized system where all members
communicate directly with all other members.
Each member has a complete copy of the data, and updates to the data must be approved by
the members, to stop bad actors. If a malicious person or user attempts to delete the entire
blockchain from a member, the other members retain the information, so no data is lost. If a
bad actor tries to edit the historical data of one member, the other members will refuse to
authenticate it. This denial prevents the false information from entering the blockchain.
Additionally, modern application development recognizes that monolithic architectures aren’t
always efficient. Keeping all the data in a central, large, authoritative database or ledger
increases risk of compromise or loss.
Each member has a complete copy of the data set. If a portion of the network goes down and
takes down a member with it, the remaining members are able to validate and accept updates
to the data structure. When the network is back up, that isolated member will be updated with
the newest data set.

Decentralized and Distributed ledger

Transparency
Another piece of blockchain that increases trust is transparency. Transparency means that the
information stored in the blockchain is visible to the members of the blockchain. Blockchain
maintains a complete record of all transactions, and that record is available to every member,
making blockchain a very transparent technology.
If we think of an agricultural example, at every step of the way, the people involved can see
the whole path to date. So, the shipping company can see all the information about when and
where the blueberries were harvested. The distributor can see all of that, plus information on
the shipping company:
Additionally, the grocery store gets to see all that information as well, all the way back to
when and where the berries were initially harvested. And because all the members have all
the data, the farmer who initially grew the berries can see when they arrived at their
destination and how they got there.
That level of transparency helps build trust, because everyone is able to see what is going on
with their product.
Which truck transported the blueberries
Who the driver was
How long the trip took
What the truck temperature was
Some blockchain technologies, such as Hyperledger Fabric, provide data privacy as a native
mechanism within the blockchain. With channels, you can create separate channels of the
blockchain to share the data that makes sense to share, without losing any of the previous
information. For example, if the distributor had contracts with multiple restaurants, grocery
stores, and wholesalers, they could branch the data off to each group. Each customer would
be able to track all the way back to the harvest, but the purchase price and volume could stay
between the distributor and the buyer.
When you think of all the data available, and the fact that everyone can see what’s in the
block on a public blockchain, transparency really helps increase trust in the data. However,
that trust in the data is only really possible because of immutability.
Immutability
Immutability simply means something cannot be edited or changed. You can update the
information in a blockchain by adding data, which will be added in a new block. However,
once a block is part of the chain, the information in that block can’t be changed.
The immutability of blockchain is directly tied to its decentralization. Even if someone were
able to edit the information in an already written block and try to push that information into
the blockchain, it wouldn’t work. As soon as the change was made on one member, and an
attempt made to synchronize back up with the rest of the chain, the rest of the members
would recognize a problem. Once the problem was recognized, the update would be blocked.
Every time a piece of information is changed, instead of updating the value and losing sight
of what it used to be, blockchain simply adds a new block that holds the new data, while
continuing to maintain all the old data as well.
This immutability builds trust by letting everyone viewing the information on a blockchain
know that the information hasn’t been tampered with. With traditional databases, if the master
database gets compromised, it can be difficult to prove that the data was tampered with and
also to know, with certainty, what the correct data is. With blockchain, you can be sure that
the data you’re viewing was the originally written data and that nobody went in after the fact
and modified it.
Auditability
Auditability is another benefit of using blockchain. Auditability speaks to how readily
available and accessible something is to audit. Blockchain, relying on the other benefits
already discussed, is a very auditable platform.
With blockchain’s transparency, the auditor can investigate the blockchain and see all the
transactions across time. They’re able to know exactly what happened, when it happened,
where it happened, and how it happened.
With blockchain’s immutability, a complete audit log for every interaction is created. This
can be shared with an auditor, who knows the data hasn’t been compromised. Auditors can
also compare the data between two members to validate the authenticity of the data.
In brief, let us compare traditional databases and Blockchain
Traditional Databases — Blockchain
1. Centralized — Decentralized
2. CRUD operations are performed — only new block can be added and view data
3. Only admin can access the data — everyone has copy of data
Benefits of Blockchain

The decentralized, distributed nature of the blockchain network, the increased security offered
by smart contracts, cryptography and consensus algorithms together make blockchain the
universally accepted infrastructure that provides increased trust and transparency.
The transparency within the network increases collaboration which leads to faster
transaction settlement. The removal of intermediary thus reduces cost as well, and
also reduces the risk of single point failure and eliminating the need of reconciliation.
The immutability and irreversibility of transaction ensures improved compliance and
audits eventually leading to a new business models, when the deal was signed in the
blockchain involving all the stakeholders.
1.3 How it is changing the landscape of digitalization?
1. Explain some of the applications of Blockchain.

Blockchain is a decentralized database that keeps a permanent record of all transactions. Once
a record is written to a blockchain, it is unable to modify.
It is changing the landscape of digitalization in many ways that mean it defines the problem
with the traditional system and provides a hint or solution that can be solved using
Blockchain.

Applications / Use cases of Blockchain:

1. The cryptocurrency Bitcoin is likely the first example of blockchain which was blockchain-
based.
Bitcoin is a decentralized digital currency. That means it’s not issued by a central bank. It
also doesn’t have a single entity controlling its value or distribution.
Bitcoin is designed to prevent counterfeiting or duplication of funds. As blockchain’s use has
grown, additional cryptocurrencies have been created. The reason blockchain is so important
to cryptocurrency is that it prevents currency from being duplicated. Someone can’t simply
go in and edit the amount of currency they have. They also can’t spend the same currency
twice — as soon as the currency is spent, it’s transferred to the new holder and the old holder
can’t double-spend it.
Bitcoin represents a well-known example of blockchain technology in a practical application.
When bitcoin launched in 2008, it allowed people to directly transact with one another
without having to trust third parties like banks. Since then, over 16000 different currencies
have been created like Ethereum, Litecoin etc.

2. Blockchain technology can be used in cars. Odometer fraud — By tampering with the
odometer, someone can make a car to be newer and less worn out resulting in
customers paying more than what the car is actually worth.

The government tries to counter this by collecting the milage of cars when they get a safety
inspection, but that’s not enough. Instead, we can replace regular odometers with smart ones
that are connected to the internet and frequently write the cars milage to a blockchain. This
would create a secure and digital certificate for each car. Since, we use a blockchain, no one
can tamper with the data and everyone can look up a vehicle’s history.

In fact, this already being developed by Bosch’s IoT lab and they are currently testing it on a
fleet of 100 cars in Germany and Switzerland.
So, Blockchains are great at keeping track of things over time.
3. Besides odometers, we can also keep track of things like Intellectual Property or Patents or
it can even function as a notary.

Notary is someone who can perform and verify signatures on legal documents. We can use a
blockchain for it. The online website stampd.io allows us to add documents to the bitcoin or
Ethereum blockchain. Once added, we can always prove that we created a document ate
certain point of time much like a notary. But right now, blockchains aren’t on the same level
as notaries in a legal perspective.
4. Digital Voting — At present, voting happens either on paper or on special computers that
are running proprietary software. Voting on paper costs a lot of money and electronic voting
has security issues.

In recent years, we have seen countries move away from digital voting and adopting paper
votes again because they fear that electronic votes can be tampered with and influenced by
hackers.
But instead of paper, we could use blockchains to cast and store votes. Such a system would
be very transparent as everyone could verify the voting count for themselves and it would
make tampering very difficult.

The Swiss company Agora is already working on such a system and it’s going to be
completely open source. But there are many challenges.
Firstly, we have to be able to identify voters without compromising their privacy.
If we allow people to vote with their own computers or phone, those might be infected with
malware designed, to tamper with the voting process.
Finally, a system like this also has to be able to withstand denial of service attacks because
that could render the whole thing unusable.

If it comes in reality, it could make a more transparent and practical voting system.
5. Food Industry — In food industry, they could use blockchain technology to track their food
products from the moment they are harvested or made, to when they end up in the hands of
customers.
Every year almost half a million people die because of food-borne diseases and it takes too
long to isolate the food that is causing harm.
Blockchains could help us to create a digital certificate for each piece of food, proving where
it came from and where it has been. So, if a contamination is detected we can trace it back to
its root and instantly notify other people who bought the same batch of bad food.
Walmart and IBM are currently working on such a system. It allowed them to trace the origin
of a box of mangoes in just 2 seconds, compared to days or weeks with a traditional system.
6. Shipping — We can track packages and shipments by using a blockchain. IBM and
container shipping giant Maersk are working on a decentralized ledger to help with making
global trade of goods more efficient.

A cargo ship being loaded with goods. Major international shippers are starting to use
blockchain technology to monitor shipments. Blockchain provides shippers with several
valuable tools to maintain control of their customer’s property. Every touch-point or
interaction can be tracked and logged. Blockchain’s consensus mechanisms ensure that all
the data included is the data that was entered — nobody has manipulated the data after the
fact. And finally, the record contains the entire history of a shipped item, from entering the
shipping system through delivery.
7. Smart Contracts — Blockchains can be used to keep track of information and verify its
integrity. But blockchains can be even more powerful when we add smart contracts to them.
These are tiny computer programs that live on the blockchain and can perform actions when
certain conditions are met.

Insurance companies could use smart contracts to validate claims and calculate a payout or
they could allow us to only pay for car insurance when we are driving.
8. With Smart contracts we can secure our own data on a blockchain. They could allow us to
store our medical records on a blockchain and allow doctors to access them when we approve
it with a digital signature.
9. Collecting royalties for artists: A future streaming service could setup two smart contracts:
1. One where users send their monthly subscription to and
2. One that keeps track of what the user has listened to.

At the end of each month, the smart contract that holds the subscription fee can automatically
distribute the money to artists, based on how many times their songs have been listened to.

Cryptography in Blockchain
What are the Cryptographic functions used in Blockchain?
The security in blockchain network is provided by the cryptography concept.
Cryptographic Functions used in Blockchain:
The Cryptography consists of mainly 3 functions called Cryptographic functions. They are
Hash functions, Public and Private Key Encryption, and Digital Signatures

Hash Function — In order to provide authentication, integrity, and protection, hash

algorithm is implemented in a blockchain network.

Encryption — public and private key encryption is used to provide confidentiality,

authentication, and integrity protection in the system or in a blockchain network.
Digital Signatures — It is used to provide authentication, integrity protection and non-
repudiation.
In the domain of blockchain, non-repudiation means that once the transaction is initiated and
completed by a node, that particular node will never be able to denied about the transaction in
the future.

The above three security mechanisms can be used stand alone or in combination to make the
system more and more secure.

If we talk about Digital Signatures and Public — Private Key Encryption, it is mainly used in
initiation and broadcasting of transaction. Whereas, Hash function is used in chaining of a
transaction.

Explain in detail about hash function and its properties.

Hash Function: (in detail)
A cryptographic hash function is a one-way function that converts input data of arbitrary
length and produces a fixed length output.

The output of a hash function is known as “hash value” or “message digest”

There are various types of hash functions like SHA256, SHA1, MD5
SHA means Secure Hash Algorithm. SHA256 produces a output of length 256 bits, SHA1
produces hash value of 160 bits, MD5 produces hash value of 128 bits and so on.

Using a fixed-length output increases security since anyone trying to decrypt the hash won’t
be able to tell how long or short the input is simply by looking at the length of the output. The
only method to determine the original string from its hash is by using “brute-force.” Brute-
force basically means that one has to take random inputs, hash them and compare them with
the target hash. For instance, if the SHA-256 hash algorithm is used, a brute-force attack
would need to make 2²⁵⁶ attempts to generate the initial data.
Properties of Hash Function:
The input to a hash function could be anything. It could be a pdf document, images or even
a log file.
This file will be inputted to hash function and the output from a hash function will be of a
fixed length which also represent the digital fingerprint of the input. This fixed length output
will be a unique value w.r.t the input file. That’s why it is also known as the digital
fingerprint of the input.

Another property of hash function is that even a small change in input lead to a completely
different output.
Let us understand with an example.

In this example, there is a number from 1 to 9 and then 0 (1234567890), whereas in second
function there is a number from 1 to 9 and then 1 (1234567891). There is just one digit
different, but if you notice the output, it is completely different. So, even a small change in
input leads to a completely different output.

Collision resistance is another important property of a cryptographic hash function. Being

collision-resistant simply means that it should be highly improbable to generate the same
output or hash for two different inputs.
Another property is that this hash function is a one-way function which means using this
function input file could be converted into a fixed length output. But there is no function
present used to convert this hash output or digital fingerprint back to the original input
document.

It is very crucial for a cryptographic hash function to be Pre-image resistant. Pre-image

resistance means that the output generated by a cryptographic hash function must not reveal
any information about the input data. For example, when an input X is passed through the
hash function, the hash generated is represented as H(X). Pre-image resistance simply means
that even if you know H(X), it must be infeasible for you to determine the corresponding
input X.

Encryption:
The second factor which controls the security in blockchain network is encryption.
Encryption takes plain text and turns it into cipher text by using a key or key pair. The result
is a meaningless message unless you have a key.
In order to perform encryption, the network need public and private key. This public, private
key can be created using online site as well.
Public key is known to everyone in the network, just like our email which is known to
everybody within our organization. Private key is private only to the user like bank account
password.
If something is encrypted with public key, it can only be decrypted with the private key and
vice-versa.

What are the types of Encryption and How encryption works in blockchain system?
There are 2 types of encryption
1. Symmetric encryption
2. Asymmetric encryption
Symmetric Encryption:
Symmetric encryption is done using single key.
Symmetric Key Cryptography is also known as Secret Key Encryption. Same key (identical
private keys) is shared between sender and receiver. Need to exchange the shared key by both
parties using a secured channel, otherwise it could lead to severe information leak.
Computationally, it is easy to generate and Robust to resist. The vulnerability increases as the
users having the same shared key increases.
For Example, Alice wants to share some confidential information with Bob

So, Alice uses Symmetric Encryption and encrypt the data using her key

Once the data got encrypted, she will send it to Bob.

At the receiver end, Bob uses Alice Key and decrypt the document.
In this example, though encryption is used, it is not considered safe, because of single key
encryption. This key could be compromised which could lead to severe information leak.

Asymmetric Encryption:
In this encryption, separate encryption and decryption key are used in order to decrypt and
encrypt a message. The users can only be able to decrypt an encrypted message, if they have
the appropriate decryption key.
This asymmetric encryption provides more advantages over symmetric encryption algorithm.
For example,
Alice wants to share some confidential information with Bob. Before sending the data to Bob,
Alice encrypts the data using encryption key. At the receiver end, Bob uses Decryption Key
in order to decrypt the data.
It can be mainly used for
1. Encrypted Communications
2. Authenticated Communications
3. Confidential and Authenticated Communications

Encrypted Communications:
This type of encryption is used, when the sender wants to ensure that only the intended users
should be able to decrypt and access the document. If something is encrypted using private
key, it can only be decrypted using public key.
Let us understand with an example.
Here, Alice wants to send some data to Bob, where she wants only Bob should be able to
open the document. In order to achieve this, Alice decided to go with Asymmetric Encryption.
Here, Alice and Bob are part of network, so both have their own public and private key
respectively.

In this case, Alice encrypted the data using Bob’s public key and send the document over the
network.
Document is received by Bob, i.e., document is encrypted using Bob’s public key which can
be decrypted by only Bob’s private key. Since Bob’s private key is only known to Bob and
hence only Bob will be able to open or decrypt the document.

Let us suppose Eve is malicious person in the network. She wants to tamper the document.

When Eve receives the document, she tried to decrypt it, but she was not able to do so
because the document was encrypted using Bob’s public key and it can only be decrypted
using Bob’s private key. Now, Bob’s private key is private to Bob alone and not shared with
Eve and hence Eve will not be able to decrypt the data, which means the network secure.
This kind of encryption is mainly used where the documents are intended for particular
people and not to everybody.
Authenticated Communications:
Let Alice tries to send some confidential data to Bob. Alice encrypted the data using her own
private key. Since both Alice and Bob are part of the network, they have their respective
public and private key combination. We need to remember that, if something is encrypted
with a private key, it can only be decrypted with a public key.

Here Alice is encrypting the data using her own private key and send the data over the
network.
Once the data reaches to Bob, he uses Alice’s public key to decrypt it. If the document gets
decrypted, it means that the document is sent by Alice. If document is not decrypted using
Alice’s public key, it means that document is tampered and compromised.

Suppose Eve is also in the network. She tries to tamper the data. She is able to decrypt the
data since the data could be decrypted using Alice’s public key which is known to everybody.
But, in order to send the data, first of all Eve has to encrypt the tampered data for which she
requires Alice private key. Now, Alice’s private key is not present with Eve, hence the
tampered data will be identified by Bob during decryption.

This kind of encryption is used in Authenticated Communications.

Confidential and Authenticated Communications:
This type of encryption is used when the receiver must be confident that the document is sent
by the correct sender and not tampered at all, as well as sender must be assured that the
document is received and decrypted by only the intended person.
Let us understand with an example.
Let Alice is sending some confidential data to Bob. Since both Alice and Bob are part of the
network, they have their respective public and private key. We need to remember that, if
something is encrypted with a private key, it can only be decrypted with a public key and vice
versa.
First, Alice encrypted the data using her own private key such that the receiver remains
ensured that the document was sent only by her. Then she will encrypt the data again using
the receiver public key such that only the intended user will be able to decrypt that.

Here, we have to remember the sequence in which encryption takes place, first with sender’s
private key and then receiver’s public key, because at the time of decryption, same order will
be followed.
Once the document is received by Bob, first he will decrypt it using his own private key
which ensures that only the intended user can decrypt the first round of encryption. Then he
will use the sender’s private key to decrypt it and read the document.

If we have an attack in the network, in order to decrypt the first round of encryption, the
attackers should have Bob’s private key which is not possible and hence network is secured
from any external attack.
Digital Signature:
A digital Signature is a mechanism to ensure the authenticity of electronically transmitted
documents like email, word document, spreadsheet etc. which remains intact.
Authenticity means that you know who created the document and you have full trust that it
has not been altered.

Let us understand digital signature with an example

Suppose Alice wants to send some data to Bob. In order to avoid legal troubles, the network
should have two major properties.
1. Non-repudiation: In this case, Bob should be rest assured that Alice can’t claim
that she never sent the document and she should not back put from the deal.
2. Integrity: Alice should be rest assured that Bob wouldn’t change the document and can’t
claim that the modified document is what Alice originally sent.
To bring these two properties in the network, Digital Signature came into the picture.
Firstly, Alice will create the digital fingerprint of the original document by passing the
document through a hash function.

Once the fingerprint is created, Alice will encrypt it using her private key such that receiver is
rest assured that the document is sent by Alice. This encrypted data is known as Digital
Signature of the document.

Once the digital signature is created alike will sent this signature along with original
document to Bob.
Verification of Digital Signature:
Now, Bob will verify the data which he has received. In total, he has received two documents.
One is original contract and the other is digital signature of the contract.

First, Bob has to decrypt the digital signature. Bob uses Alice public key which assures that
the data sent by alike alone and nobody else. After decryption, Bob will get the digital
fingerprint which is nothing but the hash value of the original document.

The second step is to proceed with the hash value of the document which was received I.,
contract document. By the end of second step, Bob has two hash values from two different
documents.

Just by comparing both the documents, Bob will come to know whether the document he has
received is correct or not. If both the hash value matches, then the document is correct,
otherwise someone tampered the document and he has received the tampered document.
Blockchain or Distributed Trust
Trust is an unstable equilibrium. When two people trust each other, it only takes one of them
to have doubts for the other to also start doubting. The result is that the parties descend into a
state of mutual mistrust, a sentiment that is much less precariously balanced.
When eBay was created, it was not the only online auction and shopping website, but it
invented the concept of buyers and sellers rating each other, a scoring feature that can now be
found on all community sites such as Airbnb, Ballecer, and so. What eBay understood is that
trust could only be created by the community itself and not by the presence of third parties,
which in its case would have meant expert auctioneers.
The externalised trust model is proving inadequate and rely on the trusted third party, to
demand ever greater resources in order to deal with the increase in the number of transactions.
Here External indicates the people like judges, teachers, managers, parents, and so on.
The community-based trust model is much more scalable and able to handle the increase in
the number of interactions. Here community is where several people are involved.
The blockchain model is even more powerful than the community-based trust model:
Blockchain technology based on three pillars: two are technological, asymmetric
cryptography and distributed systems, and the third is sociological, the vision of a transaction
model with a peer-to-peer structure, thereby enabling a distributed consensus to be reached
without the need for a trusted third party.
The blockchain enables the construction of a vast ledger that is distributed as far and as wide
as desired, visible to everyone, updated in accordance with a transactional principle similarly
distributed and guaranteed by a community, without the need for a trusted third party as a
central authority.
The blockchain makes five promises:
1. Distributed trust.
2. A system of transactions.
3. Guaranteed by an extended community.
4. No trusted third parties
5. The capacity to operate complex protocols.
The fifth promise is crucial, as it lends the blockchain its capacity for disruption: the ability to
handle complex protocols (money transfers, banking, validation, and so on) in an automated
way, with much lower transaction costs compared with systems that require human input,
above all in the form of a trusted third party. In other words, the blockchain not only
transports information, but also algorithms, and it does so with the same guarantee of trust as
applies to the information itself.
Currency, Cryptocurrency
In this, we will cover the following
1. Describe the characteristics of Fiat Currency.
2. Define Cryptocurrency and Explain how cryptocurrency works.
3. Explain briefly about e-wallet services and personal cryptosecurity.
Currency:
Before we understand cryptocurrency, let’s first understand some basics about currency that
is being used in today’s world. It is also known as “Fiat Currency.”

Currency used across the globe

Characteristics of Fiat Currency:
1. These are owned by government of respective country.
2. These are centrally controlled through various financial institutions like banks
and legal entities.
3. It is very Inflationary which means over a period of time, the value of the
currency decreases and inflation use in the intuition all together.
4. It includes various security properties which are being implemented to prevent
it from counterfeiting or being cheated.
5. But it is not really impossible to counterfeit these currencies. We probably come
across various cases where these currencies across the globe have been counter
feted in some other way.
6. That is the reason why Law enforcement comes in picture to stop and to
prosecute those who involve into counterfeit Fiat currency.
There are various Security Features that are being implemented in Fiat Currencies: These are
very common across the globe like Watermark, Security Thread, Images, Identification marks,
fluorescent inks are being used in currency notes.

Watermark
 Security Thread
Cryptocurrency:
In simple terms, Cryptocurrency is a medium of exchange like many other currencies around
the world. But the major difference is that it exists in digital form i.e., there is no tangible
money, only some program snippets.
More importantly, the currency is self-controlled and there are no middlemen like central
banks or governments to control the currency. Its security is warranted by sophisticated
cryptographic algorithms. If there is no one to issue and control the currency then how new
currency does is created? New units of cryptocurrencies are created through a process
called mining. The first know cryptocurrency was bitcoin, invented in 2009 by a mysterious
person ‘Satoshi Nakamoto’.
In April 2011 another currency known as ‘Name coin’ was created. Then onwards many other
cryptocurrencies have emerged and many of them became popular.
Benefits of Cryptocurrency:
1. Cryptocurrencies are global currencies i.e.no single country controls it. They are
accessible to everyone and can be transferred to anyone around the world.
2. Cryptocurrencies are devoid of a middleman like banks. So, there is no
middlemen fee for transactions and transactions are usually done faster.
3. It is a more secure asset than traditional currencies. The sophisticated
cryptography guarantee that only the sender and receiver can access the data.
4. It is a more transparent monetary system that any existing. The transaction
history and data are stored in public ledger and is viewable to all stakeholders.

How a Cryptocurrency Works:

Cryptocurrencies work on a distributed public ledger known as blockchain, a record of all the
transactions updated and held by the currency holders.
Cryptocurrency units are generated through a process called mining which in which includes
computer power to solve complex mathematical problems that create coins. Users can also
reach out to brokers to buy digital currencies, then store and use them through cryptographic
wallets.
If you are a cryptocurrency owner, you do not own anything tangible. You basically own a
key that helps you to move a record or a unit of measure from one user to another without
involving a trusted third party.
From an individual user’s perspective, the important elements in transacting coin are an
address, a private key, and wallet software.
1. The address is where others can send Bitcoin to us. Here, there is no centralized
“account” we need to register with another company or bank.
2. The private key is the cryptographic secret by which we can send Bitcoin to
others. If we have the private key to an address, we can use that private key to
access the coin associated with that address from any Internet-connected
computer.
 3. Wallet software is the software you run on your own computer to manage your
Bitcoin. Wallet software can also keep a copy of the blockchain — the record of
all the transactions that have occurred in that currency — as part of the
decentralized scheme by which coin transactions are verified.
e-Wallet Services and Personal cryptosecurity:
Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks
or theft. There is no customer service number to call for password recovery or private key
backup. If your private key is gone, your Bitcoin is gone. It’s the kind of problem that
consumer-facing Bitcoin startups such as Circle Internet Financial and Apo are trying to solve.
There is opportunity for some sort of standardized app or service for wallet backup with
which users can confirm exactly what is happening with their private keys in the backup
service, whether they self-administer it or rely on external vendors.
Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online
software used to store the private keys to your cryptocurrencies securely. Some exchanges
provide wallet services, making it easy for you to store directly through the platform.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet”
are used:
 Hot wallet storage: “hot wallets” refer to crypto storage that uses online
software to protect the private keys to your assets.
 Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware
wallets) rely on offline electronic devices to securely store your private keys.
Typically, cold wallets tend to charge fees, while hot wallets don’t.
Personal cryptosecurity is a significant new area for consumer literacy, because the stakes
are quite high to ensure that personal financial assets and transactions are protected in this
new online venue of digital cash. Another element of personal cryptosecurity that many
experts recommend is coin mixing, pooling your coins with other transactions so that they are
more anonymous, using services like Dark Coin, Dark Wallet, and Bit Mixer.
As the marketplace of alternative currencies grows, demand for a unified wallet will likely
rise, because installing a new and separate wallet is required for most blockchain-related
services.
Cryptocurrencies offer many great benefits in personal cryptosecurity. One of the great
advantages is that blockchain is a push technology (the user initiates and pushes relevant
information to the network for this transaction only), not a pull technology (like a credit card
or bank for which the user’s personal information is on file to be pulled any time it is
authorized) increasingly vulnerable to hacker identity theft attacks (Target, Chase, and Dairy
Queen are just a few recent examples of large-scale identity-theft vendor database raids).
Paying with Bitcoin at any of the 30,000 vendors that accept it means not having to entrust
your personal financial information to centralized vendor databases.
It might also possibly entail a lower transaction fee (Bitcoin transaction fees are much lower
than merchant credit card processing fees).

In this, we will cover the following

1. Explain advantages and disadvantages of Cryptocurrency.
2. List some cryptocurrencies and briefly explain them.
Cryptocurrency is a digital and virtual currency. It is not issued by any central bank, or any
government organization. These currencies do not have any intrinsic value.
For example, if we have any Indian currency note, say Rs. 100, Rs.200, whichever note that
we have, if we actually take that currency note out, we would see that it says , “ I promise to
pay the bearer of this note the sum of ten rupees” which means that if we have 10 rupee note,
then we are entitled to get 10 rupees from the central bank of India i.e., we are given the
guarantee that if no one else accepts this currency note from you, the central bank of India,
the reserve bank of India will take this note and they will give you the value that is written on
that particular currency note.
With cryptocurrency, there is no such backing. The cryptocurrency does not have any backing
of any government authority. Then how is it working? It is working on a perceived value.
For example, there is a pen, and if I say do you know, this pen is worth 10 lakh rupees. If you
accept that yes, it is worth 10 lakh rupees, you are ready to pay me that much money. I will
give you the pen, I will get the money. There is no backing. The government did not tell you
how much is the value of this. The value of this pen is decided by how much is the buyer and
the seller agreed to a common price. If I am the seller, I agree to a price and you are the buyer,
you agree to that price, that is how, the price of that asset is decided.
Something similar is the case with cryptocurrency, that is why it is extremely volatile in
nature. There is no particular authority and there is no set of rules that will decide the current
prices of cryptocurrency. Cryptocurrency is based on the concept of cryptography.
1. “Cryptocurrency is any form of currency that exists digitally or virtually
and uses cryptography to secure transactions.” — The point to remember is
Cryptocurrencies are not digital currencies. RBI and other nations are thinking
to introduce their own digital currency. If a digital currency is introduced by a
central bank RBI, then it will be legitimate legal currency backed up by the
reserve bank. So, these are not cryptocurrencies. Cryptocurrencies are virtual
currencies that do not have any backing.
2. Cryptocurrencies does not have central issuing or regulating authority,
instead uses a decentralized system to record transactions and issue new
units. — — This is why, if you would have noticed in the past few days, there
is a sudden decline in the value of the most cryptocurrencies, throughout the
world. Bitcoin is declining 5 -10 percent every single day. There is no
regulatory authority that will come into the picture and will say, we are taking
certain monetary measures to control the side of this cryptocurrency. That will
not happen as it would happen in case of the Indian rupee or some other
currency, which is backed by the central bank. That is where the role of central
authority comes into the picture, which is not present in case of the
cryptocurrency.
3. It is supported by decentralized peer to peer network called ‘Blockchain”.
i.e., Cryptocurrency and blockchain are not same, cryptocurrencies work on the
basis of Blockchain technology.
Blockchain can have many applications. Cryptocurrency is just one of the applications of the
blockchain technology. Blockchain technology essentially is a technology under which, any
specific information will be distributed widely across many different computers, many
different routers and it will not be possible for any single user to change that information that
means it would ensure that the information that is saved in these systems across the world is
reliable, that cannot be altered and it cannot be changed without the permission of the
required number of users.

Benefits of Cryptocurrency:
1. Fast and cheap transactions
2. Investment destinations
3. Anti-inflationary currency
Fast and cheap transactions: When we are undertaking any transactions, let us assume if you
swipe your credit card or debit card, or you transfer some money online, there is always a
minimum charge that is involved in between. This is how the banks, or card issuers like
master card, visa, rupay earn money.
With Cryptocurrency, that will not be the case. Because there is no intermediary in between,
it is obviously cheaper to transfer money from one place to the other in the form of
cryptocurrency. So, it is much cheaper, and it is faster.
The good part is because, there are no intermediary involved, there is no additional cost. The
bad thing is if something wrong happens, then there is no one that you can go ahead and
complain to. Right now, if you swipe your card, and money gets debited from your account,
but the machine says translation decline, you do have an option to complain to your bank, you
have an option to take up the matter with the RBI also. But with the cryptocurrency, there is
no such agency, where you can actually take your complaint.
Investment Decisions: It has also been seen as an investment option by a lot of people across
the world, majorly the youth. You would have seen a lot of people across the world turning
into millionaires, billionaires just by investing all that money into currency such as bitcoin in
the earlier stage.
Anti-inflationary currency: Inflation takes place when there is a lot of money supply in the
market, when the supply of the commodities remains the same, but actually a lot of money
gets into the hands of the people. With cryptocurrency, such as bitcoins etc that will not be
the case, why because the number of bitcoins, the number of ripples, the number of
Ethereum’s across the world are fixed because, the currency that we have the number and the
number of currencies fixed, there is a very little chance that there will be any inflation in case
of cryptocurrency.

Drawbacks of Cryptocurrency:
Extremely Volatile: When you see that stock market is declining or when you see a rupee is
declining, there is always a logical reason behind it, why is the stock market declining, what
is happening? But with bitcoins, we have seen that there is no logic behind it.
Unregulated: There is no central authority that comes into picture.
Speculative nature: One tweet by any influential person can increase or decrease the value of
these cryptocurrencies without any reason. It is all based on speculation, there is no
underlying value. Tomorrow, if people say that we don’t want to buy bitcoin, we are not
ready to give even one rupee for one bitcoin, the government cannot do anything. All the
bitcoins will go to waste, if people stop accepting it, if people stop buying it because it is all
based on speculation.
Security risks: Cyberattacks on wallets, exchange mechanism (Crypto jacking).
Fortunately, India has not seen these many cases, but if you actually read international media,
you will see in the past few months, a lot of issues have come up in countries such as US and
many other European countries. Cases of people actually hacking into government servers-
places or cases where people hack into very important servers and in return they ask for
ransom in the form of bitcoins or in the form of other cryptocurrencies. So, a lot of illegal
activities are happening, because the hackers also know it is almost next to impossible to trace
where the cryptocurrency has gone. That is why there is always a security risk that is attached
to it.
Shield to crime: Used for illicit trading, Criminal activities and organized crimes.
A lot of illegal activities are happening because the hackers also know it is almost next to
impossible to trace where the cryptocurrency has gone. That is why, there is always a security
risk that is attached to it. There are also new stories for it if you actually google it, that there
are people who had a lot of bitcoins in their official account, but they now have lost all their
credentials, they don’t know how to login. So, these kind of securities are still associated with
a lot of cryptocurrencies. It is increasing or it is giving a push to the crime as said. there are
lot of cybercrimes that are happening against which the people are demanding
cryptocurrencies.
Threat to the Indian rupee: If a large number of investors invest in digital coins rather than
rupee-based savings like provident funds, the demand of the latter will fail.
It is a Threat to the Indian rupee or not just Indian rupee, but many other currency. If enough
number of people start accepting the fact that Indian currency or US dollars are bad, I will
switch to cryptocurrency, I will only trade in bitcoin automatically, it will be bad news for the
official currency, the reason why official currency works is enough people trust that if I am
ready to buy the mangoes, and the Mago vendor is ready to give me the mangoes against that
currency note, it is because, he or she trusts that Indian rupee. if they stop trusting it and they
say no, I don’t trust it, I want bitcoin only in return of this, then obviously the value of any
official legal currency will fall down, and that is real threat.
Lack of Liquidity and Lower Acceptability: Lack of liquidity means if I have let’s say 10
bitcoins, tomorrow I want money, I want to sell it. It is not necessary that I will get a buyer.
maybe people are not ready to buy it. but if I have let’s say gold or silver, obviously I will
find a buyer anytime that I want. But with cryptocurrency, it is not necessary that you will
always get a buyer at the time you want price.
Price Volatility: prone to price fluctuations and waste of computing power.
Lack of consumer protection: No dispute settlement mechanisms and SEBI (Securities and
Exchange Board of India)
for both Volatility and Lack of consumer protection, there is no intermediary in between,
there is no govt agency to take of any grievance that you would have, whenever you are
trading in cryptocurrency Nd that is why cryptocurrencies are best avoided unless you have
absolute knowledge of how it actually works.
There are some success stories and there are some stories in which people have made a lot of
money due to cryptocurrency and investment but it is best avoided because again it is based
on speculation, it does not have any intrinsic value.
List of Cryptocurrencies:
There are about 16000+ cryptocurrencies available now. A new cryptocurrency can be
invented at any time. Like any other assets, the value of cryptocurrency can also raise and fall
quickly.
The most popular cryptocurrencies are:
1. Bitcoin
2. Ether
3. Litecoin
4. Ripple
5. Name coin
6. Swift coin
7. Monero
8. Dogecoin
9. Dash
10.Lisk

BITCOIN:
The Bitcoin (BTC) is the first and most famous cryptocurrency. It is invented by Satoshi
Nakamoto. The details of the founder are still a mystery and nobody is sure about his
existence. Bitcoin uses peer to peer network for its existence and the transaction conducted
are verified by miners. Mining means solving a complex mathematical problem to verify a
transaction and it needs a high amount of computing power. By verifying a transaction,
miners get a fixed amount of bitcoin as a reward and the newly created coin also become the
part of the network. However, there are a finite number of bitcoins say 21 million. And
according to miners the rest of the coins will be added to the network by 2024.
The hashing algorithm used in bitcoin is SHA-256 (Secured Hashing Algorithm-256). And
POW algorithm is used by the network to decide the next block to be added to the Blockchain.

Mining in Bitcoin
Basically, mining means searching for a new block to add in the Blockchain. When a new
block arrives, all the contents of the block is hashed first. Then this hashed output is
concatenated with the nonce and is hashed again. The resulting hash is compared with the
difficulty target. If it is less than difficulty level the block is added, else the nonce is changed
and the process is repeated till it meets the requirement.
Whenever a transaction happens in a bitcoin network, the user pushes it to the network. The
transaction is hence verified by some participants in the network called miners. The process is
as follows. When a new block arrives, all the contents of the block is hashed first. Then this
hashed output is concatenated with a random string called ‘nonce’ and is hashed again. The
resulting hash is compared with the difficulty target. If it is less than difficulty level then
block is added, else the nonce is changed and the process is repeated till it meets the
requirement. This process of verifying the transaction is known as mining.

ETHER:
Ether is another type cryptocurrency which is used in the distributed application platform
Ethereum.
Ethereum is another type of decentralized blockchain network which is specifically designed
to develop and run smart contracts and decentralized apps. Ether is the fuel of Ethereum and
it was launched in 2015 by Vitalik Buterin. The total supply of Ethereum is estimated to 60
million.
Like in bitcoin Ether mining also indicate the verification of a transaction conducted in
Ethereum network. In Ethereum network a new block is added in every 15 seconds and
presently the reward for adding a new block is 3 Ether coins.
LITECOIN:
Litecoin was launched in October 2011 by Charles Lee. It is an open-source peer-to-peer
network that is fully decentralized without any centralized authority. It has a market cap of
around $180 million.
Litecoin little bit complex than previous two. Though the working principles are similar.
There are some differences too. Open-source Cryptographic protocol is the base of Litecoin.
A new block is processed in every 2.5 minutes and it uses ‘Script’ for mining process. Since
the mining is a little bit harder in Litecoin the miner gets 25 Litecoin’s for every new block.
RIPPLE:
Ripple is used as both cryptocurrency and open payment network where the currency is
transferred. It was released in 2012 and was invented by Chris Larsen and Jed McCaleb.
Ripple coin is labelled as ‘XRP’. The current market of Ripple coin is $243 million. The
ripple coin is mainly known for its strong focus on the banking market and real-time
settlement.
Ripple uses a medium known as Gateway that enables any person or organization to put into
or take money out of the Ripple pool. Maybe the gateway mechanism is similar to the present
banking system but the shared open ledger makes the difference.
Ripple is slowly becoming popular. Companies like Santander, UniCredit, UBS have already
adopted it and Payment networks and Banks are increasingly attracted towards it.
NAMECOIN:
Name Coin is another cryptocurrency which has many similarities with Bitcoin. In fact, it
uses the same code of Bitcoin. And just like Bitcoin it also uses the Proof-of-work algorithm
and SHA-256 Hash algorithm. The total supply of the Name coin is limited to 21 million.
Name coin technology solves the problem of Zook’s triangle, where anyone can register
arbitrary human-readable names in a decentralized and secure way. These names can be used
to create online identities. Name coin was invented in April 2011 by Vince. Named was
launched in June 2013.
SWIFTCOIN:
Swift coin is also another type of cryptocurrency. Like other cryptocurrencies transaction
made in Swift coins are encrypted and anonymous. And of course, there is no central
authority to control the transactions or users. Swift coin is the first digital currency in Cuba
created by Team Daniel Bruno.
MONERO:
Monero is a cryptocurrency that mainly focuses on privacy using signature technology. It is
estimated that Monero has a market cap of about $138 million. The privacy of Monero
transactions is strengthened using ‘Confidential Transaction’ algorithm which hides the
amounts being transacted.
DOGECOIN:
Dogecoins are released in December 2013 by Billy Markus as a funny meme on the internet.
By the mid of 2015, there were 100 billion Dogecoins has been mined also 5.256 billion coins
are mined every year thereafter.
DASH:
Dash is open-source peer-to-peer cryptocurrency which strongly focuses on speed of
transaction and security. Dash uses anonymization technology for improving security. The
estimated market cap of Dash is $77 million. In January 2014 Dash coin was released in the
name of ‘Coin’. Later in February, the name was changed into ‘Dark coin’ and on March it
was rebranded as Dash. The founder of Dash was Evan Duffield and Kyle Hagan.
LISK:
Lisk is a modular cryptocurrency which utilizes Sidechains. ‘Sidechain’ are some additional
chains attached to the main blockchain in order to avoid bloated network. When there are
many bad transactions, the blocks are created faster and it slows down the network. This is
called a bloated network. Sidechains can be attached to the main blockchain and can serve as
a place to pull high volume transaction without interfering with the main blockchain. As a
result, it will ensure a fast network all day. Lisk has a market cap of $45 million.

Types of Cryptocurrency or Crypto Asset:

Cryptocurrency is also known as Crypto Assets. It can be either Crypto Coin or Crypto
Token. Cryptocurrency has its own blockchain network and also known as standalone
blockchain.

Crypto coin:
Crypto coin is a digital or virtual currency on decentralized networks based on blockchain
technology and is secured by cryptography.
Bitcoin is the very first crypto coin and all other coins are altcoins, which means all the coins
other than Bitcoin are also known as Alternate Cryptocurrency.
These altcoins are further divided based on whether it is derived from Bitcoin Blockchain or
not and whether it is mining-based or stable coin.
1. These altcoins are further divided into two types based on whether it is derived
from Bitcoin Blockchain or not.

1. Blockchain derived from Bitcoin — Firstly, it is derived from Bitcoin Blockchain.

It means they have taken the source code of Bitcoin and created their own coin and
releases in the market.
e.g.: Name coin, Peercoin, Litecoin, Bit cash etc.
2. Native Blockchain: Not derived from Bitcoin — The other type is standalone blockchain
and it has nothing to do with bitcoin. The overall idea of blockchain is same, but they created
their own blockchain network as well as crypto coin. Though they are also called as altcoins,
they are not derived from bitcoin.
e.g., Ethereum, ripple etc.
2. These altcoins are further divided into two types based on whether it is mining based or
stable coin.

For mining-based coin, the coin has created by miner by solving cryptographic puzzle and
block rewards are transferred to the miner. So, there is a fluctuation in the price movement of
such coin.
Stable coin also has an interesting functionality of cryptocurrency but does not suffer from
the vulnerability of market fluctuation and price volatility.
The stable coins are introduced to bring stability to this cryptocurrency world. Till now, it
was based on demand of coin. Now, to create a stability, it was done by creating a backup,
just like when we use to have Fiat currency which was backed by gold.
Stable coin working is simple. They are backed by a company or a central entity. This
company or a central entity manage the acceptance of new fiat and issues a corresponding
amount of fiat backed by token. The company or central entity is the custodial of the fiat
result and it backs all the tokens.
Stablecoin is further divided into
1. Fiat Collateralized Stablecoin
2. Crypto Collateralized Stablecoin
3. Non-Collateralized Stablecoin
Fiat Collateralized Stablecoins are the coins which are backed by some currency in the ratio
of 1:1. Most known example of Fiat money backed in the stable coin are dollar based
including Tether (USDT) or True USD.
Crypto Collateralized Stablecoins are the coins which are backed by some cryptocurrency
like bitcoin, or ether.
Non-Collateralized Stablecoins are the coins which are backed by an algorithm which take
care of fluctuation and provide stability.

Crypto Token:
If we are already having blockchain, and we want to implement another business on top of the
existing blockchain network, we want some way to represent digital assets. Then these assets
are represented using a Crypto Token. Typically, it will be implemented as a business case
on an existing blockchain.
Cryptographic tokens represent programmable assets or access rights, managed by a smart
contract and an underlying distributed ledger.
There are mainly two types of tokens.
1. Utility token
2. Security Token

Utility Token is one which can be used within a particular network.

Security token can be created with cryptocurrency or Fiat currency. It is considered as an
investment.
For example, in gaming station of fun world, they will give you a card to access and you have
to load money into it and within the arena, you can use that card. You have to buy a utility
token to avail the service or to pay for the service within the network.
But with the security token, you buy it as an investment, which can later be taken with the
cryptocurrency or with any other fiat currency.

Difference between Crypto coin and Crypto Token:

Crypto Wallets/ Blockchain Wallets:

Crypto Wallets are just like physical wallets which is capable of holding and storing
cryptocurrency.
1. Wallets are mainly responsible to hold and exchange more than one type of
cryptocurrency.
2. Allow to issue digital transactions that are secured on the blockchain.
3. Allow to access crypto wallets through multiple devices.
4. The privacy of wallet owner is also maintained within the network.
Blockchain Wallet Transactions:
In order to initiate any transaction, user should use only the associated public and private key
combination. Only after that, the transaction will be completed.
When you join any wallet, a set of public and private key is provided by the wallet server.
Using these keys only, any transaction can be initiated or completed. All the transitions are
recorded in the blockchain network and balance is stored in the wallet.

Advantages and Disadvantages of Blockchain Wallet:

1. The main advantage of Blockchain is that all transactions are distributed, anybody
in the network can validate the transactions and hence trust is developed.
2. However, using a blockchain wallet is like a double ended sword. Losing an email
password is not such a big deal as we can regenerate a new password, which is not
the case if we lose the private key.
Once a private key is lost, it can never be recovered and all the bitcoins and cryptocurrency
stored in the wallet will be lost.
Types of Blockchain Wallets:
There are mainly 5 type sofa wallets which are further divided into two main categories
1. Hot Wallet and
2. Cold Wallet
Cold Wallet:
Wallet is called Cold Wallet as they are not connected to the internet. Cold Wallet is further
divided into 2 types.
1. Hardware Wallet and
2. Paper Wallet
Hardware wallets are like USB. We just need to connect it to laptop or desktop and all the
credentials will be passed through the device.
Paper Wallets are like QR code printed on a piece of paper. It is secure, but we have to keep it
safe.
Hot Wallet:
Wallet is called Hot Wallet as they are connected to the internet. Some of the hot wallets are
1. Online Wallet
2. Mobile Wallet
3. Desktop Wallet
Online Wallets are connected through internet and can be accessed from anywhere.
Mobile Wallets can be accessed through a mobile device or any mobile applications.
Desktop Wallet — the private key is stored on the desktop and it can be accessed through
desktop applications.
Crypto wallet Security:
There is various level of security which is provided by these crypto wallets. They are mainly
divided into 3 levels.
1. First level is Email verification, where we register with the email and through that
email, we can recover the password. This is used to prevent users from losing
access to their account.
2. Second level is authorization by linking through phone number through which an
OTP can be generated and authenticated. This is to prevent unauthorized access.
3. Third level, which is the most important one allows users to block any requests, so
that any request which is not initiated by the owner will not be accepted.

Financial Services:
The use of technology has revolutionized the financial industry. Financial intermediation has
become more efficient with lower cost and higher speed, challenging the traditional banking
sectors and financial markets. The increased use of blockchains for creating cryptocurrencies
and other online assets has provided new classes of safe digital assets.
A prime area for blockchain businesses is interfacing cryptocurrencies with traditional
banking and financial markets.
1. Ripple Labs is using blockchain technology to reinvent the banking ecosystem and
allow traditional financial institutions to conduct their own business more
efficiently.
Ripple’s payment network lets banks transfer funds and foreign exchange transactions
directly between themselves without a third-party intermediary, as is now required: “Regional
banks can now move money bilaterally to other regional banks without having to relay those
funds through an intermediary.”
Ripple is also developing a smart contracts platform and language, Codi us.
2. Another potential symbiosis between the traditional banking industry and Bitcoin is
exemplified by Spanish bank in Confine, a Bitcoin technology startup that aims to make it
possible for end users to buy and sell Bitcoin directly without an exchange.
3. Other businesses are also connecting Bitcoin to traditional financial and payments market
solutions. PayPal is an instructive example because PayPal was initially an innovative
payments market solution outside of the traditional financial-services market, like Bitcoin, but
has since become a more formal business within the regulated industry, collecting and
validating detailed personal information about its customers. PayPal had been known for
being on the edge of financial innovation, but it then became more corporate focused and lost
the possibility of providing early market leadership with regard to Bitcoin.
Now, PayPal has been incorporating Bitcoin slowly, as of September 2014 announcing
partnerships with three major Bitcoin payment processors: Bit Pay, Coinbase, and Geocoin.
Also in September 2014, PayPal’s Braintree unit (acquired in 2013), a mobile payments
provider, is apparently working on a feature with which customers can pay for Airbnb rentals
and Uber car rides with Bitcoin.
4. In the same area of regulation-compliant Bitcoin complements to traditional financial
services is the notion of a “Bit bank.” Bitcoin exchange Kraken has partnered with a bank to
provide regulated financial services involving Bitcoin.
There is a clear need for an analogy to and innovation around traditional financial products
and services for Bitcoin — for example, Bitcoin savings accounts and lending.
BTCjam is an example of such decentralized blockchain-based peer-to-peer lending.
Tera Exchange launched the first US-regulated Bitcoin swaps exchange, which could make it
possible for institutional and individual investors to buy Bitcoin contracts directly through its
online trading platforms. Part of the offering includes an institutional Bitcoin price index, the
Tera Bitcoin Price Index, to be used as the benchmark for trading USD/XBT contracts.
5. In the same space, startup Vacuum is building an API for financial institutions to offer
traditional brokerage investors and bank customers access to Bitcoin.
6. Another project is startup Butter coin, a Bitcoin trading platform and exchange for high-
volume transactions (200,000–500,000 Bitcoin, or $70–$175 million), targeted at a business
clientele who has a need to complete large-scale Bitcoin transactions. Butter coin is partnered
with capital markets firm Wedbush Securities, itself one of the first security analysts to cover
Bitcoin and accept Bitcoin payments for its research.
Other ventures are more radically positioned against artificial unregulated monopolies in the
current stock trading market infrastructure, like the Depository Trust Company and the
National Securities Clearing Corporation, or DTCC, which is involved in the clearing and
settlement of securities.

Prediction Market:
Prediction markets are marketplaces where people trade on the outcomes of future events.
Market prices can indicate what the marketplace believes the probability of the event is. Most
prediction markets are a binary option market (e.g., “yes” or “no), where the two options will
expire at the price of 0% or 100%. Before expiry, the two assets trade between 0% and 100%,
which indicates what the marketplace thinks the odds are.
For example, “who will win in a sporting event?” For this sporting event there will be two
tokens, one for each team. If the price of token A is higher than token B, it means that the
market believes team A has a higher chance of winning. If the market price of token A is
US$0.30 and the price of token B is US$0.70, then the market believes the likelihood of team
B winning is approximately 70%.
Prediction markets can be seen as an extension of derivatives markets. Derivatives, such as
futures and options, are used to predict the future price of assets such as oil, gold, stocks, and
bitcoin. Prediction markets do the same for events.
Derivatives markets are also used to bet on the probability of some future events, but
indirectly. For example, if you believe a certain political party will win the US presidency,
you might express that belief by buying or selling certain stocks and commodities. Prediction
markets allow people to place bets directly on the probability of the election. In this way,
prediction markets can be seen as a “cleaner” way to express your views of the future.
Prediction markets might also be a public good. They have proven to be relatively accurate at
predicting future events. Companies such as Google have begun to use prediction markets.
Financial institutions pay attention to prediction markets on things like Central Bank rate
hikes. News organizations and society at large pay attention to prediction markets on political
elections.
Centralized or decentralized prediction markets:
Most prediction markets exist within the legacy finance and web2 framework.
There are many centralized prediction markets regulated by government organizations like
the SEC. These centralized markets have several problems that impact their predictive power.
The most important problem with these centralized markets is that they have low limits on
how much each person can bet. This limits the predictive power of prediction markets,
because even if a person has very strong conviction about an outcome and the means to back
it up, they are capped at limits well under $1,000. This is especially true when someone
believes that the likelihood of an event is very mispriced. They, and like-minded people, will
be unable to capitalize on the market mispricing, and the prediction market will grossly
misrepresent the probabilities.
Legacy prediction markets need to KYC their customers, shutting out many people. A smaller,
narrower pool of people likely skews the market’s predictive power. Finally, prediction
markets have high fees (e.g., a 5% withdrawal fee on Predict It) — an all-too-common
problem with legacy financial products.
Decentralized crypto prediction markets solve these problems. They do not limit people’s
ability to fully express their conviction on an outcome. There are decentralized projects that
do not have jurisdictional or KYC requirements. Finally, as is the case when comparing any
DeFi protocol to its legacy market counterparts, fees are much lower.
Bitcoin prediction market is a decentralized crypto prediction market. Examples of Bitcoin
prediction markets are Predictions and Fairlay.
Bitcoin prediction markets offer a betting venue for the usual real-world outcomes as
prediction markets always have, such as elections, political legislation, sports matches, and
technology product releases, and also serve as a good source of information about the
developing blockchain industry.
Bitcoin prediction markets are one way to see what insiders think about Bitcoin’s future price
directions, the success of different altcoin and protocol 2.0 projects, and industry issues more
generally (e.g., technical development issues with Bitcoin, such as when there will be a hard
fork — significant change of the code, and the level of difficulty of the mining algorithm).