Fintech Lecture 4: BlockChain and cryptocurrency
Money is a symbol of exchange. It does not have any intrinsic value. It has value only because we humans place a value on it. — Aristotle
Gold, silver, other metals and stones are precious only because they are scarce in nature or have a special physical property that is valuable for us.
All of the world’s gold ever been mined can be fit in 4 Olympic size pool.
Money is a symbol of exchange, store value and Unit of account(INR, USD, YEN etc). — Modern Definition
In the 1990s Pizza hut released a website for Online orders of pizza, “www. Pizza.net”. Users could have looked at their menu and ordered online. The issue was Payment. Online payment was nowhere to be found. Basically, cash on delivery is not new, it is in the market for decades.
Early Online payment
One challenge with online payment in the early 1990s was how to move value/money on the internet. How to do it securely, efficiently, and really importantly, similar to the data packets that move on the internet and peer-to-peer. Because none of this data is going through any central system to monitor it because the internet does not have a central system.
But the challenge really was, how could you prohibit double spending? How could you send a packet of data to one person and ensure that the packet of data wasn’t also sent to another, in essence, double spending?
In 1996 the solution came and we use it now — secure socket layer and transport layer security. which transmit encrypted data ensuring complete data confidentiality. These two protocols, on top of Tim Berners-Lee's protocols about the world wide web from four or five years earlier, changed the way how the internet works.
Internet Architecture
It works on the client-server architecture. Each service offered is owned by one entity/server and offered to multiple clients. As a website owner, they have the liberty of modifying information within their database(s) or deleting it from their records. If medium doesn’t like one of my articles, they can delete it and similar to this if I don’t like any of my content I can do that too because creating a profile gives me ownership of my content.
The same goes with the Banks. Although they are regulated and legally obliged to act in your favor, you still need to trust them with your finances and have faith in their IT systems. You basically have no other choice.
Blockchain technology
Generally, we deal with a peer-to-peer network where no client talks to a central server but to many other clients. This peer-to-peer network comes with a distributed database. Data is shared among all clients of the network. The data forms a chain where each block points at its predecessor in some form.
Placing individual entries into the chain would be inefficient which is why multiple entries are actually batched into blocks. This means that each block contains several data entries (thus the name of the technology).
To establish trust between all clients, or in other words, make sure that no one simply changes the chain and sends a fake one to your client, blocks contain a cryptographic reference. This reference often takes into account the content of the current and the previous block so that the correctness of a block and the whole chain can be verified, call it a smart contract.
The process of appending a new block to the chain is either called mining or forging. Bitcoin uses Proof-of-work type of mining algorithm.
The chain itself is designed to be immutable. Entries can’t be changed and can’t simply be deleted again, there is always a new entry — like an event log that states what happened when — publicly available.
No one can easily take control of a blockchain and change everything to their advantage. Small-scale manipulation can be spotted and negated by the network itself. Users do no longer have to trust a central entity to manage something for them, the network does it.
The general idea of a blockchain is to provide a publicly available, decentralized database. Everyone can participate and work with the network. Trust is established by the implementation itself because manipulation is very difficult or even impossible.
Cryptocurrency
When we purchase something online we are sharing a value. That value is the local currency and controlled by Banks to authenticate and authorize you to transfer that value. So what Satoshi Nakamoto was solving for is, what if there was no central authority? And it was a shared database or ledger, or a shared accounting system.
That was the first decentralized system.
Even then it was never considered seriously until bitcoin started making an impact in the finance domain as an alternative to fiat currency. Big tech also started looking into it. Banks took cryptocurrency seriously when Facebook launched Libra in June 2019 and now China is also coming up with its own digital currency.
One of the pros and cons of cryptocurrency is censorship resistance and scalability. Users want to stay off the grid while exchanging it. You can move about 7–10 transactions on Bitcoin per second and 10 to 20 transactions per second on Ethereum. In the middle of one of the most volatile times in February 2020, DTCC was moving 350 million transactions.
May 2010 -> 10000Bitcoin = 2 Pizzas (the first commercial transaction of bitcoin) = $42
23 February 2021 -> 10000 Bitcoin = $565,303,000.00
Pizza is such a revolutionary thing. The first thing ever bought on the internet was Pizza and the first thing ever bought through Bitcoin was also pizza.
Three properties of money, a medium of exchange, store value and unit of account work for bitcoin and sometimes it doesn’t. Cryptocurrencies are not mainstream yet but they are catalysts for change.
You can not purchase groceries with bitcoin but you can buy a Tesla, no proper medium of exchange and you’d never store all your savings in bitcoin because of its volatile nature. You might lose everything overnight. But this might not be the currency's fault. It might be because of the market. The market might not have the right infrastructure to support this currency. Once the market supports this, the volatile nature might go away. Because currently, it is digital scarce, as a limited edition skin of a video game character. But if you have bought bitcoin already, HOLD IT. Elon is taking it to the moon or maybe mars.
Lecture 3 — Open APIs — — — — — — — — Lecture 5 — Payments
Lecture 1 — Introduction — — — — Lecture 10 — Corona Crisis and Conclusion
