2. Blockchain Technology
Introduction
Lesson: BC-1.01
1. Welcome
This is level 1 in the KOIOS blockchain program, the very first course that introduce the technology, backgrounds
and main concepts.
2. An introduction
We set a storyline in this section, and although we sometimes oversimplify things to create a basic
understanding, it is still at some points detailed.
3. Multi-disciplinary!
4. Study mindset
You are currently watching a course on bachelor level, which gradually moves towards master level. A study
attitude and mental stamina will bring you a long way.
5. Lifelong learning
No worries, many courses will follow 2
3. 1.1 Overview section “ledger-nomics”
1. What is a ledger?
2. What is the history of these ledgers?
3. What is a centralized ledger?
4. What are examples of centralised ledgers in our daily life?
5. How do we record transactions in a double entry book keeping system?
6. Recap: Why start a blockchain course with ledger-nomics?
3
4. 1.1.1 A “distributed, decentralised ledger”….but…what is a ledger?
Imagine a sort of book in which activities (“exchanges”) are periodically recorded and historically
ordered. Ledgers mirror the world, reconstructing transaction in the same sequence as real life transactions.
Financial ledgers are the most known ledgers, and they represent a complete record for an entity’s
economic activities and are used to keep track of transferring or ownership of assets, like money for
example, among various stakeholders such as the entity itself, consumers, suppliers and producers.
Different activities (exchanges) = different ledgers, for example economical, social, political. Ledgers can
record tangible assets and intangible assets.
4
5. 1.1.1 What is a ledger? – Importance
A ledger-centric view of the economy: “Ledgers provide an underlying infrastructure for exchange by allowing actors (people /
organisations) to prove, validate, and verify property ownership. In this sense ledgers map economic, political and social
relationships”
1. Ledgers confirm ownership – when a transaction is recorded in a ledger, it also records who owns the asset. Therefore,
property registers are also ledgers just as inventory lists.
2. Ledgers confirm identity – the government register records details of its citizens and enshrining their legal identity. The
company’s register records the identity of enterprises.
3. Ledgers confirm status – numerous government ledgers confirm status such as the marriage register but also the electoral
register gives details of who is eligible to vote or not.
4. Ledgers confirm authority – registers are used to identify rights attached to particular people or actions.
Source
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6. 1.1.1 What is a ledger? – Examples
• Account ledgers
• Bank Accounts
• Land Registries
• Securities Records
• Medical Records
• Hotel Reservations
• Citizenship Records
• Academic Certificates
You also record historic activities and try to describe the current world (“epistemic”). A random list, like a
shopping list, is therefore not a ledger because it doesn’t try to represent the world.
6
8. 1.1.2 What is the history of these ledgers?
The historical evolution of ledgers
Double entry accounting
494 A.D. Fra Luca Pacioli entered the scene, creating a debt-based system
Delegated trust resulted in powerful “trusted third parties”
Example of increasing powerful intermediaries: the Medici family.
Growing importance of ledgers
Ledgers continuously adopt and become more and more important (“ledgerisation”)
More and more data, integration in daily life and peer-to-peer interconnection.
8
9. 1.1.3 What is a centralized ledger?
A centralised ledger is a ledger that is controlled by a “centralised party”, where centralised = concentration
of power. The more power is concrentrated to one entity, the more centralised something is.
Centralised ledgers are everywhere and are incorporated in our lives. They are controlled by centralised
parties in closed off environments and are often not open for public.
This is done by parties we trust, not only with trusting to keep the record, but also with our assets,
transactions/data and power (like money for example). We call these parties “Thrusted Third Parties”
(TTP). Until now we have always needed these TTP to maintain the ledgers, we couldn’t trust a random
stranger not to abuse the system.
A ledger can also be seen as data structured by rules, with internal and external rules.
9
10. 1.1.4 What are examples of centralised ledgers in our daily live?
Your bank account and credit
card transactions
The name of lessees of cars
leased by a car company
The General Ledger underlying your
company’s financial statements The ownership records of corporate
securities
The list of title deed holders at
your land registry office
The records relating to your
citizenship, such as your
national ID number
10
11. 1.1.5 Recording transactions in a double entry book keeping system?
Shadow banking……and how almost all of our money is created
11
Source
12. 1.1.6 Why start a blockchain course with “ledger-nomics”?
“A distributed decentralized ledger” and a new trust system since thousands of years (!!!).
We will explain how blockchain technology is not only a new form of ledger, but also enables new
possibilities in accounting and with it in governance (= governing processes). Since you now know the
history you can understand the gravity of these implications. and governance and therefore enabling new
systems in society. Just like 1494, this is the true revolution: bringing that not-so-sexy document full of lines and
data to the next level.
Ledgers structure firms (organisational charts), secure ownership (property title registers) and direct
redistribution (ledgers of recipients for social security). A change in ledger technology therefore will change
the organizational and institutional structure of an economy and society.
12
13. 1.1.6 Is blockchain the perfect ledger?
Actual ledger – “An actual ledger is a ledger that exists in the real world, whether physically or digitally, such
as an accounting spreadsheet, or an organisation chart, or a seating map of the House of Representatives”
General ledger –”The totality of all economic value and transactions we refer to with the theoretical construct
of a general ledger. The notion of a general ledger is the idea that all real property relationships (ownership
and transactions) in an economy correspond to a ledger entry in some ‘book’, or that all economic activity
involves some exchange of property rights. concept of a general ledger is the abstract notion that all
economic actions in the real world (all transactions, all exchange, contract and production) can be
hypothetically mapped to a ‘general ledger’ that records that change in state of the data of an economy”
A perfect ledger - A perfect ledger is the analog of a zero transaction cost economy, or a world in which
institutions do not matter (e.g. enabling Coase theorem).
13
14. 1.1.6 Is blockchain the perfect ledger?
We can map the technological history and dynamics of ledgers as movements in this multidimensional space
How far do you think we are..?
14
Source
15. 1.2 Shortcomings centralized ledgers
Three main risk categories
1. Exclusion (no number, no play)
2. Dishonesty (abuse of power)
3. Loss of records (destruction by nature or attacks)
In other words, this leads to consequences like:
• Centralized control have often resulted in abuse of power
• Lack in privacy and / or personal freedom
• Lack in data ownership
• Information asymmetry / corruption
• Scaling limitations (less transaction cost efficiency)
• No uniform digital scarcity nor digital time
• Security gaps
• Static data (data & machines)
• Centralized ledgers have thresholds (more transaction costs)
15
16. 1.3 So… why should you care?
• Example 1: Centralised internet & data ownership
• Example 2: The fiat experiment
• Example 3: Software is eating the world
• Example 4: Interconnecting possibilities (less asymmetry)
• Example 5: get a personal head start: It is not the strongest of the species that survives, nor the most
intelligent that survives. It is the one that is most adaptable to change. - Leon C. Megginson & Jordi M.
Jansen
16
17. 1.3 So… why should you care? – Censorship resistance & freedom!
No forging data
No excluding people or content
No forced norms & values
Freedom of the individual
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Source
19. 1.4 Distributed decentralised ledgers
1. What is a “distributed”, “decentralized” ledger?
2. The problems with distributed ledgers
3. The benefits of distributed decentralized ledgers over current centralized ledgers
19
20. 1.4.1 What is a “distributed”, “decentralized” ledger?
1. The distributed & decentralised ledger database is spread across several nodes (devices) on a peer-to-peer
network, often across the world.
2. Each replicates and saves an identical copy of the ledger and updates itself independently.
3. The primary advantage is the lack of central authority and therefore reduce the three risks f.e
4. The process in short (continuous circle):
a) when a ledger update happens, each node constructs the new transaction independently
b) When finished, it broadcasts the new transaction(s) the new page
c) the nodes vote by consensus algorithm on which copy is correct.
d) by use of a set of rules, a protocol, often enforced by a mathematical protocol instead of thrusted authority.
No internal and external rules, but mathematical rules.
e) once a consensus has been determined, all the other nodes update themselves with the new, correct copy
of the ledger and then start at a) once again.
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21. 1.4.1 What is a “distributed”, “decentralized” ledger?
A distributed ledger (shared ledger or distributed ledger technology or DLT) is a “consensus” (agreed upon by the
group) of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries,
or institutions. It is a “trust” “machine”
So….There is no central administrator / coordinating party to rely on or centralized data storage. Nodes rely
on the protocol, the set of rules. In short: everybody is able to join and is reading the exact same book (ledger)
and record transactions according to the protocol rules simultaneously.
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22. 1.4.1 What is a “distributed”, “decentralized” ledger?
Difference distributed and decentralized:
Centralization and decentralization refer to levels of control.
Distribution refers to differences of location.
Source
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23. 1.4.2 Problems with distributed ledgers
Distributed systems are a group of computers working together to accomplish a very specific goal. For
example share the same content around the world (Twitter feed). This group of computers have to overcome
three problems in order to achieve this goal:
1. Timing. Each computer/system will execute the same task at it’s own pace and time.
2. Ordering. Trying to solve what happened and when with time is still very hard since clocks start “drifting”
after a period of time. This makes order a complicated challenge since each system has its own account of
what happened and when.
3. Failure. Coordination between systems can fail due to a system crashing, not receiving/sending messages
to other systems correctly or choosing to act maliciously (Byzantine)
23
24. 1.4.3 Examples benefits of decentralised ledgers over centralized ledgers
By removing the Thrusted Third Party (TTP), you remove the single point of failure, which has a multitude of
benefits. Examples (should seem familiar….):
1. No censorship resistance and personal freedom of speech (money is a language)
2. Control your own data, no lack in privacy and earning money with your self-sovereign data
3. Immutability, the history can’t be altered.
4. Transparency & SSOT
5. Freedom of choice & openly accessible
6. More secure, less single point of failures
7. Scalable governance models (less limits, new forms of governance)
8. Different wealth distributions
9. New forms of sharing information & Less information asymmetry
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25. 1.4.3 Benefits decentralization - on a historic note
1. “Blockchain technology removes limitations and increase transaction cost efficiency”
2. “Interconnecting: moving alongside history to the “all–one–entity”
25
Source
26. 1.5 What is a blockchain
1. The problem with official definitions
2. How do blockchains work?
3. What are the properties of a blockchain?
26
27. 1.5.1 The problem with official definitions
Blockchain is an example of a distributed and decentralised ledger: so it records simultaneously updated
globally and they are “Turing-complete machines”. This mean that the ledgers are “smart” = within the
ledger itself, you have the ability to program data that automatically enforces and changes records within
the ledger……
WIKIPEDIA: A blockchain, originally block chain, is a growing list of records, called blocks, that are linked using
cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction
data (generally represented as a Merkle tree. By design, a blockchain is resistant to modification of the data. It is
"an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and
permanent way“….
27
28. 1.5.1 The problem with official definitions
IN BITCOIN SOURCE-CODE: Nodes collect new transactions into a block, hash them into a hash tree, and
scan through nonce values to make the block's hash satisfy proof-of-work requirements. When they solve the
proof-of-work, they broadcast the block to everyone and the block is added to the block chain.
So you see: the answer depends on who you ask, it is very multi-disciplinary and therefore hard to explain.
There are no official definitions and because it is so multidisciplinary, people tend to look it from different
perspectives.
A simple example of this, up for discussion: does a blockchain need to be “open and public” to be called a
blockchain or can a private “blockchain” also be called a blockchain?
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30. 1.5.2 How do blockchains work? Version 2
Blockchain formation. The main chain (black) consists of the longest series of blocks from the genesis block
(green) to the current block. Orphan blocks (purple) exist outside of the main chain.
So…..what is happening here? The blocks (pages) don’t seem in synch….?
30
Source
31. 1.5.2 How do blockchains work? Version 3
1. Open, everybody can download the same book and update their book until they reach the common
consesus, also called as the single source of truth.
2. Peer to Peer transactions between users happen according to fixed scripts and get selected and
recorded in individual books by “miners”.
3. Miner that finishes their page, their block (including the transactions & puzzel solution), publish their page
to all the nodes. All the nodes validate the transactions and the page and update their books / ledger. A new
block / page is added in the history of the blockchain / book.
4. After the update of the page, new transactions happen and a new page will be composed. Pages/blocks
are numbered to orden the transactions, and therefore mimic time in the digital realm (we get a “fixed
historic sequence” of transactions). Each page starts with a reference to the total of all previous
pages, so alteration of the past is not possible without getting a new start of a new page.
Because we can all become miners and nodes and because we use fixed agreed upon scripts for transactions
according to a certain set of rules, the protocol, we don’t need an intermediairie we trust to coordinate the
transactions and the ledger. The protocol and all of us together maintain the ledger now.
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32. 1.5.2 How do blockchains work? Version 4
1. Hash
2. Block
3. Blockchain
4. Distributed
5. Transacting tokens
6. Coinbase
MANDATORY!
32
33. 1.5.3 Properties
“Tamper-proof, shared distributed digital ledger that records transactions in a decentralized peer-to-peer
network”. It stores permanently the history of asset exchanges between the peers(participants) in the network.
Other than distributing the power, you also have the ability to program the data and allow machines to own their
own data.
#1 immutable #2 decentralized #3 open and public #4 transparent
#5 censorship resistant #6 secure #7 private #8 neutral
#9 smart programmable data #10 Increases transactions cost efficiency & computational cost efficiency
IMPORTANT: Different blockchains each have a different trade-off between these and other properties. You can’t
have them all.
33
34. But wait…. Huh?! “We all validate and record transactions in our own page & Publish and compare our own
pages?”
WHAT?!
34
35. 1.6 The Byzantine general problem (BGP)
1. The problem with distributed ledgers (quick recap)
2. Introduction of the Byzantine General Problem (BGP)
3. Short history of the BGP
4. Why is solving the BGP important?
35
36. 1.6.1 The problem with distributed ledgers
What makes digital cash without an intermediary so difficult?
“Think of digital cash as a computer file that reads "one dollar, SN 111222333." Suppose I want to email this
digital file to you in payment for services rendered. When I take a dollar bill out of my pocket and send it to the
merchant, there is no question of that dollar bill leaving my pocket. For the same thing to be true of my digital
dollar, I would be required to destroy my computer file "one dollar, SN 111222333 " after sending it to the
merchant. The problem is that people are likely to make endless copies of their digital money files. In other
words, digital money can be counterfeited costless.
And this is why we make use of intermediaries to handle payments in a virtual ledger. (We don't expect the
intermediaries to counterfeit our balances...our main complaint with them is that they charge too much for their
accounting services!)” Source
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37. 1.6.1 The problem with distributed ledgers
“We all validate and record transactions in our own page & Publish and compare our own pages?”
In other words: how to make absolutely sure that multiple entities, which are separated by distance, and don’t or
can’t trust each other, are in absolute full agreement? You need to be in full agreement before you take an
action, like for example “did I truly receive the money before I hand over the pizza?”
Does everybody agree that I received the 10.000 bitcoins?
How do we reach “full consensus” also known as “the single source of truth”.
37
38. 1.6.3 The history of BGP
It is a common challenge in distributed systems with no central control to enforce trust. The Byzantine Generals’
Problem, first proposed by Marshall Pease, Robert Shostak and Leslie Lamport in 1982, provides a stylized
description of this problem
And many attempts follow, a lot of them came from David Chaum for example.
“Bitcoin: A Peer-to-Peer Electronic Cash System”, a white paper released in November 2008 by Satoshi
Nakamoto (pseudonym), might currently be the best solution to this problem and has had, by far, the broadest
adoption.
Bottom line: bitcoin most certainly wasn’t the first attempt. Decades of research and nearly 30 big attempts have
been tried before finally succeeding.
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39. 1.6.4 Why is the solving of the BGP important?
By being able to arrange (1) transactions in a timely manner (2) and by thinking of a clever incentive
mechanism that motivates and predicts behavior, good and bad (3), it now enables us to share a global
ledger: A successful decentralized ledger that allows parties that do not know or trust each other to transact
together. In other words: as you will see upcoming session Satoshi Nakamoto solved the three distribution
problems without using a coordinating party.
Wide range of advantages, most importantly less vulnerable (not invulnerable!) to all the three main risk
categories.
So now what….Decentralization of all business ledgers and “tokenize the world”?
But wait…..Very cool this BGP and that Bitcoin claimed to have solved it…but how then? And who? See you in
next session !
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40. 1.7 Satoshi’s aproach – fitting the pieces together
1. Who is Satoshi Nakamoto?
2. What are important novelties of Satoshi’s approach regarding solving the BGP
3. Did Satoshi actually solve the BGP?
4. Previous attempts & Bitcoin novelties
5. Do Bitcoin & Public ledgers even matter?
40
42. 1.7.2 Important novelties of Satoshi’s approach in solving the BGP
A ledger can be seen as data structured by rules. The institutional economics of ledgers considers how those
rules develop effect the structure of data and the consequences of that structing for exchange
(activity!) in the real economy.
Integration of rules leads to consensus. We have banking consensus, agreement between banks about their
ledgers and debts and credits between them, and we have for example decentralized consensus (open, all can
download the same book, the same single source of truth)
Novelty was combining:
Proof of work (cryptographic proof-of-work puzzle with a unique alphanumeric hash)
Longest chain (protocol states to follow most recent chain)
Incentives = mining rewards
Block numbering = Time stamping = wow!
All existed, but the combination of all these type of factors led to a new form of consensus.
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43. 1.7.2 Important novelties of Satoshi’s approach in solving the BGP
Solution lies in communication, where computers communicate in two ways: synchronous and asynchronous,
where synchronous = “real life conversation” where a certain amount of time is allocated and where the
computers take turn & where asynchronous = like Whatsapp / Slack = communicate whenever the computer
wants.
Properties: safety (agreement on the same output) & liveliness (chain keeps growing and functioning). Only
safety = stop producing blocks, only liveliness = many forks and no way to know which is the correct one.
Satoshi implemented a rule, the longest chain principle, and the protocol told which block was the
correct one (the one with the most hashing power / energy and time investments). The rule is written in
the set of rules, called the bitcoin protocol.
Fun fact: other blockchains, other possible rules of consensus. There are many other ways nowadays that can
determine the truth.
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45. Invention mechanical time “there was simply too much variance in the measurement of time … to have a useful
meaning in many daily activities” (Allen 2011). Mechanical time allowed for ledgers to be more accurate
depictions of the real world. Mechanical time moved actual ledgers closed to the hypothetical perfect ledger.
Satoshi: invention of digital time by distributed consensus (‘industrializing trust’)
45
1.7.2 Important novelties of Satoshi’s approach in solving the BGP
46. 1.7.3 Did Satoshi solve the Byzantine General Problem (BGP)?
In Bitcoin, the blockchain specifically serves a dual purpose, as it is used to:
• Permanence and immutability of all transactions
• Prevent double-spending
But did Satoshi solve the BGP?
Since both Ethereum and Bitcoin are probabilistic (multiple outcomes can be possible, there is a chance
the current chain isn’t the correct one). Validators, for example a sales man, therefore still needs to wait for
a certain number of confirmations to ensure the transaction actually went through. By introducing time, by
numbering blocks, Satoshi created a practical loophole. The more blocks, the more probability. Used to be
6 blocks, nowadays 3 blocks is acceptable as well (because of the increased power per block). Just wait a
few blocks and see who is right.
46Source
47. Why Bitcoin Matters? By Marc Andreessen in 2014, Founder of Netscape & well-known venture capitalist:
“A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense
result of two decades of intense research and development by nearly anonymous researchers. Political idealists
researchers. Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt
establishment elites heap contempt and scorn on it. On the other hand, technologists – nerds – are transfixed by it.
nerds – are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with
nights and weekends tinkering with it. Eventually mainstream products, companies and industries emerge to
industries emerge to commercialize it; its effects become profound; and later, many people wonder why its powerful
people wonder why its powerful promise wasn’t more obvious from the start. What technology am I talking about?
technology am I talking about? Personal computers in 1975, the Internet in 1993, and – I believe – Bitcoin in 2014….
I believe – Bitcoin in 2014….
The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet
time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such
47
1.7.5 Do Bitcoin & Public ledgers matter?
48. Ask yourself this when confronted Does this truly need decentralisation?
Because you don’t use a blockchain unless you really need it. Remember: despite some of the hype,
blockchains are “incredibly inefficient,” (remember all the power in the lost power in blocks that dit not
48
1.7.5 Do Bitcoin & Public ledgers matter?
49. 1. What is money?
2. Why do we use money?
3. The history of money
4. “Who dare threaten the status quo of power?”
5. Introduction of the money app - bitcoin
6. The first use case of bitcoins – recap Bitcoin and bitcoin
7. Other use cases of bitcoin
8. The monetary policy
9. The future of money? (quick scope)
10. An economy beyond money? (quick scope)
49
1.8 The world’s first decentralised usecase: the money app “bitcoin”
50. General definition: any asset widely accepted as payment for goods and services or in the repayment of
debt.
Examples common misconceptions:
The word money has a different meaning from income or wealth. Wealth can be money, but also includes
non-money assets such as a house, cars, jewelry, artwork, stocks & bonds, crypto, etc. Wealth is known as a
etc. Wealth is known as a stock, and income as a flow. Money is a stock.
Currency refers narrowly to bank notes & coins in circulation
“Money” can therefore be anything as long as it is “widely accepted as payment for goods ans services or in
the repayment of debt”.
50
1.8.1 What is money? - definition
52. Commodity money – money that has intrinsic value (gold, silver, live stock, salt, grains, gems)
Representative money = paper notes / currency that are backed by a commodity / can be exchanged for a fixed
amount of a valuable commodity. Usually gold or silver, but can also be tabacco notes for example. Example
dollar before 1971.
Fiat money = “consensus” money / “trusted third party” money. Has no intrinsic value nor can it be redeemed for
commodities. Its value originates from government decree, or fiat Example the dollar since 1971. Side note: mixed
with commercial banks “credit money”.
Credit money = Credit cards, checks etc. Bank “ledger money”. Denominated in same notes as fiat money.
Electric-money= debit cards, m-pesa, etc.
Cryptocurrency a complete new classification or same category as electric money?
Where do we leave Ceremonial money?!
52
1.8.1 What is money? – classifications of money
53. Historically this has been shells, bones, precious metals, coins, paper notes, and recently digital ledger
entries
Salt
Fun examples
53
1.8.1 What is money? – examples of money
54. 1. Primitive monies (tobaccos, skins, huge stones, bears’ teeth, etc.) are “used to create social
relationships...prevent group hostility and warfare...elevate one’s political position...and restore peaceful social
relationships between persons and groups disrupted by conflict...” Also think about the Yap story, for example
used for ceremonial or symbolic purposes (e.g. dowries)
2. On the basis of historical and anthropological evidence, it can be concluded that primitive barter exchange
was not market exchange “without money” and that the primitive “monies” do not emerge from the reduction of
transactions costs in the exchange process.
54
1.8.1 The history of money - Primitive “monies” are not money
55. 1. “Money is a language”
2. “Money is liquid time”
55
1.8.1 What is money? – examples of money
56. Throughout history, economies have evolved money as an “institutional” technology to facilitate trade and
exchange.
New technologies lead to new forms of money
New forms of money shape economic institutions.
Money facilitates barter and solves the (double) coincende of wants = everyone will accept money in exchange,
in part because they know that others will accept in in exchange (Menger 1892, Radford 1945, Jones 1976,
Clower 1995, Dalziel 2000, Szabo 2002).
Money is a special type of economic good that emerges by convention to become a (1) medium of exchange,
(2) a unit of account and (3) a store of value.
Keep in mind (!) “Money is what money does, and what is money is what evolves as money”
56
1.8.2 Why do we use money? – Functions of money
57. 1. Medium of exchange: facilitates trade & commerce
• Reduces transaction costs / increase trans. cost efficiency
• Must be socially acceptable and recognized widely
• The ease/efficiency to be exchanged for products &services. Current currencies represent a more
and services than the barter system. Intermediary between products or services that people want to
2. Unit of account: measure & compare value
• Price things in these units ( $, EUR )
• Standard unit of pricing everything (think about introduction of the Euro)
• A standard measurement to compare the value of goods, services, economic activities, assets and
3. Store of value (wealth): extremely liquid, but subject to inflation risk
• A repository of purchasing power over time.
• Highly liquid – i.e. convertible into cash or medium of exchange
• A store of value is a mechanism by which wealth can be saved and retrieved in the future with some
Store of value is not a function solely of currencies, but of assets in general. What is the “perfect
stable or predictably knowable future supply and demand for the asset
57
1.8.2 Why do we use money? – Functions of money
58. In a monetary economy ‘money buys goods and goods buy money, but goods do not buy goods’ - Robert
Clower, 1967
Medium of exchange = Money emerges because it solves the double-coincidence of wants problem in a
barter economy, which is a transactions cost efficiency.
Unit of Account = computational cost efficiency by denominating prices in a standardized base unit (a
money price) rather than a commodity price (an exchange ratio).
58
1.8.2 Why do we use money? – Efficiencies
59. Hard to pinpoint, somehow, the definite origins of money have been lost to history. General overview
7000 BC (?) - 2000 BC - Mesopotamia; Ancient SumariaPre-historic: money accounting to a standard value
w/out transferable tokens
2000 BC – 700 BC Standardized coinage (precious metal)
700 BC – 400 AD – Roman banking system (single entry) Asia Minor; Greek Empire; Roman Empire
400 AD – 1400 AD - Metal coinage
1400 AD – 1940´s – Metal coinage & (backed) credit-money
1940’s – 2008 – Increasingly more credit and unbacked trusted third party money
2008 decentralised peer-to-peer sound private self-sovereign money
59
1.8.3 History of money - Eras
60. Money is not a thing but the properties things can have when they function as a unit of account, a story of
value, and a medium of exchange. Can be defined in law (i.e. legal tender like FIAT), in practice (a
bearer bond), or in custom (cigarettes in a prison camp, Radford, 1945). And the moneyness of the
moneyness of the thing can derive from scarcity (cowry shells, gold), trust (commodity money, fiat money),
and utility (payments networks such as credit cards).
The form of money maps the evolution of economies. Money evolves as new technologies and protocols
technologies and protocols better solve money-ness properties. Money, in other words, is a dynamic
ledger, and like all technologies evolves and develops through time.
Attempts to build better money have for the past half-century or so been focused on platforms for
focused on platforms for digital money. First private payments platforms (credit cards) and derivative
cards) and derivative markets. The second generation, starting in the 1990s, sought to build new types of
money with new protocols on digital infrastructure (Cohen 2001). Early attempts, with varying degrees of
market success, were DigiCash (David Chuam), Bitgold (Nick Szabo), b-money (Wei Dai), PayPal (Peter
Thiel),
60
1.8.3 History of money
62. Third generation electronic money : Satoshi Nakamoto’s Bitcoin the world’s first cryptocurrency (using
blockchain technology to recombine aspects of earlier ideas) that finally technically succeeded, solving the
double-spending problem that had hither-to locked digital money into a centralized network.
The discovery in 2008 of a new technology of money using distributed ledgers secured with consensus
protocols (i.e. a cryptocurrency) has given monetary economists a fresh view on the evolution of money (Luther
and Olson 2013,
62
1.8.3 History of money
63. Common misconception = there used to be a barter economy (ten chickens for one
cow)
This has most likely never been the case, at least not as a general economic system
anthropological, historical, linguistic or other scientific evidence for a barter
It is a story line, told by economists to help tell the story of money as solving to
coincidence of wants.
63
1.8.3 History of money
64. Recap of alternative story by Heinson and Steiger (1983)
1. Used to be self-sufficient communities, where people took care of each other.
2. Private property was introduced (“essential uncertainty”), you became responsible for your own social
and economic well-being.
3. Built up security by excess production (stock)
4. People started borrowing and increased borrowing let to “regulation” (aboloshing, for example 600 BC in
Athens), risk increased, interest introduced itself. Type of loans expanded, need of standardizes unit of
account (wheat / grain!). Temples played a role in standardizing (“trusted wise elderman”). Wheat money
of account served as repayment.
5. To reduce transaction costs (like counterfeit), tempels switched to stamped metal
Linguistic and historical proof:
Greek Drachma: “a fistful” (of grain), Babylonian/Judean Shekel, Livre (Lira, Pound [lb.]) and current UK
Pound of course.
The Code of Hammurabi (ca. 2123–2108 b.c.) specified grain money for certain payments
64
1.8.3 The history of money – private property theory
65. The Credit Theory of Money
The market is as a clearing house for settling debts and credits (not for exchanging
because it can cancel debts, all money is debt. Economy grows, debt grows. What
debt? Money would cease to exist.
The State Theory of Money (Chartalism)
The State (or any other authority) imposes a liability in the form of a generalized,
money—used for measuring the obligation, typically taxes. “A dollar of money is a
material of which it is made, but because of the dollar of tax which is imposed to
65
1.8.3 The history of money – private property theory
66. Our most user current forms of money is FIAT money (trust based money). Originally from central banks
(governments), currently mostly from banks and mingled with government money. This is centralised trust
money and therefore all harbour the three categories of risk as discussed in earlier session (exclusivity,
dishonesty, loss of records).
Before we discuss the contestants threatening the status quo of power, we firstly discuss a few examples of the
three risk categories aplied to current monetary system:
1. (Hyper-) Inflation of fiat
2. Bank runs & system failure
3. Hacks
4. A cashless society (and data ownership)
66
1.8.4 “Who dare threaten the status quo of power?”
67. Government (fiat) money, often with monopoly protection by statute as legal tender, and legislatively required
for payment of taxes, has been the prime form of money since the rise of the nation state through the 19th and
20th centuries (Alchian 1979, Ingham 2004, Dequech 2013). However, the predominance of State-based money
is an artifact of both legislation and technological constraints, and as Hayek (1976) explained, the absence of
market competition in money supply has produced low quality (inflationary, insecure, slow, featureless)
insecure, slow, featureless) money (Bagus 2009).
Fiat is not limited in supply and therefore not very good (store of value) money. Because governments
Because governments can “print” extra money and because it is mixed with bank ledger money (both
conveniently have the same name) the supply is unlimited. Inflation results when the supply of money increases
faster than the economy expands, which results in higher prices.Inflation does the most damage to money as a
store of value, since its value continually declines as more money is created. Rather than keeping it, people
spend it as fast as possible before it loses value, which, in turn, causes prices to rise even more.
67
1.8.4 Example 1 of centralised risks: (hyper-)inflation of fiat
Source Source
68. Causes of Inflation
So what exactly causes inflation in an economy? There is not a single, agreed-upon
variety of theories, all of which play some role in inflation:
1. The Money Supply
2. The National Debt
3. Demand-Pull Effect
4. Cost-Push Effect
5. Exchange Rates
The Inflation debate
1. “Good for economy” (healthy 2-3% per year): more dollars -> more spending ->
production (= consumerism healthy / infinite growth possible?)
2. Paradox of thrift Preventing deflation. Bitcoin is deflationary in its policy.
3. Helps debtors pay back loans guess who is the world largest debtor?
4. Highly debated, multitude of opinions.
5. “10 tips to combat inflation”= do everything except holding fiat….
68
1.8.4 Example 1 of centralised risks: (hyper-)inflation of fiat
69. 1. 1971 The gold Standard
2. What is “Quantative Easing”?
3. Examples Hyperinflation
Source
Source
69
1.8.4 Example 1 of centralised risks: (hyper-)inflation of fiat
70. A bank run (also known as a run on the bank) occurs when a large number of people withdraw their money
from a bank, because they believe the bank may cease to function in the near future. In other words, it is when,
in a fractional-reserve banking system (where banks normally only keep a small proportion of their assets as
cash), a large number of customers withdraw cash from deposit accounts with a financial institution at the
same time because they believe that the financial institution is, or might become, insolvent; they keep the cash
or transfer it into other assets, such as government bonds, precious metals or gemstones. When they transfer
funds to another institution, it may be characterized as a capital flight. As a bank run progresses, it generates
its own momentum: as more people withdraw cash, the likelihood of default increases, triggering further
withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden
bankruptcy.To combat a bank run, a bank may limit how much cash each customer may withdraw, suspend
may withdraw, suspend withdrawals altogether, or promptly acquire more cash from other banks or from the
central bank, besides other measures.
Simply explained
70
1.8.4 Example 2 of centralised risks: bank run and system failure
Source
71. A banking panic or bank panic is a financial crisis that occurs when many banks suffer runs at the same time,
as people suddenly try to convert their threatened deposits into cash or try to get out of their domestic banking
system altogether.
A systemic banking crisis is one where all or almost all of the banking capital in a country is wiped out. Bank
runs first appeared as part of cycles of credit expansion and its subsequent contraction.
71
1.8.4 Example 2 of centralised risks: bank run and system failure
72. Some prevention techniques apply to individual banks, independently of the rest of the economy.
1. Banks often project an appearance of stability, with solid architecture and conservative dress.
2. A bank may try to hide information that might spark a run. Scheduling prominent deliveries of cash can
convince participants in a bank run that there is no need to withdraw deposits hastily.
3. Banks can encourage customers to make term deposits that cannot be withdrawn on demand.
4. A bank can temporarily suspend withdrawals to stop a run; this is called suspension of convertibility.
5. Emergency acquisition of a vulnerable bank by another institution with stronger capital reserves. This
technique is commonly used by the U.S. Federal Deposit Insurance Corporation to dispose of insolvent
banks, rather than paying depositors directly from its own funds. If there is no immediate prospective buyer
for a failing institution, a regulator or deposit insurer may set up a bridge bank which operates temporarily
until the business can be liquidated or sold.
72
1.8.4 Example 2 of centralised risks: bank run and system failure
73. Deposit insurance
1. Bank capital requirements reduces the possibility that a bank becomes insolvent.
2. Transparency may help prevent crises spreading through the banking system. In the context of the recent
crisis, the extreme complexity of certain types of assets made it difficult for market participants to assess
which financial institutions would survive, which amplified the crisis by making most institutions very
reluctant to lend to one another.
3. Central banks act as a lender of last resort. The role of the lender of last resort, and the existence of
deposit insurance, both create moral hazard, since they reduce banks' incentive to avoid making risky
loans. They are nonetheless standard practice, as the benefits of collective prevention are commonly
believed to outweigh the costs of excessive risk-taking.
4. Techniques to deal with a banking panic when prevention have failed:
5. Declaring an emergency bank holiday
6. Government or central bank announcements of increased lines of credit, loans, or bailouts for vulnerable
banks
73
1.8.4 Example 2 of centralised risks: bank run and system failure
74. Recap: money in your hand is central bank issued and backed money, the money in your bank account is a
unsecured loan to a highly leveraged deposit-taking institution.
Reasons why we think that is the same, besides the same denomination and exchangeable 1-for-1, is because
for nearly a century now (80+ years) your bank depository has been secured by the central bank’s Lender-of-
Last-Resort (LLR) facilities, government-backed deposit insurance, and a bank debt credit market built around
expectations that banks are Too-Big-To-Fail (TBTF).
A possible tool for governments to gain control: Central Bank Digital Currency (CBDC)
(CBDC)
“Fedcoin would be immensely popular. Not just among individuals, but institutions, which could finally own large
balances of the unit-of-account without having to assume the credit risk of a >30x leveraged balance sheet with
a big duration miss-match between its assets and liabilities.” Promo CBCD source
74
1.8.4 Example 2 of centralised risks: bank run and system failure
75. Interesting discussion: do you think gold is money or that it isn’t?
Why (use the functions and properties in your answer)?
Since you attack people their wallet, things can get heated
75
1.8.4 Example 2 of centralised risks: bank run and system failure
76. 1. Should the government and the creation and control of money be separated once more?
2. Is it still good money over the long run if a single entity can control it?
3. Who controls the government….?
76
Quick Questions – food for thought & up for discussion!
78. A cashless society describes an economic state whereby financial transactions are not conducted with money
in the form of physical banknotes or coins, but rather through the transfer of digital information (usually an
electronic representation of money) between the transacting parties
Pro’s of cashless society
Less expensive to create, store, and transport.
Less security and business risks and costs.
Transaction speed
Better collection of economic data
Greatly reduces the tax gap of unreported income
“Criminals use cash” & “the most effective tool to stop organized crime and terrorism”
Can become programmable and smart
78
1.8.4 Example 4: A cashless society and data ownership
79. Cons centralised alternatives
Centralised money = “Single point of failure” money, still harboring the three
dishonesty and loss of records.
How about the unbanked?
Tightly controlled and people must have confidence that it can work
Privacy not safeguarded
Overspending
Banking system is currently the biggest threat regarding crime and terrorism
Not sound money
Money & Freedom of speech
https://twitter.com/AriDavidPaul/status/1095687626059857923
79
1.8.4 Example 4: A cashless society and data ownership
80. Who would issue the money? The government? Commercial banks? Central banks? Apple Pay, Google Wallet,
WeChat, PayPal, Venmo, Amazon Pay? Or Facebooks Libra? Do you trust them with your money and data?
And what about in 50 years?
80
1.8.4 “Who dare threaten the status quo?” – the contestants
81. Bitcoin application number one: bitcoin (no capital B!), the money application. Software is eating the world
and now arrived at money. Main question: who do we wish to run this software, TTP or mathematics?
81
1.8.5 Introduction of the money app - recap Bitcoin and bitcoin
82. Whitepaper: A purely peer-to-peer version of electronic cash would allow online payments to be sent
directly from one party to another without going through a financial institution.
Experimental payment network removing need for mediation, in order to reduce the fees of digital commerce
(increasing transaction cost efficiency!) and remove the need for sharing more identity information than
required (self sovereignty data = freedom from Orwellian future!).
Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of
mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the
transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-
in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads.
of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would
more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment
unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make
currency, but no mechanism exists to make payments over a communications channel without a trusted party.
party.
82
1.8.5 Introduction of the money app - initial intent bitcoin
83. • Censorship resistance
• Open & Global
• No central authority
• Transactions & balances in blockchain
• Electronically
• Programmable
• New forms of monetary policy (Hayek)
• Opt-in system
• Finality / irreversible
• Interoperable?
• Less systematic risk
• Predictable
83
1.8.5 Introduction of the money app – current state
Source
86. Government (fiat) money
1. Centralized authority
2. Rules are not set
3. Supply can be manipulated
4. Almost always inflationary
5. Requires trusted intermediaries
6. Widely accepted payment method
7. High transaction throughput
8. No costs to “print”
9. No choice & no data ownership
Cryptocurrency
1. No centralized authority
2. Rules are set and verifiable
3. Supply cannot be manipulated
4. Some inflationary, some deflationary
5. Trusted intermediaries not required
6. Not widely accepted as payment (yet?)
7. Blockchain scaling still area of R&D
8. Mining currency cost a lot
9. Free choice & data ownership
1.8.5 Basic comparisation with current system
(red and greens are up for debate!)
87. Bitcoin was created to provide a way to transact without identity or a trusted intermediary. It began as the
currency of choice for technologists & hackers, libertarians, black market users, cross-border remittances, and
the oppressed (i.e. Venezuela). This was especially timely given the government bail out of banks that took on
excess risk.
But this wasn’t the first use case of bitcoin…? So what was…?
87
1.8.5 Introduction of the money app - initial intent bitcoin
88. So, why do we need blockchain and why bitcoin? Let us construct it in reverse:
1. What we need is a ledger that covers the three risk categories as discussed, so we need an open, unstoppable, trustless system
(preferably fast and cheap!) to register peer-to-peer transactions, like for example payments.
2. We therefore need a single source of truth, based on a consensus about what the transactions are valid (when to record) and who owns
what and when (history).
3. Security is paramount, we don’t want double spending or stolen funds for example and we expect participants to be frauds sometimes.
We also expect people to come and leave on their own behalf. So we need to introduce time (a sequence) in the recording of
transactions.
4. Hence we need a proven history, which cannot be altered and that shows the origin of transactions as well as their current status (who
owns what). The blocks and transactions therefore need to be linked / chained and secured, for example by proof of work (other
blockchains use other “puzzels”)
5. Since proof-of-work cost money, it must be incentivized.
6. Usecase 1 bitcoin – incentivize miners to maintain the worlds first decentralized distributed ledger. Important note: trade off
Important note: trade off between reduced efficiency (proof of work and energy consumption) in order to provide censorship resistance
and flexible membership set of participants (openly accessible network, you can join or leave the network at own behalf).
88
1.8.6 The money app - the first use case of bitcoins
89. 1.8.6 The money app - the first use case of bitcoins
Role of cryptocurrency
89
90. It is a money application, suited for online realm
Cross border transactions
Self-sovereign
Sound money
Programmable money
Freely Tradable
Data ownership
No Trusted Intermediary
Transferring data (unique data, transfer, but not copy!)
Machine to machine payments
Increases transaction cost efficiency by removing thresholds of centralized authorities
authorities
Other cryptocurrencies and inter-operability
Etc. etc.
What do you think the intrinsic value of bitcoin is?
90
1.8.7 The money app - Other examples of usecases of bitcoin
91. Less than 1% of the world’s population — no more than 40 million people — have ever used Bitcoin. But,
according to the Human Rights Foundation, more than 50% of the world’s population lives under an
authoritarian regime. If we invest the time and resources to develop user-friendly wallets, more exchanges, and
better educational materials for Bitcoin, it has the potential to make a real difference for the 4 billion people who
can’t trust their rulers or who can’t access the banking system. For them, Bitcoin can be a way out. Source
91
92. Austrian School
Maximum / controlled supply: nearly 21.000.000 (2140)
Deflation experiment versus fiat experiment
See KOIOS Course “all about money” for the in-depths!
92
1.8.8 Monetary policy
Source
93. Historically speaking
1. Collectible
2. Store of Value
3. Medium of Exchange
4. Unit of Account
Bitcoin is in transgression between fase 1 and 2.
93
1.8.9 The future of money – the evolution of money
95. Is Bitcoin a bubble?
Not backed by gold or something
Not backed by future taxes
Not stable in price
Not Conventient and user friendly
Not accepted in a lot of places
Not as fast and cheap as bank transaction
Backed by math & investments
Openly accessible (opt-in & freedom of choice)
Borderless and digital
Immutable
Scarcity within the protocol
Smart (programmable)
Secure
Decentralized peer-to-peer
Self-sovereign sound “money”
Rapid growth
It is a better record-keeping mechanism network (it is
money and a P2P network)
96. a) Bitcoin is a bubble
Bitcoin, like all market-based monetary goods, displays a monetary premium. The
gives rise to the common criticism that Bitcoin is a “bubble”. However, all monetary
premium. Indeed, it is this premium (the excess over the use-demand price) that is
all monies. In other words, money is always and everywhere a bubble.
both a bubble and may be undervalued if it’s in the early stages of its adoption for
use as money. Source
96
1.8.9 The future of money – the evolution of money
97. b) Bitcoin is too volatile
Bitcoin’s price volatility is a function of its nascency. In the first few years of its
penny-stock, and any large buyer — such as the Winklevoss twins — could cause a
adoption and liquidity have increased over the years, Bitcoin’s volatility has
Bitcoin achieves the market capitalization of gold, it will display a similar level of
the market capitalization of gold, its volatility will decrease to a level that will make
medium of exchange. As previously noted, the monetization of Bitcoin occurs in a
Volatility is lowest during the plateau phase of the hype cycle, while it is highest
phases of the cycle. Each hype cycle has lower volatility than the previous ones
market has increased.
97
1.8.9 The future of money – the evolution of money
98. Derivates based on these moneys are not accounted for, those are many many many times larger
98
1.8.9 The future of money – the evolution of money
Source
99. c) Transaction fees are too high
A recent criticism of the Bitcoin network is that the increase in fees to transmit bitcoins makes it
unsuitable as a payment system. However, the growth in fees is healthy and expected. Miners can either
be paid by transaction fees or by block rewards, which are an inflationary subsidy borne by current
bitcoin owners. Given Bitcoin’s fixed supply schedule — a monetary policy which makes it ideally suited
as a store of value — block rewards will eventually decline to zero and the network must ultimately be
secured with transaction fees. A network with “low” fees is a network with little security and prone to
external censorship. Those touting the low fees of Bitcoin alternatives are unknowingly describing the
weakness of these so-called “alt-coins”.
The specious root of the criticism of Bitcoin’s “high” transaction fees is the belief that Bitcoin should be
a payment system first and a store of value later. As we have seen with the origins of money, this belief
puts the cart before the horse. Only when Bitcoin has become a deeply established store of value will it
become suitable as a medium of exchange. Further, once the opportunity cost of trading bitcoins is at a
level at which it is suitable as a medium of exchange, most trades will not occur on the Bitcoin network
itself but on “second layer” networks with much lower fees. Second layer networks, such as the
Lightning network, provide the modern equivalent of the promissory notes that were used to transfer
titles for gold in the 19th century. Promissory notes were used by banks because transferring the
underlying bullion was far more costly than transferring the note that represented title to the gold.
Unlike promissory notes, however, the Lightning network will allow the transfer of bitcoins at low cost
while requiring little or no trust of third parties such as banks. The development of the Lightning
network is a profoundly important technical innovation in Bitcoin’s history and its value will become
apparent as it is developed and adopted in the coming years. 99
1.8.9 The future of money – the evolution of money
100. d) Competition
As an open-source software protocol, it has always been possible to copy Bitcoin’s software and imitate
its network. Over the years, many imitators have been created, ranging from ersatz facsimiles, such as
Litecoin, to complex variants like Ethereum that promise to allow arbitrarily complex contractual
arrangements using a distributed computational system. A common investment criticism of Bitcoin is
that it cannot maintain its value when competitors can be easily created that are able to incorporate the
latest innovations and software features.
The fallacy in this argument is that the scores of Bitcoin competitors that have been created over the
years lack the “network effect” of the first and dominant technology in the space. A network effect —
the increased value of using Bitcoin simply because it is already the dominant network — is a feature in
and of itself. For any technology that possesses a network effect, it is by far the most important feature.
The network effect for Bitcoin encompasses the liquidity of its market, the number of people who own
it, and the community of developers maintaining and improving upon its software and its brand
awareness. Large investors, including nation-states, will seek the most liquid market so that they can
enter and exit the market quickly without affecting its price. Developers will flock to the dominant
development community which has the highest-calibre talent, thereby reinforcing the strength of that
community. And brand awareness is self-reinforcing, as would-be competitors to Bitcoin are always
mentioned in the context of Bitcoin itself.
100
1.8.9 The future of money – the evolution of money
101. $0–$1 (2009–March 2011): The first hype cycle in the Bitcoin market was
dominated by cryptographers, computer scientists and cypherpunks
$1–$30 (March 2011–July 2011): The second cycle attracted both early adopters
of new technology and a steady stream of ideologically motivated investors who
potential of a stateless money.
$250–$1100 (April 2013–December 2013): The third hype cycle saw the entrance
of early retail and institutional investors who were willing to brave the
liquidity channels from which bitcoins could be bought.
$1100–$19600 (2014–2018): At the time of writing, the Bitcoin market is
undergoing its fourth major hype cycle. Participation in the current hype cycle
Michael Casey described as the “early majority” of retail and institutional
But technically the heart keeps pounding every ten minutes. Expectation is that
price (however measured!) stabilises when volume increases, just like oil did.
Fluctuations already relatively decline. Conclusion: bitcoin is a 10-year old.
101
1.8.9 The future of money – the evolution of money Source
102. 1.8.9 The future of money – the evolution of money
Should we measure bitcoin in global CPI?
103. Will this new technology of money replace the old technology of money? One thing seems to be given: thanks
to Financial Debacle and Satoshi we started thinking about our money on a global scale.
103
1.8.10 An economy beyond money – it all depends on perspective
104. Remember that money is just an human institution
and changes overtime. The boundaries of machines
are beyond human capabilities, machine – to – machine
transactions could therefore open up an economy
beyond our current institutions (like the concept of
Money). Money, in other words, is a dynamic ledger,
Has three functions and like all technologies evolves
and develops through time…
…Money can become anything!
For example: self-sovereign machines & asset
104
1.8.10 HUH? WHAT? No more money?
Source
105. Blockchain Governance
Development & developers
Complexity & multi-disciplinarity
Tribalism
Scams & Hacks
Scaling limitations
Too Tech savy
Discussions about the monetary policy
Legal Framework
Energy consumption?
Ownership keys
Costs from merchant to individuals
Adoption and user functionality
Scalability
Oracle problems
Privacy
Limitations regarding smart contracts 105
1.8.10 An economy beyond money – it all depends on perspective
Filmpje pro’s and cons
106. 1. What is Ethereum
2. Definition smart contracts
3. Explanation smart contracts
4. Use cases smart contracts
5. “Do I really need a blockchain?”
6. Enter the blockchain idea maze – three thesisses
7. There is no “one-size-fits-all-solution”
106
1.9 Introduction smart contracts
107. Second largest blockchain
Smart contract platform
More flexibility and therefore less security (still enough though)
What does it do? It supports dApps: decentralised software is eating the world.
107
1.9.1 What is Ethereum?
108. Nick Szabo 1994 came up with the term “smart contract” and defined it as: “A smart contract is a computerized
transaction protocol that executes the terms of a contract. The general objectives of smart contract design are to
satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement),
minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related
economic goals include lowering fraud loss, arbitration and enforcement costs, and other transaction costs”.
108
1.9.2 Definition smart
109. Person A wants to bet on a
match
Person B wants to bet on a
match
The oracle
The Smart Contract
I say they win!I say they lose!
They have won!
109
1.9.3 Explanation smart contracts
110. Imagin an unstoppable decentralised application, the power of a world computer under your thumb.
1. Atomic operation (can’t stop half way, for example to be corrupted)…
2. …with integrity programmarly built-in,…
3. …enabling conditional transfers…
4. …on top of a decentralised distributed ledger.
110
1.9.3 Explanation smart contracts
111. 1.9.4 Examples use cases
Registrations
Certificates
Delivery
insurance
111
116. 1. Sound money – “Trustless money” that cannot be inflated by any trusted
authority such as a central bank. Long term vision sound money: “Money is
2. Web3 – “Trustless internet” where Internet architecture is free of trusted
centralized data & service monopolies. Users have more control over their data
networks also compensate participants for economic value generated in the
Web 3.0: Web3: “Own data; get money for data → Data is money.”
3. Open finance – “Trustless financial systems” that extend cryptocurrency to
provide open software primitives for equities, debt, derivatives, checking
contracts, retirement accounts, property etc. Long-term vision Open finance:
software.”
Blind men describing an elephant While they all share the same ethos of
government banks, big Internet giants, and commercial banks/fintechs), we will
cognitive dissonance in having a shared set of technical tradeoffs across
different needs.
116
1.9.6 Enter the Maze: The Three Theses Source
117. Not just “magic internet money” but blockchain is an “under the hood technology”.
Bitcoin isn’t fully trustless, there is still some degree of trust. How many users have read the source code or can
read C++? And are you sure the protocol cannot be changed? There's no guarantee that a consensus will not
form in the future to alter the program in a materially significant way that some users will not desire. The same
holds true for any consensus protocol.
• Killer-app Bitcoin = money app
• Killer-app Ethereum = new forms of governance
Remember: different products will lead to different needed trade-offs. Not all usecases will most likely suit best
on the bitcoin trade-offs (heavily on security of sound money). Different products, different optimal tradeoffs!
Compare upsides and downsides, suited best for your goal. Tip to find the goal: what is the need of the end
user?
117
1.9.7 There is no “one-size-fits-all-solution”
118. The beauty is that is entirely up to you, for the first time you actually have a choice / an opt in or opt out option.
Happy? Uneasy? Most importantly: be curious, open for changes and opinions and be critical.
“Ordinary cruelty is simple stupidity. It comes from the entire want of imagination. It is the result in our days of
stereotyped systems, of hard-and-fast rules, of centralization, of officialism, and of irresponsible authority.
Whenever there is centralization there is stupidity. What is inhuman in modern life is officialism. Authority is as
destructive to those who exercise it as it is to those on whom it is exercised.”
― Oscar Wilde
118
1.9.7 There is no “one-size-fits-all-solution”
119. The internet of Nineties?
Mediahype!
Change in trust
New forms of scalable governance
Rise of the commons & Third Industrial Revolution
Insurance policy against an Orwellian future
No more intermediates, but more competitors / Open Source Synergy and creativity?
Predictable behavior
Beginning of Skynet & The Matrix?
119
1.10 Socio-Economic consequences
120. • Deeper understanding of how a blockchain works & understand important foundations that
blockchain technology incorporates
The blockchain spectrum / “crypto flower” and the different layers it encompasses
The basics of used cryptography, distributed systems / consensus models, blockchain governance
The different roles in a blockchain network and the control bootstrap
Understand how transactions work in single, double accounting and how they work in the bitcoin
The basics of the different tools users use in a blockchain network
We start making different type of wallets and accounts
We explain how to start by finding useful information, communities and handy apps
120
Examples of subjects of next course
121. Educate and apply yourself!
You actually have a chance and choice here to get ahead of the crowd and use your new knowledge for the
greater good.
Without change there is no innovation, creativity, or incentive for improvement. Those who initiate change will
Those who initiate change will have a better opportunity to manage the change that is inevitable. - William
121
Closing remarks