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Blockchain Technology and Cryptocurrencies

Site: Saylor Academy
Course: BUS614: International Finance
Book: Blockchain Technology and Cryptocurrencies
Printed by: Guest user
Date: Wednesday, 2 April 2025, 10:46 PM

Description

Cryptocurrencies and blockchain technology are some of the means of how technology is entering the financial world. As technology advances, so does the financial products and the provision of these products and services. After watching this video and going through the attached slides, you will learn more about how technology is shaping the world of finance. Is the emergence of multiple non-central bank-backed cryptocurrencies threatening traditional central bank-backed currencies?

Table of contents

Shaping the Financial World

Overview
  • The Internet and the Payment Riddle
  • Money
  • Satoshi Nakamoto's Innovation
  • Crypto Markets
  • Blockchain Technology Use Cases
  • Challenges & Assessing Viability of Use Cases
  • Central Bank Digital Currencies
  • Ground Truths
Readings
  • 'Even if a Thousand Projects Don't Make It, Blockchain Is Still a Change Catalyst' Gensler, CoinDesk
  • 'Economics of Money & Blockchain Technology and Evaluating Projects' MIT Cryptocurrency Online Course
  • 'Responses from Big Finance' MIT Cryptocurrency Online Course
  • 'The technology of retail central bank digital currency' Bank of International Settlement
Study Questions
  • How does Bitcoin fit within the history of money, the emergence of the Internet and failed attempts of cryptographic payment systems?
  • What are the strategic and tactical considerations in assessing the viability and value proposition of a blockchain technology project? How can you separate rigorous analysis from mere assertion and hype in the blockchain ecosystem? 
  • What strategic considerations should go into Central Banks thinking of  expanding access to digital reserves through central bank digital currency (CBDC)?

Internet and the Payments Riddle

  • How to Move Value on the Internet
    • Securely 
    • Efficiently 
    • As a Packet of Data – Peer to Peer 
    • While Prohibiting Double Spending

Early Cryptographic Digital Currencies ... Failed

Notable Efforts
  • DigiCash (1994), Mondex (1994), CyberCash (1994)
  • E-gold (1996), Hashcash (1997) 
  • Bit Gold (1998), B-Money (1998), Lucre (1999)
Hurdles
  • Merchant adoption
  • Centralization
  • Double Spending
  • Consensus

Early Digital & Mobile Payment Solutions


Money

Plato:
  • Money is a 'symbol' devised for the purpose of exchanges
  • Opposed using gold or silver for money
Aristotle:
  • Solves the 'problem of commensurability'
  • 'Money is a guarantee that we may  have what we want in the future. Though we need nothing at the moment it insures the possibility of satisfying a new desire when it arises'.
  • Four absolutes to have 'Universal Value':
    • Durable, Portable, Divisible& Intrinsic Value 
Modern Characteristics:
Durable, Portable, Divisible, Uniform, Acceptable, & Stable

What is the Role of Money?
  • Medium of exchange
  • Store of value
  • Unit of account




Fiat Currency

  • Represented by:
    • Central Bank Notes
    • Central Bank Reserves &
    • Commercial Bank Deposits
  • Reliesupon System of Ledgers 
  • Very Significant Network Effects:
    • Accepted for Taxes
    • Legal Tender for All Debts Public & Private 
    • Accepted throughout Economy/Optimum Currency Area
Money's Future?


Satoshi Nakamoto’sInnovation

Satoshi Nakamoto: Bitcoin P2P e-cash paper

October 31, 2008
"I've been working on a new electronic cash system that's fully
peer-to-peer, with no trusted third party".

Blockchain Technology




Smart Contracts

  • “Aset ofpromises,
  • specifiedindigitalform,
  •  includingprotocols
  •  withinwhichthepartiesperform onthesepromises.”
    Nick Szabo, 1996 
However ....
  • SmartContractsmaynotbe 'Smart'
  • SmartContractsmaynotbe 'Contracts'




Crypto Token Sectors


  • Payment / Store of Value Tokens $152B – 76%
    • Bitcoin ($128B), ...
  • Platform Tokens $29B – 15%
    • Ethereum ($18B), ...
  • DApp Tokens $10B – 5%
    • Binance Coin ($2.3B), ...
  • Stable Value Tokens $8B – 4%
    • Tether ($6.4B), ...
  • Tokenized Securities and Assets

Blockchain Tech Potential Uses

  • SpeculativeInvesting
  • Crowdfunding through Initial Coin Offerings
  • Tokens for Exchanges, Gaming, Gambling, DeFi & FileSharing
  • Tokenized Fiat (StableValue Coins), Securities & Assets
  • Payment Systems
  • Trade Finance & Supply Chain Management
  • Clearing, Settlement & Processing
  • Central Bank Initiatives
  • Digital ID & MIT Diploma
  • Medical Records, Property Records, Internet of Things, Voting ...

Challenges & Assessing Viability of Use Cases

Blockchain Technology Challenges

  • Scalability, Performance & Efficiency 
  • Privacy
  • Security 
  • Interoperability 
  • Governance 
  • Public PolicyFrameworks 
  • CommercialUseCases

Framework for Comparing Costs & Trade-offs
(Coase)




Vitalik Buterin Trilemma



Assessing Use Cases – First Considerations

Which side of a divide the project is on?

Is the project one that services the new crypto asset class?

Is the project one uses blockchain technology and crypto currencies?

Projects servicing the cryptocurrency space:


Custody solution – Coinbase , Fidelity
 Exchange operation – Binance, Coinbase
Software provider – Blockstream
 Wallet provider – Circle
 Hardware company –BitMain Asset manager – BitcoinSuisse, Galaxy
Miningpool operator – BTC, F2Pool, Poolin  News service – CoinDesk


Assessing Use Cases – Strategic Considerations

  • What value creation proposition is there?
    • Decentralized vs. Centralized Computing?
    • Native Token filling what Gaps in Fiat Currency system?
  • What are competitors (Traditional& Blockchain) doing?
  • Why use append only ledgers, multiple party consensus and native token?
  • What verification or networking costs can actually be reduced?

Assessing Use Cases – Tactical Considerations

  • Which data needs recording on append-only ledgers?
  • Which multiple stakeholders need 'write' access to the shared ledger?
  • What are the trade offs of performance, privacy, security, governance & regulation?
  • How can broad adoption and user interface be realized?
  • If permission less, what are the token incentive systems?

Assessing Use Cases – Deeper dive

  • Why use multiple party shared ledger?
    • Why choose a distributed ledger solution over a centralized one?
    • Why not rely on a third-party authority or host?
    • Is the value proposition well distributed amongst all parties?
    • What is the adoption model?
  • What specific verification or networking costs can be reduced?
    • Authentication? Traceability? Trust?
    • Are the transaction processes & data standardized?
    • How much data needs to be stored?

Incumbents' Choices of Databases


Traditional Databases
 Private Blockchain Public Blockchain
Trusted Party Hosts Data

Trusted Party can Create, Read, Update, & Delete (CRUD)

Client Server Architecture
Known Participants

Private Write Capability

Append Only Timestamped Log

Publicly Verifiable

No Native Currency Needed

 		Unknown Participants

No Central Intermediaries

Public Write Capability
 
Peer to Peer Transactions

Native Tokens & Incentives

Central Bank Digital Currencies

Central Bank Initiatives 

Real Time Gross Settlement
  • Brazil, Canada (Project Jasper), Europe and Japan (Project Stella), Singapore (Project Ubin), South Africa (Project Khokha)
Digital Currency
  • Central Bank Claim: Bahamas (Sand Dollar), Ecuador (Dinero Electrónico), Iran (Payman), Sweden (E-Krona)
  • Commercial BankClaim:Philippines (ePiso), Senegal (eCFA), Tunisia (e-Dinar)
  • Possible Hybrid: China (Digital Currency Electronic Payment)
  • Commodity Backed: U.K. (Royal Mint Gold), Venezuela (Petro)
  • Other: Dubai –emCash, Saudi & UAE (cross-border pilot), Uruguay (Digital Peso)

CBDC Potential Architectures



CBDC – Opportunities 
  • Continue Government Provision of a Means of Payment
  • Promote Competition in Banking System
  • Promote Financial Inclusion & P2PPayment
  • Address Payment System 'Pain Points'
  • For Some Nations, Possibly Avert Sanctions
CBDC - Challenges & Uncertainties
  • Financial Stability and Potential to Increase Ease of Bank Runs 
  • Changes to Commercial Banks' Deposits and Funding Models 
  • Effects on Credit Allocation and Economy
  • Monetary Policy Implementation & Transmission
  • Resilience of Open Payment Infrastructures

Ground Truths

  • Nakamoto solved the payments riddle -avoiding double spending 
  • Money is but a social & economic construct
  • We already live in an age of digital money 
  • Append-only logs & multiparty consensus provides a peer-2-peer alternative 
  • Blockchain technology can address verification and networking costs 
  • Adoption rests on addressing comparative viability & value proposition
  • Crypto markets are rife with scams, fraud, hacks & manipulation 
  • Crypto currencies have evolved into a speculative asset class 
  • Crowdfunding built on smart contracts & ICOs raised nearly $30 billion 
  • Lightly & non regulated markets provide retail investors direct way to trade 
  • The potential, though, to be a catalyst for change is real