Blockchain Flashcards
What is a standard cash transaction?
Pro and con
The exchange of an object and its unit value.
- you don’t need intermediaries
- but you must be physically present
How does digital cash change the cash transaction problem?
Pro and con
- monetary value is now transferred electronically
- we encounter the double spending problem.
What is the double spending problem?
Trying to trick the system by using the same bitcoin for 2 transactions.
How have banks traditionally played a role in the payment system?
Cons
They are the intermediary through which payment happens.
- Intermediation fees
- Slow process
- Centralised systems are more to hacks and technical failures
How would a decentralised payment system work?
- You’d have just buyer and seller
- The network would verify transactions
- Decentralised - faster and more secure
What is bitcoin?
What is bitcoin blockchain?
- Virtual monetary unit
- Fixed money supply not controlled by government
- is a data file that Carrie’s records of all past bitcoin transactions
Why’s it tough to value bitcoin?
An asset normally equals PV of dividends. Value is hard to pin fown
4 pros, 3 cons of bitcoin
- Quick and easy
- No intermediation (decentralised)
- No geographical limit
- Little/no processing fee
- Volatile valuation
- No consumer protection
- Has been used for criminal activity
Talk about the stable framework cryptocurrencies need to function.
Crucial to establish how many monetary units exist
We need CONSENSUS MECHANISM - all participants agree on ownership rights.
We also have a shared, trusted ledger. No single user has control
What is the consensus mechanism?
Ensures all participants agree on ownership rights.
What is the definition of a blockchain?
A shared, trusted ledger that everyone can inspect but no single user can control (decentralised).
The participants collectively keep the ledger up to date (consensus mechanism) - only amended according to strict rules
How are blockchain blocks connected?
Each block contains a number from the previous block
How can you transaction through blockchain?
You send cryptocurrency through the blockchain using your private key. Receiver gets a modified version. Cryptographic code
What’s the point of transaction costs?
To incentivise miners
Who verifies the transaction with blockchain? Why’s this better?
Decentralised verification process. Many participants engage in an ongoing competition to update the ledger.
This is better than the real world because it relies on many parties and trust.
How does blockchain solve the double transaction problem? Talk about exante
The transaction that’s first verified will go through. The other transaction will be pending forever.
Ex-ante if you know this, you have no incentive to even try.
How are additional bitcoins created?
Miners. Bitcoins are rewards for updating the blockchain.
Miners compete in updating the blockchain
How does a block candidate get accepted?
A block candidate is accepted if its fingerprint possesses an extremely rare feature. It must have a certain number of zeros at the start.
Once it’s found, they upload it for verification
Talk about how the consensus mechanism relates to game theory.
Why would competitors want to verify someone else’s block for them tk be rewarded?
Because it’s optimal from a game theoretical perspective.
Deviation from the Nash equilibrium where correct answers are accepted means it’s no longer profitable for miners to work on blockchain if they won’t be rewarded.
Talk about the game theory with block verification.
It’s optimal for miners to accept correct blocks.
Deviating is not worthwhile because everyone else will reject your correct block so it’s not profitable to work.
This self enforcing rule allows the network to maintain consensus
What happens if there’s a lack of consensus/multiple blocks solving the same puzzle?
It will generate multiple chains (fork). Now you should choose the longer chain
How do we confront the problem of dishonest chains? An attackers needs to outvote the network to gain control.
Incentives - rewards and fees encourage system to be honest
Computationally - the chance that an attacker can generate a dishonest chain faster than an honest one exponentially decreases with the number of blocks
What number will bitcoin converge to? Will they all be there?
21 million
No. Some people have forgotten passwords
How does cryptocurrency and blockchain impact banking?
Well instead of having banks as intermediaries, now we use a blockchain system which is faster, cheaper and safer.
Could be a new source of business for transitional banks
Start ups can use “initial coin offerings” to finance their projects
How are banks using blockchain?
Lots of banks are invested in companies operating in blockchain
BANKS INTRODUCED BLOCKCHAIN-BASED SERVICES
What is a critique of crypto?
Bitcoin mining is contributing to extreme CO2 emission and global warming
It can be noisy
Threat to sovereign currency?
Final takeaway points for crypto.
Can change the way transactions take place.
Makes trade cheaper, more secure and faster
Issues concerning consumer protection
