Blockchain

Question 1

What is a standard cash transaction?
Pro and con

Answer 1

The exchange of an object and its unit value.

• you don’t need intermediaries
• but you must be physically present

Question 2

How does digital cash change the cash transaction problem?
Pro and con

Answer 2

• monetary value is now transferred electronically
• we encounter the double spending problem.

Question 3

What is the double spending problem?

Answer 3

Trying to trick the system by using the same bitcoin for 2 transactions.

Question 4

How have banks traditionally played a role in the payment system?
Cons

Answer 4

They are the intermediary through which payment happens.

• Intermediation fees
• Slow process
• Centralised systems are more to hacks and technical failures

Question 5

How would a decentralised payment system work?

Answer 5

• You’d have just buyer and seller
• The network would verify transactions
• Decentralised - faster and more secure

Question 6

What is bitcoin?

What is bitcoin blockchain?

Answer 6

• Virtual monetary unit
• Fixed money supply not controlled by government
• is a data file that Carrie’s records of all past bitcoin transactions

Question 7

Why’s it tough to value bitcoin?

Answer 7

An asset normally equals PV of dividends. Value is hard to pin fown

Question 8

4 pros, 3 cons of bitcoin

Answer 8

• Quick and easy
• No intermediation (decentralised)
• No geographical limit
• Little/no processing fee
• Volatile valuation
• No consumer protection
• Has been used for criminal activity

Question 9

Talk about the stable framework cryptocurrencies need to function.

Answer 9

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

Question 10

What is the consensus mechanism?

Answer 10

Ensures all participants agree on ownership rights.

Question 11

What is the definition of a blockchain?

Answer 11

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

Question 12

How are blockchain blocks connected?

Answer 12

Each block contains a number from the previous block

Question 13

How can you transaction through blockchain?

Answer 13

You send cryptocurrency through the blockchain using your private key. Receiver gets a modified version. Cryptographic code

Question 14

What’s the point of transaction costs?

Answer 14

To incentivise miners

Question 15

Who verifies the transaction with blockchain? Why’s this better?

Answer 15

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.

Question 16

How does blockchain solve the double transaction problem? Talk about exante

Answer 16

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.

Question 17

How are additional bitcoins created?

Answer 17

Miners. Bitcoins are rewards for updating the blockchain.

Miners compete in updating the blockchain

Question 18

How does a block candidate get accepted?

Answer 18

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

Question 19

Talk about how the consensus mechanism relates to game theory.

Answer 19

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.

Question 20

Talk about the game theory with block verification.

Answer 20

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

Question 21

What happens if there’s a lack of consensus/multiple blocks solving the same puzzle?

Answer 21

It will generate multiple chains (fork). Now you should choose the longer chain

Question 22

How do we confront the problem of dishonest chains? An attackers needs to outvote the network to gain control.

Answer 22

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

Question 23

What number will bitcoin converge to? Will they all be there?

Answer 23

21 million

No. Some people have forgotten passwords

Question 24

How does cryptocurrency and blockchain impact banking?

Answer 24

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

Question 25

How are banks using blockchain?

Answer 25

Lots of banks are invested in companies operating in blockchain

BANKS INTRODUCED BLOCKCHAIN-BASED SERVICES

Question 26

What is a critique of crypto?

Answer 26

Bitcoin mining is contributing to extreme CO2 emission and global warming

It can be noisy

Threat to sovereign currency?

Question 27

Final takeaway points for crypto.

Answer 27

Can change the way transactions take place.

Makes trade cheaper, more secure and faster

Issues concerning consumer protection