Blockchain focus Flashcards
Name some use cases for blockchain (presentation session 3).
- Carbon credit trading
- Supply chain management (cannabis)
- Anti-money laundering (finance industry)
- Tennis Future Earnings Token (tokenization of tennis players)
- Preventing deepfakes
- Shipping and border control
- Commodity trading
- Betting apps with smart contracts
- Insurance (international students & cars)
- Digital identity verification
- Visa applications
What are the main parts of the history of blockchain?
- Securitization is born (1981)
- Cypherpunk & Digicash (1993)
- The subprime crisis (2008)
- Satoshi Nakamoto restarts currency project, birth of bitcoin & blockchains (distributed ledger) (2008)
- First bitcoin is released (1st Jan 2009)
- After financial crisis, people stopped trusting traditional system –> rapid increase in bitcoin value
- Ethereum and smart contracts released (solves bitcoin limitations)
- ICOs
- Tokenization
What happened in 1981 connected to blockchain?
The new concept of securitization is born.
- Transforming an asset into a kind of security (what led to the subprime crisis in 2008 with mortgages)
What happened in 1993 connected to blockchain?
- Group of millionaire geeks (Cypherpunk) are against traditional financial system
- Want to create new currency that can be transferred without any traditional financial institution or central bank
- Their first project was DigiCash, but they could not make it reality since they did not manage to do it decentralized
What happened in 2008 connected to blockchain?
- The subprime crisis.
- Cypherpunk member Satoshi Nakamoto took help from internet users to restart new currency project. The white paper stated that they had found a solution to sending money peer-to-peer while avoiding the double spending problem, without using banks.
What is the double spending problem?
The risk that a cryptocurrency can be used twice or more
What happened on January 1st 2009 connected to blockchain?
The first Bitcoin was released. You paid $1 for 1500 bitcoins.
How is the aftermath of the subprime crisis connected to blockchain?
After the financial crisis, some governments (like Cyprus) decided to take a percentage from each account with more than a certain amount. People stopped trusting the traditional financial system and started trusting bitcoin, which is an explanation of the rapid increase in its value
Apart from the financial crisis, what is another explanation the the rapid increase in bitcoin’s value?
The growth of the dark web, which started accepting the bitcoin. People used to believe it was anonymous (but is only pseudonymous) so they used it on the dark web to to illegal shopping like drugs
What are the bitcoin limitations?
- Can not split the payment
- Can not postpone the payment
- Can not send money under conditions
What was new about Ethereum when it launched in 2015?
It had overcome the Bitcoin limitations. You could split and postpone payments, and pay under conditions through smart contracts
What are smart contracts?
- Smart contracts are self-executing computer codes that do not require a third party to function.
- The smart contract makes it possible to automate tasks on the blockchain.
- It is a computer protocol designed to facilitate, verify or enforce numerically the negotiation or execution of a contract.
What is Fizzy an example of?
An Ethereum application. A smart contract developed by AXA which allows compensation for late flights:
1. Simulation. I enter my ticket number
2. Coverage. I personalize my coverage
3. Identity. I fill in my personal information
4. Payment. I subscribe
5. Delay. In case of delay (2h+), my payment is automatically triggered
6. Compensation. I receive compensation on my credit card account
What are some general application areas of Ethereum?
- International logistics
- Vote registration
- Mobile payment
- Insurance
- Biodiversity protection
- Border control
- Supply chain management
- Health care systems
- Real estate transactions
- Energy
- Land/property registration
- Advertising
- Food traceability
- Art
- National security
- Tourism
- Taxation records
What are white papers?
- White paper is used to inform and persuade the other company of a new offer (such as a product or technology) to solve a particular business problem or challenge
- It is an authoritative document that aims to fully inform the reader on a particular subject
- It combines expert knowledge and research in a document that argues for a specific solution or recommendation
- White paper allows the reader to understand a question, solve a problem, or make a decision
- Used in ICOs
What is tokenisation?
The process of registering an asset and its rights on a token to enable the management and exchange in peer-to-peer, instant and secure manner on a blockchain infrastructure.
- Tokenization allows individuals to obtain a certain percentage of a real or financial asset from anywhere in the world with an internet connection, regardless of the size of the investment
- Token = right of use
What does TGE stand for?
token generation event
What are the advantages of tokenisation?
- Faster and cheaper transactions
- More transparency
- More accessibility
- More liquidity
What are some examples of tokenisation?
- Many platforms are being created to allow all individuals to invest in art and hold a part of a work. Existing platforms are: RARE, Digital Art Network, and Maecenas.
–> Andy Warhol’s 14 Small Electric Chairs have been tokenized and sold on the blockchain platform of Maecenas to 100 participants. There were more than 800 interested investors. $1.7 million was raised through this token sale. Participation of 31.5% in the artwork estimated at $5.6 million. - Alt Estate is a British company with the objective to tokenize real estate. They have already tokenized three buildings on three continents: Europe, US, and Japan. The Fluidity platform recently tokenized a 1700 m2 building in Manhattan. The competing platforms are TokenState.io and SwissRealCoin
- WPO is an expert company in renewable energies. The group launches a wind turbine tokenization project that would allow investors to hold a portion of its power output.
- Spanish agricultural land is under tokenization (sweet cherry orchards). The process consists of allocating a token to each m2 of land and selling to the public.
- TokenStars, FIT Token, and Fan Controlled Football League, are the platforms that tokenize the sports industry. Tokenization can be a powerful tool to help unknown athletes come to life and prove their true skills.
What is the definition of a blockchain?
The blockchain is a disruptive, transparent and secure technology for transferring and storing information.
- It is managed without any intermediary and without any central authority - a distributed decentralised ledger.
- The blockchain is defined as the new digital revolution that will gradually eliminate the need and the obligation to rely on a trusted third party.
What are the five basic blockchain technology principles?
- Distributed database. Each part of a blockchain has access to the database and its complete history. No part controls the data or information. Each party can check the records of its trading partners directly, without intermediaries.
- Peer-to-peer transmission. The communication occurs directly between peers rather than through a central node. Each node stores and transmits the information to all other nodes.
- Transparency with pseudonymity. Each transaction and its value are visible to anyone with access to the system. Each node (user) on a blockchain has a unique alphanumeric address of 30 characters that identifies it. Transactions occur between blockchain addresses. Users can choose to remain anonymous or provide proof of their identity to others.
- Irreversible documents. Once a transaction is entered into the database and the accounts are updated, the records can not be changed because they are related to each transaction record above (hence the term “chain”). Various algorithms and computational approaches are being made to ensure that the record on the database is permanent, chronologically ordered, and available to all others on the network.
- Calculation logic. The digital nature of the ledger means that blockchain transactions may be related to the calculation logic and essentially programmed. Users can therefore configure algorithms and rules than automatically trigger transactions between nodes (smart contracts).
What is mining and what are blocks?
- Mining is simply the creation of a valid block by one of the network members.
- A block is a group of transactions, which will be grouped together. This block is then put as a result of the blockchain and become a new link in this chain.
→ Mining is therefore a fundamental operation.
What are the 7 steps of the mining process (overview)?
- User initiates transaction from their e-wallet.
- Transaction is broadcasted over the network, placed in mempool waiting to be approved.
- The miners of the network assemble a set of transactions from this pool to form a block.
- Miners work to find signature for the block to be added to the chain. This signature is created by solving a very complex mathematical problem, unique to each block of transactions.
- The miner who finds an eligible signature for his block first, broadcasts this block and his signature to all other miners.
- Other miners check the legitimacy of the signature and confirms the block can be added (consensus). Miner gets rewarded and the length of the chain increases.
- After adding a block to the chain, each other block added is added to the confirmation of that block. Each new confirmed block implies confirmation of the entire past chain.
Describe step 1 of the mining process.
- A user initiates a transaction from their wallet app, trying to send a cryptocurrency or token to someone else.
Describe step 2 of the mining process.
- The transaction is broadcasted over the network through the wallet app.
- It is waiting to be retrieved by a miner from the blockchain to be integrated into a block.
- As long as it is not recovered, it is placed in a pool of unconfirmed transactions (the mempool). This pool is a set of unconfirmed transactions on the network, awaiting processing.
Describe step 3 of the mining process.
- The miners of the network, working at the level of their respective nodes, assemble a set of transactions from the mempool to form a block.
- At this point, when it is not yet confirmed, a block is basically a set of transactions, to which are added metadata.
- Each miner builds its own block of transactions from the common pool. It is therefore possible that several miners select the same transaction to include in their blocks.
Describe step 4 of the mining process.
- By selecting transactions and adding them to their block, miners create a block of transactions.
- To add this block of transactions to the blockchain (for all other miners and nodes to record transactions), the block must first obtain a signature (also called proof of work).
- This signature is created by solving a very complex mathematical problem, unique to each block of transactions.
Describe step 5 of the mining process.
- The miner who finds an eligible signature for his block first, broadcasts this block and his signature to all other miners.
Describe step 6 of the mining process.
- Other miners check the legitimacy of the signature. They take the data chain from the broadcasted block and scan it to see if the output hash matches the included signature.
- If it is valid, they confirm its validity and agree that the block can be added to the blockchain.
- They must reach a consensus and the majority must agree (51%) = consensus algorithm.
- –>definition of “proof of work” = The signature is the “proof” of the work done, which corresponds to the computing power spent.
- After checking, the newly founded block is added to the blockchain.
- The miner who found this new block is entitled to the block reward. The height of the block, which indicates the length of the blockchain, increases after the addition of the new block. The other nodes accept the block and save it in their transaction data. This proves that the transactions within the block correctly match the current portfolio balances (transaction history) at that time.
Describe step 7 of the mining process.
- After adding a block to the chain, each other block added is added to the confirmation of that block.
- For example, if my transaction is part of Block 502 and the blockchain has 507 blocks, it means that my transaction has 5 confirmations (507-502), since each new confirmed block implies confirmation of the entire past chain.
- Each time another block is added, the blockchain again reaches a consensus on the full transaction history, including your transaction and block. Your transaction was confirmed 5 times by the blockchain at that time.
What is a consensus algorithm?
A procedure through which all the peers of the Blockchain network reach a common agreement about the present state of the distributed ledger
What is “proof of work”?
A decentralised consensus mechanism where computing power is used to verify blockchain transactions.
Is there a link between the amount of fees and the difficulty of mining/finding the signature?
No. The process is the process no matter the fees
How do miners choose which transactions to include in a block?
- They receive compensation for each successful transaction; some transactions pay more than others.
- Reward of 12.5 BTC (new bitcoins created specifically for this purpose) each time they successfully extract a Bitcoin block (fixed).
- They also receive an additional amount of bitcoins called transaction fees, which are defined by each transaction issuer.
–> When a miner successfully operates a block, it receives 12.5 BTC plus an X amount representing the transaction fee. This amount is the sum of all transaction costs in this block.
What is the killer app?
- The killer app for the early internet was email because it drove adoption and made the network stronger and famous.
- Bitcoin is the killer app for blockchain, it drives adoption of the blockchain technology.
What are the overarching types of tokens?
- Utility tokens: giving access to goods or services developed by the issuing company
- Equity tokens: allowing remuneration according to the results of the issuing company
- Community tokens: aimed at giving investors a role in the governance of blockchain technology developed by society
- Asset tokens: representing the countervalue of one or more underlying assets
What parts does a bitcoin block contain?
- Header
- List of transactions
- Nonce (hash combination of header and transactions to find nonce)
- Signature
The signature of block 1 then becomes the header of block 2, so the blockchain can not be altered.
What is the only way to create bitcoin?
To mine it
What is the maximum number of possible bitcoins and when will this be reached?
21 million. Reached in 2140 with this system
What is a hash/hashing?
Transforming any information/data into a unique alpha-numerical code. The digital fingerprint of that information.
Can not retrieve the information by reversing the hash.
What are the overarching 5 steps of creating a block?
- Verify if transactions are valid
- Bundle transactions in a block
- Select the header of the most recent block and insert it into the new block as a hash
- Solve the proof of work problem
- When the solution is found, the new block is added to the local blockchain and propagated to the network
What is an initial coin offering?
- Halfway between the IPO and the crowdfunding, this type of financing allows to raise funds quickly and without losing control.
- Transactions are made only in virtual currency which extends the life expectancy of cryptocurrencies
- The basic premise of ICOs, fundchases based on blockchain technology, is based on tokens.
The current financial system is very complex, how could a new system made possible with cryptocurrencies help?
- simpler by eliminating layers of intermediation
- insure against risk
- open up the opportunity for different types of financial products
Two or more parties can do business, make arrangements/transactions and build value without relying on intermediaries
How could cryptocurrencies change the financial system?
- open up the financial system to people who are excluded
- lower barriers to entry
- enable greater competition
making the system more transparent will reduce intermediation chains and costs to users of the financial system.
What are some issues in the current financial system?
- Cost
- Delays
- Frictions
- Redundant and onerous paperwork
- Fraud
- Financial crimes
Why is the current financial system inefficient?
- Antiquated: Paper-based processes and many industrial technologies
- Centralized: Makes it resistant to change and vulnerable to failures and attacks
- Exclusionary: Denying billions of people access to basic financial tools
