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Question 1
“A malicious user can delete unwanted or outdated data from a public blockchain.” Based on your
understanding of a public blockchain, do you agree with this statement? Illustrate your reasons.
(8 marks)
Question 2
“The consensus algorithm for a public blockchain is designed in such a way that a user would get a
higher return by honestly validating transactions and updating the ledger instead of attempting to
manipulate the ledger (e.g., to double-spend).” Is this statement true or false? Discuss and justify
your answer.
(12 marks)
Question 3
The digital signature encrypts the content of a transaction so that it preserves the privacy of the user.
Appraise this statement.
(16 marks)
Question 4
A cryptocurrency wallet is used to store a user’s private key. Compare the working mechanisms of
hot wallet, cold wallet, and cold storage. You are highly encouraged to use a table for comparison.
(18 marks)
Question 5
You run a Bitcoin mining node in Singapore and your friend runs a Bitcoin mining node in China. At
any point in time, both your mining nodes will always be mining the same block number and your
blocks will contain the same set of transactions. Explain what the inaccuracies are in this statement.
(8 marks)
Question 6
In not more than 600 words, contrast centralised and decentralised settings for payment systems. You
may use the Bitcoin blockchain as a reference for decentralised peer-to-peer payment system.
Examine at least five (5) differences.
You will be evaluated based on the correctness of your answer, and the clarity of your discussion.
(38 marks)
Blockchain Technology and
Smart Contract for Finance
January 2021
Singapore University of Social Sciences
Assessments
FIN385: Aspects of Focus
â–ª In-depth understanding of cryptocurrency and
blockchain technology.
â–ª Bitcoin
â–ª Ethereum
â–ª Blockchain 3.0
â–ª Practical training on smart contract programming and
dApp.
Key Points
•
•
Development of payment system
Centralised vs Decentralised: What Differs?
Performance, Risk, and Security
Key Points
Development of payment system:
â–ª Evolution of financial system
â–ª The role of Internet
â–ª Bitcoin blockchain and its social structure
Centralised vs Decentralised: Performance, Risk, and Security
â–ª Distributed system and Byzantine General Problem
▪ On “identity”, user authentication, and consensus algorithm
â–ª Blockchain vs distributed ledger technologies
Evolution of Financial System
On consensus, records, trust, and interaction
Barter System
â–ª Dates back to 6000 B.C.
â–ª Phoenicians bartered goods to those located in various
other cities across oceans.
â–ª Babylonians exchanged goods for food, tea, weapons, and
spices. At times, human skulls were used as well.
â–ª Romanian soldiers were paid with salt.
â–ª In the Middle Ages, Europeans travelled around the globe to
barter crafts and furs in exchange for silks and perfumes.
â–ª Colonial Americans exchanged musket balls, deer skins,
and wheat.
Qin Shi Huang
Introduced standardized units of
measures
Introduced common currency
First Emperor of China
Unified China: 220 BCE
banliang coin
(1 liang ~ 16 g)
Records of Transactions – Historical
â–ª Records of business transactions
in the form of cuneiform writing on
clay tablets.
Allocation of beers
Summary account of silver for the
governor
Records of Transactions – Cultural
Yap’s Rai Stones
The monetary system of
Yap relies on an oral history
of ownership.
Because these stones are
too large to move, buying
an item with one simply
involves agreeing that the
ownership has changed.
As long as the transaction is
recorded in the oral history,
it will now be owned by the
person it is passed on to
and no physical movement
of the stone is required.
https://en.wikipedia.org/wiki/Yap#/media/File:Yap_Stone_Money.jpg
Silent Trade
As noted by the Greek historian Herodotus:
“The Carthaginians also tell us that they trade with a race of men who live in a part
of Libya beyond the Pillars of Hercules.
On reaching this country, they unload their goods, arrange them tidily along the beach,
and then, returning to their boats, raise a smoke.
Seeing the smoke, the natives come down to the beach, place on the ground a
certain quantity of gold in exchange for the goods, and go off again to a distance.
The Carthaginians then come ashore and take a look at the gold;
and if they think it represents a fair price for their wares, they collect it and go away;
if, on the other hand, it seems too little, they go back aboard and wait, and the
natives come and add to the gold until they are satisfied.
There is perfect honesty on both sides; the Carthaginians never touch the gold
until it equals in value what they have offered for sale, and the natives never touch
the goods until the gold has been taken away.”
The Tragedy of the Commons
https://science.sciencemag.org/content/sci/162/3859/1243.full.pdf
â–ª Individuals driven by self-interest act independently, deplete
or spoil common resource through their collective action.
â–ª Solution:
▪ Governmental: Policy, control, “central administration” has no selfinterest.
â–ª Non-Governmental: Definable resources, dependence on the
resources, community is small.
The Tragedy of the Commons
▪ Revisiting silent trade… the issue of trust between
Carthaginians and the natives – what do you think will
happen?
https://theoatmeal.com/comics/trust
Money is a Social Phenomenon
▪ When people gathers, social structure arises… So does
authority.
▪ Because there is a need for “trust”
What do you think
their role is?
The Role of Banks
â–ª Data Storage and Records
â–ª Regulated, Trusted
TRUST!
Economy as a System: Micro Level
â–ª At the micro level, men interact with each other, conducting
their everyday business of exchanging, buying and selling,
lending and borrowing, manufacturing, servicing, etc.
â–ª These activities are not conducted independently from each
other; they are locked into mutual needs and wants.
The Invisible Hand
The market will organize itself — ?
Economy as a System: Macro Level
â–ª At the macro level, regularities may be observed, measured,
analyzed, discussed, etc. E.g. depression, recession,
inflation, interest rates, prices, etc.
â–ª The economy is thus a system with (at least) 2 levels /
scales of reality, or a phenomenon with (at least) 2 scales of
observations
â–ª Interaction of agents result in macro level observations
â–ª Agents observe macro level and adjust their actions
â–ª Both scales affect each other in a feedback loop
A visible hand: Government’s
Intervention
2008
src: http://news.bbc.co.uk/2/hi/business/7521250.stm
2008, US bailed out some banks during Subprime Crisis
What is the Purchasing Power of USD ?
Structure in Trading / Exchange
â–ª When people trade or exchange, they organise themselves
into interactional structures.
Structure of Stocks
â–ª Agents pool resources
â–ª A new entity, the corporation is created to own the
pooled resources
â–ª The corporation issues ownership shares to the
agents
â–ª The agents must trade these shares in the market
Structure of Futures
â–ª A pair of counterparties enter
into a contractual mutual
obligation to trade an
underlying asset in the future
at a present set price
â–ª At a futures exchange, the
contract is standardized, thus
allowing participants to freely
open/close or go long/short
with each other.
-1 at t2
+1 at t2
+1 at t1
Exchange
+1 at t3
-1 at t3
-1 at t1
Structure of a Fixed Rate Bond
Borrower
I promise
to repay
with interest
$100
$110
I trust you
Lender
This relationship is represented by a loan contract.
Lenders may trade the loan contract among themselves.
The Role of Internet
What is the Internet?
▪ “The ocean was the first internet”
Router A
Router B
https://en.wikipedia.org/wiki/Internet_protocol_suite
The Internet: Brief History
â–ª Traceable back to ARPANET (Advanced Research Projects
Agency Network), funded by DARPA (Defense Advanced
Research Projects Agency) (late 1960s)
â–ª Used packet switching to send information in blocks around on shared
communication “lines” (rather than circuit switching which requires
dedicated by between two nodes for communication)
â–ª ARPANET adopted TCP/IP in 1983 and started to assemble into a
network of networks
â–ª TCP/IP is a communication protocol created by Robert Kahn and Vinton
Cerf
â–ª World Wide Web (websites and hyperlinks) is powered by the
HTTP protocol (from 1990)
â–ª HTTP was created by Tim Berners-Lee
Technology Stack

Up: data more structured
Down: data less structured
Structure: protocol
Hierarchy: high protocol depends on low level protocol
Communication is done using one of these protocols
https://en.wikipedia.org/wiki/Internet_protocol_suite
Example on MAC address
Example on IP address
Example: P2P Networks
â–ª Underlying technology is some P2P protocol
â–ª An application layer protocol which thus depends on transport
layer protocols
â–ª example, may use UDP for lookups and TCP to send whole
resource objects
UDP: User Datagram Protocol vs
TCP: Transmission Control Protocol
What is the role of Internet?
â–ª Letters vs Email
â–ª The issues of TIME and DISTANCE
What is the role of Internet?
â–ª Traditional banking vs Internet banking
â–ª Payment system, e.g., PayPal
Payment systems connect clients to banks and banks to
banks
Payment systems handle transactions across networks
Payment systems may offer temporary credit which
quickly gets netted with bank accounts
Peer-to-Peer Network
â–ª An application layer protocol which depends on transport layer
protocols. May use UDP for lookups and TCP to send whole
resource objects.
â–ª The opposite of a P2P network (e.g., BitTorrent, blockchain) is
a client-server network (e.g., YouTube, internet banking).
Bitcoin as a Cryptocurrency
On consensus, records, trust and interaction
Revisit: Yap’s Rai Stones
Rai Stone
Consider a Rai Stone is an immovable
but ownership-transferrable asset,
Not forgetting,
an Equity, a Bond, a bitcoin
can be interpreted as such similar Asset
A feature of distributed process: Attempt to be
immutable – No consensus!
This is MINE !
Ownership Transfer: Centralised approach
Ownership Transfer: the Distributed approach
What’s the difference?
Bitcoin vs DBS (bank) – non-exhaustive
Bitcoin
Bank
Data is stored by all nodes in P2P
network
Data is stored by the bank
Bitcoin is a medium of exchange to
all participants in the network
Different Fiat Currencies, in general.
What’s the difference?
Paypal (payment system)
src: https://www.paypalslots.ca/answers/how-does-paypal-work/
Bitcoin vs Paypal (payment system)
Bitcoin
Payment System
Bitcoin network connects its peers Payment systems connect clients
together
to banks and banks to banks
Bitcoin records transactions on its Payment systems handle
blockchain and thus has a payment transactions across networks
system baked into its structure
Bitcoins are the currencies
themselves
Payment systems may offer
temporary credit which quickly gets
netted with bank accounts
Achieving Consensus in a
Decentralised Setting
Crypto
Economy
Cryptoeconomics
▪ Crypto – “cryptography”, a suite of algorithms that provides
security guarantee based on computational difficulty – fighting
back dishonest actors.
▪ Economy – “incentives”, rewards given to honest actors who
contribute and/or help to maintain the integrity of the blockchain.
Why Cryptoeconomics?
â–ª Lack of trust!
â–ª Users are
anonymous,
thus not
accountable to
malicious
actions.
â–ª Why do I have
to help you?
Blockchain vs Distributed Ledger
Technology (DLT)
â–ª DLT refers to a novel and
fast-evolving approach to
recording and sharing data
across multiple data stores
(or ledgers).
Distributed
Ledger
Technology
Blockchain
â–ª DLT is easy to implement if
its users are trustworthy.
Trust
What is a Blockchain? A DLT?
A owed B a goat
A signed
B agreed
Many verified
Source: refinitiv
Block #n
Date/Timestamp
Asset from X to A
(need to rewrite)
Ledger #1
or Block #1
Date/Timestamp
Asset from A to B
Block #2
Date/Timestamp
Asset from B to C
Bitcoin and Blockchain
▪ A “Distributed Ledger Technology” (DLT) that operates
on top of a peer-to-peer network
â–ª Enforces TRUST through:
â–ª Cryptography
â–ª Economic incentives
Bitcoin and Blockchain
▪ A “Distributed Ledger Technology” (DLT) that operates
on top of a peer-to-peer network
â–ª Enforces TRUST through:
â–ª Cryptography
â–ª Economic incentives
Transaction
Bitcoin and Blockchain
▪ A “Distributed Ledger Technology” (DLT) that operates
on top of a peer-to-peer network
â–ª Enforces TRUST through:
â–ª Cryptography
â–ª Economic incentives
Transaction
Bitcoin and Blockchain
▪ A “Distributed Ledger Technology” (DLT) that operates
on top of a peer-to-peer network
â–ª Enforces TRUST through:
â–ª Cryptography
â–ª Economic incentives
Transaction
Bitcoin and Blockchain
▪ A “Distributed Ledger Technology” (DLT) that operates
on top of a peer-to-peer network
â–ª Enforces TRUST through:
â–ª Cryptography
â–ª Economic incentives
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
What happens after that?
Alice broadcasts her transaction to Bob to all users on the Bitcoin network.
If everyone records this transaction on their ledger, this transaction becomes a reality.
The ownership of the bitcoins now belong to Bob.
60
Social Structure in
Developer Communities
â–ª Lead figure (usually 1, who started the project)
â–ª Linux: Linus Torvalds
â–ª Bitcoin: Satoshi Nakamoto
â–ª Contributors
â–ª Core: Make major decisions on direction of project
â–ª Non-core
â–ª Voluntary and global (with heterogeneous composition)
â–ª Decision making
â–ª Non-authoritarian (benevolent dictator)
â–ª Core influence
â–ª Community consensus
People behind Technology
Who’s who in Bitcoin Blockchain Development
2008
2010
2012
Third Generation (for example Gregory Maxwell) sets up Blockstream.
Blockstream is one of the largest contributors of funding for Bitcoin Core,
the predominant bitcoin network client software.
Blockstream wanted “Segregated Witness”.
Blockstream is responsible in developing an implementation of the Bitcoin
Lightning Network
Depth of Autonomy: Open Source
â–ª Who owns open source software?
â–ª Open source software are licensed by open source licenses
â–ª Generally, these licenses aim to ensure that no one can hoard
and claim the code to be his own, restrict others’ use of it, while
at the same time enable and promote business
â–ª Idea of open source can be traced to the sharing of code from
the beginning of computer industry in the 1960s
â–ª Idea is not straightforward: Richard Stallman is proponent of
“free software” which he distinguishes from “open source
software” that is commonly found
People behind Technology
Remarks
â–ª The economy can also be perceived as a social
phenomenon.
â–ª Centralised or decentralised, people needs to have
trust and agree on something.
â–ª The Internet revolutionalises how we communicate and
trade, but brings about the issue of trust, especially in
blockchain.
â–ª Blockchain is a distributed system that is
“decentralised” from almost every aspect.
Introduction
â–ª Bitcoin (started in 2008) has created a huge ripple in the
development of finance on the internet, aka FinTech.
â–ª Two aspects:
â–ª Cryptocurrencies
â–ª Blockchain
You may be
making History!
â–ª Implications:
â–ª New forms of economic exchanges
â–ª Calls for rethink in the nature of economic entities and
exchanges, particularly financial entities and transactions
Block 0
Satoshi: “I own
1 million bitcoins”
2009
http://historyofbitcoin.org/
2 Key Aspects
564276
564275
564274
Cryptocurrency
Blockchain
Introduction
â–ª The cryptocurrency Bitcoin is enabled by blockchain.
▪ Blockchain ≠ Bitcoin!
▪ Blockchain ≠ DLT!
â–ª Blockchain is a DLT with built-in trust. The ledger is secured
using concept of “crypto-economics”:
▪ Cryptography – forbid malicious modifications of ledger
▪ Economic incentive – reward honest behaviour
Introduction
▪ Bitcoin (uppercase “B”) refers to the protocol and the
network based on a paper written by Satoshi Nakamoto
in 2008 (Nakamoto, 2008).
▪ The bitcoin (lowercase “b”) cryptocurrency is
implemented using the Bitcoin protocol and released in
January 2009.
The world used to be dominated by Centralised Computing only
Then Bitcoin Blockchain comes into the scene
Public and Decentralised/Distributed
Centralised Computing
Hack
me!
Against external hackers
Relatively more secure, more trusted
Against internal frauds
Centralised vs Decentralised/Distributed
Computing
example: USD x million per project
example: USD 5 million per project
example: USD 5 million per project
example: USD 10 000 per project
Centralised vs Decentralised/Distributed
Computing
example: USD x million per project
example: USD 10 000 per project
example: USD 5 million per project
db: database
example: USD 5 million per project
hw: hardware
Show me the Money !
Distributed Computing
Byzantine General’s Problem
What is Distributed Computing?
Distributed Computing
Distributed Computing
â–ª During the 1960s, the need arose for computers to start
talking to one another, sharing hardware like storage and
printers.
â–ª The 1970s saw the establishment of the first local area
networks. The first distributed computing systems were
local area networks such as Ethernet, a family of networking
technologies developed by Xerox. Each time you join a new
Wifi connection, you’re entering a new computer network.

What Is Distributed Computing? Examining Blockchain’s Backbone

Distributed System
â–ª A distributed system involves a set of distinct processes (e.g.,
computers) passing messages to one another and coordinating to
accomplish a common objective (i.e., solving a computational
problem).
4 Properties of Distributed System
â–ª Concurrency: The processes in the system operate concurrently,
meaning multiple events occur simultaneously. In other words,
each computer in the network executes events independently at
the same time as other computers in the network.
â–ª Lack of a global clock: For a distributed system to work, we need
a way to determine the order of events. However, in a set of
computers operating concurrently, it is sometimes impossible to
say that one of two events occurred first, as computers are
spatially separated. In other words, there is no single global clock
that determines the sequence of events happening across all
computers in the network.
Time and order of events are fundamental obstacles in a system of distributed computers
that are spatially separated.
4 Properties of Distributed System
â–ª Independent failure of components: A critical aspect of
understanding distributed systems is acknowledging that
components in a distributed system are faulty. This is why it’s
called “fault-tolerant distributed computing.”
â–ª A fault can be crash-fault or Byzantine fault.
â–ª Crash fault: All nodes of the system either follow the protocol honestly
or they crash
â–ª Byzantine fault: Nodes can crash or may choose to be malicious
4 Properties of Distributed System
â–ª Message passing: Computers in a distributed system
communicate and coordinate by “message passing” between one
or more other computers. Messages can be passed using any
messaging protocol, whether that’s HTTP (Hyper Text Transfer
Protocol), RPC (Remote Procedure Call), or a custom protocol
built for the specific implementation. There are two types of
message-passing environments: Synchronous and Asynchronous.
Distributed Computing
Pros
Cons
Higher fault tolerance
Complex
Cost effective, efficient
More security problems
Scalable
High initial setup cost

What Is Distributed Computing? Examining Blockchain’s Backbone

Byzantine General’s Problem
â–ª In 1982 a thought experiment was proposed by Lamport et al.
whereby a group of army generals who are leading different parts
of the Byzantine army are planning to attack or retreat from a city.
â–ª The only way of communication between them is a messenger
and they need to agree to attack at the same time in order to win.
â–ª The issue is that one or more generals can be traitors and can
communicate a misleading message.
â–ª Therefore there is a need to find a viable mechanism that allows
agreement between generals even in the presence of treacherous
generals so that the attack can still take place at the same time.
https://subscription.packtpub.com/book/big_data_and_business_intelligence/9781787125445/1/ch01lvl1s
ec7/distributed-systems
Byzantine General’s Problem
â–ª As an analogy with distributed systems, generals can be
considered as nodes, traitors can be considered Byzantine
(malicious) nodes, and the messenger can be thought of as a
channel of communication between the generals.
â–ª This problem was solved in 1999 by Castro and Liskov who
presented the Practical Byzantine Fault Tolerance (PBFT)
algorithm.
â–ª Later on in 2009, the first practical implementation was made with
the invention of bitcoin where the Proof of Work (PoW) algorithm
was developed as a mechanism to achieve consensus.
https://subscription.packtpub.com/book/big_data_and_business_intelligence/9781787125445/1/ch01lvl1s
ec7/distributed-systems
Byzantine General’s Problem
▪ The Byzantine General’s Problem assumes that there will be
an unknown number of participants that are expected to
misbehave and attempt to subvert the network.
▪ Byzantine General’s Problem is often used in classical
computer science to describe the challenges faced by
distributed systems in achieving consensus over unreliable
communication links.
â–ª A Byzantine fault is a condition of a computer system,
particularly distributed computing systems, where
components may fail (due to crash or power outage) or act
maliciously, and there is imperfect information on whether
a component has failed or is behaving maliciously.
Byzantine General’s Problem
â–ª Therefore, Bitcoin must maintain a distributed record keeping
system and a consensus protocol that can withstand the double
spend and Byzantine General Problem.
Byzantine General’s Problem
applied to Bitcoin
â–ª In terms of distributed computation, how may a network of nodes
agree on a state (e.g. attack, or retreat)?
â–ª For Bitcoin, the relevance is this:
â–ª 2 transactions involving a bitcoin is announced into the system
â–ª Which transaction to keep as global state?
â–ª The Double Spending Problem
All consensus protocols are designed to guarantee
either one or two of these properties under different
conditions.
Safety means nothing bad will happen during
execution. Usually this refers to the consensus
protocol’s ability to prevent the overwriting or
corruption of a previous validated state.
Liveness means something good will eventually
happen. Usually this refers to the consensus
protocol’s ability to guarantee message sent from the
sending node will eventually reach the destination
node.
Deadlock-freedom is a safety property. States of the system can be split between states
wherein deadlock is present (red states) and states wherein no deadlock is in place
(green states). The property that states that the system remains forever in green states
(or, alternatively, that the system never reaches red states) is a safety property. If one
cannot distinguish between green and red states, however, the property that says that
eventually one of the processes in the system will evolve is a liveness property.
https://en.wikipedia.org/wiki/Liveness
Liveness & Safety
â–ª Resiliency is a design measurement of consensus system.
â–ª It is based on the maximum number of adversary nodes that
the protocol is designed to tolerate in order to guarantee
safety and liveness under different fault conditions.
â–ª For instance, a resiliency of 100% means the protocol is
able to guarantee safety and liveness for any number of
adversary node.
â–ª A resiliency of 33% means the protocol is able to guarantee
safety and liveness if the number of adversary nodes do not
exceed 33% of the total number of nodes.
Liveness & Safety
â–ª When nodes are not behaving the way they are
expected to behave, then the system may become
difficult to terminate in agreement.
Consensus
â–ª The types of attacks blockchains are vulnerable to are somewhat
different: in most cases, attackers must focus on manipulating the
consensus process in order to hack or alter any information on a
blockchain.
â–ª An attacker needs to convince the community his (illegitimate)
version of ledger is actually legitimate and get community
members to begin adding on new information to that ledger.
â–ª At the end, it is about mining rewards and double spending the
tokens.
More on:
https://subscription.packtpub.com/book/big_data_and_business_intelligence/9
781787125445/1/ch01lvl1sec7/distributed-systems
Consensus
â–ª The consensus protocol (Proof-of-Work or PoW) is designed in such a way that requires
all nodes on the network to compete for the reward of adding a block of records to the end
of the chain.
â–ª This competition involves the search for a nonce by sheer brute-force use of processing
power such that the resulting block hash is lower than the target set by the network.
â–ª The system also defines a fixed block frequency which determines the average amount of
time the winning node will take to find such a nonce.
99
Recall
â–ª Blockchain is a DLT with built-in trust. The ledger is
secured using concept of “crypto-economy”:
▪ Cryptography – forbid malicious modifications of
ledger
▪ Economic incentive – reward honest behaviour
Bitcoin Network Nodes
Have you ever witness Bitcoin Network Nodes, live ?
Blockchain Evolution
Blockchain Evolution
Blockchain 2.0
Introduction of
Smart Contract
example: Ethereum
Blockchain 3.0
Industry
applications
Blockchain 1.0
The Founder
example: Bitcoin
example:
Multichain &
others
Vitalik Buterin
Blockchain 1.0
Bitcoin is like a payment
mobile phone application
Blockchain 2.0
Ethereum is like
an App store / Play Store
Types of Blockchain
Does not
exist
Reflections
How would Bitcoin disrupt institutions such as PayPal?
What are the possible limitations of blockchain compared to
traditional institutions?
Remarks
â–ª Bitcoin blockchain is essentially a distributed ledger
technology recording bitcoin transactions.
â–ª As a form of distributed computing, it brings many
advantages but also complexities and risks.
▪ It is vulnerable to attacks – the ultimate purpose is to
double spend.
â–ª The consensus algorithm in any blockchain must be
Byzantine fault tolerant. It must also satisfy the liveness
& safety properties.
References
â–ª Study Unit 1 in Study Guide
â–ª Mastering Bitcoin by A. Antonopoulos & others
https://github.com/bitcoinbook/bitcoinbook
â–ª Distributed Computing & Consensus:
â–ª https://www.c-sharpcorner.com/article/elements-of-distributed-computing-withblockchain-perspective/
â–ª https://www.ostechnix.com/blockchain-2-0-explaining-distributed-computing-anddistributed-applications/
â–ª https://subscription.packtpub.com/book/big_data_and_business_intelligence/978
1787125445/1/ch01lvl1sec7/distributed-systems
â–ª https://www.preethikasireddy.com/post/lets-take-a-crack-at-understandingdistributed-consensus
â–ª Bitcoin scaling debate:
â–ª https://cointelegraph.com/explained/bitcoin-scaling-problem-explained
Appendix
What is a Fork in Blockchain ?
In Cryptocurrencies, a fork is defined variously as
1. “what happens when a blockchain diverges into 2 potential paths
forward”
2. “a change in protocol”
3. “copy, modify and create a new coin”, like Litecoin
…
Temporary forks
Temporary forks
Temporary forks
Temporary forks
Soft and Hard Fork
Soft Fork
• A change to the protocol where
only previous valid blocks or
transactions are made invalid
Hard Fork
• A change to the protocol where
previous invalid blocks or
transactions are made valid (or
vice versa)
old: 1MB
new: 500kB
old: 1MB
new: 2MB
• Backwards compatible
• Not backwards compatible
• Requires a majority of the miners to
upgrade to enforce the new rules
• Requires all nodes to upgrade and
agree on the new version
The Fork of 11/3/2013
â–ª From block 225430, the blockchain was split into two.
â–ª Half the network built on one chain while the other half built
on another.
â–ª The split lasted for 24 blocks or 6 hours until one version of
the chain firmly pulled ahead of the other.
The Fork of 11/3/2013
â–ª The fork was first noticed by user thermoman on the
bitcoin-dev IRC channel at 23:30 GMT on 11/3/2013.
â–ª He noticed that his client showed 225430 blocks while the
public block explorer showed 225431 blocks.
â–ª Then in quick succession other users also reported
discrepancies in the block height readings.
Signs of Trouble

Analyzing the 2013 Bitcoin fork: centralized decision-making saved the day

The Cause
â–ª What caused the fork was that the developers inadvertently
changed the protocol when they applied a new piece of technology
in upgrading clients to version 0.8.
â–ª The phase during which nodes were switching clients saw a mixed
distribution of clients in the network – 0.7’s and 0.8’s, with one
version following one set of rules while the other following another
set of rules.
â–ª The developers decided to switch the community back to 0.7. The
main consideration was that many more users on 0.7 would have to
be forced to upgrade if they stuck to 0.7. Since 0.8 could also read
0.7’s code, such a scenario would not occur if they switched back to
0.7.
Critical Decision

Analyzing the 2013 Bitcoin fork: centralized decision-making saved the day

Critical Decision

Analyzing the 2013 Bitcoin fork: centralized decision-making saved the day

Critical Decision

Analyzing the 2013 Bitcoin fork: centralized decision-making saved the day

Activation
â–ª Over the next few hours, all-out
effort was made to notify
developers, miners, users,
business, etc.
â–ª The 0.7 chain was 13 blocks
behind the 0.8 chain at one point.
By 6:19, both chains converged
at block 225454. Most miners
abandoned 0.8 and returned to
0.7 by then.
https://bitcoin.org/en/alert/2013-03-11-chain-fork
What do we learn from here?
0.7 Bitcoin Core
version &
earlier
0.8 Bitcoin Core
version
Produces larger
blocks
Will reject larger
blocks
Produces
smaller blocks
What do we learn from here?
0.7 Bitcoin Core
version &
earlier
0.8 Bitcoin Core
version
Produces larger
blocks
Nodes are more
active
Most are likely
mining pools
Will reject larger
blocks
Produces
smaller blocks
What do we learn from here?
0.7 Bitcoin Core
version &
earlier
0.8 Bitcoin Core
version
Produces larger
blocks
Will reject larger
blocks
Nodes are more
active
Therefore,
contactable
Most are likely
mining pools
Higher hash
rate
Produces
smaller blocks
Let’s all
downgrade!
The Value Overflow Incident
â–ª On 15/8/2010, block 74638 contained a transaction that
created over 184 billion bitcoins for two different addresses.
â–ª This happened because the code did not account for
outputs which are so large when summed. The transaction
is a bad one. It needed to be “removed” from the network.
â–ª The developers quickly corrected the code and a new
version is uploaded within several hours.
The Value Overflow Incident
â–ª The network of users still need to switch over to the new
client in the meanwhile.
â–ª The network continued to build on the “bad” chain while the
“good” one had to catch up. It finally caught up at block
height 74691.
UASH and UAHF
(SegWit as an example)
User Activated Soft Fork
(UASF)
• A Soft Fork activated by flag
day and enforced by full
nodes instead of miner
signalling
• Same features as Soft Fork
User Activated Hard Fork
(UAHF)
• Developers add a mandatory
rule set to change the node
software on a flag day.
• Same features as Hard Fork
2.2.3 Hard Fork example: Scaling Debate
In November 2018, a hard-fork chain split of Bitcoin Cash occurred
between two rival factions called Bitcoin ABC and Bitcoin SV.
On 15 November 2018 Bitcoin Cash ABC traded at about $289 and Bitcoin
SV traded at about $96.50, down from $425.01 on 14 November for the
un-split Bitcoin Cash.
The split originated from what was described as a “civil war” in 2
competing bitcoin cash camps.
The first camp, led by entrepreneur Roger Ver and Jihan Wu of Bitmain,
promoted the software entitled Bitcoin ABC (short for Adjustable Blocksize
Cap) which would maintain the block size at 32MB.
The second camp led by Craig Steven Wright and billionaire Calvin Ayre
put forth a competing software version Bitcoin SV, short for “Bitcoin
Satoshi’s Vision,” that would increase the blocksize to 128MB.
Portfolio with cryptocurrency
Lee, D. C. K., Guo, L., & Wang, Y. (2017). Cryptocurrency: A new
investment opportunity?. The Journal of Alternative
Investments, 20(3), 16-40.
Cryptocurrency: A new investment
opportunity?
â–ª Paper: Lee, D. C. K., Guo, L., & Wang, Y. (2017). Cryptocurrency:
A new investment opportunity?. The Journal of Alternative
Investments, 20(3), 16-40.
â–ª Ranked top 10 downloaded paper in cryptocurrency on SSRN;
cited for over 100 times; included in the CFA reading list (CFA
Digest) by the CFA Institute.
â–ª The paper investigates the diversification role of cryptocurrency
and the effects of including cryptocurrency in a portfolio that
consists of mainstream assets. It also constructs a cryptocurrency
portfolio based on the sentiment analysis of the cryptocurrency
market.
Introduction – cryptocurrency market
â–ª The cryptocurrency market is attracting a large amount of funds.
The number of altcoins has increased a lot and altcoins are
playing an increasingly important role – meaning there are a lot
tokens to choose from other than Bitcoin.
â–ª CRIX (CRypto IndeX http://thecrix.de/) is used to represent the
cryptocurrency market.
â–ª The paper draws the comparisons between cryptocurrencies and
mainstream asset classes (e.g. stocks, bonds, commodities, gold,
oil, PE, REITs) in two ways:
1. The differences in return and risk;
2. The effect of adding cryptocurrencies to a portfolio that
consists of mainstream asset classes.
136
Findings – risk & return profile
â–ª Cryptocurrencies outperform traditional assets in terms of average
daily returns. However, this outperformance comes with a high
degree of volatility or a high risk.
S&P 500
CRIX
Findings – diversification role
â–ª Correlations between cryptocurrencies and mainstream asset classes are
very low (e.g., correlation of CRIX with the S&P 500 is 0.036). So
cryptocurrency could be a promising investment to hedge portfolio risks.
â–ª Including CRIX in a portfolio of mainstream assets shifts the efficient
frontier upwards, meaning the entire portfolio has better performance
under the same level of risk.
Efficient
frontier
shifted
upwards
%
Mainstream + CRIX
Mainstream
Introduction – investor sentiment
â–ª To see if investor sentiment drives the price for cryptocurrency
market – this would provide insights about its pricing
â–ª Investor sentiment: proxied by the average return in the past 10
days for each cryptocurrency
â–ª High (Low) past return -> Investors are optimistic (pessimistic)
about the cryptocurrency -> High (Low) investor sentiment ->
Low (High) future return -> If the hypothesis works, a reversal
effect will be observed
Findings – sentiment effect
â–ª We sort and categorize top 100 cryptocurrencies into 3 groups
based on past returns: High, Median, and Low sentiment groups.
We find that there is a reversal effect in the cryptocurrency
market.
Introduction – sentiment portfolio
â–ª Sentiment-based portfolio strategy
1. For each trading day, we sort all 100 cryptos by sentiment,
defined as the average return over past 10 days
2. We short/sell the top 10% cryptos and long/buy the bottom
10% cryptos form 2 equal-weighted portfolios
3. To hold both the long and short portfolios for 1 trading day and
rebalance at the closing price of the next trading day
Findings – sentiment portfolio
â–ª The portfolio generates
a high cumulative
return!
â–ª Benchmark 1: CRIX
index, representing the
overall cryptocurrency
market performance
â–ª Benchmark 2: an
Equal-Weighted
portfolio investing
equally into all 100
cryptos
Findings – sentiment portfolio
â–ª The sentimentbased portfolio
outperforms the
rest in terms of
average return
and riskedadjusted return
(highest Sharpe
Ratio and
Information ratio)
Conclusions
â–ª Cryptocurrency is a good tool to hedge risk due to its low
correlations with mainstream asset classes
â–ª Inclusion of cryptocurrency increases the performance of
a portfolio consisting of only mainstream assets
â–ª There are sentiment effects in the cryptocurrency market
â–ª Sentiment-based portfolio strategy will generate high riskadjusted returns
Course Development Team
Head of Programme
: Dr Tan Chong Hui
Course Developer(s)
: Dr Tan Chong Hui
Technical Writer
: Johnny Tan, PO
Video Production
: Dr Tan Chong Hui, SBIZ
© 2020
Singapore University of Social Sciences. All rights reserved.
No part of this material may be reproduced in any form or by any means without
permission in writing from the Educational Technology & Production, Singapore
University of Social Sciences.
ISBN 978-981-47-8746-8
Educational Technology & Production
Singapore University of Social Sciences
463 Clementi Road
Singapore 599494
How to cite this Study Guide (APA):
Tan, C. H. (2020). FIN385 Blockchain technology and smart contract for finance (study guide).
Singapore: Singapore University of Social Sciences.
Release V1.2
Build S1.0.5, T1.5.21
Table of Contents
Table of Contents
Course Guide
1. Welcome…………………………………………………………………………………………………… CG-2
2. Course Description and Aims…………………………………………………………………. CG-3
3. Learning Outcomes…………………………………………………………………………………. CG-5
4. Learning Material……………………………………………………………………………………. CG-6
5. Assessment Overview……………………………………………………………………………… CG-7
6. Course Schedule………………………………………………………………………………………. CG-9
7. Learning Mode………………………………………………………………………………………. CG-10
Study Unit 1: Internet Economy and Networks
Learning Outcomes……………………………………………………………………………………. SU1-2
Overview……………………………………………………………………………………………………. SU1-3
Chapter 1: History and Background of Digital Currencies…………………………. SU1-4
Chapter 2: Networks………………………………………………………………………………… SU1-18
Chapter 3: Lab: Overall Plan…………………………………………………………………….. SU1-27
Chapter 4: Lab 1: Open Source Programming on Blockchain Platforms
(Getting Started)………………………………………………………………………………………. SU1-29
Summary………………………………………………………………………………………………….. SU1-87
Quiz………………………………………………………………………………………………………….. SU1-91
i
Table of Contents
Study Unit 2: From Bitcoin to Blockchain
Learning Outcomes……………………………………………………………………………………. SU2-2
Overview……………………………………………………………………………………………………. SU2-3
Chapter 1: Emergence of the Original Blockchain………………………………………. SU2-4
Chapter 2: The Bitcoin Whitepaper……………………………………………………………. SU2-7
Chapter 3: Components and Spin-Offs…………………………………………………….. SU2-20
Chapter 4: From Blockchain to Smart Contracts……………………………………….. SU2-22
Chapter 5: Lab: Open Source Programming on Blockchain Platforms
(Ethereum Ecosystem, Accounts/Transactions, Simple DApp)………………… SU2-27
Summary………………………………………………………………………………………………….. SU2-72
Quiz………………………………………………………………………………………………………….. SU2-76
Study Unit 3: The Evolution of Blockchains and Their Applications
Learning Outcomes……………………………………………………………………………………. SU3-2
Overview……………………………………………………………………………………………………. SU3-3
Chapter 1: Public vs Private Blockchains……………………………………………………. SU3-4
Chapter 2: Ethereum, Hyperledger and Multichain…………………………………… SU3-6
Chapter 3: Use Cases………………………………………………………………………………… SU3-14
Chapter 4: Building a Blockchain Project (Using the Truffle
Framework)……………………………………………………………………………………………… SU3-18
Summary………………………………………………………………………………………………….. SU3-53
Quiz………………………………………………………………………………………………………….. SU3-56
ii
Table of Contents
Study Unit 4: A New Economy
Learning Outcomes……………………………………………………………………………………. SU4-2
Overview……………………………………………………………………………………………………. SU4-3
Chapter 1: Phases of Blockchain Development…………………………………………… SU4-4
Chapter 2: Blockchain 1.0…………………………………………………………………………… SU4-6
Chapter 3: Blockchain 2.0…………………………………………………………………………. SU4-14
Chapter 4: Blockchain 3.0…………………………………………………………………………. SU4-18
Chapter 5: Lab 4: Building a Blockchain Project (Basics of Solidity)………….. SU4-21
Summary………………………………………………………………………………………………….. SU4-71
Quiz………………………………………………………………………………………………………….. SU4-74
Study Unit 5: Further Topics
Learning Outcomes……………………………………………………………………………………. SU5-2
Overview……………………………………………………………………………………………………. SU5-3
Chapter 1: Scalability Challenges and Potential Solutions………………………….. SU5-4
Chapter 2: Consensus Mechanisms…………………………………………………………….. SU5-9
Chapter 3: Zero Knowledge Proofs…………………………………………………………… SU5-18
Chapter 4: Regulatory Challenges…………………………………………………………….. SU5-20
Chapter 5: Lab 5 – Building a Blockchain Project (Deployment)……………….. SU5-22
Summary………………………………………………………………………………………………….. SU5-37
Quiz………………………………………………………………………………………………………….. SU5-40
iii
Table of Contents
Study Unit 6: Bitcoin Nuts and Bolts
Learning Outcomes……………………………………………………………………………………. SU6-2
Overview……………………………………………………………………………………………………. SU6-3
Chapter 1: Transactions and Types…………………………………………………………….. SU6-4
Chapter 2: The Proof-of-Work Puzzle…………………………………………………………. SU6-6
Chapter 3: Statistics of the Bitcoin Network………………………………………………. SU6-7
Chapter 4: Graphical Structures……………………………………………………………….. SU6-11
Chapter 5: Community……………………………………………………………………………… SU6-20
Chapter 6: Peeking at Other Cryptocurrencies…………………………………………. SU6-23
Summary………………………………………………………………………………………………….. SU6-28
Quiz………………………………………………………………………………………………………….. SU6-32
iv
List of Figures
List of Figures
Figure 1.1 Graph of the Konigsburg Bridge………………………………………………….. SU1-19
Figure 1.2 ……………………………………………………………………………………………………… SU1-21
Figure 1.3 ……………………………………………………………………………………………………… SU1-33
Figure 1.4 ……………………………………………………………………………………………………… SU1-34
Figure 1.5 ……………………………………………………………………………………………………… SU1-35
Figure 1.6 ……………………………………………………………………………………………………… SU1-36
Figure 1.7 ……………………………………………………………………………………………………… SU1-37
Figure 1.8 ……………………………………………………………………………………………………… SU1-38
Figure 1.9 ……………………………………………………………………………………………………… SU1-39
Figure 1.10 ……………………………………………………………………………………………………. SU1-40
Figure 1.11 ……………………………………………………………………………………………………. SU1-41
Figure 1.12 ……………………………………………………………………………………………………. SU1-44
Figure 1.13 ……………………………………………………………………………………………………. SU1-45
Figure 1.14 ……………………………………………………………………………………………………. SU1-46
Figure 1.15 ……………………………………………………………………………………………………. SU1-46
Figure 1.16 ……………………………………………………………………………………………………. SU1-47
Figure 1.17 ……………………………………………………………………………………………………. SU1-48
Figure 1.18 ……………………………………………………………………………………………………. SU1-49
v
List of Figures
Figure 1.19 ……………………………………………………………………………………………………. SU1-51
Figure 1.20 ……………………………………………………………………………………………………. SU1-59
Figure 1.21 ……………………………………………………………………………………………………. SU1-60
Figure 1.22 ……………………………………………………………………………………………………. SU1-60
Figure 1.23 ……………………………………………………………………………………………………. SU1-61
Figure 1.24 ……………………………………………………………………………………………………. SU1-61
Figure 1.25 ……………………………………………………………………………………………………. SU1-65
Figure 1.26 ……………………………………………………………………………………………………. SU1-66
Figure 1.27 ……………………………………………………………………………………………………. SU1-67
Figure 1.28 ……………………………………………………………………………………………………. SU1-68
Figure 1.29 ……………………………………………………………………………………………………. SU1-71
Figure 1.30 ……………………………………………………………………………………………………. SU1-73
Figure 1.31 ……………………………………………………………………………………………………. SU1-77
Figure 1.32 ……………………………………………………………………………………………………. SU1-78
Figure 2.1 ……………………………………………………………………………………………………… SU2-11
Figure 2.2 ……………………………………………………………………………………………………… SU2-12
Figure 2.3 ……………………………………………………………………………………………………… SU2-13
Figure 2.4 ……………………………………………………………………………………………………… SU2-29
Figure 2.5 ……………………………………………………………………………………………………… SU2-33
Figure 2.6 ……………………………………………………………………………………………………… SU2-34
Figure 2.7 ……………………………………………………………………………………………………… SU2-40
vi
List of Figures
Figure 2.8 ……………………………………………………………………………………………………… SU2-45
Figure 2.9 ……………………………………………………………………………………………………… SU2-47
Figure 2.10 ……………………………………………………………………………………………………. SU2-48
Figure 2.11 ……………………………………………………………………………………………………. SU2-50
Figure 2.12 ……………………………………………………………………………………………………. SU2-53
Figure 2.13 ……………………………………………………………………………………………………. SU2-55
Figure 2.14 ……………………………………………………………………………………………………. SU2-56
Figure 2.15 ……………………………………………………………………………………………………. SU2-57
Figure 2.16 ……………………………………………………………………………………………………. SU2-58
Figure 2.17 ……………………………………………………………………………………………………. SU2-59
Figure 2.18 ……………………………………………………………………………………………………. SU2-62
Figure 2.19 ……………………………………………………………………………………………………. SU2-66
Figure 2.20 ……………………………………………………………………………………………………. SU2-70
Figure 2.21 ……………………………………………………………………………………………………. SU2-71
Figure 3.1 ……………………………………………………………………………………………………….. SU3-6
Figure 3.2 ……………………………………………………………………………………………………….. SU3-7
Figure 3.3 ……………………………………………………………………………………………………….. SU3-8
Figure 3.4 ……………………………………………………………………………………………………… SU3-11
Figure 3.5 ……………………………………………………………………………………………………… SU3-19
Figure 3.6 ……………………………………………………………………………………………………… SU3-21
Figure 3.7 ……………………………………………………………………………………………………… SU3-24
vii
List of Figures
Figure 3.8 ……………………………………………………………………………………………………… SU3-38
Figure 3.9 ……………………………………………………………………………………………………… SU3-39
Figure 3.10 ……………………………………………………………………………………………………. SU3-40
Figure 4.1 ……………………………………………………………………………………………………… SU4-33
Figure 4.2 ……………………………………………………………………………………………………… SU4-34
Figure 4.3 ……………………………………………………………………………………………………… SU4-36
Figure 4.4 ……………………………………………………………………………………………………… SU4-54
Figure 4.5 ……………………………………………………………………………………………………… SU4-55
Figure 4.6 ……………………………………………………………………………………………………… SU4-56
Figure 4.7 ……………………………………………………………………………………………………… SU4-57
Figure 4.8 ……………………………………………………………………………………………………… SU4-58
Figure 4.9 ……………………………………………………………………………………………………… SU4-59
Figure 4.10 ……………………………………………………………………………………………………. SU4-66
Figure 4.11 ……………………………………………………………………………………………………. SU4-69
Figure 4.12 ……………………………………………………………………………………………………. SU4-70
Figure 6.1 ……………………………………………………………………………………………………… SU6-12
Figure 6.2 ……………………………………………………………………………………………………… SU6-13
Figure 6.3 ……………………………………………………………………………………………………… SU6-15
Figure 6.4 ……………………………………………………………………………………………………… SU6-16
viii
List of Lesson Recordings
List of Lesson Recordings
Lab – Overall Plan………………………………………………………………………………………… SU1-27
Lab 1 – Getting Started…………………………………………………………………………………. SU1-29
The Electrum Wallet……………………………………………………………………………………… SU1-32
Acquiring Bitcoins………………………………………………………………………………………… SU1-40
Connecting to Ethereum……………………………………………………………………………….. SU1-42
Geth………………………………………………………………………………………………………………. SU1-50
Connecting with Javascript…………………………………………………………………………… SU1-52
Ethereum on Windows…………………………………………………………………………………. SU1-57
Ethereum Software Ecosystem: Geth…………………………………………………………….. SU2-27
Solidity………………………………………………………………………………………………………….. SU2-35
Solidity on Windows…………………………………………………………………………………….. SU2-41
Web3.js, TestRPC, Truffle.js…………………………………………………………………………… SU2-44
Managing Accounts and Transactions with Geth………………………………………….. SU2-51
A Simple DApp with Geth…………………………………………………………………………… SU2-59
Truffle Framework………………………………………………………………………………………… SU3-18
Inside Truffle.js……………………………………………………………………………………………… SU3-25
Migrations…………………………………………………………………………………………………….. SU3-28
Test Contracts on TestRPC……………………………………………………………………………. SU3-30
ix
List of Lesson Recordings
A Voting App with Truffle……………………………………………………………………………. SU3-36
Greeter Example……………………………………………………………………………………………. SU3-45
Overview of Solidity…………………………………………………………………………………….. SU4-21
Getting Solidity to Work……………………………………………………………………………….. SU4-33
Introduction to Solidity: Basic Concepts, Layouts…………………………………………. SU4-38
Types and Data Structure……………………………………………………………………………… SU4-46
Introduction to Solidity: Functions……………………………………………………………….. SU4-50
Events……………………………………………………………………………………………………………. SU4-63
Deploy to TestRPC………………………………………………………………………………………… SU5-22
Deploy to a Private Net………………………………………………………………………………… SU5-27
x
Course
Guide
Blockchain Technology and Smart
Contract for Finance
FIN385
Course Guide
1. Welcome
Presenter: Dr Tan Chong Hui
This streaming video requires Internet connection. Access it via Wi-Fi to
avoid incurring data charges on your personal mobile plan.
Click here to watch the video. i
Welcome to the course FIN385 Blockchain Technology and Smart Contract for Finance, a
5 credit unit (CU) course.
This Study Guide will be your personal learning resource to take you through the course
learning journey. The guide is divided into two main sections – the Course Guide and
Study Units.
The Course Guide describes the structure for the entire course and provides you with an
overview of the Study Units. It serves as a roadmap of the different learning components
within the course. This Course Guide contains important information regarding the
course learning outcomes, learning materials and resources, assessment breakdown and
additional course information.
i


CG-2
FIN385
Course Guide
2. Course Description and Aims
This course gives and overviews the origins of the blockchain technology and its
evolution. Students will learn how blockchain and smart contracts may enable efficiencies
in markets, and how it can also be a disruptive force in industries. Topics covered
will include the history of digital money, the creation of bitcoin, technical aspects of
Ethereum blockchain, private blockchains, consensus mechanisms, smart contracts, and
the applications that can be created with blockchain and smart contracts.
Course Structure
This course is a 5-credit unit course presented over 6 weeks.
There are six Study Units in this course. The following provides an overview of each Study
Unit.
Study Unit 1 – Internet Economy and Networks
This unit helps you understand the conceptual and developmental background behind
cryptocurrencies and blockchains as they are rooted in the internet, the economy and the
science of networks.
Study Unit 2 – Bitcoin and Ethereum: Development and Structure
This unit will focus on the rise and key concepts of Bitcoin and Ethereum.
Study Unit 3 – Blockchains: Types and Applications
The aim of this unit is to compare between different types of blockchains and to discuss
use cases for them.
CG-3
FIN385
Course Guide
Study Unit 4 – A New Economy
This unit will cover the idea that blockchain development comes in stages: currency,
contracts, communities.
Study Unit 5 – Further Topics
This unit describes further topics that are under development for cryptocurrencies
and blockchains, namely, scalability challenges, consensus mechanisms, zero knowledge
proofs and regulatory challenges.
Study Unit 6 – Bitcoin Nuts and Bolts
This unit covers a more detailed look at various parts of the Bitcoin protocol and how
those parts are varied in other cryptocurrencies.
CG-4
FIN385
Course Guide
3. Learning Outcomes
Knowledge & Understanding (Theory Component)
By the end of this course, you should be able to:
• Show an understanding of the development of cryptocurrencies and blockchain
• Compare different types of consensus mechanisms and their role in blockchains
• Discuss the alternative applications of blockchain technology and smart contracts
• Analyse the various risks and security issues involved with the blockchain
technology
• Examine the role of regulation and the development of various blockchains
• Appraise the economic incentive structure of the networks
• Distinguish how blockchain could be implemented in various industries
Key Skills (Practical Component)
By the end of this course, you should be able to:
• Demonstrate the essential knowledge and interpersonal skills to exchange ideas
about blockchains and smart contracts effectively in a team
• Demonstrate proficiency in writing on issues in blockchains and smart contracts
coherently
• Create a DAO/DAPP for a specific application
CG-5
FIN385
Course Guide
4. Learning Material
The following is a list of the required learning materials to complete this course.
Required Textbook(s)
Bashir, I. (2017). Mastering blockchain: distributed ledgers, decentralization and smart
contracts explained. Birmingham, UK: Packt Publishing Ltd..
Other recommended study material (Optional)
The following learning materials may be required to complete the learning activities:
Website(s):
https://www.packtpub.com/big-data-and-business-intelligence/mastering-blockchain
CG-6
FIN385
Course Guide
5. Assessment Overview
The overall assessment weighting for this course for the Evening Cohort is as follows:
Assessment
Assignment 1
Assignment 2
Description
Weight Allocation
Pre-Course Quiz 1
2%
Pre-Class Quiz 1
2%
Pre-Class Quiz 2
2%
Group-Based
38%
Assignment / GBA
Class Participation
Class Participation
6%
Examination
Written Examination
50%
TOTAL
100%
The overall assessment weighting for this course for the Day-time Cohort is as follows:
Assessment
Assignment 1
Assignment 2
Description
Weight Allocation
Pre-Course Quiz 1
2%
Pre-Course Quiz 2
2%
Pre-Course Quiz 3
2%
Group-Based
38%
Assignment / GBA
CG-7
FIN385
Course Guide
Assessment
Description
Weight Allocation
Class Participation
Class Participation
6%
Examination
Written Examination
50%
TOTAL
100%
The assessment strategy consists of two components, Overall Continuous Assessment
(OCAS) and Overall Examinable Component(OES) that make up the overall course
assessment score.
For SBiz courses, both components will be equally weighted: 50% OCAS and 50% OES.
a.
OCAS: The sub-components are reflected in the tables above and are different for
the day-time and evening cohort. The continuous assignments are compulsory
and are non-substitutable.
b.
OES: The End-of Course Assessment (ECA) is 100% of this component.
To be sure of a pass result, you need to achieve scores of at least 40% in each component.
Your overall rank score is the weighted average of both components.
CG-8
FIN385
Course Guide
6. Course Schedule
To help monitor your study progress, you should pay special attention to your
Course Schedule. It contains study unit related activities including Assignments, Selfassessments, and Examinations. Please refer to the Course Timetable in the Student Portal
for the updated Course Schedule.
Note: You should always make it a point to check the Student Portal for any
announcements and latest updates.
CG-9
FIN385
Course Guide
7. Learning Mode
The learning process for this course is structured along the following lines of learning:
a.
Self-study guided by the study guide units. Independent study will require at
least 3 hours per week.
b.
Working on assignments, either individually or in groups.
c.
Classroom Seminar sessions (3 hours each session, 6 sessions in total).
iStudyGuide
You may be viewing the iStudyGuide version, which is the mobile version of the
Study Guide. The iStudyGuide is developed to enhance your learning experience with
interactive learning activities and engaging multimedia. Depending on the reader you are
using to view the iStudyGuide, you will be able to personalise your learning with digital
bookmarks, note-taking and highlight sections of the guide.
Interaction with Instructor and Fellow Students
Although flexible learning – learning at your own pace, space and time – is a hallmark
at SUSS, you are encouraged to engage your instructor and fellow students in online
discussion forums. Sharing of ideas through meaningful debates will help broaden your
learning and crystallise your thinking.
Academic Integrity
As a student of SUSS, it is expected that you adhere to the academic standards stipulated
in The Student Handbook, which contains important information regarding academic
policies, academic integrity and course administration. It is necessary that you read and
understand the information stipulated in the Student Handbook, prior to embarking on
the course.
CG-10
Study
Unit
Internet Economy and Networks
1
FIN385
Internet Economy and Networks
Learning Outcomes
By the end of this unit, you should be able to:
1.
Distinguish the most important ideas underlying the FinTech trend.
2.
Experiment with the tools that connect to the Bitcoin and Ethereum networks.
3.
Create transactions on cryptocurrency networks.
SU1-2
FIN385
Internet Economy and Networks
Overview
Introduction to cryptocurrencies and blockchains through an appreciation of the historical
development of related issues.
Introduction to software that helps to connect to the Bitcoin and Ethereum networks.
SU1-3
FIN385
Internet Economy and Networks
Chapter 1: History and Background of Digital Currencies
1.1 Internet and the Economy
The internet started its life as a DARPA (Defense Advanced Research Projects
Agency) project in the 1960s. Through attracting worldwide participation and a mutual
commitment towards open development, it has grown into the hugely successful
behemoth that it is today. On the scale of human evolution, at about 50 years old, it is quite
young.
The economy goes back much longer. Economics as a discipline can be said to have started
by Adam Smith with his book The Wealth of Nations published in 1776. A key point that
arises from the book is that the everyday business interaction of man is synthesised into
social phenomenon which can and should be fruitfully studied. This everyday business
interaction, on the other hand, has been going on for a long, long time. Historical records
that go back at least to 4000 BCE show that the Sumerians were already fussing over loans,
accounts and contracts.
The marriage between the internet and the economy is a recent affair. It is true that the
internet has made it easier for people to connect and for information to flow. But having
a medium of exchange created purely as an internet entity, as Bitcoin has done, is a
recent state of affairs. This development can potentially and fundamentally alter economic
activities in the years ahead.
In this study unit, we will acquire an understanding of the nature of economic activities,
the internet and the potentially deep impact that the underlying technology of Bitcoin,
namely blockchain, will have on the two.
1.1.1 The Bitcoin Landscape
Bitcoin surfaced in November 2008 when Satoshi Nakamoto posted an article titled Bitcoin:
A Peer-to-Peer Electronic Cash System on the internet. In January 2009, the bitcoin network
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was born with the issuance of the first bitcoins. Nine years later in 2017, there are 14 million
users and the price of 1 bitcoin costs about $1500.
Over the 9 nears since its inception, Bitcoin has inspired other cryptocurrencies. Over 700
cryptocurrencies have arisen and a dozen has a market capitalisation above $10 million
each. One of the most notable among these is the Ether. The inventor of the Ether, Vitalik
Buterin, has in fact created an entire computational platform, called the Ethereum, to
handle smart contracts. His idea is that what the underlying technology is enabling is
not merely currencies, but contracts that reside on the internet which use cryptographic
techniques to enforce trust and consensus that are normally associated with them.
Roughly speaking, a cryptocurrency is a peer-to-peer network accounting system that
keeps track of who possesses how much of the currency. This is done by recording all
transactions involving the transfer of currency from one peer to another in a data storage
facility called the blockchain. The blockchain remembers the entire history of the network
from its inception and thus enforces the integrity of the system.
Another line of development sees software developers modifying the blockchain for other
purposes than the creation of another cryptocurrency. A notable example here is the
multichain. This is an open source fork of the Bitcoin project that allows users to create
and maintain tokens with a private blockchain for their own organisation.
Blockchain is currently spurring the development of the FinTech industry. It is reported
that the DTCC, a US post-trade services group that processes more than $1,500tn of
securities a year, will use technology from IBM and US blockchain start-ups R3 and Axoni
as the basis for its next-generation trade information warehouse. In another report, ICAP
is preparing to process thousands of foreign exchange trades on blockchain technology
amid signs the emerging standard is encroaching on global markets.
1.1.2 The Nature of the Economy
The economic phenomenon concerns people interacting in their everyday business
dealings, such as making bread for sale, paying for muffins with cash, borrowing and
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lending money. Such interactions underlie our sociality – dependence on each other for
subsistence and thus very existence.
Some points of note here are the following:
• Such activities have been going on for as long as there is recorded history, and quite
surely for far longer than that prior to recorded history.
• Such activities weave into a social phenomenon, with regularities that are
observable at a higher scale.
• Such activities are not arbitrary, but are structured.
• Issues of authority and autonomy are integral to such activities.
1.1.2.1 Looking into the Past
Recorded history goes back to the Sumerians (c. 5000 BCE) who lived in Mesopotamia a region located in the present day Iraq. The Sumerians lived in a temple-centred social
organisation and the settlement flourished into cities with them.
On excavating the ancient site, archaeologists have found plenty of records of business
transactions in the form of cuneiform writing on clay tablets, such as allocation of beer or
movement of goods in and out of temple storage grounds. These have been interpreted
as one of the first instances of writing in human history.
Of particular note, clay devices called bullae have also been found that have been
interpreted as the precursor of writing. These bullae are shaped like balls and are hollow
inside. They contain little tokens that were shaped like commodities of daily life: jars,
loaves and animals. The discoverer, Denise-Schmandt-Besserat, showed that these tokens
were a system of accounting of goods. The bullae would be broken when the accountant
needed to tally, and there were marks on the tokens to indicate numbers. Some bullae
are found to be covered entirely in the impressions of cylinder seals. This suggests that
they functioned as contracts. The seals are equivalent to signatures of the modern day.
When the goods were returned, the bullae were broken and the tallying is done against
the tokens inside.
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It is clear that the record of things to account for them is a major impetus to the
development of writing. What is generally less appreciated is that such representations
or tokens are a key aspect of finance. When something is recorded, the subject that is
being recorded appears to be more essential than the recording that is done of it. But
in finance, the recording itself is essential to the phenomenon. Financial contracts are
representations or records that are agreed upon by the counterparties. A cryptocurrency
comprises nothing more than tokens or states of possession that are recognised by its
community of users who interact on the internet.
1.1.2.2 The Economy as a System
Adam Smith is regarded as the father of economics as an academic discipline by virtue of
this writings in Wealth of Nations. An oft-quoted contribution is the notion of the invisible
hand as it appears in the following passage from the book (Book IV, Chapter II, paragraph
IX):
By preferring the support of domestic to that of foreign industry, he intends only his own security;
and by directing that industry in such a manner as its produce may be of the greatest value, he
intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to
promote an end which was no part of his intention. Nor is it always the worse for the society that
it was not part of it. By pursuing his own interest he frequently promotes that of the society more
effectually than when he really intends to promote it.
This has generally been interpreted to mean that by pursuing their own selfish goals,
merchants contribute to the good of the society as their actions are guided by forces in the
market that turn out to be socially positive. This is a topic of intense debate and research
in economics and elsewhere.
What I wish to highlight is a less controversial and more objective fact. The economy is
a system that comprises (at least) two scales of observation. At the level of individuals,
we observe agents going about their mundane business dealings. At the level of the
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system, these micro interactions weave into macro-level regularities that may be observed,
measured, reasoned with, discussed, etc.
Thus, when we think about how much an individual owns, or the financial statement of
a company, we are thinking about the state of individual agents in the economy. On the
other hand, when we discuss market wide interest rates and prices, recession, inflation,
or depression, we are discussing macro-level regularities that result from micro-level
interactions.
This realisation is important because in order to understand a very fundamental aspect
of the modern economy that cryptocurrencies expose as a concept, namely money, one
must first appreciate it to be a social phenomenon. When you pay money to someone to
receive a tangible good, such as a bowl of noodles, your counterparty accepts it in spite
of the obvious fact that what you are handling to him is just a piece of paper. Basically,
he accepts the money because he believes that he will be able to exchange it for tangible
goods with other members of our society with ease (and he needs to pay his taxes with
the money).
1.1.2.3 Structure in Interaction
Men develop various structured ways to interact with each other in the exchange of things.
A primitive example is that of the silent trade. This was noted by the Greek historian
Herodotus, who wrote:
The Carthaginians also tell us that they trade with a race of men who live in a part of Libya beyond
the Pillars of Hercules. On reaching this country, they unload their goods, arrange them tidily
along the beach, and then, returning to their boats, raise a smoke. Seeing the smoke, the natives
come down to the beach, place on the ground a certain quantity of gold in exchange for the goods,
and go off again to a distance. The Carthaginians then come ashore and take a look at the gold; and
if they think it represents a fair price for their wares, they collect it and go away; if, on the other
hand, it seems too little, they go back aboard and wait, and the natives come and add to the gold
until they are satisfied. There is perfect honesty on both sides; the Carthaginians never touch the
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gold until it equals in value what they have offered for sale, and the natives never touch the goods
until the gold has been taken away.
Such examples of silent trade are not isolated. They have also been observed in other
continents at other times in history.
Another example of structured interaction is auctions. A well-known cultural example is
that from the Tsukiji Fish Market in Tokyo.
In finance, we are quickly drawn to the fact that modern day global economics is
dominated by markets, the major of which are the foreign exchange market, stock markets,
commodities markets and their futures exchanges and the fixed income market which is
usually separated into the money market and the capital market. In each of these markets,
the participants interact in certain structured and regular ways in the exchange of money,
contracts and goods.
The foreign exchange market deals with the media of exchange of the international
community of countries. The currency of a country enables its citizens to easily procure
and exchange goods and services. The foreign exchange market enables countries and
their citizens to do so across their borders. As noted above, the fact that fiat or paper
money can function as a medium of exchange is a particular structure in how things are
exchangeable for things in a community of agents.
The stock market trades in shares of corporations. The key notion underlying a
corporation is that of the pooling of resources and the issuance of tokens that represent
equitable stakes in the venture undertaken by the corporation. A group of individuals
coming together, laying down their assets in order to combine into a pool of resource
in order to undertake a risky venture that promises attractive future returns, having the
pool formalised into the notion of a corporation that is recognised by the law to be a
separate individual which is also endowed with the right to issue shares that represent
fractional ownership of the corporation, is a structure that developed over time. The first
stock market was the Amsterdam Stock Exchange established in 1602. This enabled shares
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of listed corporations to be traded. Currently, almost every country in the world has its
own stock exchange.
In commodities futures exchange, participants engage in the trading of futures contracts.
This enables them to exchange the underlying commodity on a future date with cash
amount that is agreed and fixed on an earlier present date. The contracts are standardised
by the futures exchange so that they may be easily transferred from one trader to the
next, regardless of the position. The structure underlying futures trading thus enables
assets from a future date to be exchanged with cash amounts that are determined on
an earlier date. The contract locks the individuals involved into mutual obligations. The
transferability feature promotes liquidity and enables the community of futures traders
to be able to locate the acceptable futures price for the underlying in a collective manner.
The fixed income market creates a market out of borrowing and lending. When one
borrows, one promises to pay with interest the principal in the future. The counterparty
accepts the deal with trust and hands the borrower money upfront. In the fixed income
market, such promises are formalised into bond or money market contracts, which can
change hands from one trader to the next. Such promissory contracts alter the perspective
from one of borrowing/lending to one of buying/selling. Rules of engagement abound in
these markets. They are determined by regulations and norms. The contracts determine
the flow of assets and funds between the bounded counterparties. In each case, one can
make out distinctive underlying features that distinguish the particular market.
1.1.2.4 Authority and Autonomy
Through history, one sees that when people gather, certain social structures arise. Society
evolves status and hierarchy. Fewer are at the top of the hierarchy and they become
authoritative figures and exert power over the rest, down the hierarchy. On the other hand,
the masses interact among themselves through everyday business transactions as social
equals. The things that matter in commerce are material resources and/or trust, rather
than social status. Individuals are free and autonomous in their dealings with each other.
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Those in power relies on the masses to feed them with resources. The masses on the other
hand rely on the authority to provide social order. This mutualism does not function in
complete equilibrium. For where there is active commerce, some may become rich and
powerful, thus intrude into the upper echelons and alter the social hierarchy. The existing
power guards its position in this flux. It does so by interfering and keeping an eye on the
markets.
In the 20th century, an aspect of the tension between authority and autonomy surfaces
in schools of thought in economics. Keynesian economists advocate government
intervention in the markets through public policies that aim to achieve full employment
and price stability. On the other hand are the classical economists who advocate a
laissez-faire approach to markets – Adam Smith’s invisible hand will guide profitseeking businessmen to an optimal solution of the problem of equitable social resource
distribution.
We will not get into these economic arguments. What we should note however is
that in economic interactions, the notions of autonomy and authority are important
considerations. In the interactions of everyday business transactions, people make
decisions through free will. You are not coerced into buying a particular food to fill your
stomach, for instance. You have the choice of the type of food and the price to pay. Thus,
individuals in the market are autonomous.
However, this autonomy is not complete. There is implicit reliance on certain order that
exists uniformly throughout the market. The most obvious is the freedom from violence
which is provided by the policing services of the authority. Less obvious are units of
measures and units of exchange. When the Emperor Qin Shi Huang unified China in
220 BCE, among the policies he implemented were standardised units of measures and
a common currency throughout the lands he conquered. This provided the means for
smooth communication and exchange amongst the people.
Thus, we see that social interaction of autonomous agents relies on certain global
coordination and signals. This global coordination, which may be figuratively identified
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as the invisible hand of Adam Smith, has often been provided by the authority. The
reasoning goes roughly like this:
• A signal is provided by the authority.
• The authority, due to its power to assert itself, is trusted by individual autonomous
agents.
• The autonomous agents assume the signal in their interactions with each other.
Another metaphor may be useful here. A quartet involves 4 autonomous musicians
who coordinate among themselves easily to produce sweet music. An orchestra on the
other hand requires a conductor to provide the authoritative invisible hand to guide the
production of organised sound. The large number of autonomous musicians makes it hard
for them to produce the musical social order otherwise.
1.1.3 The Internet
The history of the internet can be traced back to the Advanced Research Projects Agency
Network (ARPANET) in the 1960s. Over time, the network grew by connecting smaller
networks together, initially many of which are from academic institutions. A suite of
communication protocols enable this. This suite is in fact better understood as a stack (the
TCP/IP protocol stack) since the information units that are dealt with by the protocols
can be categorised according to their ease of direct understanding by human beings. The
functions of these protocols are best understood to specify how data should be packetised,
addressed, transmitted, routed and received. Thus, the internet is described to be a packetswitching network. Near the top of the stack (the Application layer) lies the HTTP protocol
(Hypertext Transfer Protocol) which is the foundation for communication in the world
wide web of human readable and media-heavy websites, implemented by Tim BernersLee in the 1980s.
The internet broadly enables open communication. Entry into the network is easy and the
means to do so are readily available. There are hardly any centralised means of control.
To have a sense this, let’s consider several aspects:
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• Where are the hardware cables underlying internet communication found and who
control(s) them?
• Information can only be found on the internet because it is located at sites which are
identified by addresses – where are these addresses stored and who control(s) them?
Internet data relies on submarine cables (categorised into international and domestic)
to be transmitted across the globe. These cables are separately owned by consortiums
of telecommunication companies of an international mix. A map of these cables may
be found here. On land, internet data is transmitted through wifi, cables, etc. that are
provided by telecommunication companies.
Internet names and addresses are organised by the domain name system (DNS). This is
administered by the Internet Assigned Numbers Authority (IANA) which is an affiliate of
the Internet Corporation for Assigned Names and Numbers (ICANN) which is governed
by a global multistakeholder model. In the domain name system, names are associated
to IP addresses and this association is stored in possibly multiple name servers on the
internet. Name servers are normally maintained by internet service providers which have
to be approved by the ICANN.
In spite of the lack of centralised means of control, there are regulatory bodies that chart
the directions of the internet and influence its constitution. These bodies are populated
by members of the governmental agencies and technology companies of an international
nature.
As an infrastructural backbone, the internet has significantly enabled certain aspects of
human communication and exchange. Let’s consider several points here:
• What internet has achieved can be starkly contrasted with episodes of
communication in history, e.g. the story of the Olympic Games, the Silk Road
• Internet participants can define and redefine communication protocols themselves.
Thus, although the world wide web is powered by the HTTP, peer-to-peer
communication is enabled by individual P2P protocols.
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• The internet makes possible cooperation towards creating knowledge/software
products that is not restricted by international borders and is persistent in nature.
Specifically, open source software project communities are a rich source of creativity
and new tools and software on the internet. The prime example is Linux, the open
source operating system that powers a significant number of servers on the internet.
These points are hereby elaborated in the next 3 sections.
1.1.3.1 Historical Episodes in Communication and Exchange
The modern Olympic games is said to have been inspired by a legendary incident in
ancient Greece.
In 490 BCE, a Persian army landed on the plain of Marathon, about twenty-five miles
from Athens, threatening to capture the city. The Athenian Philippides was dispatched to
seek help from the Spartans. He covered the distance of 150 miles to Sparta in 2 days – a
remarkable feat. Eventually, the Persians were defeated by the Athenians themselves at
the plain. Philippides brought the news back to the city by running long distance, falling
dead after announcing “Rejoice, we conquer!”.
Distance has been an impediment and challenge for man and his communities for
centuries. With the internet, the problem of communication as described by the story
above is completely solved. Information can now be sent almost instantaneously from one
point on Earth to another.
However, not all issues arising from human interaction are made obsolete by the internet.
For instance, the Silk Road evolved over centuries to connect regions in Asia from Japan,
across China, to the Mediterranean Sea. The Road promoted cultural exchange and trade
of goods. Such long-term communication of ideas and knowledge as well as the flow of
physical things are aspects that are not made obsolete by the internet.
Obviously, it is impossible for real things to be transmitted through air or through cable.
Thus, flow of physical things must still rely on transportation systems and ocean lines.
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However, ownership of things is information-based and the current buzz around FinTech
is about the impact of internet technology on it.
Culture is the glue that gels a community together. It relies on memory that is stored
in writings, artwork or symbols cast in artefacts or in the memory of members of the
community which are transmitted through communication. Such long-term memory is
being stored on the internet as well. Open source software communities are able to
form with members coming together on the internet, cooperate productively to produce
highly complex and useful software. While Linux is the prime example – being the main
operating system that powers the servers of companies big and small – open source
communities continually create and maintain new tools and software that push the
frontiers of technology. Bitcoin and all other cryptocurrencies based on it are developed
around the notion of a blockchain, which is effectively a permanent memory of all
transactions by the members of a cryptocurrency community.
By comparing the state of human communication and exchange from the past, we can
better appreciate the significance of present and future impacts of the internet on us.
1.1.3.2 Peer-to-Peer Networks on the Internet
A peer-to-peer (P2P) network is a network of communicating nodes that is decentralised.
A node corresponds to a software that is downloaded from the web – this is called the
client. Each client stores the necessary rules and methods for it to join the network and to
communicate with other nodes. As the nodes interact, the state of the system is captured
by the nodes. No single node has the entire picture of the system. The entire picture is
broken down into bits and stored throughout the nodes. The first globally successful P2P
network is the BitTorrent. The protocol – the rules by which the nodes communicate – was
designed by Bram Cohen in 2001. At one time, it was said to be responsible for 50% of
internet traffic and 75% of P2P traffic. In the BitTorrent protocol, nodes are either peers,
leechers or trackers. A peer is one instance of a BitTorrent client running on a computer
on the Internet to which other clients connect and transfer data. A leecher is a downloader
of data or a node that has a negative impact to the network. A tracker keeps track of the
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nodes and the data that is flowing around. A file, such as video, is broken down into parts,
called seeds, which are sent to the various peers in the network, to be finally reassembled
for the downloader.
P2P networks underlie some financial networks on the internet, notably cryptocurrencies.
The lending network [Prosper](https://www.prosper.com/) is also P2P in nature.
Appreciating how they function and their characteristics is important to the
understanding of cryptocurrencies in general and blockchain-based systems like
Ethereum.
1.1.3.3 Open Source Software Communities
Internet software is not created out of thin air. There are communities of motivated and
intelligent individuals who contribute to them. These communities are not disorganised
or anarchic. The social structure evolves around a core of contributors, very often, centred
around an individual who contributed the core code that got the project started in the first
place. Outside the core is a community of volunteers who contribute in various ways to
the project, generally with lower levels of consistency or intensity as compared to the core
group.
It is important to appropriately situate the developer community and its core in the
overall scheme of things. For instance, in a cryptocurrency open source project, the initial
contributors tend to gain a great deal if the value of the currency appreciates relative to
the dollar as the project gains traction as they own significant amounts of the currency
when it was still relatively without value at initial stages. Another illustration: in the
infamous DAO hack incident, Ethereum developers were forced to fork the project – see
for instance, this article. This was a major decision in the life of the Ethereum project. While
the decision is arrived at through the community, the actual decision making process had
to be negotiated through a definite social structure. Thus, though the software underlying
P2P clients are open source and the network is toutedly decentralised, the developer core
has a significant clout in the ecosystem.
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1.2 Where Are We Heading?
To summarise:
• There is a current buzz around FinTech . Claims of potential fundamental change
to financial processes abound. We want to better understand the issues involved
in this course.
• The buzz was initiated by Bitcoin , which has spawned over 700 cryptocurrencies.
Two aspects of the technology will be most relevant to understanding these things:
the cryptocurrency that the technology enables, and the blockchain technology
that drives it.
• Cryptocurrencies allow participants in the
network
to exchange tokens in the
same manner as traditional money is exchanged. This is achieved by recording
all transactions into the blockchain that is temper-proof and open for all in the
community to check and verify.
• The same consensus mechanism can be used to administer financial
contracts
among participants in a peer-to-peer network. This is the key idea underlying the
Ethereum platform.
• These networks are able to implement exchanges in a
decentralised
or
autonomous manner. And this is in contrast to the existing prevalent system that
requires an authority to back currencies and the legal system to enforce contracts.
We will get our hands dirty in exploring Bitcoin and Ethereum to understand the
underlying concepts better in the rest of the course. The keywords and phrases in bold
may serve as your convenient conceptual guide.
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Chapter 2: Networks
Underlying Bitcoin is a peer-to-peer network of nodes and the design philosophy of the
Bitcoin protocol is to have a decentralised network.
Thus, the idea of a network is quite integral to the understanding of Bitcoin as well as
other cryptocurrency systems.
Networks have been a subject of study in mathematics, physics and computer science for
many decades. This provides a knowledge base of concepts as well as perspectives for us
to grapple with real world networks.
Let’s briefly go through some fundamental notions here.
2.1 Mathematical Perspective: Graph Theory
A graph looks typically like this:
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Figure 1.1 Graph of the Konigsburg Bridge
It consists of nodes (or vertices) and edges. It can be denoted by G = (V, E), where V is the
set of vertices, E is the set of edges and G is the graph itself.
The important thing about the notion of a graph is that it abstracts away unnecessary
details and focusses only on nodes and edges. The only relationships that count are the
incidences (i.e. connections) between vertices and edges.
In the graph above, there are 4 vertices and 7 edges. The degrees of the vertices are
respectively 3, 3, 3, 5 (note: degree of a vertex is the number of edges that are incident to
it).
Various structures can be distinguished from a graph. For instance, a path is a sequence
of connected edges from one vertex to another. An Eulerian circuit is a path that has the
same start and end vertex and traverses each edge exactly once. A Hamiltonian circuit, on
the other hand, is a path that traverses each vertex exactly once.
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Many mathematical results are known for graphs. Here are 2 samples:
1.
The sum of degrees over all vertices in a graph is equal to twice the number of
edges.
2.
The problem of determining if a graph has a Hamiltonian path is NP-complete.
Let me briefly explain these 2 statements so that you may have a flavour of the reasoning
behind grap…
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