FinTech - Shaping the Financial World mit course finance technology fintech

Blockchain Technology & Cryptocurrencies

• Mid 1990s is when Tim Berners-Lee developed the protocols for the web
• How to move value on the internet?
  • Securely
  • Efficiently
  • Peer to peer (packet of data)
  • Prohibiting double spending
• There were tons of early digital currency projects that failed
  • DigiCash, Mondex, CyberCash, E-gold, Hashcash, Bit Gold, B-Money, Lucre
• 1996 --> SSL and TLS allowed us to secure the internet
  • Enabled online payments
• What is money?
  • Plato
    • Money is a symbol devised for the purpose of exchanges
    • Opposed using gold or silver for money
  • Aristotle
    • Solves the problem of commensurability
    • "Money is a guarantee that we may have what we want in the future. Though we need nothing at the moment it insures the possibility of satisfying a new desire when it arises."
    • Four absolutes to have universal value:
      • Durable, portable, divisible, and intrinsic value
  • Modern characteristics:
    • Durable, portable, divisible, uniform, acceptable, and stable
• What is money's future?
  • Crypto? Credit chips ala Star Wars?
• Satoshi Nakamoto releases a paper on October 31, 2008 introducing the world to Bitcoin
  • The unique spin that was introduced was adding proof of work
• Blockchain technology
  • Timestamped, append-only ledger
  • Secured via crypography
    • Hash functions for integrity
    • Digital signatures for consent
• Crypto token sectors
  • Payment/store of value (~76%)
  • Platform tokens (~15%)
  • dApp tokens (~5%)
  • Stable coins (~4%)
• Potential uses for blockchain tech:
  • Speculative investing
  • Crowdfunding (ICOs)
  • Tokenized fiat (stable coins), securities, and assets
  • Using platforms like exchanges, gaming, gambling, DeFi, etc.
• Blockchain tech challenges:
  • Scalability, performance, and efficiency
    • 7-10 transactions per second for Bitcoin
    • Centralized solution can moves ~350 million transactions per day
      • Significantly more than Bitcoin
  • Privacy
  • Security
  • Interoperability
  • Governance
  • Public policy
• Crypto trilemma
  • Scalability <> Decentralization <> Security
• Central bank initiatives
  • Real time gross settlement
  • Digital currencies
• Ground truths
  • Satoshi Nakamoto solved the payment riddle -- avoiding double spending
  • Money is a social and economic construct
  • We already live in the age of digital money
  • Crypto is full of scams and fraud
  • Crypto is a speculative asset class
  • Retail investors are taking a lot of risk by being involved today
  • Potential to be a catalyst for change is very real

Readings

• Even if a Thousand Projects Don’t Make It, Blockchain Is Still a Change Catalyst Gary Gensler, CoinDesk (December 15, 2019)
• The technology of retail central bank digital currency Raphael Auer and Rainer Boehme, Bank of International Settlement (March 1, 2020)

Optional

• Bitcoin: A Peer-to-Peer Electronic Cash System Satoshi Nakamoto (October 31, 2008)
• Blockchain Technology Overview Dylan Yaga et al. National Institute of Standards and Technology (October 2018) (pages 1–3, & 7–28, sections 1, 3 & 4)

Study Questions / Issues to Prepare

1. How does Bitcoin fit within the history of money, the emergence of the Internet and failed attempts of cryptographic payment systems?
2. What are the strategic and tactical considerations in assessing the viability and value proposition of a blockchain technology project? How can you separate rigorous analysis from mere assertion and hype in the blockchain ecosystem?
3. What strategic considerations should go into Central Banks thinking of expanding access to digital reserves through central bank digital currency (CBDC)?