Lecture 3 - Fintech Innovations & Applications PDF

FINTECH INNOVATIONS & APPLICATIONS LECTURER: DHASHWEEN BHOGUN 1 LECTURE 3 FINTECH INNOVATIONS & APPLICATIONS 2 Introduction Bitcoin Recap Ethereum – Gas & Gas price, Smart Contracts & EVM Public & Private Keys – Digital Signatures Crowd Funding...

FINTECH INNOVATIONS & APPLICATIONS LECTURER: DHASHWEEN BHOGUN 1 LECTURE 3 FINTECH INNOVATIONS & APPLICATIONS 2 Introduction Bitcoin Recap Ethereum – Gas & Gas price, Smart Contracts & EVM Public & Private Keys – Digital Signatures Crowd Funding - Initial Coin Offering (ICO) FINTECH INNOVATIONS & APPLICATIONS 3 Bitcoin Recap FINTECH INNOVATIONS & APPLICATIONS 4 How does BTC Blockchain work? FINTECH INNOVATIONS & APPLICATIONS 5 Inside a Block Version Number of software Time stamp Hash of the previous block Merkle Root Transaction List Goal of Current Difficulty & Nonce + Mining FINTECH INNOVATIONS & APPLICATIONS 6 Inside a Block FINTECH INNOVATIONS & APPLICATIONS 7 Hashing in Blockchain https://andersbrownworth.com/blockchain/hash FINTECH INNOVATIONS & APPLICATIONS 8 Nonce & Mining FINTECH INNOVATIONS & APPLICATIONS 9 Difficulty Level FINTECH INNOVATIONS & APPLICATIONS 10 Why use Bitcoin? FINTECH INNOVATIONS & APPLICATIONS 11 Why is Bitcoin tech safe? Blockchain uses volunteers — lots of them — to sign hashes that validate transactions on the Bitcoin network using cryptography This system makes it so transactions are generally irreversible, and the data security of Bitcoin is strong FINTECH INNOVATIONS & APPLICATIONS 12 Why is Bitcoin tech safe? While being public may not sound safer, Bitcoin’s ledger transparency means that all the transactions are available to the public even if the people involved are anonymous FINTECH INNOVATIONS & APPLICATIONS 13 Why is Bitcoin tech safe? When you buy or sell bitcoin, you don’t add any personal information to the blockchain like your passwords, credit card numbers, or your physical address, So, there is no personal information to leak FINTECH INNOVATIONS & APPLICATIONS 14 Why is Bitcoin tech safe? Bitcoin’s distributed network has over ten thousand nodes all over the world that keep track of all transactions happening on the system. This large number of nodes ensures that if something happens to one of the servers or nodes, others can pick up the slack FINTECH INNOVATIONS & APPLICATIONS 15 Why is Bitcoin tech safe? It also means that trying to hack into one of the servers is pointless FINTECH INNOVATIONS & APPLICATIONS 16 Is Bitcoin investment safe? With no regulatory body and an international, 24/7 market, a bitcoin worth $60,000 one day can be worth $30,000 just a few days later. FINTECH INNOVATIONS & APPLICATIONS 17 Bitcoin Passwords Bitcoins are stored in crypto wallets If you forget your Bitcoin password — that is, the password to your wallet — you’ll be in trouble. There’s no central authority you can contact to recover your account. FINTECH INNOVATIONS & APPLICATIONS 18 Intro to Ethereum Bitcoin only really meant for payments Ethereum -> Blockchain meant as a general use platform upon which applications can be built Ethereum Virtual Machine is the core architecture of the platform FINTECH INNOVATIONS & APPLICATIONS 19 Ether This is Ethereum’s cryptocurrency – P2P currency like Bitcoin Fuel that runs the network Used to pay for the computational resources for any transaction executed on the Ethereum network FINTECH INNOVATIONS & APPLICATIONS 20 Ether Also used to pay for transactions made on the network FINTECH INNOVATIONS & APPLICATIONS 21 Ethereum Accounts In Ethereum, --the state is made up of objects called "accounts“ --each account having a 20-byte address --State of all accounts is the state of Ethereum network -> Updated with every block FINTECH INNOVATIONS & APPLICATIONS 22 Ethereum Accounts --state transitions being direct transfers of value and information between accounts i.e Transactions FINTECH INNOVATIONS & APPLICATIONS 23 Ethereum Accounts Externally-owned accounts 1. Exchange of Ether 2. Managed by humans 3. No Cost – Can be created for free 4. Transfer Ether from account to account 5. Cannot write and deploy new contracts 6. Wallet integration with private key (MetaMask, etc.) FINTECH INNOVATIONS & APPLICATIONS 24 Ethereum Accounts Contract Accounts 1. Write and deploy new contracts onto the blockchain 2. Exchange & transfer of Ether 3. Stores code & managed by this code 4. Cost associated – Deploying your code in the blockchain & require storage space FINTECH INNOVATIONS & APPLICATIONS 25 Transaction Nonce Scalar value equal to the number of Tx sent from 1 address (external accounts) or number of contracts made by this account (contract account) Suppose you want to send 2 transactions transferring 10 and 14 ETH respectively FINTECH INNOVATIONS & APPLICATIONS 26 Transaction Nonce Without trx nonce, it would be impossible for miners to know your intent of maintaining the order of transactions. FINTECH INNOVATIONS & APPLICATIONS 27 Transaction Nonce If your first trx (10 ETH) has nonce 0 (new accnt.) then 14 ETH transaction will have nonce 1 Tx with 14 ETH will not be mined unless previous transaction of 10 ETH (with lower nonce) is mined -> Maintain sequence of transactions Major Unit (Dollar); Gwei -> Minor Unit (cents) FINTECH INNOVATIONS & APPLICATIONS 32 Transaction Cost Example You want to send to perform a simple money transfer using Ethereum, and you have the below: The Gas for a simple trx is 21,000 Popular wallets such as Metamask estimate the Gas Price -> Gas Price = 100 Gwei Price of 1 ETH is $1,800 FINTECH INNOVATIONS & APPLICATIONS 33 Transaction Cost Example Transaction Cost = Gas Price x Gas = 21,000 x 100 Gwei = 2.1M Gwei = 0.0021 ETH Trx Cost = 0.0021 ETH x 1,800 = $3.78 FINTECH INNOVATIONS & APPLICATIONS 34 Gas Price (Gwei) Determination All pending transactions land in the Mempool Waiting for miners to pick them up Assuming fixed Gas level, Miners are incentivised to pick trx with the highest Gas price 1st i.e. Higher price for same amount of work FINTECH INNOVATIONS & APPLICATIONS 35 Gas Price (Gwei) Determination Further, miners are limited in terms of the no. of trx that can be included in a single block (Gas Limit) Max Gas Limit at 12.5M -> Max of 595 trx per block FINTECH INNOVATIONS & APPLICATIONS 36 Gas Price (Gwei) Determination Assume similar gas level for all trx, gas price tends to increase when there are many transactions competing for fixed spaces in the next block -> Auction system FINTECH INNOVATIONS & APPLICATIONS 37 Execution Commonly asked question is "where" contract code is executed -> In the local nodes’ EVM and in all the nodes that confirm the block and the Txs contained in it Ethereum network will perform the proof-of-work consensus algorithm (similar to Bitcoin hash function creation). The miner nodes on Ethereum will validate this transaction FINTECH INNOVATIONS & APPLICATIONS 41 Ethereum Virtual Machine Once the transaction is confirmed, the ether will be debited from A’s wallet and will be credited to B’s wallet During this process, the miners will charge a fee to validate this transaction and will earn a reward FINTECH INNOVATIONS & APPLICATIONS 42 Ethereum Virtual Machine In Ethereum, the syntax, the Tx signature, timestamp, nonce, gas limit, and sender account balance are validated before execution. The fuel or gas points and other resources available for smart contract execution are also validated. FINTECH INNOVATIONS & APPLICATIONS 43 Ethereum Virtual Machine Secure Blockchain Txs Txs Form Block; Finalize & Validate Verify Gas, Others Verify Add block Execute Txs Consensus Broadcast Txs Resources Block to the Process Block Blockchain, Confirm Txs FINTECH INNOVATIONS & APPLICATIONS 44 Mining in Ethereum Bitcoin Ethereum Hashing Algorithm SHA-256 Ethash Time taken to mine 1 block Avg of 10 minutes Avg of 12 – 15 seconds Rewards Halving 3 ETH Process Proof of Work Proof of Work Variable/Miner Input Nonce Block Nonce (not trx nonce) Output Hash Value Hash Value Similar to BTC mining, Ethereum miners validate new blocks by FINTECH INNOVATIONS & APPLICATIONS 45 Smart Contracts Simple computer program that facilitates the exchange of any asset between two parties -> Trx protocol It could be money, shares, property, or any other digital asset that you want to exchange FINTECH INNOVATIONS & APPLICATIONS 46 Smart Contracts Consists primarily of the terms and conditions mutually agreed on between the parties (peers) Trigger event -> Once hit, contract executes itself as per the coded terms & conditions FINTECH INNOVATIONS & APPLICATIONS 47 Smart Contracts Once executed, it cannot be altered, and any transaction done on top of a smart contract is registered permanently Verification (validation – Mining) process for the smart contracts is carried out by anonymous parties (nodes) in the network without the need for a centralized authority FINTECH INNOVATIONS & APPLICATIONS 48 Smart Contracts Benefits Speed, efficiency and accuracy Digital and automated No paperwork to process and no time spent reconciling errors that often result from manually filling in documents FINTECH INNOVATIONS & APPLICATIONS 49 Smart Contracts Benefits Trust & Transparency No third party involved Encrypted trx are shared across participants -> No need to question whether information has been altered for personal benefit FINTECH INNOVATIONS & APPLICATIONS 50 Smart Contracts Benefits Security Encrypted, with each record being connected to the previous and subsequent records on a distributed ledger -> Hackers would have to alter the entire chain to change a single record FINTECH INNOVATIONS & APPLICATIONS 51 Smart Contracts Benefits Potential Savings Remove the need for intermediaries to handle transactions By extension, their associated time delays and fees FINTECH INNOVATIONS & APPLICATIONS 52 Ethereum Applications Voting Voting systems are adopting Ethereum The results of polls are publicly available, ensuring a transparent and fair democratic process by eliminating voting malpractices. FINTECH INNOVATIONS & APPLICATIONS 53 Ethereum Applications Shipping Tracking of cargo and prevents goods from being misplaced or counterfeited Ethereum provides the provenance and tracking framework for any asset required in a typical supply chain FINTECH INNOVATIONS & APPLICATIONS 54 Ethereum Applications Agreements Smart contracts: Agreements can be maintained and executed without any alteration Industry that has fragmented participants, is subject to disputes, and requires digital contracts to be present FINTECH INNOVATIONS & APPLICATIONS 55 Ethereum Applications Ocean Carriers on the TradeLens Ecosystem https://www.ibm.com/blockchain/ container-logistics FINTECH INNOVATIONS & APPLICATIONS 56 Digital Signature A digital signature is a cryptographic output used to verify the authenticity of data A digital signature algorithm allows for two distinct operations: a signing operation and a verification procedure FINTECH INNOVATIONS & APPLICATIONS 57 Digital Signature FINTECH INNOVATIONS & APPLICATIONS 58 Private vs Public Key Public Key – Long string of codes or QR code Makes up the wallet address Anyone can use for transaction purposes (e.g. send you crypto) Can only to encrypt trx FINTECH INNOVATIONS & APPLICATIONS 59 Private vs Public Key Private Key – Binary code, Hexadecimal Code, QR Code, Mnemonic Phrase To verify and prove any trx, the Private Key is required to unlock the trx -> Proves ownership and should be kept secret Used to encrypt and decrypt trx FINTECH INNOVATIONS & APPLICATIONS 60 Private vs Public Key Can use 1 private key to create many public keys Both keys required for a crypto trx FINTECH INNOVATIONS & APPLICATIONS 61 Private vs Public Key A is sending B 10 ETH A unlocks trx using private key (verify ownership) A sends crypto using public key A must know public key of B FINTECH INNOVATIONS & APPLICATIONS 62 Private vs Public Key A public key helps to encrypt (lock) the trx on chain B decrypts with the private key & prove owner of destination address (account) FINTECH INNOVATIONS & APPLICATIONS 63 Digital Signature Message authentication − When the verifier validates the digital signature using public key of a sender, he is assured that signature has been created only by sender who possess the corresponding secret private key and no one else. Data Integrity − In case an attacker has access to the data and modifies it, the digital signature verification at receiver end fails. FINTECH INNOVATIONS & APPLICATIONS 64 Digital Signature The hash of modified data and the output provided by the verification algorithm will not match. Hence, receiver can safely deny the message assuming that data integrity has been breached. FINTECH INNOVATIONS & APPLICATIONS 65 Digital Signature Non-repudiation − Since it is assumed that only the signer has the knowledge of the signature (Private key), he can only create unique signature on a given data. FINTECH INNOVATIONS & APPLICATIONS 66 Key Aspects of an ICO 1. Whitepaper 2. Fundraising/Token Sale 3. Crowdsale and distribution 4. Regulatory Considerations 5. Timeline & Phases FINTECH INNOVATIONS & APPLICATIONS 67 ICO The issuance and sale of a new digital token or cryptocurrency to investors and contributors in exchange for established cryptocurrencies like Bitcoin or Ethereum, or sometimes even fiat currencies. Startups secure funding without the need for traditional venture capital or public offerings. FINTECH INNOVATIONS & APPLICATIONS 68 ICO Purpose The primary purpose of an ICO is to raise funds for the development and implementation of the project. The funds raised through the token sale are used to finance the project's operations, research, development, marketing, etc. FINTECH INNOVATIONS & APPLICATIONS 69 ICO & Smart Contracts The ICO relies on smart contracts to automate the issuance and distribution of tokens. These smart contracts define the rules and conditions for token allocation, determine the token release schedule, and handle the transfer of tokens to contributors' wallets. FINTECH INNOVATIONS & APPLICATIONS 70 Timeline & Phases ICOs often have specific start and end dates, along with different phases or rounds. This can include private sales, pre-sales, and a public sale phase. The project team may offer bonuses or discounts for early contributors as an incentive to participate. FINTECH INNOVATIONS & APPLICATIONS 71 Token Sale The project team offers a new digital token or cryptocurrency to interested participants. These tokens typically represent a form of utility within the project's ecosystem, granting holders certain rights, privileges, or access to goods or services. FINTECH INNOVATIONS & APPLICATIONS 72 Token Sale The project team determines the price of the tokens being offered during the ICO. The price can be fixed or determined through a dynamic pricing mechanism. The token price is usually denominated in established cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH), or occasionally in fiat currencies. The pricing strategy can vary, including fixed prices, tiered pricing, or even auctions. FINTECH INNOVATIONS & APPLICATIONS 73 Token Sale The tokens are typically built on an existing blockchain platform, such as Ethereum, using smart contracts. The team defines the token's properties, including its name, symbol, total supply, and any specific functionalities or utilities it may have within the project's ecosystem. FINTECH INNOVATIONS & APPLICATIONS 74 Whitepaper The whitepaper is a crucial document in the context of an Initial Coin Offering (ICO) or blockchain project. Published prior to fundraising It provides an in-depth explanation of the project's concept, technology, goals, and roadmap. FINTECH INNOVATIONS & APPLICATIONS 75 Whitepaper This document outlines the project's concept, goals, technical details, token economics, and the team's roadmap for development. The whitepaper serves as an informational resource for potential investors to evaluate the project's viability. FINTECH INNOVATIONS & APPLICATIONS 76 Whitepaper Written in a clear and concise manner, avoiding technical jargon that may be difficult for non- technical readers to understand. Well-structured, logically organized, and supported by relevant research and data. Effectively communicates the project's vision, value proposition, and potential. FINTECH INNOVATIONS & APPLICATIONS 77 Whitepaper Content 1. Intro & Executive 7. Team & Advisors Summary 8. Market Analysis & 2. Project Overview Competitors 3. Problem Statement 9. Legal Considerations 4. Technical Details 10. Risk Factors 5. Token Economics 11. Disclaimers 6. Roadmap & Milestone FINTECH INNOVATIONS & APPLICATIONS 78 Examples of Whitepaper https://blog.sagipl.com/ico-white-paper/ FINTECH INNOVATIONS & APPLICATIONS 79 Regulatory Considerations The regulatory landscape around ICOs varies by jurisdiction. Some countries have established specific guidelines or regulations to govern ICOs, while others have taken a more cautious or restrictive approach. It's important for both project teams and investors to be aware of the legal and regulatory requirements applicable to ICOs in their respective jurisdictions. FINTECH INNOVATIONS & APPLICATIONS 80 ICO Scams Scams around ICO’s have been prominent in the recent past. Some examples: CentraTech BitConnect Pincoing & Ifan Prodeum FINTECH INNOVATIONS & APPLICATIONS 81