Chapter 3 - Bitcoin & Crypto-assets PDF

By Dr. Ghassan 1 Chapter 3 – Bitcoin and Crypto-assets By Dr. Ghassan Alkoureiti Information Systems Department IT College  By Dr. Ghassan 2 Learning Objectives Gain a deeper understanding of how the Bitcoin network works E...

By Dr. Ghassan 1 Chapter 3 – Bitcoin and Crypto-assets By Dr. Ghassan Alkoureiti Information Systems Department IT College  By Dr. Ghassan 2 Learning Objectives Gain a deeper understanding of how the Bitcoin network works Examine the differences between top crypto-assets Examine the top cryptocurrency exchanges Look at different cryptocurrency valuation models Discuss the concept of digital tokens and value Learn how block explorers can be used to gather data  By Dr. Ghassan 3 Blockchain in Action – CryptoKitties In 2017, CryptoKitties was the first game built on blockchain technology. Involves buying, selling, and breeding digital pictures of cats using Ether. Impossible to counterfeit them as we can trace their records through the blockchain.  By Dr. Ghassan 4 Blockchain in Action – CryptoKitties Some people have created whole businesses buying, selling, and breeding new cats. This early generation cat sold for 600 ETH (or $170,000 of “real” fiat) at a Christie’s auction in 2018 Record goes to another game; Axie Infinity currently has the most expensive crypto asset: Angel at 1.1$ million in 2021*  By Dr. Ghassan 5 Blockchain in Action –CryptoKitties & Axie Infinity Each kitty has its own unique genetic makeup that affects what it looks like but also what its offspring will look like. Certain combinations may even unlock special “ascension” cats; i.e., with a previously unknown characteristic. On launch in 2017, it congested the Ethereum blockchain.* While as a fad, CryptoKitties may point the way forward for other innovations on the blockchain using digital assets. Axie Infinity is another NFT-blockchain game* Q: What does fad mean?  By Dr. Ghassan 6 What Are Crypto-assets? All the digital coins after the creation of bitcoin are called altcoins. Digital token – way of representing value on a blockchain network. Crypto-assets are the broadest concept of value on a blockchain. They are purely digital and transacted in the form of coins or tokens. Can represent anything from a store of value, to a means of payment (or medium of exchange), to a physical asset.  By Dr. Ghassan 7 Divided into three categories: What Are Crypto- Cryptocurrencies assets? Crypto-commodities Crypto-tokens  By Dr. Ghassan 8 Cryptocurrencies What are characteristics of cryptocurrency? Only exists digitally. Usually has no central issuing or regulating authority. Uses a decentralized system to record transactions and manage the issuance of new units. Relies on cryptography to prevent counterfeiting and fraudulent transactions. Q: Guess how many unique cryptocurrencies created?  By Dr. Ghassan 9 Cryptocurrencies As a currency it functions as a “digital asset” that can be used as a medium of exchange that works on a blockchain or a distributed ledger to provide a record of financial transactions. These digital assets can also be called “coins” or “currency tokens.” Bitcoin is the first successful example of a digital coin. There are > 20,000 cryptocurrencies as of 2024.* Nearly half are dead.*  By Dr. Ghassan 10 Cryptocurrencies A digital coin is designed to function like currency in that it represents a store of “value” and can be used as a medium of exchange (e.g., for payments). Moreover, digital coins is associated with its own blockchain. In economics, “value” is commonly defined as a measure of the benefit provided by a good or service to an economic agent. Fiat currencies (like dollar) were invented to facilitate the transfer of value. The most common type of crypto-asset today is certainly the currency token. Converting a token into fiat currency or other tokens is an important indicator of fungibility.  11 Crypto-commodities Commodities are a class of assets that represent raw materials and different goods or things that bring value. Cryptocommodities are the digital way to represent commodities or physical assets on a blockchain. Oil-backed tokens: Petro (PTR) and Oilcoin (OIL)* Real estate tokens: RealT (RTT) and Propy (PROP)* By Dr. Ghassan  By Dr. Ghassan 12 Crypto-commodities Governments are looking at regulating tokens like ether – used to perform transactions on the Ethereum network – under the lens of commodities, in part because the tokens are being used to run smart contracts rather than just store value or make payments. Some critics argue that categorizing certain tokens as commodities is just a way to get around industry regulations.  By Dr. Ghassan 13 Crypto-commodities Crypto-commodities includes Asset-backed Tokens is a subset of crypto-commodities designed to be digital representations of tangible assets – such as precious stones or real estate – as well as intangible assets, such as intellectual property. Everledger is a company that tokenizes diamonds, linking the physical asset with a digital twin. Representing and tracking assets that are unique has been a challenge for many businesses dealing with existing assets (like land titles, diamonds, or art) and is a growing opportunity space for new digital assets.  By Dr. Ghassan 14 Crypto-commodities Attention economics argues that our attention is a scarce commodity. It is tokenized and traded as “Basic Attention Token” (BAT) which allows for a blockchain-based model for digital advertising. BAT earned by viewing ads and using Brave browser. BAT also awarded for content creation.  By Dr. Ghassan 15 Other Crypto-tokens Crypto-tokens represent other tokenized assets or purposes in a blockchain environment that fall outside the categories of cryptocurrency and commodity. Often, crypto-tokens provides governance privileges i.e., influence the decision-making process within a blockchain network Stocks offer rights such as governance and ownership, as well as dividends Crypto-tokens 16 Stocks offer rights such as governance and ownership, as well as dividends; we can see similar functionalities in the blockchain space. Tokens confer voting and governance rights in a network is an important element of using a blockchain.* Note that that tokens does not imply ownership of the blockchain*. Only in voting for future of the blockchain. E.g., Maker DAO, Uniswap etc. Accumulation of tokens to few nodes can be problematic. Q: Why? By Dr. Ghassan  By Dr. Ghassan 17 ROI Cryptocurrencies Some cryptocurrency do give ROI, depending on how a blockchain or token is implemented. This is done by liquidity pool investments*. By Dr. Ghassan 18 Simple taxonomy of token classification and usage By Dr. Ghassan 19 Network Tokens Network tokens are a broad category that encapsulates tokens created by their network, rather than by a Dapp. Network tokens used usually to install software, run software, store data, pay for computation, or participate in governance on a given blockchain. e.g. Dfinity network, requires Dfinity tokens (DFN) to perform these functions. Q: Can we have a network token as a cryptocurrency?  By Dr. Ghassan 20 Utility Tokens & Network Tokens Network tokens are similar to utility tokens, in that they are utilized for actions on a network. Main difference is that Utility tokens are created by Dapp, while Network tokens are created by network protocols. E.g., social network platforms dapps (like Steemit and HIVE). You could use their tokens (STEEM & HIVE respectively) to execute transactions, such as posting, searching, or commenting on their platform. Tokens used for upvoting and in turn content creation payout.*  By Dr. Ghassan 21 Network Tokens ETH can be classified as both a cryptocurrency and a network token. Trade its value on an exchange Use it to manage transactions on the Ethereum platform itself. E.g., pay Ether for computing power to execute a smart contract.  By Dr. Ghassan 22 Utility Tokens Utility tokens (or app coins) because they are usually linked to a specific company or project’s blockchain application. These tokens are often created at the beginning of a new Decentralized Application (Dapp) and are given to investors as part of their Initial Coin Offering (ICO). These tokens make it easier to buy and sell services. Not ownership; but act as “golden tickets”.  By Dr. Ghassan 23 Security Tokens Security tokens represent an investment in an asset. Like a security, they are backed by the tradable resources of the issuing entity. For example, Digix and Goldmint are asset-backed tokens that make it easier to own gold assets. Q: Why security tokens instead of selling associated security?  24 Security Tokens Liquidity and fractionalizing of security tokens make them easily traded in DEX decentralized exchanges (DEXs) than physical assets. Security and Exchange Commission (SEC) in the U.S. has taken note, moving to regulate these tokens just as they would securities. This is why all the companies that rushed to launch an ICO are now trying to avoid having their token listed as a security token. If classified as a security token, this will put restrictions on who can invest in the tokens and how they can be used. Until now, utility tokens have been much more popular since they are much easier to launch and are still in a regulatory gray area. By Dr. Ghassan  By Dr. Ghassan 25 Security vs Utility Tokens One way to conceptualize the difference between a utility token and a security token is to think of utility tokens more like “coupons” for services by a specific company, rather than partial ownership of assets. Utility tokens are more like going to an arcade and winning tickets which can only be redeemed at the arcade prize counter. Outside of the arcade, the tickets lose their value, but inside the arcade, they continue to be useful. ICOs 26 Like an Initial Public Offering (IPO), this is when a project opens for investment by individuals and institutions. Investors invest with cryptocurrencies like bitcoin or ether to a project. In return, they receive tokens related to the project that either exist already or will be dispersed upon technical development of the project. By Dr. Ghassan  By Dr. Ghassan 27 ICOs & ERC-20 The ease in launching these fundraising efforts – crowdfunding campaigns on steroids – Billions of dollars have been raised using ICOs already. It is also because of ERC-20 Ethereum standard. This particular standard describes basic functions and events that a token contract built on Ethereum must have. Large % of recent ICOs have used the ERC-20 Ethereum standard. It can only take 30 minutes to launch a utility token on Ethereum’s platform.  By Dr. Ghassan 28 ICO Scams Unfortunately, the ease of raising these funds has meant that many ICOs are poorly thought out, if not outright scams. A study showed about 20% of ICOs appeared to be fraudulent, earning about $1 billion. The prime indicators were: 1. Plagiarized prospectuses or white papers 2. Promises of risk-free, huge profits. Some ICOs were guaranteeing returns of over 40% per month. 3. Use of stock photographs of people to create fictitious boards. 4. Celebrity endorsements.  By Dr. Ghassan 29 Top Ten Cryptocurrencies by Market Capitalization Note: Market capitalization is not necessarily a sound way to the value of cryptocurrencies. Similar to how market cap is calculated for the stock market: No. of coins in circulation X Coin Price = Market Cap. Price and market cap can be manipulated by off-market trades. A coin would technically have a market capitalization of $1 trillion USD by minting 1 trillion tokens for 1$ sold to a third-party. Another criticism of using market cap is that often many of the coins for a given network are still held in reserve by the network’s founders. A better market cap calculation would therefore include the crypto-equivalent of “shares outstanding,” or the coins that are not in circulation but are part of the total number.  By Dr. Ghassan 30 Top Ten Cryptocurrencies by Market Capitalization  By Dr. Ghassan 31 Bitcoin First successful cryptocurrency. All other cryptocurrencies created after bitcoins are called “altcoins” First successful decentralized application running on blockchain technology. Remains by far the leading and longest-functioning cryptocurrency currently in existence. Though the wallets are transparent, police cannot freeze the contents as they could with a typical account at a bank. By Dr. Ghassan 32 WannaCry Ransomware 2017*  By Dr. Ghassan 33 WannaCry Ransomware 2017* Affected more than 200,000 computers across 150 countries. NHS had 70,000 medical devices were affected. Damage cost up to 4$ billion. Prevention was doable a year before via patching. Demanded ransom in bitcoins. 300$ per device to decrypt. Ransomware made only 50,000$. Why so?  By Dr. Ghassan 34 WannaCry Ransomware 2017* Many did not know or had bitcoins. Ransomware reputation do not decrypt. Problem with WannaCry could not associate payment with a device. Ransomware expected to generate unique ID and public wallet address for each device. WannaCry hackers had no way to know who paid for what. Kill switch: registering an unregistered domain name in ransomware code to himself.  By Dr. Ghassan 35 Bitcoin Benefits Maintaining a permanent and transparent record of transactions on the blockchain. Faster payment processing Cutting down on transaction fees from third parties. Supporting international payment processing. Simplifying processing of high-value payments. Reducing the paperwork associated with banking accounts by using wallets. Domestic and international transactions confirmed within an hour regardless of size. First truly global (and non-national) currency.  By Dr. Ghassan 36 Bitcoin Challenge – Scaling Problem One of the biggest controversies is with respect to changing the size of the blocks that are mined. Currently, the standard protocol is is 1 MB block size, and it takes roughly ten minutes to mine a new block. Bitcoin processes average of 4 transaction per second. Credit card companies process 20,000 transactions per second. Transactions with no or little transaction fees can be queued longer. Miners are incentivized to verify transactions with higher fees.  By Dr. Ghassan 37 Bitcoin – Forking A measure to evolve cryptocurrency is forking. A fork is a mechanism for adding new features to the blockchain or for dealing with the effects of hacking or some kind of disastrous bug in the system. Consensus is a must among the users of a blockchain network to change its protocol. Bitcoin undergone hard forks to increase the size of block from 1 MB to 2, 4 and even up to 2 GB or to change protocol*. Bitcoin Classic (2 MB Block Size), Bitcoin Cash (32 MB Block Size), Bitcoin Gold (ASIC- resistant), Bitcoin Satoshi Vision (no block size limit).  By Dr. Ghassan 38 Bitcoin – Forking A hard fork is when majority of the nodes agree to change the protocol in a way that is incompatible with the old rules. For example, a hard fork would be required if a consensus of BTC miners decided to increase the size of blocks to 2 MB. Some of the original miners could decide to continue on with the old protocols for creating new blocks. This would precipitate a major split in the blockchain. E.g. Ethereum hard forked into Ethereum Classic blockchain updated Ethereum blockchain. By Dr. Ghassan 39 Bitcoin – Forking  By Dr. Ghassan 40 Bitcoin – Forking A soft fork is different in that the change in the protocol is backwardly compatible with the old protocol. For instance, if new blocks were changed to 500 KB, it would still fit the old protocol. So, they would be allowed under both the old and new rules. Not upgrading to the new protocol means still mining 1 MB-sized blocks. This mining will be rejected by the updated miners. This can lead to a hard fork if group of miners decide not to update their software to the new protocol and keep mining under the old one.  By Dr. Ghassan 42 Implications of Forks for Cryptocurrencies Forks serve as a governance tool – a way to create checks and balances. Forks are a way to evolve a codebase through the consent of its users. Acceptance of updates is often incentivized since miners and users want to be a part of the longest chain, which will have the most continued transactions, and thus, profit. There are also times when updates deal with critical existential or security questions for how a specific blockchain will continue, and the community of users and miners decide to refrain from updating, preferring to maintain an older version of the software (such as with Ethereum Classic or Bitcoin Cash).  By Dr. Ghassan 43 Implications of Forks for Cryptocurrencies Some argue that forks weaken the cryptocurrency overall and should be avoided. They suggest this is especially true when forks represent some kind of corrective measure to refund coins that were siphoned off due to buggy smart contract code, rather than bugs in the blockchain protocols. There are additional criticisms that forks are influenced by powerful leaders in the crypto community. They can sway users by commenting on proposals or using social media to tell certain narratives. But others argue that forks are necessary for cryptocurrencies to evolve and grow and that they will be more stable in the long run. As with any codebase, a blockchain’s protocols need maintenance and upkeep as new attack vectors are discovered and the economics of the platform shift over time.  By Dr. Ghassan 44 Implications of Forks for Cryptocurrencies In 2017, Bitcoin experienced two hard forks. In August, Bitcoin Cash was launched and then Bitcoin Gold followed in October. Bitcoin Cash wanted to speed up transaction and increase size of block to 8 MB. Bitcoin Gold wanted to discourage the corporatization of mining and so created an algorithm that limited the use of specialized mining hardware as part of its fork. Cryptocurrency traders love it when a cryptocurrency forks, partly because of the volatility that could ensue. By Dr. Ghassan 45 Where Did All the bitcoin Go? It has been estimated that as much as $30 billion dollars-worth of bitcoin has been lost or misplaced by bitcoin owners.  By Dr. Ghassan 46 Altcoins Instead of creating a fork to add new features or updates, some developers have simply left bitcoin and started fresh by creating whole new digital tokens. Most of these are trying out new protocols and models to solve some of the scalability and speed problems being encountered with the Bitcoin network. Some are offering more support for developing Dapps or making it easier and cheaper to attract new users. Many are moving to get rid of the problems with miners by shifting from a Proof of Work protocol to a Proof of Stake or some other modification to the standard. By Dr. Ghassan 47 Ethereum (ETH) Vitalik Buterin, after studying Bitcoin, first proposed the idea of Ethereum in a 2013 whitepaper. Launched in 2015. Said he did the Ethereum project after nerfing his favorite character in WoW* Ethereum transactions surpassed Bitcoin by 2017. The core idea was that a distributed ledger could be more than just to store and validate transaction records. Use smart contracts to create programmable transactions.  By Dr. Ghassan 48 Ethereum (ETH) Public, Permissionless, PoS to earn Ether. Ether does function as a cryptocurrency and can be traded on altcoin exchanges. But it should also be thought of as a token that allows for the management of a finite resource, namely computing power. Many new private blockchains have started using forks of the Ethereum protocol mainly for its smart contract features. Question: Why do we need tokens in blockchain? By Dr. Ghassan 49 Ethereum (ETH)  By Dr. Ghassan 50 If no token were required, the network could be spammed by contracts that execute on an infinite loop and hog up all the computing resources. Ethereum In 2016, Ethereum was the subject of an attack where a large quantity (ETH) Classic of ether was siphoned off to a separate “child DAO” account by using a recursive call exploit. This became known as “The DAO attack.” A Narrative huge debate ensued among the Ethereum community about how to respond to this attack. Some thought that the response should be to do a soft fork and upgrade the software. However, there was concern that this upgrade would open the platform up to DDOS (Denial of Service) attacks. Others wanted to roll back the fraudulent transactions and make it up to those who lost their funds in the buggy DAO project’s smart contract. In the end, it was decided by the community that a hard fork was in order, and so Ethereum Classic (ETC) was the name given to the original version of the Ethereum network that wanted to maintain its code and disagreed with the update that rolled back funds. By Dr. Ghassan 51 Ripple (XRP) Only similarity with Bitcoin is that both are P2P. Some argue it is not even blockchain. Ripple’s main purpose is to move large quantities of money around the world in the most efficient manner. XRP tokens are not mined. 100 billion are created arbitrarily. XRP was distributed like security tokens. SEC took action because Ripple Labs did not register XRP as securities. Co-founders received 600$ million from XRP sale.* By Dr. Ghassan 52 Ripple (XRP) The basic strength of Ripple is that it is designed to help banks move any kind of asset around Assets could be gold, currencies, or other cryptocurrencies the world more quickly and cheaply. Ripple claims that they can scale the network to process 50,000 TPS. Maintains its own list of approved validating servers, Ripple has been criticized for going back to a centralized model of control  By Dr. Ghassan 53 Bitcoin Cash (BCH) Bitcoin Cash (BCH) is a cryptocurrency born out of the hard fork of Bitcoin in August 2017. Justification was scalability. With growth in blockchain and adopters, processing takes longer. Paying absolute minimum transaction fees results in average of 13 minutes wait… Imagine you use Bitcoin for grocery or restaurant payments. The new BCH token has a block size limit of 32 MB as opposed to the original 1 MB limit of BTC. To attract the all-important miners to BCH, the network lowered the difficulty level for mining new blocks. This attracted so many miners over from BTC that there was a significant drop in the BTC hashrate.  By Dr. Ghassan 54 Launched in 2017 by Dan Larimar. He founded Steemit and BitShare*. EOS blockchain to process over 50,000 transactions/sec. Similar to Ethereum, EOS is a complete Dapp development platform with the capability to customize user interfaces and build smart contracts. Supposedly “Ethereum” killer*. Uses C++ than Ethereum’s Solidity.* The goal is to speed up the process of confirming transactions. EOS (EOS) New blocks are currently generated every three seconds.  By Dr. Ghassan 55 EOS (EOS) Does not require miners. Uses a Delegated Proof of Stake (DPoS) protocol. This consensus protocol uses elected delegates to finetune such issues as block-size, fees, and transaction size. (PoS expects miners to stake their coins to validate transactions).* Relies on 21 Block Producers.* In 2018, the 21 Block Producers froze 34 accounts suspected of containing stolen EOS.* This created outrage in cryptocommunity who demand decentralization.* The lack of transparency and accusations was beginning of EOS downfall.*  By Dr. Ghassan 56 EOS (EOS) However, there are many criticisms of EOS, in particular that it is developing a constitutional protocol that is essentially re-centralizing power in the hands of people rather than code. A Cornell academic tweeted, “If you like EOS’ governance, you can achieve the exact same effect in Ethereum or Tezos by pumping all payments through a contract that delays payments until approved by 15 out of 21 arbiters. EOS’ entire value proposition can be simulated elsewhere.” Founder ambiguously left in 2018. Major drop in developers on blockchain.* Charged by SEC for failing to register ICOs profits in 2019.* Other cryptocurrencies compete with EOS in all its functionalities.*  By Dr. Ghassan 57 Litecoin (LTC) Developed by Charlie Lee, ex-employee of Google in 2011. If Bitcoin were the cryptocurrency equivalent of gold, Litecoin was built to be the new “silver”: a version of Bitcoin that was cheaper and suitable for everyday use. Litecoin is an opensource clone of Bitcoin codebase with a few modifications. Soft fork in 2022 added optional privacy option to hide amount transferred. New blocks are mined every 2.5 minutes. PoW adopted called Scrypt, a simplified SHA-256 requiring less computing power.  By Dr. Ghassan 59 Cardano (ADA) Charles Hoskinson, one of the co-founders of Ethereum, founded Cardano to be a Blockchain 3.0 platform. According to him, the Blockchain 1.0 was Bitcoin and digital tokens, 2.0 was Ethereum and smart contracts, and Cardano is evolving to be Blockchain 3.0 Developed a new version of the Proof of Stake consensus protocol called Ouroboros, which attempts to find an optimum between processing speed and fairness to miners. Based on sound academic and mathematical principles.  By Dr. Ghassan 60 Cardano (ADA) To increase interoperability between blockchains, Cardano is trying to eliminate the need for cryptocurrency exchanges through the use of “sidechains.” These sidechains will run in parallel to the main chain and will contain a compressed version of the other blockchains that are to be linked. This will allow for checking the transactions stored on other chains and linking them to the transactions on the main chain. To improve sustainability, a certain portion of each block reward is set aside in a “treasury.” Developers can apply to the treasury for a grant which gets voted on by Cardano stakeholders.  By Dr. Ghassan 61 Stellar / Chain (XLM) SAME FOUNDER AS RIPPLE, JED MCCALEB. FOCUSES ON IMPROVING THE OVERALL EFFICIENCY OF CROSS-BORDER PAYMENTS AND TRANSFERS. NO BLOCKCHAIN PARTNERED WITH IBM AND DELOITTE. MORE THAN 30 BANKS SIGNED INTO THE PLATFORM.  By Dr. Ghassan 62 IOTA (MIOTA) Does not use PoW or PoS, but an innovative and more efficient process called DAG “Directed Acyclic Graphs”. DAGs remove the need for miners and even a blockchain. IOTA is developed to make micro-payments between Internet of Things (IoT) devices. There is no separate set of mining nodes in the IOTA network. Any user who makes a transaction must consequently participate in validating two other transactions, almost a roundrobin of validation.  By Dr. Ghassan 63 IOTA (MIOTA) Instead of a blockchain, IOTA creates something called the “tangle.” This involves complex math to link up transactions. The tangle also removes the necessity of paying mining fees, meaning it can process micropayments as well as large transfers of value. Unlike Bitcoin or Ethereum which use the traditional blockchain approach where the more users it has the slower it gets, the more users IOTA has on the tangle, the faster it works.  By Dr. Ghassan 64 Tron (TRX) Tron was to develop a platform for sharing media on a decentralized network. Disintermediates other popular app-sharing platforms such as the Apple Store and Google Play store. PoS and later migrated to their own blockchain from Ethereum. Using the Tron platform, users pay developers directly for sharing their apps and media content without paying the typical 30% fees taken by the other platforms. Problems: had plagiarized some of the content in their Whitepaper’; CEO resigned; Huge number of its Tronix (TRX) coins – one billion – they minted; Sued by SEC for wash trading to buoy TRX price. By Dr. Ghassan 65 Dogecoin (DOGE)  By Dr. Ghassan 66 Dogecoin (DOGE) The meme spawned the creation of “Dogecoin,” a cryptocurrency that took the image as its inspiration and logo. While originally a bit of a joke, it became more legitimate once a community started trading it. Block minted every 1 minute. Today, Dogecoin is used somewhat for online tipping.  Supported by JP Morgan Permissioned and open-source blockchain No native cryptocurrency Not PoW; but voting algorithm Found applications in many Finance-related industries.* Prepared by Dr. Ghassan 67  Differs from Ethereum with the following points:* Hybrid private-public network Provides privacy of transactions Contains enterprise level access control for users Has multiple consensus mechanism which is useful to enterprises Prepared by Dr. Ghassan 68 By Dr. Ghassan 69 Designed to improve on the privacy of permissionless blockchains. Hard fork of Bitcoin. Zcash (ZEC) Zcash is pioneering the use of “zero-knowledge proofs,” which is a cryptography mechanism for proving properties about encrypted data without revealing the data itself. By Dr. Ghassan 70 Unlike the Bitcoin Supposed to be network, where everyone can see untraceable and anyone else’s wallet anonymous and trace individual transaction histories. Monero (from the Esperanto word for Monero (XMR) “money”) Utilizes combination of cryptographic elements (ring signatures and stealth addresses) that randomizes addresses even further. By Dr. Ghassan 71 Fungibility Fungibility refers to how interchangeable one asset is for another asset of the type or class. Criticisms of Bitcoin is that it lacks fungibility. Why? By Dr. Ghassan 72 Bitcoin vs. Monero Because all the transactions that a bitcoin has been involved in can be traced, this leads to the idea that some of the money could be “tainted” by having been used in illegal transactions. If you receive some of this tainted bitcoin, you yourself might become a suspect to the authorities. If this line of reasoning holds, then not all bitcoin are perfectly interchangeable. Untraceability of Monero means that there is no concept of tainted or clean money, and thus it is also perfectly fungible.  By Dr. Ghassan 73 Dfinity (DFN) Longtime crypto-entrepreneur Dominic William. Dfinity is a protocol that seeks to become an “Internet Computer.” Addresses some of scalability issues around running smart contracts on the Ethereum platform. Does not use PoW or PoS. Uses Threshold Relay as part of its consensus mechanism. Threshold Relay creates a random group of validators on the network derived from a cryptographic beacon. By Dr. Ghassan 74 Dfinity (DFN) Created governance features of the network to enable voting to undo fraudulent transactions rather than relying on hard forks. This can make it less appealing to attempt to hack than some of the other “immutable” Dapps like Bitcoin.  By Dr. Ghassan 75 Popular Cryptocurrency Scams – FOMO-based ICOs One of the benefits of cryptocurrencies is that they are unregulated and semi- private. This makes them prime targets for criminals. One of the biggest scandals is simply raising funds without ever intending to deliver value, relying on people’s Fear of Missing Out (FOMO) to do the heavy lifting.  By Dr. Ghassan 76 FOMO-based ICOs All that was needed to launch an ICO was to modify some open-source code and slap together a fake website with phony pictures and bios of the team members. Promises of sky-high profits and even commissions for signing up new investors were some of the other tip-offs that an ICO was a fraud. E.g., My Big Coin, Squid Games Coin  By Dr. Ghassan 77 Mining Pools Pooling computing resources with thousands of other members of a “mining pool”. Human organizers of the pool are the ones who decide how to split up the proceeds. Hackers have also broken into some mining pools and tricked members into revealing their private keys and emptying their wallets. One mining pool called AntPool, was found to be selling mining hardware that included malware that would allow them to remotely shut down equipment of customers or competitors and make themselves more profitable. Malware that installs itself on individual’s computers, turning them into zombie mining machines; mining bitcoin for the malware’s creators. Others created Ponzi Scheme Mining services by signing up new affiliates. E.g. Mining Max, and Bitcoin Savings and Trust  By Dr. Ghassan 78 Cybercrime and Cryptocurrencies Silk Road was the “eBay for drugs” and 97% of the transactions handled on this site were conducted using bitcoin. generated $1.2 billion in bitcoin-based sales when closed in 2013. Dozens of new darknet marketplaces sprang up to replace it. E.g. Alpha Bay which shut down in 2017 for drugs also used bitcoins & Monero. It was 10x size of Silk Road. By Dr. Ghassan 79 Cybercrime and Cryptocurrencies The development of new cryptocurrencies such as Monero and ZCash has allowed the actual ownership of specific wallets to be hidden from view, making it difficult to track activity and find patterns of regular users but also criminal activity. Q: But what took advantage of Monero’s privacy-focused algorithm?  By Dr. Ghassan 80 What Makes a Good Token Project? Following slides are some considerations to keep in mind when considering investments in cryptocurrencies or blockchain networks.  By Dr. Ghassan 87 How Decentralized are Blockchains? https://arewedecentralize dyet.com Shows the percentage of money supply held by the top 100 accounts for many cryptocurrencies.  By Dr. Ghassan 88 Digital Token Exchanges Cryptocurrency exchanges are similar to the exchanges we understand in our financial markets today, such as the New York Stock Exchange, where stocks are traded. An exchange or “digital currency exchange” (DCE) might be considered as an entry and exit ramp into the world of cryptocurrencies. DCEs are set up as online platforms to allow users to trade their digital currencies and tokens for other digital currencies or for traditional fiat money like dollars and euros. E.g. Q: What are the three DCE licensed in Bahrain? Q: How does DCE make money?  By Dr. Ghassan 89 Digital Token Exchanges Exchanges make money by charging fees for each transaction, but these can vary widely from a flat fee to a certain percentage. Some accept credit cards like Visa or PayPal but charge a relatively higher fee. Many banks and exchanges have disallowed this practice, since banks do not want to have to protect against fraud in cryptocurrency transactions. Many banks who frown on customers getting involved with cryptocurrencies.  By Dr. Ghassan 90 Digital Token Exchanges Exchanges can serve as: Trading Platforms – basic websites that connect buyers to sellers and take a transaction fee. May provide access to sophisticated trading tools and require an account to be set up. Brokers – similar to currency trading dealers, they allow anyone to buy and sell but at the prices which they determine. Direct Trading Platforms – function to connect individual traders to each other to buy and sell at the prices which the individual sellers determine. Popular in global trading settings. By Dr. Ghassan 91 Digital Token Exchanges  By Dr. Ghassan 92 Digital Token Exchanges The growth of cryptocurrency exchanges has fueled interest in safely buying cryptocurrencies. Some traditional financial investment advisors are now even advising that a portion of a typical portfolio should include some of the best of the cryptocurrencies. Exchanges come and go so quickly that it is virtually impossible to keep track of them. They have been the source of much of the worst fraudulent activity in the cryptocurrency space. E.g. Mt. Gox cannot account for 850,000 bitcoins.  By Dr. Ghassan 93 Coinbase Coinbase functions as both a trading platform and a broker. Some users complain that they are too similar to a normal bank and require lots of documentation in order to set up an account. 1st exchange to be approved by U.S. regulators and has instituted AML and KYC protocols just like any other American bank. By Dr. Ghassan 95 Kraken Started in 2011 and is based in San Francisco. Platform for the intermediate and professional traders. Claims to be the top mobile trading platform. Can set up a margin account to trade on margin.  By Dr. Ghassan 96 Decentralized Exchanges (DEX) Exchange and trading of CC w/o institutions Designed to have less down-time, more privacy, and less censorship potential. They are harder to use and lack the liquidity of the larger, centralized exchanges.  By Dr. Ghassan 97 OTC Crypto Exchanges Trades are not on a typical exchange and so are considered to be “off the books” and just involve transfers to and from individual wallets. Attempt to skirt some of the regulatory restrictions against cryptocurrency exchanges. Messaging between buyers and sellers is handled by texting or by tools like Skype. Their minimum transaction size is $25,000, so they are generally not focused on the consumer market. By Dr. Ghassan 99 Cold storage Cold storage is the term used to talk about keeping your tokens offline. Used as necessary security protocol for storing large amounts of crypto- assets. A USB stick containing an encrypted wallet file (often kept in a safety deposit box or safe) A “paper wallet” or your private key written on paper (and often kept in a safety deposit box or safe) An offline hardware wallet (such as Trezor or Ledger)  By Dr. Ghassan 100 Financial Modeling for Cryptocurrencies Cryptocurrencies, even bitcoin, remain highly volatile in comparison to fiat currencies, which generally have volatility ranges between 0.5 and 1.0 %. People continue to hold (sometimes called HODL as a meme in the crypto-community) and use it for transactions. The estimate is that the last bitcoin will be mined in the year 2140. As the reward for creating new blocks continues to decrease, miners will transition to a different payment system where more and more of their revenue will come from transaction fees. By Dr. Ghassan 101 HODL Memes  By Dr. Ghassan 102 Blockchain Analytics Blockchain analytics are ways to look for patterns among the transactions. This should be true for both public and private blockchains. On public blockchains such as Bitcoin, one could identify which wallets are receiving funds of a certain frequency and type. E.g. It would be possible to identify which wallet was receiving the ransomware payments from the WannaCry malware attack.  By Dr. Ghassan 103 Blockchain Analytics A number of startups have started to focus on blockchain analytics. These include Chainalysis, Elliptic, and Skry. Chainalysis is the leader and has created special software for tracking transactions and wallets. Their analytics have been used in investigations around the world. Elliptic are tracking WannaCry ransom*.  By Dr. Ghassan 104 Blockchain Analytics There are also groups like Amberdata that offer blockchain health and intelligence to be able to understand maintenance. Used to analyze blockchain performance. By Dr. Ghassan 105 Blockchain Analytics Blockchair.com allows analysis of millions of transactions for free.  By Dr. Ghassan 109 Venezuela Venezuela are a particular example that both Case: regulators and blockchain innovators are paying Regulatory great attention to. Considerations The economic depression and massive hyperinflation occurred in Venezuela. A cup of coffee has cost upwards of one million bolivars. National currency has lost an estimated 99.9% of its value since 2016. electricity is so cheap. Many families have set up crypto-mining operations in their homes to help make ends meet. It is reported that even the government is confiscating GPUs to mine themselves.  By Dr. Ghassan 110 Ethical and Other Issues with Blockchain Like any kind of investing or gambling, trading crypto-assets, especially cryptocurrencies, with their wild swings for fast profits can really get the adrenaline pumping. Some clinics treat what is called “cryptocurrency addiction.” Ease of access and lack of experience to trade contributes to this phenomenon. Some lost everything, went to debt, and even reports of suicide.  By Dr. Ghassan 111 Ethical and Other Issues with Blockchain Like any form of gambling, the symptoms of cryptocurrency addiction include: Spending too much time thinking about cryptocurrencies. Spending a high percentage of your income on cryptocurrencies. Getting angry if you must limit your time on a computer. Disrupting relationships with friends and family. Lying to friends and family about how much you have invested and/or lost. Missing work in order to trade cryptocurrencies. Continuing to trade after losing money in order to win it all back. By Dr. Ghassan 112 Ethical and Other Issues with Blockchain By Dr. Ghassan 113 Ethical and Other Issues with Blockchain  End of Chapter Any Questions? Comments? Concerns? Crypto-questions? By Dr. Ghassan 114