Introduction To Cryptocurrency

Introduction to Cryptocurrency
Course Objectives
Understand the historical definition and Examine the present landscape of how Comprehend what is blockchain
characteristics of money value is exchanged in the digital age technology, its limitations, and how it is
used
Define what is cryptocurrency and how Be able to explain how cryptocurrencies

it is similar to and differs from are held
traditional fiat money
Corporate Finance Institute®

Functions of Money
Functions of Money – Unit of Measure
Quantify the cost of goods or services
Gauge relative value of goods or services

Functions of Money – Medium of Exchange
Facilitate economic value exchange
Solves the “double-coincidence of wants”

Functions of Money – Store of Value
Facilitate timing differences in trade and

economics
Retains purchasing power

Characteristics of Money
Characteristics of Money – Durability
If something is perishable, it is not considered money but rather a commodity.

1 Durability
2 Commodity Cash Money

Characteristics of Money – Portability
1 Money is small and easily transportable.
2 Portability

Characteristics of Money – Divisibility & Uniformity
Money must be easy to divide into smaller units and so uniform that
1 it is entirely fungible from one unit to another.
Divisibility &
3 Uniformity

Characteristics of Money – Limited Supply
1 Scarcity prevents Government controls the

hyperinflation money supply
Limited
4 Supply

Characteristics of Money – Finality & Acceptability
1 Finality Acceptability
2 Transactions cannot be Money is widely accepted

undone as payment
Finality &
5 Acceptability

Fiat Money
Fiat Money – Central Bank
The Central Bank looks at money supply as one of the levers to control
economic factors such as:
Central
Bank
Interest Rates Bank Reserves Economic Growth
Inflation

Fiat Money – History of Money
Bartering
Pros Cons
Commodities • Anonymous • Risk of forgery
• Recordless • Cumbersome in
Precious Metals large amounts
• Final
Paper Money

Fiat Money – Legacy Financial System
Double-Entry Bookkeeping Legacy Financial System
• Commercial and central banks • Centralized ledgers
• Value exchange all over the world • Holdings and transactions no longer
anonymous
• Access to funds controlled by banks

Centralized Digital Money
Centralized Digital Money – Credit Cards
Legacy financial system still most common
Credit cards are the de facto method of B2C

transactions over the internet
Merchants must receive approval from each

card company
Direct card transfers don’t work as

individuals cannot receive payment

Centralized Digital Money – Digital Processors & Apps
Digital Processors Apps
• Offer a channel for small business and • Popular in developing economies

individuals to transfer value
• One or both parties must have a bank • Stop-gap to fully digital money
account and/or credit card
• Charge a premium over credit card fees • Smartphone integration

Centralized Digital Money – Private Currencies
Micropayments and Private Currencies
Loyalty Points Travel Miles In-Game Currencies
Still require permission and centralized ledger keeping

Decentralized Digital Money
Decentralized Digital Money – Double Spend Problem

Decentralized Digital Money – Security Issues
Thanks!
1 2
Centralized, Trusted Party
Here is $10 B
for you,
B…and C
3
Thanks!
• Single point of failure
A • Potential censorship of users
• Corruptible C

Decentralized Digital Money – Bitcoin Introduction
October 31, 2008

Satoshi
Nakamoto
Purely peer-to-peer Double-spend problem Ledger modifications

without need for a financial solved by using a needed to be
institution decentralized ledger cryptographically proven

Decentralized Digital Money – Bitcoin Premise
Transaction is Block is created Block is sent Nodes validate

agreed upon to nodes the block
Fastest node
is rewarded
VS
Blocks are very Longest chain Block added Consensus

difficult to undo is used to the chain achieved
Blockchain
Blockchain – Analogy
Order Order Order Order Order

Confirmation Processed Shipped Enroute Delivered
Append-Only Sequence

Blockchain – Consensus
Distributed
Ledger Network Vote Consensus New Block

Blockchain – Probabilistic Finality
Probabilistic Finality
As more blocks are added, the transaction becomes increasingly difficult to reverse or alter

Blockchain – Certificates
Credentials are Recorded credentials can

cryptographically generated never be changed

Blockchain Technology
Blockchain Technology – Tamper Resistance
Blocks are linked cryptographically
Hash Digital
Functions Signatures

Blockchain Technology – Key Pairs
Signatures should be difficult to forge but easy to check
Public Key Private Key

Key
Pair
Encrypt &
Decrypt
transactions
Identity Prove ownership

of Public Key

Blockchain Technology – Key Pairs
PKI
Public Key Infrastructure
Public Private

Blockchain Technology – Digital Signatures
A digital signature proves ownership of a private key without revealing the private key
Unique Digital Signature

Blockchain Technology – Digital Signatures
A digital signature proves ownership of a private key without revealing the private key
••• Algorithm ••• Legitimate private

key used?
Digital Specific Public

Signature transaction data Key

Blockchain Technology – Hash Functions
Input (Message) Hash Function Output (Hash Value)
569D C9F0 7B48 7F58 9241

CFI SHA-1
AD4C 5C28 7DA0 A448 8D08
82C0 5EDC 608F AA08 8EE0

Corporate FI SHA-1
BDD8 8E22 3B38 CA38 82CC
2013 85FC EEE4 F73D 07F0

Corporate Finance Institute SHA-1
4F2A A4CB B0E9 12BF BBB8
Corporate Finance Institute C501 23CE 8BB2 A42D 5BB4

SHA-1
1 4DA7 3FC2 3B3D 62F5 14A5

569D C9F0 7B48 7F58 9241

CFI SHA-1
AD4C 5C28 7DA0 A448 8D08
82C0 5EDC 608F AA08 8EE0

Corporate FI SHA-1
BDD8 8E22 3B38 CA38 82CC
2013 85FC EEE4 F73D 07F0


SHA-1
1 4DA7 3FC2 3B3D 62F5 14A5
40 Characters

569D C9F0 7B48 7F58 9241

CFI SHA-1
AD4C 5C28 7DA0 A448 8D08
82C0 5EDC 608F AA08 8EE0

Corporate FI SHA-1
BDD8 8E22 3B38 CA38 82CC
2013 85FC EEE4 F73D 07F0


SHA-1
1 4DA7 3FC2 3B3D 62F5 14A5

569D C9F0 7B48 7F58 9241

CFI SHA-1
AD4C 5C28 7DA0 A448 8D08 Easy
82C0 5EDC 608F AA08 8EE0

Corporate FI SHA-1
BDD8 8E22 3B38 CA38 82CC
2013 85FC EEE4 F73D 07F0


Hard 1
SHA-1
4DA7 3FC2 3B3D 62F5 14A5

569D C9F0 7B48 7F58 9241

CFI SHA-1
AD4C 5C28 7DA0 A448 8D08
82C0 5EDC 608F AA08 8EE0

Corporate FI SHA-1
BDD8 8E22 3B38 CA38 82CC
𝟑𝟏𝟒 𝟐 98596
𝟗𝟖𝟓𝟖𝟔 𝟑𝟏𝟒 𝟐
Hash functions are the basic tools of modern cryptography

Cryptocurrencies
Cryptocurrencies – Combining Hash Functions and Digital Signatures
Bob Alice
Hash of Previous Alice’s Public Bob’s Digital

Transaction Key Signature

Bob Alice
Alice thinks – “I wonder if Bob spent this…”
Hash
Previous Hash
Block
Validation Block’s Transactions
Proof-of-work
Timestamping Proof-of-work

NONCE SHA-256
Solving a Hash
Number that causes its Cryptographic algorithm that

block’s hash to being with a miners use to guess the
certain number of zeroes proof-of-work for Bitcoin

Transaction Example
Transaction Example – Alice and Bob
$85 USD
0.0019 BTC
1 BTC $44,736.84 USD
1 Satoshi 0.00000001BTC
1 BTC 100,000,000 Satoshis

Transaction Example – Alice and Bob
0.0019 BTC
Alice digitally signs the Broadcast the signed Transaction fees encourage miners
transaction transaction to nodes to process the transaction faster

Transaction Example – Blockstream Explorer
Alice Bob

Digital Wallet
…3a275 …637la
…c6e84 …f0ca4
…1930b …0eb15
Alice
Alice

Transaction Fee
0.0031823 BTC – 0.0029823 BTC =
0.0002 BTC

Transaction Example – Validation
Starts with: Ends with:

Hash and timestamp of Current block’s proof-
the previous block of-work
0.0019 BTC
Miners randomly guess numbers until the SHA-256 algorithm

produces a hash that starts with the right number of zeroes.



A successful miner is awarded the block reward and transaction fees.
Nodes Vote Nodes Vote

Yes No
Nodes continue to work

The block containing on a blockchain that does
Alice’s transaction is not include the block
added to the blockchain containing Alice’s
transaction



Transaction Example – Probabilistic Finality
The point at which the number of

blocks added makes altering or
reversing the original transaction
improbable
Nodes Vote
Yes
The block containing

Alice’s transaction is
added to the blockchain

Transaction Example – Probabilistic Finality
60 min = 6 Blocks * 10 min

Blockchain Overview
Blockchain Overview – Miners
When a miner Miners also receive The difficulty of mining

Miners are nodes
produces an fees for processing increases with the
racing to solve proof-
approved block, they users’ transactions amount of processing
of-work problems
are rewarded with power in the network
Bitcoins

Blockchain Overview – Miners
Laptops GPU Rigs ASIC Farms

Blockchain Overview – Protocols & Principles
Blockchain protocols ensure that the network runs the way it was intended to by its creators
21 Million Coins No Censorship Open-Source Permissionless
Irreversible
Pseudonymous Fungible
Transactions

Blockchain Overview – Forks
Hard Fork
Permanent divergence from the blockchain

creates an entirely new currency
Soft Fork
Still, only one blockchain exists, as

nodes are backwards-compatible
The network fails to
reach consensus

Blockchain Overview – Benefits
Blockchain records can be confidential, hard-to-forge, amend, or tamper with
Public Private
Blockchain Advantages
• Lower transaction costs • No single point of failure or censorship
• Reduced privacy/security and • Transactions can take place 24/7

networking costs

Blockchain Overview – Limitations
Difficult to coordinate, Very slow compared to Size of the blockchain Transactions are only
govern, and scale traditional digital continuously grows finalized after multiple
transaction technology blocks have been added

Blockchain Overview – Limitations
Blockchains are
Consensus protocols Blockchains are not
pseudonymous, not
subject to “51% attacks” always related
anonymous

Wallets
Wallets – Digital Wallets
Cryptocurrencies are never held by the

owner, but rather remain on the blockchain
18c177926650e5550973303c300e136f22673b74





Wallets – Mobile Wallets
Mobile Wallets
App that runs and stores your private

keys on your smartphone
Pros Cons
• Easy access • Fraud

• Trade and buy crypto with • Control
your phone • Malware & hacks

Wallets – Web Wallets
Web Wallets
Store your private keys on a third-party

server
Pros Cons
Server is Convenient Third-party Hackers

always online access to funds trust

Wallets – Desktop Wallets
Desktop Wallets
Store your private keys on your

computer’s hard drive
Pros Cons
No reliance on Cater to different Still requires internet May require lots

third parties user needs connection of disk space

Wallets – Hardware Wallets
Hardware Wallets
Secure physical devices believed to be

the most secure storage method
Pros Cons
• Most secure method of storage • Can be misplaced

• More resistant to malware • Malicious hardware in circulation

Wallets – Hardware Wallets
Physical Media
Physical document that is completely

offline
Pros Cons
Most hacker- QR codes can be Need to be

Can be misplaced
proof solution quickly scanned safely stored

Conclusion
Conclusion – Are Cryptocurrencies “Money”
What are Cryptocurrencies Lacking?
Acceptability Stability Medium of Exchange
There is limited acceptance for The prices of cryptocurrencies The speed and efficiency of
cryptocurrencies for B2B experience large fluctuations existing digital payment
purposes systems are not yet matched by
cryptocurrencies

Introduction To Cryptocurrency

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Introduction To Cryptocurrency

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Introduction to Cryptocurrency

Define what is cryptocurrency and how Be able to explain how cryptocurrencies

Corporate Finance Institute®

Quantify the cost of goods or services

Gauge relative value of goods or services

Corporate Finance Institute®

Facilitate economic value exchange

Solves the “double-coincidence of wants”

Corporate Finance Institute®

Facilitate timing differences in trade and

Retains purchasing power

Corporate Finance Institute®

If something is perishable, it is not considered money but rather a commodity.

2 Commodity Cash Money

Corporate Finance Institute®

1 Money is small and easily transportable.

Corporate Finance Institute®

Corporate Finance Institute®

1 Scarcity prevents Government controls the

Corporate Finance Institute®

2 Transactions cannot be Money is widely accepted

Corporate Finance Institute®

Interest Rates Bank Reserves Economic Growth

Corporate Finance Institute®

Commodities • Anonymous • Risk of forgery

Corporate Finance Institute®

Double-Entry Bookkeeping Legacy Financial System

• Commercial and central banks • Centralized ledgers

• Access to funds controlled by banks

Corporate Finance Institute®

Legacy financial system still most common

Credit cards are the de facto method of B2C

Merchants must receive approval from each

Direct card transfers don’t work as

Corporate Finance Institute®

Digital Processors Apps

• Offer a channel for small business and • Popular in developing economies

• Charge a premium over credit card fees • Smartphone integration

Corporate Finance Institute®

Micropayments and Private Currencies

Loyalty Points Travel Miles In-Game Currencies

Still require permission and centralized ledger keeping

Corporate Finance Institute®

Corporate Finance Institute®

A • Potential censorship of users

Corporate Finance Institute®

October 31, 2008

Purely peer-to-peer Double-spend problem Ledger modifications

Corporate Finance Institute®

Transaction is Block is created Block is sent Nodes validate

Blocks are very Longest chain Block added Consensus

Order Order Order Order Order

Corporate Finance Institute®

Corporate Finance Institute®

Corporate Finance Institute®

Credentials are Recorded credentials can

Corporate Finance Institute®

Blocks are linked cryptographically

Corporate Finance Institute®

Signatures should be difficult to forge but easy to check

Public Key Private Key

Identity Prove ownership

Corporate Finance Institute®