Blockchain

Satyakam Chakravarty
DataBlock Technologies
Background and History

• Money and Financial Systems

Need for exchange of value
People always had a need for exchange of goods/ services
Barter System
Challenges of Barter System -
Discovery/ Lack of information
Double Coincidence of Wants
Lack of a Standard Unit of Account
Impossibility of Subdivision of certain Goods
Perishable goods are unstable in value

Another big challenges – multiple price combinations

For more than one product, how many price combinations to
maintain
If there are N goods to be traded, the price combination are
NxN
If 5 goods then 25 price combination and if 50 goods then
2500 price combinations
 Birth of currency

Shell money Early coins Silver and Gold coins

Started with community issued

money
War lords
State issued money

First paper money some 1400 years ago Electronic money

Role of Gold in Currency
Gold backed money

Before world war I, almost all currencies were backed by Gold

Money supply was restricted to the growth of gold supply Govts issue bonds to manage fiscal
deficit
European countries needed to finance the high costs of war, When investors do not buy govt
they abandoned gold standard in early 1900 bonds, central banks print new
money
Increasing price of gold indicates decreasing value of local fiat This may lead to higher inflation
currency in that country

Alexander, Julius Caesar and others built their empires around a

monetary system based on gold.
Maintaining the value of one’s currency was key to keeping power

A school of thought says Roman empire fell because roman

coin fell in value
 Currency – advantage and properties
• Solves double coincidence problem • Functions of money
• Solves coordination issues • Medium of Exchange
• Unit of Account T
• Anonymous • Store of Value
• Characteristics of money
• Fungibility Advantages of gold standard:
R
• Durability Forces governments to be disciplined in their fiscal policy
• Transferability Gold offers monetary security – tool against depreciation
• Acceptability of money U
Gold is recognized and used globally
• Scarcity/ Limited Supply
• Non-counterfeit property
S
With gold standard, not possible to print money to England experienced low inflation for 100 years until the
supply easy credit to businesses to kick start the dissolution of gold standard in 1914
economy
T
European countries abandoned Gold standard to finance World War I, post, excess money creation continued, leading
to credit bubble in 1920s – lea to market crash in 1929 and deep recession.
Book Keeping and Accounting System
• Single Entry Accounting System Triple Entry Accounting System -
existed 5000 years ago possible with Blockchain
• Easy to maintain • Double entry with third component of
• Almost impossible to authenticate Blockchain
• Who paid • Blockchain connects two or more double
• Who owes entry accounting ledgers
• Missing money • Advantages
• Immutable
• Double Entry Accounting System- • Deterrent to manipulations/ frauds
600 years ago • A public ledger where all
• Highly efficient participants mandatorily enter
• No connection between different entries
accounting books • Perfect audit trail with no
dependency on auditors
 Birth of Internet
First leased line was installed in 1991 between Mumbai and Delhi
Speed – 9.6 kbps

Educational Research Network in 1986

VSNL launched public internet
15 Aug 1995
INR 5200/– for 250 hours
9.6 kbps

In 2004, broadband was defined as 256 kbps speed Internet changed the way
In 2013, it was revised to 512 kbps
In Jan 2019, it was raised to 2 Mmbps
businesses happen and
gave birth to whole new
industries
 The Efficient Communication Layer
Communication Before Internet Communication After Internet

High charges
High cost Cost of communication has been
& brought down significantly by
Slow delivery internet

Publishing in control of Media Houses Publishing power in the hands of people

Digital Revolution
• Online transactions
• Net Banking
• Credit Card
• Debit Card
• UPI- Unified Payments Interface for instant transfer of funds between two
banks using a mobile phone
• Mobile Wallets

Before Internet, there were not much innovations in banking services

 Digital Revolution in transactions
Cash Digital Currency
• Digital currencies
• Currency in digital form Completely Tracks all transactions
• Similar to physical Fiat currency anonymous
Transaction possible Transaction does not
• Double Spend Problem only when both parties need parties to be
• What is it? physically present present
• Role of Intermediary Very large transactions Very large transactions
not possible are possible

Does not need an Needs an intermediary

intermediary for for transaction to
transaction complete
Digital Currencies- DigiCash
• DigiCash
• By David Chaum in 1989
• Anonymous, using cryptographic protocols, blind signature to protect privacy
• Was supported by Mark Twain Bank in US and Deutsche Bank in Germany
• Worked like virtual ATM – one gets digital coins that are stored on his PC
• Using these coins one could buy items online
• Working:
• the software generates unique serial number for each coin and sends to the bank in
encrypted form for signature.
• Anyone could deposit signed unique serial number coins to bank and convert back to fiat
• Bankrupt and sold in 1998
• Came before its time,
• Before e-commerce really evolved
 E-Gold
• Douglas Jackson and Barry Downey came out with an idea in 1996, to put
gold in a safe and release digital coin worth its value called e-gold.
• Instant transfer of value between e-gold accounts (first micropayments-
one thousandth of a gram)
• Third party exchanges were offering conversion between e-gold and fiat
• Grew to 5 million accounts by 2009
• At its peak in 2006, it was transferring $2billion worth of value on a
monetary base of $71 million worth of gold.
• Money velocity/ turnover 28 times a year vis-à-vis dollar 6 times
• Cyber attacks on e-gold and legal issues killed it later
• Similar websites
• Hacked accounts using flaws in early operating systems and web browsers
• Patriot Act passed in 2001, made it a crime to transfer value without a state license
• All digital value transfer is considered as money transfer now
 Financial Crisis: 2007 -08
Post dot com bust and 9/11 Then interest rates started
attack, Fed lowered the rising from June 2004 and
These loans were packaged
interest rates from 6.5% in reached to 5.25% by 2006.
and resold as mortgage
2000 to 1% in 2003
backed securities or low risk
Subprime on floating rates
financial instruments
Flooding the economy with soon got into trouble.
Cheap money
In 2004, SEC allowed high risk
By Aug 2007, the crisis spread
taking for five banks
Upward swing in home to outside US
(Goldman Sachs, Merrill
prices- borrowers took
Lynch, Lehman Brothers, Bear
advantage of low mortgage Match 2008, Bear Stearns
Sterns and Morgan Stanley),
rates and Sep 2008, Lehman
allowed them to leverage
Subprime borrowers were Brothers collapsed.
upto 40 times of their initial
also able to get houses
investments
Rest is history.

https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp
Satoshi Nakamoto
• Pseudoname
• Stated coding in 2007
• Registered domain bitcoin.org in Aug 2008
• White paper in Oct 2008
• First block on 3rd Jan 2009
• By December 2010, stopped
communicating
 Message on blockchain
Satoshi inserted message in the genesis block

https://blockchair.com/bitcoin/block/0

Satyakam first blockchain calls at NEOMA Business school

https://live.blockcypher.com/btc/tx/ea5c85ae843e7acebea216f3620a893ae75621b081f87970eaf2f38e6993e74b/
Bitcoin – first successful cryptocurrency

• It is simply a means of sending and receiving numbers

to and from "addresses"
• An Open-Source Peer-To-Peer Payment Network
• Using Digital Signatures & Encryption
• decentralization is the basis for Bitcoin's security and freedom
• Performs all functions of money
• Unit of Account
• Medium of exchange
• Store of value
• Censorship resistance