Seminar

Report on
DECENTRALISED VIRTUAL BANKING ON THE
ETHEREUM BLOCKCHAIN
In partial fulfillment of requirements for the degree of

Bachelors in Engineering

SUBMITTED BY: KABIRI GODSWILL KOSISOCHUKWU

2017030179580

Under the Guidance of

Dr F.A Okoye

DEPARTMENT OF COMPUTER ENGINEERING

ENUGU STATE UNIVERSITY OF SCIENCE & TECHNOLOGY

AUGUST 2022
 CERTIFICATION

This is to certify that KABIRI GODSWILL KOSISOCHUKWU (Reg.No

2017030179580) did this Seminar paper in partial fulfillment of the requirements
for the award of the degree of' Bachelor of Engineering (Honours) in Computer
Engineering, Enugu State University of Science and technology(ESUT)

……………………………. ….…………………………….

NAME Date

SEMINAR SUPERVISOR

……………………………. ………………………………

NAME Date

(HOD)COMPUTER ENGINEERING
 ACKNOWLEDGMENT

I will like to first thank God and my parents for giving me the opportunity to
participate in this exercise and I also like to thank my supervisor Dr. F.A Okoye
for his extraordinary support and his guidance during this report
 ABSTRACT

Blockchain technology has been a major breakthrough in digital leger security as it

enables the storing of data which can’t be altered indefinitely in a decentralized
manner. We are going to use this technology to build a decentralized virtual bank
which offers the same functions a s a regular bank but with more security
transparency and autonomy.

The goal of this report is to summarize the literature on implementation of

blockchain and is digital techniques to create and updated banking system which
can forever change banking when adapted and to draw appropriate conclusion
 TABLE OF CONTENTS

SECTION ONE: INTRODUCTION……………………………………...page 6

1.1 Detailed problem definition………………………………….page 6

1.2 Need of proposed system…………………………………….page 6

1.3 Applications………………………………………………….page 7

1.4 Organization of report………………………………………..page 7

SECTION TWO: LITERATURE REVIEW………………………………page 7

2.1 Study of existing systems/technologies……………………...page 7

2.2 Analysis of existing systems/technologies…………………..page 7

2.3 Comparison of existing systems with proposed system……..page 10

SECTION THREE: TECHNICAL DETAILS……………………………page 12

3. I Concept……………………………………………………...page 12

3.2 Algorithms…………………………………………………..page 13

3.3 Performance Analysis……………………………………….page 14

SECTION FOUR: CONCLUSION………………………………………page 14

4.1 Observations/Future scope………………………………….page 15

4.2 Reference……………………………………………………page 15
 SECTION 1

1.0 INTRODUCTION

Blockchain being relatively a new technology, a representative sample of research

is presented, spanning over the last ten years, starting from the early work in this
field. Different types of usage of Blockchain and other digital ledger techniques,
their challenges, applications, security and privacy issues were investigated.
Identifying the most propitious direction for future use of Blockchain to create a
secure and decentralized virtual bank is the main focus of this report. Blockchain
(BC), the technology behind Ethereum crypto-currency system, is considered to be
essential for forming the backbone for ensuring enhanced security and privacy for
various applications in many other domains including the Internet of Things (IoT)
eco-system.

1.1 DETAILED PROBLEM DEFINITION

Banking has existed for centuries and is vital to the economy of any functional
organization but it can be a double edge sword if not handled with transparency.

Mismanagement in the banking sector has caused the world economy not only
money but also the livelihood of an average person, littered throughout history is
examples of what mismanagement of the financial sector can do from the 2008
financial mortgage backed security crash to the 1920 great depression which saw
the collective savings of the masses wiped out because of out of control
speculations encouraged by banks. Traditional banks aren’t transparent and their
goal is to make money for their shareholders not safe guard peoples capital
especially when the bank is in a crisis example Bankruptcy or other unforeseen
issues.

1.2 NEEDS OF PROPOSED SYSTEM

The virtual bank uses are immense as it helps create a non-custodial banking
system that is transparent, fair and immune to manipulation and doesn’t need a
party to be trusted since its governed by code which can’t be changed once its
deployed thanks to blockchains immutability.
1.3 APPLICATIONS

The virtual bank can be applied to the current banking sector to enforce non-
custodial banking where all your money is held by the contract and not your bank
which makes it impossible for a bank to over leverage or spend your money, it
won’t be used in unregulated financial bets and it won’t be touched when the bank
goes bankrupt because its help by none of the middle parties except the contract
directed to hold the funds for the user. It can also be applied to businesses that
manage large amount of inventory and cash as it helps store accurate immutable
accounting data and achieve unlimited runtime regardless of time.

SECTION TWO

2.0 LITERATURE REVIEW

2.1 Study of existing systems/technologies

Existing financial systems although working are prone to a lot of issues which have
been exploited more than once and examples will be given below

2.2 Analysis of existing systems/technologies

Today, the current traditional financial system relies on banks and financial
institutions to provide these services to its customers. Normally, if you plan to
borrow, lend out money, earn interest on savings, invest some money, or apply for
a mortgage, you would need to use a bank, financial advisor, or broker. For sure,
they will provide such services, however at quite high rates.

To be able to access financial services, the first option is to go to your local bank.
Of course, you would need to provide proof of identity, address, and employment
before they will open an account for you. However, it is a time consuming and not
a straightforward process. Very often you may get rejected by a bank at your first
visit. I remember it happened to me in the past It took me a good few weeks and
multiple trips to a bank before I could open my first student account.

Earning interest with bank

Furthermore, we keep our hard-earned money in the bank as we believe that it is
the safest place on Earth. Therefore, banks and intermediaries have control over
our funds. They use our savings for their benefit so they can make high returns.
Unfortunately, the average account holders get only between 0.75 -1.25% interest
rate per annum on their savings in the best-case scenario. During unhealthy and
difficult economic times, banks often turn to negative interest rates. This
effectively means that people will have to pay their bank for storing their funds.
The unprecedented global economic disruption caused by the Covid-19 pandemic
has forced banks around the world to experiment with a negative interest rate
monetary policy. The Central banks of Denmark, Japan, Sweden, and Switzerland
have lowered interest rates below zero. For now, interest rates in the US, UK,
Norway, Canada, Australia, and New Zealand are all at a near-zero threshold of
0.25%. Most likely that the UK and New Zealand will consider adopting negative
rates in response to the economic downturn. Thus, bank account owners will have
no choice but to pay fees for keeping their savings in the bank until the economy
recovers.

Is the bank a safe place for your money?

Despite a bank is considered to be the safest place for storing our money, there is
always a risk of default. Thus, government or bank can freeze, close your account
or confiscate money without your permission. Moreover, a bank can go bankrupt
and collapse leaving you with zero balance.

Cypriot banking collapse

There are a couple of good examples of banks failing to return money to their
account holders. The 2012-2013 Cyprus bank crisis was the result of bad
investment and lending decisions by the Cypriot banks. As they were on the brink
of collapse, banks had to raise funds and bail themselves out. The only place
Cyprus could find large amounts of money were in people’s personal savings
accounts. The country’s biggest Bank of Cyprus was forced to seize deposits from
its account holders to survive in 2013. It taxed everyone with a saving account
between 6% – 10% and used this money to pay the debt and avoid collapse itself.

Greek debt default

In 2015, Greece became the first developed country that defaulted on its debt. It
failed to make an IMF loan repayment on time under the bailout program. Known
as the Greek government-debt crisis, the sovereign debt crisis was largely the result
of structural economic reforms and tax evasion problems faced by the Greek
economy in the aftermath of the financial crisis of 2007-2008. To prevent the
country’s financial and banking system from collapsing, banks in Greece imposed
the restrictions on cash withdrawals. Initially, account holders were facing tough
limits on what they can withdraw from their banks. They were only allowed to
withdraw 60 euros a day, and if they missed one day, they were unable to get the
cash another day. The monthly limit of about 1,800 euros was gradually raised.
These measures were fully lifted only after three years, in 2018.

The Lebanese liquidity crisis

The Lebanese liquidity crisis is one of the most recent and ongoing banking crises
that started in August 2019. Lebanon’s financial collapse is one of the most heavily
indebted nations in the world that was caused by corrupt politicians and
mismanagement of debt. They have brought the country’s economy and banking
system down by failing to deliver reforms for years. Some economists believe that
Lebanon’s financial system is a nationally regulated Ponzi scheme. Banks were
offering remarkably high-interest rates to attract new money deposits and then used
them to pay existing creditors.

This ‘financial mechanism’ worked for some time until the local currency pegged
to the dollar has lost more than 50% of its value in 2019. The fall of the exchange
rate caused banks to suffer big losses. This ultimately resulted in panic among
people who rushed to their banks and started to withdraw money. However, banks
no longer had enough funds to pay depositors queuing outside. Hence, they had no
choice but to preserve liquidity and implement unlawful controls on cash
withdrawals and money transfers. These days, the weekly limit on dollar
withdrawals imposed by banks is $300. People accuse the banking system of
holding their life savings hostage and believe that they are being subjected to
humiliation.
2.3 Comparison of existing systems with proposed system

Cryptocurrency Ethereum has made it possible to create a new globally

decentralized financial services ecosystem. An emerging and rapidly growing
decentralized finance aims to become an important element of the digital economy.
Without a doubt, it has a great potential to replace old traditional financial services.
Today, Decentralized Finance (DeFi) can offer any type of digital financial
services or products in a trustless and transparent way. It operates and controls
financial transactions without the need of any central authority or bank and is
available to everyone.With the help of an Internet connection and smartphone,
people around the world can instantly access DeFi services at their convenience.
Therefore, they don’t have to pay high fees to a third-party intermediary. They can
be in full control of their money and accumulate much higher interest on their
savings.

Decentralized Finance technology is a much better alternative to a traditional

banking system. It is an ecosystem of Internet-based financial products and
services that are built on decentralized blockchain technology. Decentralized
Finance offers a few promising advantages over traditional financial system such
as:

-The main benefit of DeFi is that it is an open-source, permissionless, and

transparent decentralized network of digital financial services. It operates on its
own and doesn’t need to be managed by a single institution or any third party. The
users would access financial services and exchange DeFi products in a peer-to-peer
way through fully automated digital platforms and decentralized market places. All
financial transactions are controlled by coded smart contracts and recorded on the
blockchain ledger without human interaction.

-Another significant advantage of Decentralized Finance is the ease of access to

digital markets of financial products and services. They are available to everyone
in the world with an Internet connection. DeFi has provided access to millions of
people, especially for those who are isolated from the current financial system.
Traditional financial services are often excluded from remote locations with low-
income people as banks are mainly focused on making profits.
-DeFi is an immutable and censorship-resistant ecosystem. As these financial
services are built on top of blockchains networks, there is no single point of failure.
All financial transactions are recorded on the blockchain ledger and distributed
across the entire decentralized network of computers. It makes it practically
impossible to censorship or shut down DeFi services.

-Decentralized Finance can provide better security for user’s funds compared to
traditional banks. Users interact directly with the smart contracts from their secure
cryptocurrency wallets. Hence, they maintain full ownership, control, and access to
their funds at all times.

What’s more?

– Operating without an intermediary, the coded decentralized finances significantly

reduce the costs associated with providing and using these services. They allow for
a more frictionless and broader range of digital financial services. DeFi makes
transaction fees much cheaper as its fully automated digital platforms perfectly
match the borrowing and lending demand directly between two anonymous users
in a peer-to-peer way in different parts of the world. Unlike the traditional financial
system today, there is no bank in the middle.

-Another potential benefit of DeFi is its interoperability. Decentralized financial

applications can easily connect and interact with each other. They can also be
combined to create entirely new financial markets and a broader range of financial
products, and services.

-All smart contracts of decentralized financial applications are open-source and

transparent. They are visible to everyone who would like to look at the code and
understand the functionality of the application. Furthermore, all transaction records
are also available on the blockchain to anyone who would like to view them.
However, trust and privacy are still maintained as transactions do not reveal real
identity but are tied to cryptocurrency wallets addresses.

-DeFi is a better alternative to the traditional banking system that offers much
higher rewards to its investors. It allows you to lend out money and earn significant
interest on your digital assets. You can easily take out a loan at more flexible rates,
or participate in staking and liquidity pools which can generate substantial rewards.
Furthermore, investors can access and trade new financial digital instruments,
exchange one asset for another, implement new investment strategies, and make
substantial profits.

SECTION THREE

3.0 TECHNICAL DETAILS

3. I Concept

Decentralised finance banking or Defi banking is basically banking in a non-

custodial autonomous way that obeys laws that can never be broken and trusted
without any third party. To build such a thing we must first familiarize ourselves
with smart contracts and the popular language for building a smart contract.

What is a Smart Contract?

All of the code on the blockchain is contained in smart contracts, which are
programs that run on the blockchain. All of the code on the blockchain is contained
in smart contracts, which are programs that run on the blockchain. They are the
building blocks of blockchain applications. We'll write a smart contract in this
project to power our Banking system.

Intro To Solidity :

Solidity is the main programming language for writing smart contracts for the
Ethereum blockchain. It is a contract-oriented language, which means that smart
contracts are responsible for storing all of the programming logic that transacts
with the blockchain. It's a high-level programming language that looks a lot like
JavaScript, Python, and C++.

There are other smart contract languages but solidity is by far the most popular and
widely used especially in the ethereum blockchain where we will be launching our
project

3.2 Algorithms

The core of the program will be written in solidity, after that is done the front end
will be written in react and bundled together to form the application. You will be
using a local instance of the blockchain to speed up development

Prerequisites :

Ganache (Local Development Blockchain)

The dependency is a personal blockchain, which is a local development blockchain
that can be used to mimic the behavior of a public blockchain. We recommend
using Ganache as your personal blockchain for Ethereum development. It will
allow you to deploy smart contracts, develop applications, and run tests. It is
available on Windows, Mac, and Linux as a desktop application and a command-
line tool.

Linux and vs code:

Although this can be done on any system we recommend linux as most tools used
will work perfectly on linux and vs code is the editor of choice.

3.3 Performance Analysis

Limitations of the applications performance is due to ethereum bottle neck when to

many transactions are going in at once causing gas fees to rise in the blockchain
thereby making simple transactions expensive. This can be avoided in various
ways the easiest fix is to use the zkrollups system that wraps multiple transactions
into 1 and then sign it into the blockchain or wait for eth 2.0 when shading
officially gets introduced into the system.

SECTION FOUR

4.0 CONCLUSION

Blockchain technology hasn’t been around for a long time, but so far its been able
to show its capability to disrupt and improve our traditional way of doing banking
by making it trustless, transparent and more secure than traditional banking. I
believe with the right approach and research it can take over current banking
system without any major issues.

As we are moving into the digital economy era, Decentralized Finance is focused
on creating a more transparent and efficient financial system. An open finance
ecosystem that is independent of the traditional financial system and will no longer
rely on banks or intermediaries. Being an emerging and rapidly growing Web 3.0
decentralized infrastructure, DeFi will provide access to new types of digital
products and services. It allows its users to maintain full control over their funds
and interact in a peer-to-peer way.

4.1 Observations/Future scope

Defi isn’t even up to 3 decades old has taken the traditional financial market by
storm and with other minds coming together to solve more problems using this
new disruptive technology called blockchain. If successful, it will be available to
more people around the world. They will be able to benefit from cheaper loans,
higher interest rates on lending and savings, easier access to money pools, and
financial instruments globally. It has great potential to replace the old centralized
banking system and offer better rewards to everyone.

REFERENCES

[l] Decentralized Finance vs Traditional Banking? Crypto Guide for Beginners /

By Oleh Lesiv https://newbitcoinuser.com/2020/11/decentralized-finance-vs-
traditional-banking/

[2] Blockchain Paper Published by Mahdi H. Miraz1

https://www.seminarsonly.com/computer%20science/blockchain-technology.php

[3] And me ;)