6 / 139 Digital Currency Digital Currency (a.k.a. Digital Money or Electronic Currency/Money) is a type of currency available only in digital form, not in physical (such as banknotes and coins). It exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of- ownership.
Global Money Supply: More than 90% of the currency in the world is digital, that is, money held or traded in it's non-physical form. Ref: [The Money Project] 7 / 139
8 / 139 Digital Currency Most of the traditional money supply is bank money held on computers. This is also considered digital currency. One could argue that our increasingly cashless society means that all currencies are becoming digital ("electronic money"), but they are not presented to us as such. Cf. [Digital currency] Cryptocurrency A special kind of digital currency. The most popular Cryptocurrency is Bitcoin. "Crypto" refers to the cryptographic method used in the currency to secure transactions and create new unit of the currency. This kind of digital money is a revolutionary technology that allows people or institutions to transfer funds instantly, securely and without a middleman.
9 / 139 Bene ts Non-Traditional Digital Currency Ref: [5 Ways Digital Currencies will Change the World | Susan Athey] 1. Faster, Cheaper Bank Transfers 2. A Boost to Global Remittances 3. Safe Money for the Poor 4. Unleashing the Potential of e-Commerce 5. Programmable Money and Smart Contracts International bank transfers can take up to a week. By using digital currency, bank transfers could be made instantly, cheaply and safely. Using digital currency, users can send money directly to their families via mobile phone, eliminating transfer fees that often run up to 10% or more.
10 / 139 Possible Risks A New Battlefront New record-keeping and payments systems create huge cybersecurity issues, from theft to hacking. Cryptocurrencies like Bitcoin are volatile, because their value is based on supply and demand. And the supply is determined by a computer code, not a central bank.
13 / 139 The term Financial Technologies or FinTech is used to describe a variety of innovative business models and emerging technologies that have the potential to transform the nancial services industry. Financial Technology describes tech-enabled products and services that improve traditional nancial services.
14 / 139 Innovative FinTech Business Models o er one or more speci c nancial products or services in an automated fashion through the use of the internet. unbundle the di erent nancial services traditionally o ered by service providers -- incumbent banks, brokers or investment managers. Examples Equity crowdfunding platforms intermediate share placements Peer-to-peer lending platforms intermediate or sell loans Robo-advisers provide automated investment advice Social trading platforms o er brokerage and investing services
15 / 139 Emerging Technologies Cryptography Big-Data Machine Learning/ Arti cial Intelligence Distributed Ledger Technologies (DLTs) Such emerging technologies can be used to supplement both FinTech new entrants and traditional incumbents, and carry the potential to materially change the nancial services industry.
19 / 139 FinTech has Changed the Competitive Landscape Since the 2008 Financial Crisis, FinTech startups have targeted single underserved nancial products with better UI, digital marketing, and services that cater to shifting customer demands. Ref: [Banks in Fintech]
20 / 139 Disruption from Every Direction Challengers to the big banks now range from PayPal, the granddaddy of e-payments which spun o from eBay (2015), to cryptocurrency companies such as Coinbase. Ref: [IOSCO 2017]
21 / 139 Financial Inclusion Digital currencies can become another convenient and safe form of payment and savings in emerging markets where most citizens don't have bank accounts. High unbanked population, weak consumer banks and high mobile phone penetration make emerging markets ripe for FinTech disruptions. There are billions around the world without access to traditional nancial services. Fintech innovations could be their chance to be included in the global digital economy. Participation in the nancial system can reduce income inequality, boost job creation, and directly help the poor manage risk and absorb nancial shocks. Ref: [The Fintech Revolution]
22 / 139 Possible Impacts Fintech companies could wipe out as much as 60% of bank pro ts. Almost 2 million jobs ini banking will be lost, especially in areas such as lending and payments, where technology takes over human roles. While it's di cult to predict how FinTech will play out over the years, the game is most de nitely on. Ref: [The Fintech Revolution]
29 / 139 There are more than 5,000 FinTech startups in the world in 2016. Cumulative funding into FinTech start-ups: $127 B Companies tracked: 10,993 Ref: [INSEAD, FinTech Control Tower]
FinTech is no Longer a Niche Market | Ref: [Banks in FinTech] FinTech Companies have attracted Millions of Customers (Since Respective Launch Date) 33 / 139
35 / 139 FinTech Trends (2018) Fintechs unbundling leads to rebundling European ntechs will expand their global footprint Banks forgo partnering in favor of ghting ntech with ntech Wealth management will become the hottest ntech sector in China Latin America and Southeast Asia will see strong ntech growth Banks deepen their partnerships with regtech ... Ref: [CBInsights FinTech Trends 2018]
37 / 139 FinTech has evolved from startups that want to take on and beat incumbents, to a broader ecosystem of di erent businesses looking in many cases for partnerships. FinTech startups don't just need capital, they need customers. At the same time, incumbents need new approaches to drive change and deliver innovation. Innovation is also coming from outside nancial services and being driven by a variety of sources including tech companies, e-retailers, and social media platforms.
56 / 139 The 2008 nancial crisis caused a lot of people to lose trust in banks as trusted third parties. Many questioned whether banks were the best guardians of the global nancial system. Bad investment decisions by major banks had proved catastrophic, with rippling consequences. Bitcoin - also proposed in 2008 - presented something of an alternative.
57 / 139 Bitcoin made digital transactions possible without a "trusted intermediary". The technology allowed this to happen at scale, globally, with cryptography doing what institutions like commercial banks, nancial regulators, and central banks used to do: verify the legitimacy of transactions and safeguard the integrity of the underlying asset. Bitcoin is a decentralized, public ledger. There is no trusted third party controlling the ledger. Anyone with bitcoin can participate in the network, send and receive bitcoin, and even hold a copy of this ledger if they want to. In that sense, the ledger is "trustless" and transparent.
58 / 139 Bitcoin The rst cryptocurrency Created by Satoshi Nakamoto in 2009 Open source Considered the reserve currency of the cryptocurrency world Lifetime supply of only 21M coins, of which likely about 30% are already lost Ref: [J. Wong]
59 / 139 Bitcoin Bitcoin is a decentralized, public ledger. This ledger is known as a blockchain. There is no trusted third party controlling the Bitcoin blockchain. Instead, anyone can read it, write to it, and hold a copy. The Bitcoin blockchain tracks a single asset: bitcoin. The blockchain has rules, one of which states that there will only ever be 21M bitcoin. All participants must agree to Bitcoin's rules in order to use it. Ref: [CBInsights]
60 / 139 Bitcoin Because anyone can read it and write to it, Bitcoin needs a method to establish consensus among untrusted nodes. It solves this problem via clever economics: Incentive: The rst miner to verify transactions and devote immense computing power to secure the blockchain can append a block of transactions to the chain of previous blocks. This miner is rewarded with bitcoin, and the race starts over every ten minutes. Disincentive: Bad actors are dissuaded from attacking the blockchain, because it's e ectively a money-losing proposition. Ref: [CBInsights]
65 / 139 Digital asset for value exchange Decentralized control (no central bank) Uses cryptography for: Securing transactions Controlling creation of additional units Verifying the transfer of assets Most are built on a technology called blockchain, which is a public, immutable, distributed ledger of all transactions
67 / 139 #1 Desentralized Traditional money is controlled by banks and governments - which makes it a "centralized" currency. Crypto (eg. Bitcoin) is not controlled or regulated by any single entity like a bank - which makes it a "decentralized" currency. Having no banks in control makes sending and receiving money cheaper, faster, and easier. Ref: [upfolio.com]
68 / 139 #2 No Counterfeit Money Paper currencies, credit cards, and checks can be counterfeit. Crypto solves the Double Spend Problem which means criminals cannot create fake cryptos. Counterfeiting is (almost) impossible. Counterfeit traditional money is very common. In the U.S. alone it is estimated that between $70 and $200 million in counterfeit bills are in circulation. That's up to 1 out of every 4,000 real bills. You won't have to pay those high fees for fraud protection either! Ref: [upfolio.com]
69 / 139 #3 Limited Supply Traditional money is created by governments in unlimited quantities. They print more constantly, which decreases the value over time. Cryptos' supply is usually limited. Why? It's designed to be scarce so that it increases in value over time. A constantly increasing supply of money creates something called in ation. This means that the money you are holding is worth a little less every day. If you're working hard and trying to save up, that's bad. It's why an ice cream was $0.05 in 1950, but is $5.00 today traditional money keeps losing value. Crypto's limited supply creates the opposite e ect, called de ation. Ref: [upfolio.com]
70 / 139 #4 Divisible Old fashioned money can be spent only in amounts as small as a single cent (ie. up to 2 decimal places). Crypto is highly divisible because its value is designed to increase over time (through de ation). This divisibility means you can spend very small amounts of a coin. So basically, an ice cream cone may cost 0.001 coins today, but in the future it may cost 0.00000010 coins, if coin's value rises even more. Crypto's high divisibility is useful eg. for microtransactions. These are very small payments used for digital goods and services. Microtransactions are something traditional money can't do, because cents are not divisible enough and therefore too big for very small purchases. Ref: [upfolio.com]
71 / 139 #5 Security Cryptocurrency uses cryptography to securely send payments. Hence the name. Cryptography is a technology that protects information through complex math functions. Cryptocurrencies use strong cryptography to protect your account and let you securely send money. Note that security is a highly-dynamic multi-dimensional aspect ie. cryptography alone is not enough to de ne actual level of security. Ref: [upfolio.com]
73 / 139 Altcoins Alternative Coins Coins that were created after Bitcoin. Because Bitcoin's code is open-source, anyone can use Bitcoin's code to create an altcoin. Many of them seek to improve on Bitcoin or expand its capabilities. Altcoins use di erent rules and engage with other economic models.
74 / 139 Cryptocurrencies focus on di erent goals, but almost all shared the original purpose of removing middlemen. Some of the most popular cryptocurrencies include Ethereum, Ripple, Litecoin, Dash, NEO, Monero, and IOTA. The list grows constantly, because new cryptocurrencies are created all the time. Anybody is allowed to create their own cryptocurrency. In fact, there are already over 1,500 di erent ones, and that number is growing quickly. People are developing new cryptocurrencies for fun, to solve problems, and to make money. Because anybody with some technical skills can make them, it's important to know that some cryptocurrencies are more trustworthy than others. Ref: [upfolio.com]
84 / 139 Ethereum E ectively, Bitcoin is a decentralized application for payments. Ethereum adds another layer by allowing users to put code on its blockchain that executes automatically. This code is called a "Smart Contract". In this way, Ethereum hopes to create a decentralized computing platform - a global supercomputer. Ref: [CBInsights]
87 / 139 Ethereum is a decentralized platform that runs smart contracts. Ethereum allows participants to execute complex code (smart contracts) on its ledger. Ethereum uses a blockchain to track a cryptocurrency called "ether". Users spend ether to run programs on the Ethereum platform. Ethereum is also a construction set for building decentralized applications. Instead of building their own blockchains from scratch, developers can use Ethereum's blockchain.
91 / 139 Token Native Tokens App Tokens Utility Tokens A unit of value for a blockchain system. Tokens can be used for payment, access, voting, and facilitating the overall blockchain infrastructure. Most tokens are based on Ethereum. bitcoin is a token that provides ownership of a unit of account on the Bitcoin ledger (BC). It is impossible to participate in the Bitcoin ledger without owning bitcoin; bitcoin is the network's exclusive means of exchange. In this sense, bitcoin isn't a security, but utility within a network.
92 / 139 Hash Hash Function Hash Value Hash Rate SHA-256 A hash function is any function that can be used to map data of arbitrary size to data of xed size. The values returned by a hash function are called hash values, hash codes, digests, signatures, or simply hashes. Hash Rate/Power. The number of hash computations per unit time that can be performed by a mining hardware. The rate determines their mining e ectiveness and pro t. SHA 256. SHA-256 is a member of the SHA-2 (Secure Hash Algorithm 2) cryptographic hash functions. Digest is 32 Byte (256 bits) long. Bitcoin mining uses SHA-256 as the Proof of Work algorithm. SHA-256 is also used in the creation of bitcoin addresses to improve security and privacy.
93 / 139 Mining Mining Pool Mining Reward Mining Rig The process by which transactions get veri ed, bundled, and added to the Blockchain. It's an essential part of any cryptocurrency, because it processes all transactions. Mining Pool. A group of people or organizations who come together to pool and share their computer resources for cryptocurrency mining. They then also split the rewards. Mining Reward. The payment resulting from volunteering computer resources to process cryptocurrency transactions. Mining rewards are often a mix of new coins and transaction fees. Mining Rig. A computer setup that's specially designed for mining a cryptocurrency. Often involves multiple graphic cards (GPUs) or other complicated setups for maximum e ciency.
105 / 139 Consensus Consensus Point An automated mechanism that allows blockchain participants to agree on which transactions happened and in which order. Consensus Point. A point in time when blockchain participants agree on which transactions happened and in which order. Can be based on a time interval or based on a volume of transactions.
106 / 139 PoW Proof of Work Bitcoin uses a Proof of Work scheme to create distributed trustless consensus and solve the double-spend problem. Proof of Work is a requirement that mining be performed. Miners proof that they did that computational work by nding the solution of a math puzzle known as PoW problem. All the network miners compete to be the rst to nd a solution for the mathematical problem that concerns the candidate block, a problem that cannot be solved in other ways than through brute force so that essentially requires a huge number of attempts. A reward (new coins) is given to the rst miner who solves each blocks problem.
107 / 139 PoW Proof of Work From a technical point of view, mining process is an operation of inverse hashing: it determines a number (nonce), so the cryptographic hash algorithm of block data results in less than a given threshold. A Proof of Work is a piece of data which is di cult (costly, time- consuming) to produce but easy for others to verify and which satis es certain requirements. Producing a PoW can be a random process with low probability so that a lot of trial and error is required on average before a valid proof of work is generated. Bitcoin uses the Hashcash PoW system. In order for a block to be accepted by network participants, miners must complete a PoW which covers all of the data in the block. The di culty of this work is adjusted so as to limit the rate at which new blocks can be generated by the network to one every 10 minutes (Bitcoin). Due to the very low probability of successful generation, this makes it unpredictable which worker computer in the network will be able to generate the next block.
108 / 139 PoS Proof of Stake In a distributed consensus-based on the PoW, miners need a lot of energy. One Bitcoin transaction required the same amount of electricity as powering 1.57 American households for one day (data from 2015). And these energy costs are paid with at currencies, leading to a constant downward pressure on the digital currency value. In a PoS scheme, the creator of a new block is chosen in a deterministic way, depending on its wealth, also de ned as stake. All the digital currencies are previously created in the beginning, and their number never changes. This means that in the PoS system there is no block reward and the miners take the transaction fees. This is why, in fact, in this PoS system miners are called forgers, instead.
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