finance 460 exam 1

limited access problem?

-7.1 mil (5.4%) of housholds unbanked in US -2 billion people in world unbanked -a lot of entrepreneurs can't get smaller loans they need

what is arbitrage and what are the requirements?

-Arbitrage is the practice of making a profit by buying and selling the same or similar asset in different markets at different prices. The goal is to take advantage of price differences across markets without taking on much risk. 1. spend no money 2. take 0 risk 3. have CERTAIN profit

what is the double spend problem?

-Earlier digital currencies failed as no one could solve the "double-spend" problem: how to allow for the electronic exchange of money without a trusted intermediary to verify that the money had not be spent twice. -Satoshi's solution was to use a time-stamped electronic record-keeping system to record transfers of bitcoins. -This electronic ledger [blockchain] was secured against alterations using cryptography. -The blockchain would remain public and transparent, with multiple copies widely available on a P2P network run on independent computers (called nodes)

governance token

-Governance tokens are similar to equity tokens in the sense they represent percentage ownership. Instead of asset ownership, governance token ownership applies to voting rights -Many smart contracts have embedded clauses stipulating how the system can change; for instance, allowed changes could include: 1 adjusting parameters 2 adding new components 3 altering the functionality of existing components many platforms strive for a decentralized upgrade process, often mediated by a governance token Ex: MKR and COMP

What is hyperinflation? What are some examples?

-Hyperinflation is a severe form of inflation that causes prices to rise rapidly and uncontrollably over a period of time. -zimbabwe with daily inflation rate of 98%. People using Zim dollars as toilet paper because it was that worthless

what are the blockchain mechanics/steps?

-Miners will solve a puzzle to create a unique number for the block (aka a hash) using the information contained in our block and use that to make our ledger secure! -First to generate a correct hash wins -Other miners and nodes will verify if that hash is correct -Bitcoin blocks occur every 10 minutes -The last line over every block contains a hash -Last line (hash) is repeated as the first line in the next block. This is why it is called "chain". -Altering any data in say block 1, means the last line willchange and will not match the first line in block 2.

distributed ledger

-No central authority to hold ledger or be attacked -All people (aka nodes) have complete ledger.

proof of work

-POW is extremely secure -The amount of work required to produce so many leading zeros means that it is almost impossible for a bad actor (hacker or even country) to change a historical block. -PoW is extremely wasteful and energy consuming (0.5% of world's energy use)

proof of stake

-Proof of Stake (PoS) consensus mechanism -There are many alternative to reach consensus on blocks -PoS does not require mining to verify transactions -Instead, a holder of a given cryptocurrency must deposit or "stake" cryptocurrency with the network to be entered into a pool of validators. -Validators are randomly chosen to verify transactions and receive the block reward, with the probability linked to the amount of cryptocurrency they have staked. -A validator that verifies (or attests) malicious blocks loses their stake as a penalty. -In September 2022, the Ethereum network completed its transition from PoWto PoS, reducing its energy consumption by 99.95%

bitcoin motivation

-Satoshi's motivation was to create a currency not controlled by a central authority. -A peer-to-peer (P2P) version of electronic cash would allow online payments to be sent directly from one party to another without going through a central intermediary, such as a central bank. -The Bitcoin network was launched over the internet in2009, with Satoshi mining the first coins. -Ownership of bitcoins is recorded in an electronic distributed ledger called the blockchain, where transactions are batch processed in blocks and secured using cryptography in an immutable, append-only, public ledger

what are miners?

-These networked computers, or miners, process the transaction in exchange for a payment in Bitcoin. -Miners group the transactions together (i.e. a "block") and take a hashof the transactions plus an arbitrary number - the "nonce" -miners validate transactions -they then compete to solve a puzzle and if they win they get to add a block. they get 3.125 bitcoin for solving the puzzle.

bitcoin vs USD

-US dollar has not had any physical backing (i.e., gold) since 1971 -Demand for the USD comes from 1) taxes 2) purchase of goods denominated in USD 3) repayment of debt in USD -US economic expansions and contractions impact value -Central Bank (i.e., Federal Reserve) has the ability to inflate

Characteristics of money

-Unit of Account: way to compare the value of different goods. -Medium of Exchange: Allows non-barter transactions -Store of Value: Allows value to be retained - rather than decay (e.g., storing food)

what is fintech 1.0?

-began with transatlantic cable between london and nyc ibn 1858 -lasted until 1960s -characterized by analog tech such as the electronic ticker tape

centralized control problem?

-central banks control currency through inflation and interest rates -banking system is concentrated

opaque problem

-current system is not transparent -we do not get many of the underlying risks in banking, and the financial crisis demonstrates this...there's so much banks do with our money that we have no idea about -bank trust is a function that is a combination of regulation and government backstops, such as FDIC insurance

interoperability problem?

-difficult to move money from one institution to another -difficult to move securities (stocks, bonds, etc) frojm one institution to another

is bitcoin worth anything?

-no intrinsic value because nothing backing it, not like the USD which is backed by the government -things can be valuable and not have intrinsic value -think of the example with the Swiss Dinar. There technically was no value because they had to be turned in but people were still accepting it as money

open ledger?

-open ledger means that anyone can see anything that is happening on the blockchain -Ledger can be public while concealing identity (public key vs private key) -also means that you must have the funds to send and everyone will know if you do

what is fintech 2.0?

-started with the computer revolution in the late 1960s and ended in mid 2000s -fax, atm, nasdaq, phone,

crypto collateralized stablecoin

-these have to be over collateralized because the prices of crypto change so much faster than a dollar. -MakerDAO

ineffiency problem

-transactions are expensive (3% for credit card swipe) -transactions take a long time. there is a 1 day settlement time for stock transaction, slow transfers of funds, fraud, chargebacks, and insecurity

what is fraud?

-wrongful or criminal deception intended to result in financial or personal gain -a LOT of fraudulent activity happens with bitcoin -silk road drug website

are there multiple blockchains? how is this data formatted?

-yes, bitcoin is only one blockchain but there are many -formatted like a ledger. data added on in blocks. the blocks are chained together cryptographically so that an audit of former history can be done

what are the 3 types of stablecoins

1. fiat collateralized 2. crypto collateralized 3. algorithmic

5 problems with current banking systems

1. opaque 2. ineffiencient 3. centralized control 4. limited access 5. lack of interoperability

is bitcoin currency?

1. unit of account fails. nothing is priced in bitcoin 2. medium of exchange passes because you could exchange a good or service for it 3. store of value fails because it must be "Relatively stable" and bitcoin is not

what is custody

A critical DeFi characteristic is the ability to escrow or custody funds directly in a smart contract. Why Escrow is so important:o Additional possibilities that it opens up:o Retaining fees and disbursing incentiveso Facilitating "token swaps"o Collateralized Loanso Auctionso Insurance funds

what are smart contracts?

A smart contract is code that can create and transform arbitrary data or tokens on top of the blockchain It allows the user to trustlessly encode rules for any type of transaction Many standard business contracts can be algorithmically encoded and algorithmically enforced **Contracts run on the Ethereum Blockchain.

what is staking

A staking reward - user receives a bonus in his token balance based on the stake she has in the system Several versions of staked incentives Reward options Fixed payout or pro rata payout Same token type as staked or a distinct token Compound issues staking rewards on user balances that are custodied in a borrowing or lending position. These rewards are paid in a separate token (COMP) which has a fixed supply

What is barter?

Barter was one of the early methods of market exchange -Barter is peer-to-peer -Barter is very inefficient. If I have a gallon of milk and I want two dozen eggs, then I need to find an exact match (someone who has two dozen eggs and wants a gallon of milk). -Money (FinTech!!) solved the matching problem

hard fork example

Bitcoin Cash forked on Aug 1 2017 at block 478,558 on the Bitcoin blockchain. The hard fork was in response to Segregated Witness(SegWit), which aimed to increase processing speed. Bitcoin Cash introduced larger block size up to 8M, requiring a more complex mining process that favored large miners with more computing power

what are oracles?

Chainlink is an oracle, they solve the oracle problem of getting outside info onto the blockchain -Chainlink is a decentralized network that connects blockchains to off-chain data, allowing smart contracts to access external data and events

atomicity

Conditions in a smart contract can cause a transaction to fail If this happens - revert all previous steps of the transaction; we term this characteristic atomic Atomicity - critical feature of transactions because funds can move between many contracts (i.e., "exchange hands") with the knowledge and security that if one of the conditions is not met, the contract terms reset as if the money never left the starting point.

potential uses of crypto?

Depending on the intent of the developer(s), a cryptocurrency / token /coin can function as... i. medium of exchange ii. contractual right to transact (e.g., use a service) iii. vote on governance iv. financial security providing cash flow claims v. Unique claim (NFT) - e.g., art

ERC-20?

ERC-20 - the most popular standard for "fungible tokens" - i.e., tokens that have identical utility and functionality. Tether (USDT), Shiba Inu (SHIB), and Chainlink (LINK) are all ERC-20 Our GBO token is ERC-20o Monetary example - US dollars are "fungible". Two different $1 bills have the same value. Five $1 bills have the same value as a $5 bill. The benefit of these standards is that application developers can code for one interface and support every possible token that implements that interface.

what is ERC-721

ERC-721 - this is the standard for "non-fungible tokens" - i.e. NFTs. These are unique tokens and are often used as unique claims (e.g., Bored Ape) ERC-721 defines the non-fungible standard It is similar to ERC-20 except that each unit has its own unique ID Their alternate name is deeds, implying unique ownership of unitary assets Lottery tickets are nonfungible because only one or a limited number will be winning tickets and the remainder are worthless. NFTs can represent collectibles (e.g., ownership in a piece of art)

what is ethereum?

Ether (ETH) is the most innovative and transformational cryptocurrency. It is the token used to run decentralized applications (dapps) on the Ethereum blockchain. Ether was launched through a crowd sale in mid-2014 -- the first ICO and made 18.4million -The Ethereum blockchain is more like an open-source platform where developers can build decentralized applications (dApps) create smart contracts launch new tokens -no limit on how many ETH can be created

gas transaction example/details

Ethereum charges a "gas fee" for every transaction Think of Ethereum as one giant computer with many applications (i.e.,smart contracts). If people want to use the computer, they must pay foreach unit of computation. Gas prices vary greatly Assume the average gas price is 150 gwei and we implement a smart contract that transfers ETH, checks the balance of an account, and loads 2 bytes of memory from storage The total amount of gas required is 21,000 + 400 + 200 = 21,600 The total cost of this transaction is 21,600*150*(1*10^-9) = .00324 ETH If we set our gas limit to 25,000, then we will be refunded the excessgas of 3,400 If we set our gas limit to 18,000, the miners will be unable to execute the entire transaction.

what is ETH

If Ethereum is a toll road, then ETH is the cost to use it While coding and hosting a dapp on Ethereum is free, running this dapp has a cost (aka "gas"), paid in ETH The amount of gas depends on the computational resources required to run a program. Promotes efficient coding

what is intrinsic value

Intrinsic value is the perceived or calculated value of an asset, investment, or company and is used in fundamental analysis and the options markets.

what is a nonce

Miners group the transactions together (i.e. a "block") and take a hashof the transactions plus an arbitrary number - the "nonce" The current requirement for Bitcoin miners is 17 leading zeros. The probability of guessing this a nonce that satisfies this requirement is (1/16)^17

what is minting?

Minting (increase supply) Minting increases the number of tokens in circulation It can incentivize a wide range of user behavior. Can encourage supplying liquidity or using a particular platform

private key

Owners of cryptocurrency have a private key and a public key. When a token is transferred, the sender uses a digital signature algorithm to sign the token over to someone else's address. The signature mathematically reveals that the sender has the private key associated with the sender's public address

what are DeFi applications?

Smart contacts are used to create a decentralized application (dapp, Dapp, or dApp) A dapp must have the following characteristics: 1. Written in open-source code 2. Held in a publicly accessible blockchain network 3. Use a cryptographic token to work 4. Use a consensus method such as PoW or PoS

terra and luna case study

Terra was a blockchain with its own governance token, LUNA, linked to algorithmic stablecoin Terra USD (UST) by S. Korean founders, Do Kwon & Daniel Shin UST (Terra) was backed by sister coin, LUNA, with an algorithm automatically adjusting UST supply to keep the price at $1

fees and bitcoin

The Bitcoin network does not impose any official transaction fees to process transactions. Unverified transactions wait their turn to be processed in the memory pool or "mempool." Senders wanting quicker confirmation can pay a voluntary fee to incentivize miners to pick them first. Miners choose transactions offering the highest fee-to-size ratio to maximize the fee for each block. This fee is known as the "feerate" and is measured in Satoshi-per-byte, where 1 bitcoin is divisible into 100,000 Satoshis.

what are NFTs

The NFT itself is a unique digital code that is secured and stored on a public blockchain. Other properties of an NFT- One token is not interchangeable for another. - A token cannot be further divided. - Most NFTs are currently deployed as ERC-721 non-fungible tokens on Ethereum -What the NFT provides is a disintermediated, secure ownership record that is recorded (immutable) on the Ethereum blockchain

tokens and bottleneck

The early "flexible" nature of token creation resulted in developer bottlenecks in the Ethereum Network. These bottlenecks where largely due to the lack of interchangeability (i.e., fungibility) between different tokens and smart contracts.• In 2017, the Ethereum developer community moved to standardize all fungible tokens (using smart contracts) following the ERC-20 (Ethereum Request for Comment 20) standard.

what is hashing

The last line over every block contains a hash• Last line (hash) is repeated as the first line in the next block. This is why it is called "chain". Altering any data in say block 1, means the last line will change and will not match the first line in block 2. SHA-256 (Secure Hashing Algorithm) -Hashing is a one-way function -Passwords are routinely stored on websites in hashed form -The output of a SHA-256 is 256 bits (64characters) no matter how large the input

what is burning

To burn a token means to remove it from circulation. Intentional vs. Accidental Burning a token can take two forms: 1 Manually send a token to an unowned Ethereum address 2 Create a contract that is incapable of spending them. Burning - analogous to the destruction or irreversible loss of currency (in the traditional finance world) Here are some practical reasons 1. Represent exiting of a pool and redemption of underlying (common in equity tokens like cTokens for Compound) 2 Increase scarcity to drive the price upward (e.g., AAVE) 3. penalize bad acting

what is the mempool

Transactions are posted to a memory pool, or mempool, before they are added to a block. Miners monitor these posted transactions, add them to their own mempool, and share the transaction with other miners to be included in the next available block If the gas price offered by the transaction is uncompetitive relative to other transactions in the mempool, the transaction is deferred to a future block

how to do transactions on ethereum

Transactions involve sending data or ETH (or other tokens)from one address to another. An Ethereum user can control addresses through an externally owned account (EOA) or by using smart contract code (contract account)

What is the original smart contract?

Vending machine

what is a hardfork

When the holders of a cryptocurrency disagree and vote to split, it can lead to the creation of a new digital coin with a similar name. A new blockchain is created to verify new transactions; these new coins are no longer recognized as valid by the original blockchain. Both coins share the same transaction history up to the fork

fiat collateralized stablecoin

backed by an off blockchain reserve of target asset. tether is an example these are centralized

what is fintech 3.0?

began mid 2000s and focuses on underserved retail and small businesses -P2P lending platforms, crowdfunding platform Kickstarter, bitcoin in 2009 - a big difference between F3.0 and others is that it was not started by big banks or financial institutions, mostly done by tech companies -apple pay is a rare example

what are problems with bitcoin?

extremely volatile, takes up a ton of energy through the proof of work, the USD will never go to $0 but a bitcoin could

what is the oracle problem?

getting data that is external from blockchain onto the blockchain and into contracts

immutable and append only definitions?

immutable: attacks to ledger are impractical due to need for majority of nodes (aka 51% attack) to agree to a change and the computational power required. append only: each entry (aka block) is linked to the previous entry via some math (aka hash).

issues with fiat money

inflation, insolvency of financial institutions, central bank issues, and many more

what is set protocol

like a mutual fund but anyone can manage the basket

medium of exchange

meaning that you can sell the item for dollars, not a 1-1 barter system

store of value

money can be put aside and not used and it won't decay away like food or goods

algorithmic collateralized stablecoin

not backed by an underlying asset. Use algorithmic expansion and contraction of supply to shift the price to the peg Token holders in the platform receive the increase in supply when demand increases When demand decreases and the price slips below the peg, these platforms would issue bonds of some form which entitle the holder to future expansionary supply before the token holders receive their share Terra and Luna are example and terra went to zero.

utility token

one of the ERC 20 tokens fungible tokens that are required to utilize some smart contract system It is possible for these tokens to have an intrinsic value(proposition) that is defined by its smart contract system -this is when a token is issued and has the utility to buy something but only in that system...grapes of wrath example Ex:FILE, DAI, LINK

types of erc-20 tokens?

payment, utility, security, governance

security/equity tokens token

represents ownership of an underlying asset or pool of assets Each corresponds to an identical share in the pool (ie., fungible) Ex: suppose a token, TKN, has a total fixed supply of 10,000, and TKN corresponds to an ETH pool of 100 ETH (held in a smart contract) -equity tokens are more complex -uniswap is a smart contract that helps trade tokens between cryptos

what were some uses for ethereum as listed in their white pages

savings accounts, P2P gambling, financial derivatives, and new cryptocurrencies. Also described non-financial uses cases: decentralized data storage, email, or digital identity.

What is FinTech?

tech innovation in the way that capital is transferred, borrowed, or invested. examples include checks, online banking, ATMs, payday lending, robinhood. these innovations are generally done in order to fix a problem. fintech can be spurred by events, think of 9/11

What is the law of one price?

that two identical items must sell for the same price or arbitrage will occur and take advantage of this

unit of account

the way things are priced and a means for comparing the value. everything priced in the same unit at a store ($)

what are challengers to traditional banking?

transferring capital 1. deposit accounts (online banking) - MPesa 2. payments/transfers (digital payments) - paypal, venmo Raising capital 1. business/personal lending (P2P, crowdfunding) - lending club, kickstarter 2. investment banking investing capital 1. investment advisor (robo advisors) - wealthfront, betterment, vanguard 2. trading - robinhood 3. wealth management - analytics based wealth management - creditkarma

payment tokens

used to buy things crypto are payment tokens very volatile...stablecoins emerged as a special case