Blockchain & Bitcoin
What is the name of the first academic paper that described bitcoin?
"The Bitcoin White Paper"
What is Bitcoin?
A form of digital currency, created & held electronically. - no one controls it They are not printed - produced by people and more & more businesses - they use software that solves mathematical problems, which upon completion yields a Bitcoin
Greater Transparency
Impact on Institutional investors and Activists - less likely to invest in a company traded on blockchain Permits markets to observe investors' ownership position - shares they are transacting of that company but of other as well - "are they in a money crunch, or do they know something the market doesn't?"
Applications in Corporate Finance
1) Smart Contracts 2) Recording Ownership of Assets 3) Greater Transparency 4) Accuracy of Elections (of managers) 5) Accruals Earnings Management (avoid gimmicks)
5 Basic Principles Underlying the Technology
1) Transaction Record (distributed database) 2) Peer-to-Peer (P2P) 3) Transparency with Pseudonymous Titles 4) Irreversibility (with computational proof) 5) Computer Logic
How Did the Blockchain Start?
2008; A technical paper was posted on the internet by Satoshi Nakamoto titled - Bitcoin: A Peer-to-Peer Electronic Cash System Described a system of cryptocurrency that was not backed by any government or based on any existing currency Satoshi Nakamoto is a pseudonym, so the identity of the true creator is unknown
How Many Bitcoins Will Ever Be Created?
21 Million
Have there ever been bitcoin bubbles in the past?
3 - 2011 - 2013 - 2014
What is the name of the general ledger that tracks all bitcoin transactions?
Blockchain
Name 2 countries that have banned their banks from servicing bitcoin companies
China & Russia
Peer-to-Peer Transmission
Communication occurs directly between peers instead of through a central node Each node stores & forwards information to all other nodes
Smart Contracts
Debt securities & financial derivatives - able to execute autonomously Pre-contracted resolutions of financial distress - transfer of collateral in case of default Payment of employee compensation - transactions triggered when performance goals achieved More transparency - especially to monitor managers Reduce opportunity for corruption behavior
Use for Recording Ownership of Wider Range of Assets
Distributed ledger - copy of each block of transactions if distributed (or made visible) to all members of the network
Distributed Database
Each party on a blockchain has access to the entire database and its *complete* history No single party controls the data or the information Every party can verify the records of its transaction partners directly, without an intermediary (clearing house)
How often does the bitcoin ledger reconcile?
Every 10 minutes
Transparency with Pseudonymity
Every transaction and its associated value are visible to anyone with access to the system Each node (user) on a blockchain has a unique 30-plus character alphanumeric address that identifies it Users can choose to remain anonymous or provide proof of their identity to others Transactions occur between blockchain addresses
Accuracy of Elections
Managers and BOD votes recorded for everyone on the network to see
The computers that process transactions for the bitcoin network are commonly called...
Miners
Irreversibility of Records
Once a transaction is entered in the database and the accounts are updated, the records cannot be altered. Why? - records are linked to every transaction record that came before them ("chain") Various computational algorithms & approaches are deployed to ensure that the recording on the database is - permanent - chronologically ordered - available to all others on the network
Applications Based on Type of Blockchain
Public Ledger - Bitcoin Private - Permission based Gatekeeper - Can restrict entry into a market . . . o monopolistic user fees . . . o edit incoming data . . . o preferential treatment . . . o limit a user's access . . . o share data externally
Accruals Earnings Management
Reporting schemes to alter the health/image of a firm would be much harder if not eliminated
Why Can't Cheat at Bitcoin?
Say someone wants to alter a transaction in block 70, while the newest block being worked on is block 90. In order to change block 70, the miner would have to redo all the computations for blocks 70-89 *before* everyone else in the Bitcoin network completes block 90 The computing power in order to complete that process in the small window is virtually, theoretically, and practically impossible
What was the name of the illegal underground market that sold drugs & other products for bitcoins, which was shut down by the FBI?
Silk Road
Computational Logic
The digital nature of the ledger means that blockchain transaction can be tied to computational logic - i.e. programmed So, users can set up algorithms & rules that automatically trigger transactions between nodes
Where is the bitcoin central server located?
There is none
Bitcoin Transaction Life Cycle
__Rob's request to send 0.3 BTC to Laura__ User; Rob opens his bitcoin wallet >> scans/copy Laura's address >> fills the amount & fee >> sends Machine; >> Rob's wallet signs the transaction using his private key >> transaction is propagated & validated by network nodes (10 seconds from start of process) >> miners include the transaction in the next block to be mined >> mining calculates a certain hash >> miner who solves the Proof of Work propagates the new block to the network (*new BTCs created*) >> nodes verify the result & propagate the block >> Laura sees the first conformation >> new conformations appear with each new block that is created >> *THE END*