Essential Concepts: Money, Cryptography, Blockchain, AI, Fintech, Web3
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Money and Monetary System
- Money: An asset that serves three functions: medium of exchange, store of value, and unit of account.
- Fiat Currency: Money issued by a government with no physical backing (e.g., euro, dollar).
- Fiduciary Currency: Money based on trust, not intrinsic value (e.g., Bitcoin, checks).
- Ledger: An accounting record showing debts and transactions.
- Unit of Account: Allows expressing the price of goods/services (e.g., a coffee costs €2).
Cryptography
- Hash: A mathematical function that converts data into a unique and irreversible digital fingerprint.
- Asymmetric Cryptography: Uses a pair of keys (public and private) to encrypt and decrypt messages.
- Digital Signature: Proves that a message was sent by a specific user and has not been modified.
- Non-repudiation: Ensures that the sender cannot deny having sent a transaction.
Bitcoin and Blockchain
- Blockchain: A distributed, append-only database with timestamps and no central authority.
- Bitcoin: A peer-to-peer electronic cash system that solves the double-spending problem without intermediaries.
- Proof of Work (PoW): A consensus mechanism where miners compete to solve computational problems.
- Coinbase Transaction: The first transaction in a block; creates new bitcoins as a reward.
- Halving: A periodic reduction in mining rewards (approximately every 4 years).
- UTXO (Unspent Transaction Output): An unspent transaction output used as a future input.
- Input/Output: An input references previous bitcoins; an output defines how much is sent to whom.
- Mempool: A list of validated transactions that are not yet confirmed in a block.
Blockchain Economics
- Verification Costs: The effort needed to confirm data authenticity.
- Networking Costs: The costs of connecting and integrating network participants.
- Metcalfe’s Law: The value of a network grows with the square of its users.
- Blockchain Trilemma: The difficulty of simultaneously achieving security, decentralization, and scalability.
Fintech
- Fintech: Technology applied to financial services (payments, credit, investment, insurance, etc.).
- BaaS (Banking as a Service): A model where non-banks offer banking services through APIs.
- Open Banking: A system requiring banks to open data via public APIs (per PSD2).
- Open API: An interface that allows third parties to securely access services and data.
Artificial Intelligence
- Algorithm: A set of instructions to solve a problem.
- AI (Artificial Intelligence): Systems that make decisions like humans based on data.
- ML (Machine Learning): Algorithms that learn from data.
- Supervised Learning: Learns from examples with known outcomes.
- Unsupervised Learning: Groups data without knowing the outcomes.
- Reinforcement Learning: Learns via trial and error with rewards.
- Deep Learning: Deep neural networks that learn complex structures (e.g., facial recognition).
- Fine-Tuned Model: An AI model adapted using specific company data.
- RAG (Retrieval-Augmented Generation): AI that retrieves real-time data to improve answers.
Web3 & Innovation
- DAO (Decentralized Autonomous Organization): An organization run by smart contracts and tokens.
- Smart Contract: A self-executing contract that activates when predefined conditions are met.
- NFT (Non-Fungible Token): A unique token representing ownership of a digital asset (art, music, etc.).
- Token: A digital unit of value used in blockchain networks for governance, payments, or access.
- Robo Advisor: An automated financial advisor that may use AI and blockchain for investment.
Practice Questions
What three roles must money fulfill to be considered money?
Money must fulfill three roles: medium of exchange, store of value, and unit of account.
What is asymmetric public key cryptography?
It is a system that uses two keys: a public key to encrypt (receive) and a private key to decrypt (spend). It ensures confidentiality and authenticity in digital transactions like Bitcoin.
Explain inputs, outputs, and the function of Bitcoin's mempool.
- Inputs: References to previous transactions (UTXOs) used as the origin of the funds.
- Outputs: Indicate where the money is going and how much.
- Mempool: A queue of validated transactions waiting to be added to a block by miners.
What is a digital signature?
A digital signature guarantees:
- Message integrity (not altered)
- Origin authentication (who sent it)
- Non-repudiation (sender cannot deny it)
It is generated using asymmetric cryptography combined with a hash.
Maximalist vs. Minimalist Arguments
Maximalist Perspectives:
- Disintermediation of payments (no fees, microloans)
- Traceability and smart contracts (insurance, logistics)
- Decentralized identity and governance (voting, registries)
Minimalist Perspectives:
- High energy cost and fees
- Volatility and limited use
- Risk of losing private keys and fraud
What are verification costs in blockchain?
Verification costs refer to the effort required to confirm a transaction’s truth. Blockchain reduces them through:
- Hash-based integrity
- Transparency
- Economies of scale
How can verification costs be reduced in trade finance (give example)?
By using blockchain to verify payments and documents in international trade.
Example: Coffee shipment traceability with a QR code and blockchain certifying payments and origin.
Relationship between Open APIs, BaaS Fintechs, and Traditional Banks
Open APIs allow fintechs to securely access banking data (with user consent). A BaaS fintech can use these APIs to provide fast, personalized banking services without being a traditional bank.
Use of Deep Learning in BaaS for Data and UX
Deep Learning can be used to:
- Analyze user data (Big Data)
- Improve UX with personalized interfaces
- Automate decisions (e.g., credit scoring)
Explain the Zero-Commission Model and its Application Since 2014.
Since 2014, fintechs like Revolut and Robinhood have offered zero-commission models, primarily using data monetization. This model is now standard thanks to digitization, open APIs, and data-based revenue streams.
At which steps in the credit supply chain do Open APIs make sense?
Open APIs make sense at every step of the credit supply chain:
- Data collection (credit scoring)
- Risk analysis
- Credit approval
- Loan monitoring
They enable automation and process improvement.
Should an entrepreneur build a Web3 Robo Advisor? Pros & Cons
Yes, it makes sense, but with considerations.
Pros:
- Transparency
- Traceability
- Low fees
Cons:
- Scalability
- Regulation
- Crypto volatility
- Technological complexity
- Limited adoption
Tricky Questions
The Double-Spending Problem and Bitcoin's Solution
- The risk of spending the same digital value more than once.
- Bitcoin solves it with a public blockchain where every transaction is verified by all nodes.
- Thanks to Proof of Work, transactions cannot be duplicated or forged.
Permissioned vs. Permissionless Blockchain: Use Cases and Examples
- Permissioned Blockchain: Only known actors can write (e.g., banking networks for transfers).
- Use Case: Supply chain traceability.
- Permissionless Blockchain: Anyone can participate (e.g., Bitcoin, Ethereum).
- Use Case: Cryptocurrencies, NFTs.
- Permissioned Blockchain: Only known actors can write (e.g., banking networks for transfers).
Is Blockchain Truly Useful in the Supply Chain?
Blockchain adds transparency, traceability, and trust.
However, it may be unnecessary if a robust ERP system is already in place. It is particularly useful when many actors are involved, there is a lack of trust, and open traceability is required.
What is a Hash and its Function in Bitcoin?
A mathematical function turning data into a unique digital fingerprint.
Properties: One-way, Unique.
In Bitcoin, it:
- Protects block integrity.
- Builds Merkle trees and block headers.
Bitcoin's Economic Model
- Miners validate blocks approximately every 10 minutes, receiving a reward.
- The first transaction in a block is the Coinbase transaction.
- The reward halves approximately every 200,000 blocks (known as Halving).
- Maximum supply: 21 million BTC (expected by 2140).
- Miners also earn transaction fees.
Open APIs and PSD2 Regulation
- PSD2 mandates public APIs from banks.
- Authorized Third-Party Providers (TPPs) can access banking data.
- This encourages competition and innovation, leading to the rise of Fintechs like BaaS.
- Access is always with user consent.
When is a DAO Better Than a Traditional Company?
Example: A global digital art community (e.g., for NFTs).
A DAO allows:
- Token-based public voting
- Transparency
- Flat governance
DAOs are legally recognized in some countries.
Risk: Smart contract code may contain bugs.
The Blockchain Trilemma and Solutions
Challenge: It is difficult to simultaneously achieve decentralization, security, and scalability.
- If too decentralized, speed may be compromised.
- If too scalable, security may be compromised.
Solutions include: Sidechains, Rollups, and Proof of Stake (as an alternative to Proof of Work).