Essential Concepts: Money, Cryptography, Blockchain, AI, Fintech, Web3

Classified in Economy

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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

  1. 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.

  2. 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.

  3. 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.
  4. 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.

  5. 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
  6. 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
  7. 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.

  8. 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.

  9. 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)
  10. 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.

  11. 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.

  12. 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

  1. 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.
  2. 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.
  3. 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.

  4. 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.
  5. 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.
  6. 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.
  7. 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.

  8. 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).

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