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

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).