Internet G3: Blockchain Technology & Finance

Since we’ve reviewed the evolving history of the internet and the financial crises which have occurred, we can ask:

How does blockchain technology challenge the financial sector?

First, we need to identify some common words in order to understand the full picture.

1. Money – Money is known as the stored value of tangible assets. Until the 70’s this took the form of gold. Afterwards, in the 80’s, this shifted to a promise from the Federal Reserve of the US to honor the value in the Fiat paper money issued.

You can use money as a medium to exchange goods and services and price the most valuable commodities with that currency. No more Gold base valuation. Governments now accept money as payment for taxes, as well as being a reserve currency for most of the countries in the world (unit of account).

1. Finance – finance is moving/recording values, money, and risks between the network of people, using a ledger to keep and save the transactions that have occurred. This uses banks and financial institutions as trusted third parties and mediators for all transactions
2. Transaction – All of our purchases and transfers of money are considered transactions. Millions of transactions occur every second when people buy or sell something or transfer money to each other. The main process in any transaction is based on three elements:

a. Authorization process

b.?Clearing process

c.Settling the transaction (debit/credit ledger)

The value of transactions is 0.5 – 1% of the global GDP. The financial sector accounts for 7.5% of the US GDP.

The transaction cost/value in the US is 2.7% with the following breakdown:

Example: $100 purchased with a credit card:

$97.25 – goes to the merchant

$2.20 – issuing bank

$0.23 – payment processor

$0.19 – acquiring bank

$0.13 – card network

In China or India, this is less.

Now we understand the economics of the transaction, and how important it is.

Blockchain technology came to challenge it.

As we explained, any transaction is peer to peer with a trusted party in between to verify both participants in the transaction.

Blockchain said: We can do this with no third party involved, using encrypted technology.

Now we understand the main elements needed to understand blockchain: money, finance, transactions, verifications of these transactions.

In October of 2008, Satoshi Nakamoto published his P2P Cash Paper:

“I’ve been working on a new electronic cash system that’s fully P2P with no trusted third party.] —> grammar.”

That was the Birth of Blockchain – Bitcoin.

But … what is Blockchain Technology?

Blockchain is a combination of timestamped append-only logs where each log/block is full of data (transactions that have been compressed together using hash functions). This data (transactions) is secured by cryptography and appended to each other by a Consensus Protocol* (refers to reaching consensus aka a method to reach agreement). Each block used to contain 1MB (now much more) of data/transaction which needs to be verified.

The reward given to miners for verification was Bitcoin, which was a kind of token with no monetary value until May 2010 when Laszlo, a computer scientist at the University of California earned Bitcoin, and ended up spending 10K Bitcoins for 2 large pizzas. In those days, this was worth $42. Today, the same Bitcoins would be worth over $400 million USD.?

From that day, the 22nd of May 2010, Bitcoin began to be priced and valued.

Now, we’ve started to price and evaluate blockchain technology.

Bitcoins today as digital assets/currency represent 41% of total cryptocurrency globally, at almost $1 trillion USD.

The global crypto market cap is $2.8 trillion USD. It has increased tenfold within the last 14 years, from $200 billion in 2018 to almost $3 trillion in 2022, with 170 million active accounts as of 2021.

To compare:

• Global Cap of Equity is $37 trillion
• Debt bonds are $125 trillion
• Gold is $11 trillion
• Crypto market cap is $2.8 trillion (almost $3 trillion with Bitcoins as 40% of the market)

* Consensus means agreement. In Crypto, Consensus can occur a variety of ways. The main types you need to be aware of are PoW / Proof of Work = Consensus using computer power and electricity and PoS / Proof of Stake= another type of Consensus that uses much less electricity. There are other types that have more specific methods of attaining agreement. Bitcoin, for example uses PoW. Ethereum currently uses this as well but will switch to PoS because it is more efficient and will make the network much faster.

But a simple grouping is PoW and non-PoW. Computers/people in the network then verify this data/transaction. These people/computers are called Miners and are rewarded with Bitcoin when they verify a block of transactions. Therefore, we don’t need a trusted third party to do it because the decentralized system in the network will verify the transaction instead of a bank.

But … What is Cryptocurrency/Assets?

???????? These are any technologies which can enhance and improve the blockchain process and operation, like smart contract consensus for data verification – represented by Ethereum, which is now a currency. The improvement of the speed of transactions up to 200k/second is represented by Solana, which is now a currency as well.

The evolving of any innovation to regulate and improve technology is a currency.

Now we have blockchain technology used in supply chains, healthcare, finance, and other use cases, with each one having their own currency and even multiple currencies in the same industry.

It’s time to regulate all these currencies and the way they are traded.?