How Blockchain May Change the World?

ECOM6013 (Source: Cold Fusion 2020) (13 min)

E-Commerce Technologies (2024-25)

Topic 7
Blockchain, Crypto and
CBDC
Paul Cheung

paul.cheung@hku.hk

Token money Notational money

• Represented by a physical object (token) such as a banknote, • Represented by a notation/entry in a ledger, passbook, or database (e.g.,
a bank account)
coin, etc.
• Notational money cannot be lost (in theory)
• Without that token the value is lost
• Requires an intermediary (bank or clearing house) for spending
• No intermediary is required for spending • Requires faith in the maintainer of the ledger
• But requires faith in the issuer, usually a government or a
bank

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Hybrid money Digital money

• Requires both a token and a ledger account (e.g., personal • The money is just a string of bytes (data) stored on a device
(computer, mobile phone, etc.)
check, stored value card, gift card, etc.)
• Device failure means the money/value is gone
• Can be lost and requires faith in the issuer
• Device intrusion means the money can be stolen (just like any other
• Requires an intermediary (bank or clearing house) for data)
spending • Good reason to backup devices

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Virtual money (?) Cybercurrency

• No token • Who creates the money? Why

• No ledger is it money? • An Internet-based form of currency or medium of exchange
• No issuer, no government • Without a token or ledger, how distinct from physical (such as banknotes and coins) that
backing (or supervision) do you know how much you exhibits properties similar to physical currencies, but allows
have? What is its value?
• No intermediary required for for instantaneous transactions and borderless transfer-of-
spending • How do you know the spender ownership (Wikipedia)
is the owner?
BUT • The first and most influential cybercurrency by far at this time
• What prevents spending the
• Is this even possible? same money more than one is Bitcoin , followed by Ethereum
time?
• The key technology behind all cybercurrency is Blockchain

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 What is Blockchain? (5:45) Blockchain Analogy: Land Deeds (1/2)

• Land ownership is defined by a “chain of title,” a sequence of deeds

leading from the original owner to the present owner
• Deeds are recorded in the Land Registry
• Ownership is established by searching the Registry
• The Land Registry is, in effect, a ledger holder
• If the Registry is altered, ownership can be lost
• Double-selling is prevented by timestamps

Source: Centre for International Governance Innovation, 2018 9 10

Blockchain Analogy: Land Deeds (2/2) Blockchain for Business (TechTarget)

Article and short video available on Moodle (not played during lecture)

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Main Types of Blockchain Technology

Source: https://www.blockchain-council.org (1 Nov 2022)

Note: this was 2022 article. There is an update focusing on the trendy word
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“AI”!!

Top 10 Benefits of Blockchain for Business (1) Top 10 Benefits of Blockchain for (2)
Source: Mary K Pratt, Techtarget (13 Sep 2023)

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Technologies Behind Blockchains Hash Functions and Blockchain (2:28)
(Many are used in Internet security in Topic 4)
What makes Blockchain a secure, immutable and transparent network

• Hash functions – one way hashing using SHA-256 which produces 256
bit hashes (with cryptographic hash properties)
1. Produces a unique hash value for all inputs
2. The hash is secure (cannot reverse to get inputs)
3. Efficiently computed
• Public-private key (asymmetric) encryption
• Everyone has a public-private key pair
• Ensures end-to-end security, non-repudiation, etc.
• Digital signatures
• All of these technologies are mature and trusted

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Source: Lisk Academy https://www.youtube.com/watch?v=2BldESGZKB8

Bitcoin – the best known use of Blockchain The 5 elements of Bitcoin

• Designed for the “online society” using Internet technologies and ideas • Currency – send units of value, convertible, divisible (challenged by its
• Decentralized and independent of national currencies volatility and energy consumption)
• Excellent for anonymous transactions (like hard currency but unlike credit • Commodity – scarcity stores wealth, market fluctuates with speculation
cards) (limited to 21 million, we are closed to the limit)
• Excellent for E-Commerce – online exchange, no specific currency, micro- • Brand – marketing message, commodity and sharing knowledge
payments, etc.
• Protocol – decentralized trust via distributed ledger
• Easily convertible to national currencies (only when the market trust still
exists, and you do not care about volatility) • Technology – blockchain
• Important to distinguish the difference between Blockchain technology
and Bitcoin – Bitcoin is only an (important) example application of
Blockchain.

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Bitcoin Made Simple How do you get Bitcoin?
(Source: The Guardian) 3 min

•Sell something
•Salary (?)
•Use a Bitcoin exchange (including Bitcoin
ATMs)
•Bitcoin “mining”
• There will never be more than 21 million BTC
(2*50*210,000); divisible into units as small as
1/100 millionth of a BTC (micropayments)

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Bitcoins Status – What’s Left? Technically, How Bitcoin Works? (5:25)

Source: https://bitbo.io/how-many-bitcoin/ (29 Oct 2024 @ 11:29 pm HKT)

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Bitcoin Price History Snapshot of
Cybercurrency
(Oct 2023)

Source: bitinfocharts.com
(3 Nov 2024, 9:21 am HKT)

Source: Yahoo Finance 3 Nov 2024 @ 9:15 am HKT 25 26

Bitcoin Characteristics Bitcoin Protocol

• No physical object, not even a character string; “Bitcoin” refers to the
protocol, “bitcoin” refers to the value
• Bitcoin was invented in 2008 by an anonymous person (maybe a team)
• “a chain of digitally signed transaction records leading from the original call Satoshi Nakamoto (中本哲史) allegedly in Japan (but likely in the
owner to the current owner” – similar to the chain of land deeds Silicon Valley)
• Transaction records contain • The Bitcoin protocol for generating and exchanging bitcoin is
• Hashes that are difficult to break and implemented in publicly available, open source software – this has led
• Virtual owner IDs (addresses) to other cybercurrencies – called “forks”
• There is no Bitcoin registry, no central authority • Anyone can obtain and run a Bitcoin client
• Bitcoin blockchains are broadcast to everyone; anyone can verify them Satoshi Nakamoto White Paper Link:
(crowdsourcing) addresses https://bitcoin.org/bitcoin.pdf
(available on the course Moodle Website)

Bitcoin Blockchain
size - 588 GB in 23
Sep 2024
(Source: Statista)
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Bitcoin Addresses What is Ethereum and How Does it Work?
(Source: CNBC, 7 Mar 2022) 11:38 but only play first 3 min in class

• Bitcoin software generates addresses of 25-44 characters for users, e.g.,

1BBsbEq8Q29JpQr4jygjPof7F7uphqyUCQ
• The address is actually an elliptic curve public key; a 44 character key is as
secure as a 7000-bit RSA key
• To send bitcoins, user specifies a receiving address (public) and amount
and then initiates the transaction
• To receive bitcoins, only an address (public) is needed
• Addresses are not directly registered to users; there can be a different
address for each transaction if desired

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Ethereum and Ether (ETH) Ethereum Forks and Merge

• Ethereum is a blockchain-based platform best known for its cryptocurrency, • In July 2016, the Ethereum network hard forked into two blockchains:
ETH. Ethereum and Ethereum Classic. Ethereum Classic is now a completely
• Vitalik Buterin, a Russian-born programmer in Canada, published a white separate cryptocurrency with different technological and philosophical
paper introducing Ethereum in 2014. The Ethereum platform was launched in goals. (See https://ethereumclassic.org/, more on the fork here:
2015 by Buterin and Joe Lubin (and others). The blockchain technology that https://help.coinbase.com/en/coinbase/getting-started/crypto-
powers Ethereum enables secure digital ledgers to be publicly created and education/eth-hard-fork)
maintained.
• Bitcoin and Ethereum have many similarities but different long-term visions
• Ethereum has gone through a major “upgrade” on 15 Sep 2022 (can be 14
and limitations.
Sep in some part of the world) by moving from Proof-of-Work to Proof-of-
• Ethereum is transitioning to an operational protocol that offers incentives to Stake to reduce energy needed to validate the blocks. (More about the
process transactions to those who stake their ETH. merge here: https://ethereum.org/en/upgrades/merge)
• Ethereum is the foundation for many emerging technological advances,
including Smart Contracts, Decentralized Finance (DeFi), Non-Fungible Token
(NFT), and Decentralized Autonomous Organization (DAO).
Note: For more information, you may wish to read the short paper on Ethereum from
Investopedia. The White Paper by Vitalik Buterin (2014) is only for those really interested in
Ethereum and is not easy to read at all. It is included in the Moodle website for completeness.
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 Bitcoin & Ethereum Price and Volatility (1 year)
Ethereum Merge - 15 Sep 2022 (CoinDesk) (A major challenge to replace currency)
(Source: https://www.youtube.com/watch?v=oe5-GO4Vt6Q)
(May not play in class due to lack of time – 5 min) – will not play in class due to lack of time

BTC

ETH

More about the Merge - https://ethereum.org/en/upgrades/merge/ 33

Source: CoinDesk.com @ 9:40 am HKT on 3 November 2024 34

Crypto
Scams

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Cryptocurrency Heists in History The JPEX Cryptocurrency Scandal (2023)
Source: SCMP (Apr 2024)

• MT Gox (850K BTC, 2011-14) • BadgerDAO ($130M, 2021)

• Linode (64K BTC, 2011) • Bitmart ($200M, 2021)
• BitFloor (24K BTC, 2012) • Wormhole ($328M, 2022)
• Bitfinex (119,756 BTC, 2016) • Ronin network ($602M, 2022)
• Bitgrail (US$145M Nano, 2017) • Beanstalk ($181M, 2022)
• Coincheck ($530M NEM, 2018) • Harmony Bridge ($100M, 2022)
• KuCoin ($275M, 2020) • (Terra LUNA/UST (~$50B, May 2022)]
• PancakeBunny ($200M, 2021) • FTX (Est US$8.9B, 11 Nov 2022 still
• Poly Network ($600M, USDT etc under investigation)
2021) • JPEX (Est HK$1.6B, 2023 still under
• Cream Finance ($130M ETH, 2021) investigation) – my addition!!!

Source: Cointelegraph, March 2023 37 38

Crypto Mining Energy Issues Bitcoin Transaction compared with YouTube Watching
(first 1:49 out of 17 min )
and VISA Transaction in Carbon Emission

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 Bitcoin Mining Compared with Gold Mining Crypto-mining energy consumption (technopedia)

• In May 2023, Bitcoin’s energy consumption per transaction = 703 kWh

• Energy consumption for 100,00 VISA transaction = 148 kWh

Vulnerabilities of BitCoin Challenges for Bitcoin

• Scalability – Currently, bitcoin can process approximately 4.6 transactions
• No way to reverse a transaction without the payee’s cooperation per second, compared with 1,700 transactions per second that Visa can
• Software bugs process worldwide!! (old number, may change due to computing power)
• “Bank robbery” by hackers • Time to solve a block (mine one bitcoin) takes ~10 min, no matter how
• Malware attacks against wallets many people are actively mining (part of the bitcoin algorithm) – always
limit its speed of processing
• Government attempts to control
• Competing digital currencies easy to make (fork) – Auroracoin, • It takes 120 exahashes/s to solve a new block in bitcoin in early 2020
Dogecoin, Namecoin, Primecoin, etc. (1 exa=quitillion=1018).
• The bitcoin network is estimated to consume about 96 terawatt of power
in total (more than consumption of Belgium, Philippines or Kazakhstan in
2023)
• This makes transaction of fractions of bitcoin (smallest unit is 1/100
millionth = 1 Satoshi!) meaningless and highly inefficient.

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Possible future of Bitcoin/virtual currencies China’s
(economic/political) Crypto
Currency
• A future with digital currencies and decentralized stores is likely to be positive (Bloomberg 25
– some people trust math over people (how sad!) August 2020)

• National adoption of decentralized currencies may bring political transparency

and economic neutrality (?!)
• Developing nations seeking to curb corruption and break free of economic
dependence on other countries could see potential in these technologies
• What next? – come Central Bank Digital Currency (CBDC)
• China has announced it has launched its own CBDC and is experimenting in 4
cities within China. Plan to do it across China in 1-2 years
• Could this be one of the reasons for Facebook to withdraw Libra?
• To learn more about CBDC, read the IMF Working Paper “A Survey of Research
on Retail Central Bank Digital Currency” released in June 2020 on our Moodle
Course Website.
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China's digital currency revolution (5:26) Control Structure of Currencies

(Source: ABC News, Jul 6, 2023) (a more updated video on Moodle)

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Different Degrees of Responsibilities for the CBDC Threatens the Dominance of US Dollars (15 min)
Central Bank - Could China Dethrone USD with digital Yuan” (CNBC, 26 Jul 2021) (play only 2 min)

“A Survey of Research on Retail Central Bank Digital Currency”, Working Paper “As cash disappears, official digital currencies will emerge, and the
published by IMF in June 2020 49
links between people and central banks are likely to become 50
stronger. ” Economist, 16 Feb 2021

The Fall Of FTX And Sam Bankman-Fried (6:33) Want to Know More? (all optional)
(May not show in lecture)
1. Read the original paper by Satoshi Nakamoto published in 2009 - difficult
2. Read the ”Distributed Ledger Technology: beyond block chain” - A 88-pages white-
paper by the UK Government Chief Scientific Adviser published in 2016
3. Watch the 26 min video on ”How Bitcoins actual Work?” by 3Blue1Brown, more
details on the technologies used – only for those interested on details.
4. Read the short Article on Economist “What is the fuss over central-bank digital
currencies?”, 16 Feb 2021
5. Read the Article “What is an NFT?” by Forbes and/or “NFT explained” by The Verge
if you want to know more about NFT
6. Read “A Survey of Research on Retail Central Bank Digital Currency”, Working Paper
published by IMF in June 2020. (IMF=International Monetary Fund, 66 pages!)
7. Read “IMF Approach to Central Bank Digital Currency Capacity Development”, Staff
Report, Apr 10, 2023 – IMF is slow, the paper talks about preparing a Handbook on
CBDC!
8. For those interested, you may wish to read the “IFF China Report 2021” – I have
extracted the FinTech pages (p.79-88) for your personal reading. Please DO NOT
circulate. (IFF = International Finance Forum)
9. There are two videos on Moodle on Crypto Scams - FTX (and SBF) and OneCoin, and
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one on Energy isssues of BitCoin. Watch if you are interested. 52

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