Blockchain Technology and
Applications
CS 731
History of Money
Dr. Ir. Angshuman Karmakar
IIT Kanpur
Teaching assistants
• Puja Mondal (pujamondal@cse.iitk.ac.in)
• Supriya Adhikary (adhikarys@cse.iitk.ac.in)
• Indranil Thakur (indra@cse.iitk.ac.in)
• Sumit Lahiri (sumitl@cse.iitk.ac.in)
Broad perspective
• What is blockchain?
• Evolution of Blockchains.
• Fundamental components of blockchains
• Types of blockchains
• What is cryptocurrency?
• How does the real-world cryptocurrencies such as Bitcoin, Ethereum, etc. work.
• Advantage and disadvantages of cryptocurrencies etc.
• What we are not going to learn
• Trading
• ICO
• Or anything related to real-world finance
• Disclaimer: All discussions are for academic interest only
A brief history of money
Barter
• A prime example of application of blockchains
• Barter system
• Availability
• Cumbersome
• No Common measure value
A brief history of money
Currency
• Currency
• Oldest known instance by Lydians in northern Cyprus
• Denominations were animal faces
• Common measure value
• Convenient to use and carry
A brief history of money
Currency
• Other interesting currencies
• Cacao beans in Mayan • Cowrie shells in Indus
and Aztec civilizations valley civilization
A brief history of money
Precious metals
• Precious metals
• Gold, Copper and silver coins
• International standard
• Roman coins from 2nd century BC is found in India
A brief history of money
Gold/Silver standard
• Disadvantages of precious metals
• Security
• Inconvenient to carry
• Purity
• Paper currency
• Gold or silver standard
• Issued by governments
• Convenient : Can be exchanged instead of gold or silver
A brief history of money
Fiat Currency
• Fractional reserve banking
• Banks can print more money than their actual deposit of money
• Money panic of 1907
•Federal reserve act of 1913
•Central banks can "print" money
•Federal reserve bank, Bank of England, Reserve bank of India
•Legal tender
•Backed by government
•Fiat currency
•Almost all countries of the world
A brief history of money
• Backed by the issuer
• Governments
• Trust in the stability of government
• Case study: Zimbabwe (Z$), Venezuela (Bolivar)
Gold/Silver
Barter Coins
standard
Fiat currency ?
A brief history of money
Arrival of internet
• DARPA (Defense Advanced Research Projects Agency)
• R&D division of US department of defense
• Launched ARPANET ( Advanced Research Projects Agency Network)
• Wide area network implementing TCP/IP
• Foundation of today's internet
• Payment was still in cash
• Payment over this network?
Online payments
• Banks started offering online payments
• 1994, the Stanford Federal Credit Union
• In India, ICICI bank in 1996
• PayPal was disruptive entry in the late 90s
• Payment using mobile devices, email address
Online payments
• Centralized vs peer-to-peer payment
• Centralized entity may fail
• Acts as middleman
• Exclusion and inclusion
• Political reasons, Censorships
• No transparency
• Privacy of users
• Vulnerable to central policy making
• Devaluation, Inflation
• Physical or offline peer-to-peer payment possible
• Fully anonymous online peer-to-peer payment was an open problem
Simple e-cash online payments
I would like to buy
a token
Alice Bob
Simple e-cash online payments
coin#1: 0110..0
Alice Bob
Simple e-cash online payments
coin#1: 0110..0
Alice Bob
Simple e-cash online payments
coin#1: 0110..0
I would like to
validate a token
Alice Bob
Token-based online payments
coin#1: 0110..0
Alice Bob
Simple e-cash online payments
coin#1: 0110..0
I would like to
redeem a token
Alice Bob
Simple e-cash online payments
coin#1: 0110..0
Alice Bob
Token-based online payments
• Advantages
• Digital payments
• Peer-to-peer
• Disadvantages
• Banks have to be online
• Not fully de-centralized
• Censorship
• Banks can fail
• Privacy
• Fungibility
• But we are getting there......
Chaum's eCash1
• Used cryptographic methods
• RSA blind signatures
• Alice chooses the digital representation of coin
• A random secret number
• Alice can hide or unhide this number
• Bank receives the money and blindly signs the representation of the coin
1Chaum, David (1983). "Blind signatures for untraceable payments" (PDF). Advances in Cryptology Proceedings of Crypto. 82 (3): 199–203.
Chaum's eCash
I would like to buy
a coin h(rn)
Alice Bob
Chaum's eCash
Sign(h(rn))
Sign(rn), rn
Alice Bob
Chaum's eCash
Sign(rn), rn
Alice Bob
Chaum's eCash
No Need to verify with the
bank
Alice Bob
Chaum's eCash
coin#1: 0110..0
Sign(rn), rn
I would like to
redeem a token
Alice Bob
Chaum's eCash
Alice--> Bob, Eve
Eve
Sign(rn), rn
Sign(rn), rn
Alice Bob
Chaum's eCash
• Advantages
• Digital payments
• Peer-to-peer
• Banks can be offline
• Privacy
• Disadvantages
• Not fully de-centralized
• Censorship
• Banks can fail
• Fungibility
Further developments
• Mondex (National Westminster Bank) - 1993
• CyberCash (Lynch, Melton, Crocker & Wilson) – 1994
• E-gold (Gold & Silver Reserve) – 1996
• Hashcash (Adam Back) – 1997
• Bit Gold (Nick Szabo) – 1998
• B-Money (Wei Dai) - 1998
• Lucre (Ben Laurie) – 1999
29
Solution?
• Bitcoins
• From: Satoshi Nakamoto <satoshi <at> vistomail.com>
• Subject: Bitcoin P2P e-cash paper
Newsgroups: gmane.comp.encryption.general
Date: Friday 31st October 2008 18:10:00 UTC
• “I've been working on a new electronic cash system that's fully peer-
to-peer, with no trusted third party.”
• On 11th February, 2009 they announced bitcoin
Bitcoin: A peer-to-peer electronic cash system
Bitcoin finance volume
Image courtesy : https://coinmarketcap.com/charts/
Energy usage and environmental impact
Image courtesy : https://www.statista.com/chart/18632/estimated-annual-electricity-
consumption-of-bitcoin/
Energy usage and environmental impact
Acknowledgements
• MIT open courseware
The End !
