Bitcoin and Crypto Currency

Technologies
Elective CSE 662
MTech. I CSE 2nd Sem
(6 and 13 Feb 2023)

Dr. Dhiren Patel

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 News
• the UK Treasury on Wednesday (1 Feb) outlined a
regulatory regime for crypto businesses in Britain.
The proposal says that companies wishing to set
up shop in the UK will need to obtain
authorization from regulators.
• Bitcoin mining difficulty hit a new all-time
high this week as miners continue to deploy more
hardware to mine the largest cryptocurrency by
market cap, despite the sector being hit by
mounting energy prices.

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 Technology trends (News)
• Artificial intelligence and acMhine learning will be the
most influential technology in shaping the future of
trading over the next three years. (Feb 2023)
• Now, AI dwarfs every other major category of
technology, its 53% citation rate far and away ahead of
API integration (14%) and blockchain (12%). The top
2022 technology, mobile apps, fell to 7%, along with
quantum computing and natural language processing.
• Crypto and digital coins, commodities, and credit are
predicted to have the biggest increases in electronic
trading volumes over the next year!!

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 Rough weather ahead
• the greatest impact on the markets in 2023
• recession risk (30%), inflation (26%), and
geopolitical conflict (19%)

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 Bitcoin was built on several key
innovations
• Firstly, Nakamoto guaranteed that Bitcoin
transactions were immutable, by recording all
transactions on a distributed ledger known as a
blockchain.
• Secondly, he ensured Bitcoin’s scarcity by capping
the total number of Bitcoin in existence at 21
million.
• Finally, the community was incentivized to verify
transactions by receiving rewards in the form of
“mined” Bitcoin for checking the accuracy of the
blockchain.

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 Difficulty adjustment
• Because the Bitcoin network is completely
decentralized and not run by any single
overarching authority, an algorithm hard-coded
into the source code by Bitcoin’s creator(s)
• This algorithm constantly readjusts the difficulty
of the mining process in line with how many
miners are operating in the network to ensure
that blocks are discovered at a steady pace.

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 Difficulty adjustment
• The Bitcoin difficulty algorithm is programmed to
keep the entire system stable by maintaining a
10-minute duration for finding new blocks.
• In essence, it takes roughly 10 minutes for one
miner out of the entire network to generate a
winning code and win the right to propose a new
block of bitcoin transactions to be added to the
blockchain.
• each 2,016 block interval is called the difficulty
epoch (2 weeks = 24 x 60 x 14 = 20160 minutes)
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 Difficulty adjustment
• To maintain this frequency, the algorithm steps in and
increases or decreases the difficulty of mining bitcoin.
• Whenever there’s an influx of miners or mining rigs, it
ramps up the difficulty of mining bitcoin.
• If the reverse is the case (that is, if there is a drop in
the number of miners competing to find new blocks),
the protocol reduces the mining difficulty to make it
easier for the remaining miners to discover blocs.
• The mining difficulty of the bitcoin network is altered
by adding or reducing the zeros at the front of the
target hash.

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• Whoever generates a random code that
happens to have an equal or higher number of
zeros at the front than the target hash first is
selected as the winner.

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 Why?
• The fact that the circulating supply is capped
at a maximum of 21 million coins also means
it’s a truly finite asset with a relatively scarce
maximum supply.
• Both of these factors help support bitcoin’s
price over time – assuming demand remains
high.

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 Bitcoin Technology
• Bitcoin components (max. supply 21 M BTC)
• Hash function SHA256
• Puzzle to solve (making x leading bits of block
hash to 0)
• Difficulty adjustment (auto – approx. every 2
weeks (time it took to find the last 2,016 blocks)
to keep av. time between blocks to 10 min)
• Elliptic curve crypto - Secp256k1 is the name of
the elliptic curve used by Bitcoin to implement its
public key cryptography (wallets)

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 Blockchain - visualization
• [Link]
stributed

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 Blockchain Immutability Demo
• [Link]
ash
• [Link]

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 Cryptocurrency (Wikipedia)
• It is a digital asset designed to work as a medium of exchange
that uses strong cryptography to secure transactions, control
the creation of units, and verify the transfer of assets
• encryption techniques are used to regulate the generation of
units of currency and verify the transfer of funds
• It uses decentralized control as opposed to centralized
currency and central banking systems
• (normal (fiat) currency example – exchange, storage,
ownership, value, purchase power, trust, production,
interoperability..)
• The decentralized control of each cryptocurrency works
through DLT, typically a blockchain, that serves as a public
financial transaction database (coinbase??)
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 Mining
• A trustless and distributed consensus system
means that if you want to send and/or receive
money from someone you don’t need to trust
in third-party services.
• Mining serves as two purposes:
• To verify the legitimacy of a transaction by
avoiding the so-called double-spending;
• To create new digital currencies by rewarding
miners for performing the previous task.
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 Mining (Difficulty)
• From a technical point of view, the mining
process is an operation of inverse hashing: it
determines a number (nonce), so
the cryptographic hash algorithm of block
data results in less than a given threshold.
• This threshold, called difficulty, is what
determines the competitive nature of mining

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Proof of Work Puzzle and Difficulty

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 PoW v/s PoS
• Using a Proof-of-Work system, bad actors are
cut out thanks to technological and economic
disincentives.
• programming an attack to a PoW network is
very expensive, and you would need more
money than you can be able to steal
• the Casper protocol (Ethereum PoS), a bad
validator might lose their deposit. (use the set
some circumstances)

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 What? Why?
• Blockchain’s decentralized network
participants, are not necessarily known to
each other.
• Credentials cannot be checked by the
conventional means such as verifying who
you are with your driver's license.
• Participants can join and leave the chain as
they wish.
• They operate beyond the boundaries of trust.
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 What? Why?
• Given this context: how do you identify the peer
participants?
• How do you authorize and authenticate the
transactions?
• How do you detect forged or faulty transactions?
• Private public key pair and hashing are important
foundational concepts in decentralized networks
that operate beyond trust boundaries.

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 Double spending
• what if more than one miner solves the
consensus puzzle where it close in time to each
other?
• What if more than one transaction references as
input the same digital asset?
• There's a possibility that digital currency and
other consumables are single used digital
assets, can be intentionally or inadvertently
reused in transactions.
• This situation is called double spending.
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 Handling exceptions
• In a decentralized network, like a blockchain, there is
no intermediary.
• We need a policy and an automatic deterministic way
to handle this situation.
• A policy for handling transaction and double spending
in Bitcoin is to allow the first transaction that reference
the digital asset and reject the rest of the transaction
that reference the same digital asset.
• There should be a well-defined processes for handling
exception improve trust in the blockchain

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 Fork
• Background - a minor perturbation in the
chain - is handled as a naturally expected
occurrence within the block chain.
• On the other hand, occasionally, a minor
process adjustment has to be carried out
typically by bootstrapping a new software to
the already running processes.
• This is soft fork. (sort of - the release of
software patches)

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 Hard fork
• Hard fork implies a major change in the
protocol.
• (sort of – a new version of operating system)
• Forks are mechanisms that add to the
robustness of the blockchain framework.
• Well-managed forks help build credibility in
the blockchain by providing approaches to
manage unexpected faults and planned
improvements.
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 Forks
• A Soft Fork is a fork where updated versions
of the protocol are backwards compatible
with previous versions.
• A Hard Fork is a change of the protocol that is
not backwards compatible with older versions
of the client. Participants would absolutely
need to upgrade their software in order to
recognize new blocks.

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 What is the threat to Bitcoin?
• Bitcoin has never been successfully hacked,
but many see brute force attacks
using quantum computers as the likely tool
someone would use to take down Bitcoin.
• Could Quantum Computers Defeat Bitcoin?
Not So Fast

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 Quantum computing
• Quantum computing uses quantum mechanics to
perform operations on data at much greater
speeds than modern computers.
• Many times more powerful than an average
desktop PC, quantum computers are attractive in
calculation-heavy cryptography, but are much
more challenging to build, program, and use.
• Their speed and processing power, crypto
enthusiast fear, may one day be able to break the
encryption used to secure Bitcoin.
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 Estimate by University of Sussex
• a quantum computer with 1.9 billion qubits
could essentially crack the encryption
safeguarding Bitcoin within a mere 10
minutes.
• Just 13 million qubits could do the job in
about a day.
• IBM unveiled its 127-qubit processor in 2021,
while a unit sporting 1,000 qubits is set to be
completed by the end of 2023.

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 Future
• The process of upgrading existing private keys,
however, could create new vulnerabilities.
• That’s because, new keys will be generated by
the system after successfully implementing
post-quantum encryption.
• To activate a switch to the new key, users will
have to sign for approval with their old one.

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 Problem
• Sizable dormant wallets, like the ones
containing around 1 million Bitcoins that
supposedly belong to Satoshi Nakamoto, likely
will never see an encryption enhancement.
• This could leave certain legacy portions of the
crypto ecosystem open to quantum-based
attacks even if the blockchain they rely on has
been safely upgraded.

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 Progress
• if researchers were successful in developing
quantum computing, the first target would not be
cryptocurrency but massive stores of leaked and
stolen encrypted data that nation-states have
accumulated over the years
• While quantum computers may still be years
away from posing a threat to encryption and
cryptocurrency, several companies—including
Google, Microsoft, Amazon, Raytheon, and
Lockheed Martin—have entered the race to bring
quantum computing to the market.

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 Token Economics:
Crypto currency foundations
• Back in time before there were governments,
before there was currency, one system that
worked for acquiring goods was barter.

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 The History of Purchasing Assets
• Before the introduction of currency, assets were obtained
through a barter system, which meant goods were directly
exchanged
• led to problems where one or both actors did not want what
the other had to offer, which necessitated the involvement of
other secondary actors to complete relatively simple
transactions
• with a tangible measure of value - metal coins were invented in
Lydia (Turkey) – 2600 years ago
• in order to decrease the weight of carrying coins and further
ease the use of currency, the Chinese invented paper money in
the 7th century
• State or Central Banks were created to monitor and regulate
the system – 19th century
• the Internet allowed for remote transactions with electronic
money – 20th century (facilitated the transfer of assets, increasing liquidity)
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 Barter system
• Let’s say Alice wants a tool and Bob wants medicine. If
each of them happen to have what the other person
needs, then they can swap and both satisfy their needs.
• On the other hand, let’s say Alice has food that she’s
willing to trade for a tool, while Bob, who has a tool,
doesn’t have any need for food. He wants medicine
instead.
• Alice and Bob can’t trade with each other, but if there’s
a third person, Carol, who has medicine that she’s
willing to trade for food, then it becomes possible to
arrange a three-way swap where everyone gets what
they need.
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Coordination problem in Barter system
• The drawback, of course, is coordination —
arranging a group of people, whose needs and
wants align, in the same place at the same
time.
• Two systems emerged to solve coordination:
credit and cash

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Evolution of Cash

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 Blockchain Technology
• Blockchain at the core is a social innovation
that gives individuals more freedom because
they are less dependent on middle men,
government and companies

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 agenda
• set of clear rules and guidelines on how to
deal with tokenization
• to achieve widely supported token regulation
• to reduce the barriers to the adoption of
tokenization and help realise the wider
societal benefits

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 Tokens
• Although the use of tokens dates back to ancient times,
new technology, such as blockchain, increases the
potential of tokens.
• Token technology offers more efficient digital solutions
for, among other things, existing financing methods
(e.g. crowdfunding, fractional ownership) and the
emergence of completely new models for financing
and partnerships.
• Because tokens are also programmable, it provides
new opportunities for companies to be more flexible
with regard to ownership, voting rights, dividends, and
financing.

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 Tokens
• Tokens offer us the chance to rethink collaboration across
society as a whole, from businesses to governments and
citizens. With tokens, value transactions become
immutable, verifiable and traceable without the need for
an intermediary, while significantly increasing efficiency
and effectiveness.
• Until today, real estate, collectables and art have been
perceived as illiquid, but with the advent of tokens, this will
drastically change.
• When such assets are tokenised and sold across the globe,
they have the potential to become highly liquid.
• That would result in an influx of liquid assets (trillions of
USD) that could significantly change global markets.

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 Tokens
• A token is a representation of something in the
blockchain.
• This something can be money, time, services,
shares in a company, a virtual pet, anything.
• By representing things as tokens, we can allow
smart contracts to interact with them,
exchange them, create or destroy them.

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 Why Tokenization?
• Tokenization is the process of transferring the
information and associated values of real world assets
onto the blockchain
• tokenization is somewhat similar to corporatization:
stocks are akin to tokens, rights and conditions are set
out by smart-contracts, and the classic stock exchange
has its digital reflection
• Its much more than Corporatization.... with
• automated smart contracts for increased conversion
rates, commands for automatic transactions, and
formulas for calculation of the asset price

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 Tokenization
• With the help of tokenization, you don’t need to be at
the point of purchase: all terms of the deal will be set
out by the smart contract
• smart contract is a set of tasks that the program
automatically carries out when the asset owner fulfills
certain conditions
• It then creates a valuation, or deal, which can be
independently verified on the platform
• So, tokenization is more about the digitization of assets
in an accessible and transparent manner, in order to
share their value among multiple actors

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 terminology
• Tokens: the digital representation of value (e.g. asset) on a
blockchain.
• Tokenisation: the process of changing value (e.g. asset) into
its digital representative
• Tokenomics: the study of the emerging field of the design of
crypto tokens and related digital assets using economic
incentives, game theory, cryptography and computer
science.
• Token engineering: the practice of using tokens as the
foundation for designing value flows and ultimately
economic systems
• Purpose-driven tokenisation: leveraging the exchange of
value to drive behaviours of an ecosystem towards a
particular goal
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 Crypto currency basics
• online capital distribution protocols - that
transfer the cash flow of the assets. These
protocols have the responsibility of allowing
access to the various sources of
cryptocurrencies and fiat money, as well as
hedging against misuse and bad actors

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 Proof of Asset Protocol
• connects asset-buyers with asset-sellers
• Proof-of-Asset means the token released as part of the
protocol is insured with an asset
• It also allows for independent experts to create
different add-ons like oracles, databases, and nodes
• As a result, the Proof-of-Asset protocol will bring
increased cash flow to the token that is issued by an
originator, or asset owner
• The Proof-of-Asset protocol involves participants who
control, validate and verify the transactions, which
makes ecosystem more trustworthy
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 Initial Smart-Asset Offering (ISAO)
• Tokenization can be performed using an ISAO.
• ISAO is a new method for businesses (farms, stores,
manufacturing plants) to raise capital using
tokenization of their assets
• an ISAO may be held only when the company controls
a physical asset. As a result, technology startups or
research and development activities cannot be
tokenized
• Tokenization further facilitates the trading of assets and
makes it more secure.
• Tokenization transfers real-world assets to the world of
the blockchain

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 Tokenization 2.0
• For example, in the case of real estate, there will be tokenization of
assets of different qualities, which will allow for a new method of
their evaluation
• possible through the globalization of capital
• these assets will acquire new features, such as voting, analysis,
dividends, and the possibility of quick unrestricted transactions
among many others.
• As a result, the market built around tokenization will become more
sustainable
• Increased demand will catalyze the growth of price, demand, and
associated expectations
• Tokenized assets’ price growth is essentially an added value to the
new opportunities that will open with the transition to blockchain
• So, tokenization is a perfect way to increase capitalization and raise
an asset’s value

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 Tokenization 2.0
• In the blockchain, transactions will be held
without bank accounts and currency conversion,
and the number of documents needed for the
identity verification significantly decrease
• Will tokens with smart-contracts be able to
replace traditional equity?
• technically it’s possible - the costs of such an
upgrade is a challenge today
• In the near future, the majority of companies will
tokenize their assets, and government regulators
will have to adapt to the changing reality…
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 Tokenization 3.0
• strengthen the linkages between the world of
blockchain and traditional economy
• tokenization development will increase the
variety and flow of cryptocurrencies and fiat
money, and cryptocurrency holders will therefore
be incentivised to buy traditional assets
• the correct interaction of a large number of
components, such as depositaries, cadastre
chambers, archives, dealers and distributors, KYC,
escrow agents – expensive affair
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 Tokenization 3.0
• Tokenization of intangible assets (such as audio and
video content) may decrease their cost and improve
their availability, which will be convenient, but not
profitable
• With the help of the smart-contracts code, it is
possible to prevent market manipulation, financial
mismanagement, corruption, and money-laundering
• Smart-contracts also solves problems such as
misdirected transactions, transaction repayment, and
public keys loss
• Cryptocurrency Popularization – no more exclusive
territory of advanced internet users and programmers

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 Tokenization 3.0
• Soon enough car dealers, real estate agents,
traders, bankers, directors and senior
executives will have to know about the
blockchain ecosystem, just like they are
currently adapting to internet-marketing
• positive effect on transparency and the
integrity of a business linked with blockchain

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 Tokenization 3.0
• Tokenization of assets requires the formation of
registers, depositories, and companies that store the
data and rights concerning real estate and equities
(Data Store security)
• IoT is made up of sensors and smart devices that
automatically count, weigh, identify and transfer
information to the decision center
• E.g. RFID sensors transfer data to blockchain and make
cargo transportation more transparent
• Tokenization of assets will provide important
opportunities for related industries as well as important
connections between the blockchain and fiat
economies
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 why we need tokenization?
• Shared understanding – how to align interests and motivations to
collaborate and make progress in ecosystems?
• Innovative funding – how to fund ecosystems beyond traditional
VC financing or (bank) loans?
• Change management – how to understand and facilitate the
change implied with new ways of interacting?
• Messaging and engagement – should the narrative around
tokenization change to enable innovative ecosystems?
• Knowledge and skills – what skills do organisations need to
transition to tokenised ecosystems?
• Problem-solution fit – how to ensure addressing real problems
where tokenization can help realise in new solutions?
• Tokenization and the law – what are the legal requirements around
purpose-driven tokenization?

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 Why do we need token financing?
• There are many reasons why we need token
financing. One of the main reasons is that it
offers companies a variety of benefits,
including the democratization of value.
• Token financing simplifies raising funds across
borders, opening up new markets, and, with
that, potentially new customers.

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 DeFi
• Decentralized Finance (DeFi), is one of the
core sectors that keeps itself busy with
creating new protocols with a seamless UI/UX
experience, improved interoperability,
decentralized exchanges, and self-sovereign
identity.

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 Regulations
• Any industry confronted with disruptive
technology faces the challenge of establishing
a legal framework that sets the rules of the
game to protect investors, consumers and
companies and get rid of bad actors.
• The same applies to the blockchain
ecosystem. Therefore, we to create a robust
regulatory system that embraces these forms
of new technology.

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 Token ecosystem
• A well-designed token ecosystem unlocks
value by bringing parties together in new ways
and stimulates the target behaviour by having
cryptographic tokens as built-in incentives.

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 Use cases
• Tokens offer multiple, technical, advantages over
traditional funding. First of all, they are
programmable. This means that governance and
rules can be embedded within the token.
• For example, the longer you hold a token, the
more dividend you will receive. This allows you to
drive the behaviour of your investors while
raising funds.
• In addition, tokens are transparent, secure and
traceable, giving regulators more control to
ensure correct behaviour.

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 Use cases
• Anything can be tokenised and made liquid,
including real estate (fractional ownership),
CO2 rights, mobility, futures, art or even entire
clubs and sport contracts to increase fan
engagement.

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 Fan Tokens
• Redefining Fan: It’s a range of different tribes
who consume the same brand as you and me,
but just in a different way. And therefore you
need different products for those different
fans.
• The reason that fan tokens exist is not just for
the domestic/local fans, it's really to try to go
after the non-local fans, the 99% of fans that
are not in a stadium

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 Token contract
• A token contract is simply an Ethereum smart
contract. "Sending tokens" actually means
"calling a method on a smart contract that
someone wrote and deployed".
• At the end of the day, a token contract is not
much more a mapping of addresses to
balances, plus some methods to add and
subtract from those balances.

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 Token contract
• It is these balances that represent
the tokens themselves. Someone "has tokens"
when their balance in the token contract is
non-zero. That’s it!
• These balances could be considered money,
experience points in a game, deeds of
ownership, or voting rights, and each of these
tokens would be stored in different token
contracts.

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 Fungibility
• Fungible goods are equivalent and
interchangeable, like Bircoin, Ether, fiat
currencies, and voting rights.
• Non-fungible goods are unique and distinct, like
deeds of ownership, or collectibles.
• when dealing with non-fungibles (like your
house) you care about which ones you have,
• while in fungible assets (like your bank account
statement) what matters is how much you have
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 Token standards
• the community has developed a variety
of standards (called EIPs or ERCs) for documenting how
a contract can interoperate with other contracts
• ERC20: the most widespread token standard for
fungible assets, (somewhat limited by its simplicity).
• ERC721: the de-facto solution for non-fungible tokens,
often used for collectibles and games.
• ERC777: a richer standard for fungible tokens, enabling
new use cases and building on past learnings.
Backwards compatible with ERC20.

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 ERC20
• An ERC20 token contract keeps track
of fungible tokens: any one token is exactly
equal to any other token; no tokens have
special rights or behavior associated with
them.
• This makes ERC20 tokens useful for things like
a medium of exchange currency, voting
rights, staking, and more.

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 ERC721
• what if not all tokens are alike?
• This comes up in situations like real
estate or collectibles, where some items are
valued more than others, due to their
usefulness, rarity, etc.
• ERC721 is a standard for representing
ownership of non-fungible tokens, that is,
where each token is unique.

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 ERC777
• Like ERC20, ERC777 is a standard for fungible tokens,
and is focused around allowing more complex
interactions when trading tokens.
• The standard also brings multiple quality-of-life
improvements, such as getting rid of the confusion
around decimals, minting and burning with proper
events, among others, but its killer feature is receive
hooks.
• A hook is simply a function in a contract that is called
when tokens are sent to it, meaning accounts and
contracts can react to receiving tokens.

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 ERC777 hooks
• This enables a lot of interesting use cases,
including atomic purchases using tokens (no
need to do approve and transferFrom in two
separate transactions), rejecting reception of
tokens (by reverting on the hook call),
redirecting the received tokens to other
addresses (similarly to
how PaymentSplitter does it), among many
others.
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 ERC777
• Furthermore, since contracts are required to
implement these hooks in order to receive
tokens, no tokens can get stuck in a contract that
is unaware of the ERC777 protocol, as has
happened countless times when using ERC20s.
• The ERC777 standard is backwards compatible
with ERC20, meaning you can interact with these
tokens as if they were ERC20, using the standard
functions, while still getting all of the niceties,
including send hooks.

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 What is an ICO?
• An ICO or Initial Coin Offering is the initial
offering of a digital cryptographically secure
piece of data (a digital token) created on a
blockchain as part of a decentralised software
protocol
• An ICO is a popular way to raise money for a
new project/start up by distributing a
percentage of the initial currency supply to
early supporters of the relevant project
 ICO
• Unlike conventional crowdfunding, however,
tokens are usually tradable via online exchanges.
This liquidity helps attract investors, and means
that the overall ICO process has similarities both
with conventional crowdfuning and with an Initial
Public Offering
• An initial coin offering (ICO) is a type of capital-
raising activity in the cryptocurrency and
blockchain environment. The ICO can be viewed
as an initial public offering (IPO) that uses
cryptocurrencies.

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 VC, CrowdFunding vs ICOs

• VC, Crowdfunding • ICOs

• Slow settlements – Can raise money in
seconds (e.g. Filecoin
• Many intermediaries raised $252 Million in 30
• Costly process minutes; Brave’s 'Basic
Attention Token' raised
• Opaque process $36 Million in 30 seconds)
• Lack of liquidity for – No intermediaries involved
investors – Low cost of token issuance
– Transparent process
– Offers immediate liquidity
to investors
– Paperless process
 Steps - ICO
• 1. Identification of investment targets
• 2. Creation of tokens (existing blockchain
platforms that run existing cryptocurrencies
such as Ethereum allow the creation of the
tokens with minor modifications of the code.)
• 3. Promotion campaign
• 4. Initial offering

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 Stablecoins
• Cryptocurrencies are constantly subject to
exchange rate fluctuations and are
characterized by high price volatility.
• For making crypto money more useful and
more stable, a special type was
created: stablecoins.
• Stablecoin is a cryptocurrency whose value is
tied (pegged) to some valuable asset ("stable"
asset or basket of assets).
 Stablecoins
• This asset could be fiat money, precious
metals like gold and silver, oil or almost
anything that has tangible value.
• Realization of a better monetary system: one
that would be resistant to hyperinflation, free
from centralized control, and more stable and
robust than the monetary systems that came
before it.
 Ideal Stablecoin functions
• An ideal stablecoin should perform three main
functions:
• Act as a means of exchange (buying and
selling goods and services directly).
• Be a saving asset (allowing funds to be saved
without loss of value).
• Be used as a unit of accounting (comparing
the cost of goods and services).
 Stablecoin examples
• Commodity-backed - Stablecoins backed by
commodities such as precious metals (gold,
silver etc.) are much less likely to be inflated
than fiat backed stablecoins. It is harder to
mine gold or silver than it is to "create
money out of thin air." E.g. DGX (Digital Gold
Tokens) – 1gm of Gold
 Stable coin examples
• Fiat-backed - The value of stablecoins of this type is
based on the value of the backing currency, which is
held by a third-party regulated financial entity. Fiat-
backed stablecoins can be traded on exchanges and are
redeemable from the issuer. E.g. USDT (USD Tether) – 1
USD
• Cryptocurrency backed - issued with cryptocurrencies
as collateral, which is conceptually similar to fiat-
backed stablecoins. E.g. DAI – 1 USD
 Seigniorage-style coins
• Seigniorage-style coins utilize algorithms to control the
stablecoin’s money supply, similar to a central bank's
approach to printing and destroying currency.
• Significant features of seigniorage-style stablecoins are:
– Adjustments are made on-chain
– No collateral is needed to mint coins
– Value is controlled by supply and demand through
algorithms, stabilising price
• (a less popular form of stablecoin)
• E.g. Basis (shutdown in Dec 2018)
 Tether (USDT)
• Issued by Circle Inc. since 2015
• Price ~1 USD
• Discrepancies – 1 USD = 82.74 INR, 1 USDT =
87 INR
• Circulation supply ~68.32 B
• Financial Stability Oversight Committee to add
new rules for stablecoins and to regulate
stablecoin issuers like banks
 Assets
• Anything, both tangible and intangible, that can be
owned and exchanged for value, is considered an asset.
• There are a variety of assets in financial markets from
physical assets such as commodities (oil, electricity,
food), infrastructure (real estate, machinery, trains),
and exotic luxury goods (art, cars, collectibles), to non-
physical assets such as patents, copyrights, and
goodwill.
• By having so many contrasting and private record-
keeping systems, it becomes difficult to price assets
based on holistic market observations.
 Towards CBDC
• Central Bank (issued) Digital Currency

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 News 13 Feb
• Draft EU Rules Will Force Banks to Give
Cryptocurrencies Highest Risk Rating
• banks would need to give all their crypto asset
exposure a proposed risk weight of 1,250%
until December 2024, meaning they will be
forced to hold an equal amount of capital
matching the crypto they hold.
• BTC and ETH are having the first negative
week in 2023 (Feb 2nd week – price reduced!)

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 Group 2
• Well-known cryptocurrencies such as Bitcoin (BTC)
and Ethereum (ETH) would be considered to be Group
2 cryptoassets
• Group 2 assets are then subdivided into two groups by
the committee: Group A, which covers crypto holdings
that are made via ETFs or other derivatives, which can
be traded on regulated public markets, and Group B
where this isn’t the case.
• Group 2 B assets will be given a proposed risk weight of
1,250%, whereas Group 2 A will be subject to lower
requirements.

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 Group 1
• However other forms of crypto assets, such as
tokenized versions of traditional assets like
equities, some types of stablecoins which don’t
rely on algorithms to maintain their price, and
potential Central Bank Digital Currencies (CBDCs)
would fall under lower capital requirements and
are considered to be in Group 1.
• A bank’s total exposure to Group 2 crypto assets
must not exceed 2% of the bank’s capital

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 Assignments
• Burning coin (Wallets) – how to create one?
• Block Chain Analysis – what parameters are
there? What are the historical tx (e.g. Pizza
buying (May 2009))?
• Check explorers of Different tokens (crypto
currencies) – Bitcoin, Ether, Solana, Avax,
Monero, Link – and study differences

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