finalcial innovation

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Industrial Engineering

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Dec 6, 2023

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Elisa Martinelli Financial Innovation homework 1. Summary 5-7 main points in the Bitcoin White Paper by Satoshi Nakamoto and how they relate to some of the main features of Blockchains. The Bitcoin Whitepaper's first part explains why the creator made a new payment system. The Bitcoin network was made to get rid of the trust-based way of doing digital transactions. Before, financial institutions had to approve every transaction. But with Bitcoin, people can do transactions without needing to trust third-party providers. Bitcoin was made to be a secure way to do peer-to-peer transactions without fraud. This is why people see Bitcoin as money and it can change the finance system. Bitcoin is a digital coin made of computer code. It can't be held physically and only exists online. When someone wants to send Bitcoin to someone else, the value of the coin is sent across the network. To send the coin, the owner uses a unique digital code from the previous transaction. Bitcoin uses two keys to keep it safe: a public key and a private key. The public key is used to encrypt the transaction, and the private key is used to access the account where the coin is going. To check if transactions are correct is used a Proof of Work system. Each transaction is given a random number and a puzzle. The sender must solve the puzzle and send it to the receiver. If it's correct, the transaction is completed. People who validate transactions are called miners and are paid in bitcoin. 2. What are some of the benefits of a distributed ledger over a traditional centralized database? There are two types of ledgers: centralized ledgers and distributed ledgers. The first one refers to a database that is under the control of an entity, such as a business or government. This type of ledger is frequent in traditional financial institutions, such as banks, that maintain records of customers' data, account balances, and transaction histories. On the other hand, a distributed ledger is a database that is dispersed across numerous computers or nodes, rather than being confined to a single location. Consequently, no individual or organization holds exclusive control over the data. Distributed ledgers are strongly connected to blockchain technology. Each node possesses a copy of the ledger, and any modifications to the ledger must receive approval from the network before being saved. The utilization of distributed ledgers is much better because the data and transactions recorded on the ledger cannot be altered by a solitary party and they use cryptographic techniques to safeguard the data, making it harder for hackers to attack it. Once a transaction is recorded on the distributed ledger, it becomes irrevocable. In my opinion, distributed ledgers have the potential to be more efficient than centralized ledgers due to the elimination of intermediaries that secure transactions. 3. What blockchain does Bitcoin use? How are Bitcoins mined? Keep your answer brief.

The Bitcoin blockchain is utilized to record all transactions and maintain the network's integrity. It is a public ledger that contains a record of all confirmed transactions in chronological order. Bitcoins are mined through a process called proof of work, which involves miners using powerful computers to solve complex mathematical problems that validate and secure transactions on the network. The process involves transaction verification, creating a block, hashing and proof of work, difficulty adjustment, block addition and reward, and blockchain update. This process repeats for every new block, creating a chain of blocks and securing the Bitcoin network through the proof-of-work mechanism. I think that Bitcoin mining can be profitable if you invest in the right tools and join a bitcoin mining pool, but there are a lot of variables, and a high profit is not guaranteed. 4. What could be some of the potential benefits of using blockchains to record donations to a charity? Using blockchains to record donations can bring numerous benefits. Donors can easily verify how their donations are being used, thanks to the immutable ledger provided by blockchain. This fosters trust between charities and donors. Moreover, blockchain enables instant processing of transactions worldwide, making the entire process more efficient. Additionally, charities can simplify the generation of reports by utilizing the transparent data structure found on the blockchain. 5. What is the purpose of a Hash function in blockchains? Hashing is a way to change a group of letters and numbers into a special code that is always different. It doesn't matter what letters and numbers are used, the code will always be unique. This is important for things like buying and selling cryptocurrency. Hashing is used in many parts of blockchain technology, like making new blocks and keeping transactions safe. 6. What is money? Money is everything that is durable, portable, divisible, equally, with a limited supply and most important accepted. Perhaps the easiest way to think about the role of money is to consider what would change if we did not have it. If we didn't have money, we would have to rely on a system of bartering. This means that in order to get something we want, we would have to exchange it for something we can provide. But with money, you don't need to find a specific person to trade with. You just need a market where you can sell your goods or services. In this market, you don't trade for individual items, but instead exchange your goods or services for money, which is a common medium of exchange. With this money, you can then buy what you need from others. As people specialize more, it becomes easier to produce more, which leads to more demand for transactions and therefore more demand for money. Concluding money is something that holds its value over time, can be easily translated into prices, and is widely accepted.

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