Blockchain and Cryptoeconomic Policy IEEE Tencon 2018 Tutorial Oct. 28th, 2018

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Information about Blockchain and Cryptoeconomic Policy IEEE Tencon 2018 Tutorial Oct....

Published on October 28, 2018

Author: HeungNoLee

Source: slideshare.net

1. Blockchain Technology and Cryptoeconomic Policy Heung-No Lee GIST, South Korea Home page: http://infonet.gist.ac.kr Facebook/Publication ID: Heung-No Lee You can download this lecture note from slideshare.net! 이흥노 교수 강의자료 1

2. Abstract  Bitcoin is a peer-to-peer electronic cash transfer system without a bank in the middle. The e-cash can be sent to anyone in the internet as if it was an in-person transfer of money. To meet such an end, Bitcoin introduces a novel idea, blockchain. Blockchain maintains a group of “cryptographically chained” digital documents, a ledger. Cryptographic chain is required to record in an unforgeable way transactions such as coin transfers from one to the other. The ledger is published and left open in the internet. The open chained ledger makes electronic transfer of money possible over the internet without the authority in the middle. Since 2009 Bitcoin was introduced, it has made tremendous strides. Market value has been created, capitalization surpassing more than 20 Billion USD in 2017. Thousands of follow-up systems have been created. World Economic Forum has forecasted that 10% of global GDP will be stored in blockchains by 2025. In this tutorial, we aim to review Bitcoin and Ethereum for their program architectures and operations. Ethereum is believed to have made the e-cash system to the next level by inclusion of “smart contracts” in its function. Smart contracts enable formation of contractual relations between two or more parties and the terms specified in the contract are executed automatically when prescribed conditions are met. In this tutorial, we also aim to shed light on technical sides of blockchain technology such as privacy, security and autonomy which are sensitive to regulations and policies. Many initial coin offerings has been made amassing a large amount of crowd funding. While it is a revolutionary invention, blockchain and cryptocurrency systems are at its infancy stage. In order to foster continued healthy development, it is imperative for us to see the core of the technology and be able to evaluate the short and long term impacts of this technology based on scientific facts. This shall help us avoid any unwanted act of fear and road blocks to development. Regulations should be kept at its minimal. There are obvious ones: price manipulation practices and fraudulent investment operations should be prevented and punished heavily when caught. But more importance should be developing a policy to fostering researches, startups and funding to help uncover new opportunities. Blockchain can be useful in many future applications such as transfer of lands and houses, bank accounts to people in underdeveloped nations, and low cost maintenance of valuable records such as patents and copyrights. If some of them are indeed realizable, blockchain is sure to make the society clearer and more expectable. Protection of rights for underprivileged people can be improved; disputes and conflicts in the society lessened; transaction costs reduced and healthy interaction among people encouraged. Who knows that it shall lead us a step closer to the society of genuine trust! Lecture by Heung-No Lee 2

3. Introduction of the lecturer Lecture by Heung-No Lee 3 Short Bio: Heung-No Lee graduated from University of California, Los Angeles(UCLA), U.S.A. with Ph.D., M.S., and B.S. degrees all in Electrical Engineering, 1999, 1994 and 1993 respectively. He then moved to HRL Laboratory, Malibu, California, and worked there as Research Staff Member from 1999 to 2002. He was then appointed as Assistant Professor at the University of Pittsburgh, Pittsburgh, Pennsylvania, U.S.A. in 2002. He then moved to Gwangju Institute of Science and Technology (GIST), Republic of Korea, in 2009 with the rank of Associate Professor. In 2013, he was promoted to the rank of Full Professor at GIST. His research lies in the areas of Information Theory, Signal Processing Theory, and Communications Theory, and the application to Wireless Communications and Networking systems, Compressive Sensing and Optical Engineering, Biomedical systems, and Brain Computer Interfaces. Awards he has received recently include Top 50 R&D Achievements of Fundamental Research in 2013 (National Research Foundation), Top 100 National R&D Research Award in 2012 (the Ministry of Science, ICT and Future Planning) and This Month Scientist/Engineer Award (National Research Foundation) in January 2014. He has written more than 70 international journal publications and a hundred international conferences and workshop papers. He was the Director of Electrical Engineering and Computer Science track within GIST College in 2014. In March 2015, he was appointed as the Dean of Research at GIST.

4. Flow of tutorial today  Born of Bitcoin  Bitcoin and blockchain, how does it work?  What does Ethereum do?  Possible applications of blockchain  Cryptoeconomics  Policies around the world Lecture by Heung-No Lee 4

5. Born of Bitcoin Trust enabled by peers 5

6. Bitcoin  Since born in 2009, bitcoin has never been stopped breathing and alive currency system.  Global digital currency works beyond national boundaries.  It was the time when trust on the banks and governments were severely degraded.  Issues around bitcoin are • Decentralization • Reforming Wall Street • Unbundling big corporations • Reducing inequality • Sharing economy Lecture by Heung-No Lee 6

7. Lecture by Heung-No Lee 7 ISSUES Reforming Wall Street Wall Street cannot continue to be an island unto itself, gambling trillions in risky financial decisions while expecting the public to bail it out. It is time to break up the largest financial institutions in the country. The six largest financial institutions in this country today hold assets equal to about 60% of the nation’s gross domestic product. These six banks issue more than two thirds of all credit cards and over 35% of all mortgages. They control 95% of all derivatives and hold more than 40% of all bank deposits in the United States. We must break up too-big-to- fail financial institutions. Those institutions received a $700 billion bailout from the US taxpayer, and more than $16 trillion in virtually zero interest loans from the Federal Reserve. Despite that, financial institutions made over$152 billion in profit in 2014 – the most profitable year on record, and three of the four largest financial institutions are 80% bigger today than they were before we bailed them out. Our banking system must be part of the productive, job- creating economy. The Federal Reserve, a government entity which serves as the engine of the banking industry, must eliminate its internal conflicts of interest, provide stricter oversight, and insist that the banks serve the economy in a way that works for everyone, not just a few.

8. Government, Economy, Currency  People want an ever improving state of self and economic position compared to what they have enjoyed in previous years.  Gov. needs to provide what people want. • Food and house • Energy and water • Safer environment. • Less work but improved life style with leisure. • Equal opportunity for limited resource • improved education for children. • improved economic condition

9. Frequent world wide economic crises, why? Deficit Spending and Currency Expansion USD over timeUSD minting process Today, currency is not money. Currency does not have any internal value (No more gold standard). Currency is created by banks when someone takes out a loan or government issues bonds (I.O.U.) to banks.

10. The Evolution of Trust Lecture by Heung-No Lee 10 Scientific American 318, 38 - 41 (2018) Published online: 19 December 2017 | doi:10.1038/scientificamerican0118-38 Natalie Smolenski • Banks and governments have in many ways failed to broker trust for the global economy, especially in the past few decades. Ordinary people have grown wary of centralized power and are seeking alternatives. • Bitcoin—and blockchain technology in general—allows the brokering of trust to be shifted toward machines and away from human intermediaries such as bankers. This technology could design exploitation out of the system instead of punishing it later. • Blockchains lend themselves both to human emancipation and to an unprecedented degree of surveillance and control. How they end up being used depends on how the software handles digital identity.

11. Bitcoin, what is it? A global computer network run by people which mints coins every 10 minutes. 이흥노 교수 강의자료 11

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13. Bitcoin’ Minting Schedule 이흥노 교수 강의자료 13 Coins Mining Reward Block number Year 2018

14. How does Bitcoin work? Lecture Note by Heung-No Lee 14

15. Bitcoin Bitcoin runs on a P2P network. All computers in the network, cooperate and verify the coin transaction. It is designed to keep out faulty transactions such as ones with unproven ownership and double spending problem. This protocol enables, a digital message such as “A gives B a single coin“ works as an in-person transfer of money if the message is verified, recorded and kept unaltered. Without the involvement of a third party such as banks and middle man, anybody can open up a transaction with anyone in the internet. How can such an invention be possible? The answer was in fact very simple. Namely, the content and time of a transaction are recorded, kept in an immutable manner which is not alterable and published in the internet so that anybody can open up and look. 이흥노 교수 강의자료 15

16. Blockchain, what is it?  What is blockchain • Series of files contaiting TXs and time-stamp?  What happens when any alteration is made?  What if there is no proof-of-work attached? Lecture by Heung-No Lee 16 #520763 AB 2BTC nonce1 hash0 M. hash1 #520764 nonce 2 hash1 M. hash2 #520765 nonce3 hash2 M. hash3 #520766 nonce4 hash3 M. hash4 BC 1BTC CD 0.5BTC M. hash1 changes hash 1 changes hash 2 changes hash3 changes

17. 17 Bytes Name Description 4 version The block version number indicates which set of block validation rules to follow. See the list of block versions below. 32 previous block header hash A SHA256(SHA256()) hash in internal byte order of the previous block’s header. This ensures no previous block can be changed without also changing this block’s header. 32 Merkle hash A SHA256(SHA256()) hash in internal byte order. The merkle root is derived from the hashes of all transactions included in this bloc k, ensuring that none of those transactions can be modified witho ut modifying the header. See the merkle trees section below. 4 time The block time is a Unix epoch time when the miner started hashing the header (according to the miner). 4 nBits An encoded version of the target threshold this block’s header hash must be less than or equal to. See the nBits format describe d below. 4 nonce An arbitrary number miners change to modify the header hash in order to produce a hash less than or equal to the target threshold. If all 32-bit values are tested, the time can be updated, the coinbase transaction can be changed, the merkle root updated. 80 Byte Block Header Source : https://bitcoin.org/en/developer-reference#block-headers Lecture by Heung-No Lee

18. Proof of work The proof of work is used to keep the ledger unalterable. It is the proof that all in the network worked together. For one to redo all the work done, it shall take the same amount of time spent. Properties of proof-of-work  P1: Easy to verify but difficult to prove  P2: Robust to detecting block modification attacks  P3: Controllable in changing the difficulty level  P4: Open to anyone with a CPU Lecture by Heung-No Lee 18

19. What is Hash Function?  Bitcoin uses SHA256 (NIST, USA) • Input to the hash function is a text message or a file. • Output of the hash function is 256 bit string.  Conditions for Good Hash Function • (One way) With any change in input, output is completely different. • (Collision free) Given y = H(x), finding x1 such that H(x1) = y shall be almost impossible! • (Collision free stronger) Finding an input pair x and x1 which leads to H(x) = H(x1) shall be almost impossible! 19Lecture by Heung-No Lee

20. Secure Hash Function I/O 20 Pictures from google image Digest of input Collision possible but never observable Lecture by Heung-No Lee

21. SHA256, F(x) = y 21  is a message up to 1 Mbyte in sizex x:  is a 256 bit stringy y: 2d711642b726b04401627ca9fbac32f5c8530fb1903cc4db02258717921a4881 64 hexadecimal 256 77 2 ~ 10 1,000,000 2 Lecture by Heung-No Lee

22. Finding a Good Block Summary  Let F(*) be the Hash Function  Function F takes an input x and gives output y y = F(x)  F(block) = block summary  (Proof-of-Work) Finding a nonce which produces a block summary meeting a goodness requirement: F(block, nonce) < a value  Given a block, finding a nonce which satisfies the PoW inequality takes many hash cycles.  Once nonce found, recording it in the block header completes the process of PoW. 22 There are 20 balls in total and 2 white balls. What is the probability to select a white ball? Output of the function Lecture by Heung-No Lee

23. What is the probability a cpu solves (PoW) in a single cycle, with the goodness condition that the hash must have at least four strings of leading hexadecimal zeros? 23 256/4 = 2^(8-2) = 2^6 = 64 256 bit is 64 hexadecimal string A hash value 2d711642b726b04401627ca9fbac32f5c8530fb1903cc4db02258717921a4881 A good hash value which passes the condition that the first four digits are 0s. 0000f727854b50bb95c054b39c1fe5c92e5ebcfa4bcb5dc279f56aa96a365e5a c = the set of any hash values = 2^256 a = the set of wanted hash values= 2^(256 – 16) = 2^240 Prob of success in a single hash cycle is P1 = a/c = 2^-16 = 1/65536 256 77 2 ~ 10 Lecture by Heung-No Lee

24. Proof-of-Work  Changeable difficulty: At least d = 16 leading zero bits.  Repeat the cycle until a good hash is found.  A node which has found a nonce which gives a good hash, records the nonce and completes the PoW.  This node has the right to mint a given amount of coin as a reward for the work. (Mining coins as reward for work) Lecture by Heung-No Lee 24 nonce Prev. digest digest SHA256 Hash Function 256 bit digest Nonce =+ Counter Any hash 2d711642b726b04401627ca9fbac32 f5c8530fb1903cc4db02258717921a4 881 Good hash 0000f727854b50bb95c054b39c1fe5 c92e5ebcfa4bcb5dc279f56aa96a365 e5a  Record Nonce (Proof-of-Work) Good? No Yes

25. Trust enabled by blockchain  Immutable recording of transactions and openness for reference give confidence to all the parties who are rationally involved in transactions.  What’s recorded in blockchain can be trusted by everyone involved in transactions for the integrity of its content even after some time has passed since the moment it was generated. Lecture by Heung-No Lee 25

26. Bitcoin Difficulty  Simply put it is the number of leading zeros Nz to find a good hash. • Today, Nz = 74 • Difficulty = 2^74 = 18 e 21 = 18 zeta hashes  When there are more miners who joined the mining network, the time to mine a single block is shortened.  Then, the difficulty level is increased.  Then, Nz is increased to have the average time to mine a single block fixed at 10 min. Lecture by Heung-No Lee 26

27. Lecture by Heung-No Lee 27 https://bitcoinwisdom.com/bitcoin/difficulty Bitcoin hashrate is the estimated no. hashes per second to mine a block. • Peta = 10^15, exa = 10^18 Today, it is about 25 exa hashes/sec. Bitcoin Difficulty

28. ASIC Mining Hardware Lecture by Heung-No Lee 28 Bitcoin hashrate = 25 exa hashes/sec Hashrate = 2 Tera hashes/sec Exa = 18, tera = 12 Number of miner machines >= O(10^7)

29. Data immutability by PoW  How long does it take to mine a block alone? • For one AntMiner machine, it would take 16 years. • But, with more than 10 million miners working together, it will take 10 minutes on the average to mine a single block.  The nonce is thus a proof that the network of10 million miners have worked together to forge a block.  Thus, the content scribed into the blockchain cannot be altered easily. Lecture by Heung-No Lee 29

30. Bitcoin Summary  Bitcoin is an electronic cash.  This e-cash can be used to transfer the ownership chain of signatures.  A fixed amount of bitcoins are created in each block.  The created bitcoins for a block are given to the miner who has succeeded in finding the nonce value for the pertinent block.  In fact, the miner has the right to produce a fixed amount of bitcoin and give it to one of his bitcoin address.  Thus, each created bitcoin belongs to a bitcoin address.  Ownership rights are transferred from payer bitcoin address to the payee bitcoin address.  A transaction is valid only when it is attached with a digital sign.  A valid digital sign shows the proof of ownership of the pertinent coin.  Miners are the ones who verify the digital signs and make sure to see if the pertinent coin is not already spent.  Miners put valid transactions to a block and find a good hash for the block.  The miner who found a valid block summary is given the right to mint the bitcoin.  Bitcoin is an electronic cash system which runs without the third party such as mint or bank.  In Bitcoin, however, the third party is the network of miners who verify the validity of each transaction and scribing validated transactions into the blockchain.  The miners are decentralized and autonomous. Anyone can join as a miner. They simply need to buy mining chips, connect to the open Bitcoin network, and become a miner (person). Anytime these miners can stop working as a miner any time. Lecture by Heung-No Lee 30

31. Bitcoin Blockchain Verticals  Decentralized  Public  Shared  Immutability  Trust  Anonymity  Minting coins  Design is based on • Game theory, Openness, Economic incentive Lecture by Heung-No Lee 31

32. Seigniorage Effect • Seigniorage is the difference between the value of money and the cost to produce it — in other words, the economic cost of producing a currency within a given economy or country. If the seigniorage is positive, then the government will make an economic profit Seigniorage and the Federal Reserve • While the basic principle behind seigniorage suggests that a country can profit from the production of new bills, there can be other factors affecting the entire transaction. Within the United States, if the Federal Reserve agrees to increase the number of dollars available within the U.S. economy, it will purchase a Treasury Bill in exchange for permitting the production of more dollars. While the government may appear to profit when the cost of production is lower than the face value of the bills, it is important to note that Treasury Bills require interest payments to the Federal Reserve in addition to the original investment placed when the Treasury Bill was purchased. https://www.investopedia.com/terms/s/seigniorage.asp 32Lecture by Heung-No Lee

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34. Lecture by Heung-No Lee 34 Bitcoin, Re-centralized?

35. Lecture by Heung-No Lee 35 According to Bitcoin analysis blog Digiconomist, energy consumed by Bitcoin mining now exceeds what is used by countries like Ireland, Hungary, Oman, and Lebanon. Bitcoin uses about as much power as the entire country of Morocco and slightly less than Bulgaria. If Bitcoin were a country, it would have the 61st highest energy consumption. However, this only covers miners. It does not include any power consumed by Bitcoin-enabled devices like vending machines and ATMs. Energy spending for bitcoin mining exceeds energy consumption of a country

36. Any alternative to PoW?  Proof-of-work has been re-centralized today. • Handful of mining sites dominate the bitcoin mining. • The trust has been degraded. • No more one cpu one vote.  Alternatives, but each with its own new problems • Proof-of-Stake • Delegated Proof-of-Stake • Proof-of-Network • Proof-of-Random voting Lecture by Heung-No Lee 36

37. Brief history on bitcoin markets Source https://thenextweb.com/insider/2015/03/29/a-brief-history-of-bitcoin-and-where-its-going-next/ 37Lecture by Heung-No Lee

38. ~2010 : M. value created, Pizza Day  October 2009  Bitcoin receives an equivalent value in traditional currencies. The New Liberty Standard established the value of a Bitcoin at $1 = 1,309 BTC. The equation was derived so as to include the cost of electricity to run the computer that created the Bitcoins in the first place.  May 2010 (Pizza day)  A programmer living in Florida named Laslo Hanyecz sends 10,000BTC to a volunteer in England, who spent about $25 to order Hanyecz a pizza from Papa John’s and sent it to Laslo. 38Lecture by Heung-No Lee

39. 2013: Regulation started, “Bitcoin is money”  March 2013 (First regulation)  ​The US Financial Crimes Enforcement Network (FINCEN) issues some of the world’s first bitcoin regulation in the form of a guidance report for persons administering, exchanging or using virtual currency. This marked the beginning of an ongoing debate on how best to regulate bitcoin.  August 2013 (Bitcoin is money)  Federal Judge Mazzant claims: “It is clear that Bitcoin can be used as money” and “It can be used to purchase goods or services” in a case against Trendon Shavers, the so-called ‘Bernie Madoff of bitcoin’.  December 2013 (Bitcoin is not currency)  China’s central bank bars financial institutions from handling bitcoin transactions. This ban was issued after the People’s Bank of China said bitcoin is not a currency with “real meaning” and does not have the same legal status as fiat currency. 39Lecture by Heung-No Lee

40. 2014 : Taxation, Regulations, Funds  January 2014 (Online retailer accepting bitcoin payments)  Overstock.com becomes the first major online retailer to embrace bitcoin, accepting payments in the US. Overstock was the first in what is now an expeditiously growing list of large businesses that accept bitcoin.  February 2014 (Bitcoin is digital assets)  HMRC classifies bitcoin as assets or private money, meaning that no VAT will be charged on the mining or exchange of bitcoin. This is important as it is the world’s first and most progressive treatment of bitcoin, positioning the UK government as the most forward thinking and comprehensive with regard to bitcoin taxation. 40Lecture by Heung-No Lee

41. 2015: Derivatives, Assets, Payments  October 2014 (First bitcoin derivatives)  TeraExchange announces that the first bitcoin derivative transaction was executed on a regulated exchange, adding a new hedging instrument to bitcoin and instilling credibility and institutional confidence in the entire bitcoin community.  December 2014 (MS accepts bitcoin payments)  Tech giant Microsoft begins accepting bitcoin payments.  January 2015 (Digital Asset and derivatives, NYSE)  The New York Stock Exchange is a minority investor in Coinbase’s $75M funding round. The NYSE aims to tap into the new asset class by bringing transparency, security and confidence to bitcoin. 41Lecture by Heung-No Lee

42. What is bitcoin (tokens)?  Digital asset  Digital currency • Medium of exchange, storage of value, stability  Commodities  Payments  Securities Lecture by Heung-No Lee 42

43. WEF’s Perspective on Cryptocurrency  1980 PC Windows  1995 Internet, Explorer  2005 Mobile, Android iOS  Blockchain is the next big thing!!!  May 2015 WEF Reports, • “By 2023 A nation will appear, with tax collection in cryptocurrencies” • “By 2027, 10% of World GDP will be stored in cryptocurrency”  World GDP is expected to be 100,000B USD 2027  Cryptocurrencies Market Cap : 10B 2015  10,000B 2027 (0.01%  10%, x1000 growth)  Cryptocurrencies Market Cap 2018 = 216B (0.25% of WGDP) 43Lecture by Heung-No Lee

44. Ethereum, Many New Application Areas of Blockchain 44Lecture by Heung-No Lee

45. Cryptoeconomy  Design • Mint schedule, TPS, Incentive Mechanism, Master plan based on game theory and market design  Developers • Maintain the system • Upgrades  Users • Payments, assets, remittance  Miners Unintended but  Exchanges  Investors  Crowd funding: ICO and IEO 45Lecture by Heung-No Lee

46. Blockchain Core (Program) Network of peers  Node registration, get-address, give-address  Full node or light node Wallet for TX generations  Make private and public keys, address, store UTXOs, make TX, put signature, announce it to the neighbor, check to see if the TX is supported by the blockchain. Miners guard the blockchain  Data: Genesis block + regular blocks, one block every 10 min, block-size 1Mbyte  Protocol: consensus, block header, difficulty level adjustment, …  Mining: Get the longest chain, validate it and all transactions within it, get transactions from mempool and form a block, run SHA repeatedly until you hit a good hash, put the proof into the block header, and attach the proofed block to the longest chain, and make announcement ASAP. Web server interface  Communication among the wallets and the miners Program  C++, Python, Go, Java, Flask, http  Download and run, then you have a blockchain server. Lecture by Heung-No Lee 46

47. Lecture by Heung-No Lee 47 Internet Mobile HTTP requests Response HTTP requests Anyone can download and run a blockchain.core Blockchain Internet A server Runing Blockchain API mem cpu http://203.2.3.7 A server running Blockchain API mem cpu http://218.12.3.11 Python, Pycharm, Flask, Postman Wallet Blockchain API mem cpu http://22.12.3.101 Wallet Blockchain API mem cpu http://22.12.3.101

48. ICO  Startups in the blockchain world uses Initial Coin Offering (ICO) as a tool to raise funds.  It is similar to an IPO, but with some notable differences. • “Rather than looking to traditional angel or venture investors to place capital as an equity investment, companies developing new blockchain-based products and services have turned to the cryptocurrency community to crowdsource the purchase and usage of their token in an ICO.” (Forbes Sept. 27th 2017)  In an ICO, the startup raise funds in the forms of Bitcoins and Ethers with trade of startup’s crypto- currencies. • Trades against other digital assets and fiat (USD, EUR, GBP) are also possible. • Cf) Crowdsale, crowdfunding and token sales.  Reference: https://icowatchlist.com/education/history-and-evolution-of-icos Lecture by Heung-No Lee 48

49. ICO, how did it started?  It was the 2013 San Jose Bitcoin conference.  By that point, the panelist, J.R. Willett, had been hawking his crazy idea for more than a year.  In January 2012, on the Bitcoin Talk forum, the Seattle-based software engineer published a white paper titled, “The Second Bitcoin White Paper.”  To quote the summary: “We claim that the existing bitcoin network can be used as a protocol layer, on top of which new currency layers with new rules can be built ….  We further claim that the new protocol layers … will provide initial funds to hire developers to build software which implements the new protocol layers, and … will richly reward early adopters of the new protocol.”  https://www.forbes.com/sites/laurashin/2017/09/ 21/heres-the-man-who-created-icos-and-this-is- the-new-token-hes-backing/#36db35661183 Lecture by Heung-No Lee 49 J.R. Willett, the founder of the ICOCOURTESY OF J.R. WILLETT

50. Evolution of ICOs  https://icowatchlist.com/education/history-and-evolution-of-icos  The first reported ICO was conducted by Mastercoin in 2013.  Mastercoin raised close to 5,000 bitcoins or $500,000 at the time.  Since the first ICO, there has been a flood of ICOs launches.  In 2018, there are thousands of ICOs  Ethereum ICO in 2014, raising millions of dollars. • “The price of ether is initially set to a discounted price of 2000 ETH per BTC, and will stay this way for 14 days before linearly declining to a final rate of 1337 ETH per BTC. The sale will last 42 days, concluding at 23:59 Zug time September 2.” (https://blog.ethereum.org/2014/07/22/launching-the-ether-sale/) • The ether has risen more than 1000 times. (.5USD 10/2014, 600USD today) Lecture by Heung-No Lee 50

51. Ethereum & Token Economy  It allows storing of full programming computer codes in BC.  Blockchain is platformitized so that it is easy for anyone to use.  Smart contracts and tokens can be made easily.  Decentralized applications (Dapp) are proliferated.  Tokenization of assets (lands/buildings/emission reductions…) Lecture by Heung-No Lee 51 coins data codes Bitcoin only records coin TXs Ethereum allows data and codes as well

52. Ethereum’s Block stores the Panmunjeom Declaration Lecture by Heung-No Lee 52 2018.04.28

53. Blockchain ~ a network of servers  Keeps the ledger as transactions occurs time and content immutably recorded.  What’s recorded inside the ledger? • Coin transactions (Bitcoin, Tokens, …) Cryptocurrency • Important records Public repository of records • Computer code and execution  Contract execution computer  Incentivization with cryptocurrency! • Birth of decentralized autonomous organization(DAO), Crytpoeconomy Lecture by Heung-No Lee 53 (Ethereum)

54. Innovative Projects  Currency: if trusted and used, it is a currency.  Public record: Anytime, anywhere referenceable and immutable records are very useful.  Contracts: • Without the middleman such as lawyers, insurers, administrators, one can expect to make a nice business relation with anyone in the internet. • Computer codes -- smart contracts -- can be used to make contracts and expect self-execution of contracts when contractual terms are satisfied. Lecture by Heung-No Lee 54

55. Contracts vs. Smart Contracts Lecture by Heung-No Lee 55 Sharing Economy Insurance Voting IP management MediChain Real Estate Law Administration Farmers Contract Once A is done, B will be executed Signed by Lawyer Registered Executed Code Once A is done, B will be executed Signed by Recorded Executed

56. Possibilities: Blockchain wout coins, governance, Donation Network, Drug supply chain, Odometer track chain, IoT blockchain, Autonomous Vehicle blockchain, Medical record blockchain, Music blockchain, Proliferation of Blockchain Projects Lecture by Heung-No Lee 56 Altcoins Ethereum = coin + smart contract Bitcoin Priority 1. Proven in market 2. Peer review papers 3. Court orders/Regulations 4. VC Funding 5. Github source codes 6. New paper articles

57. Blockchains in 2018? Lecture by Heung-No Lee 57 Bitcoin MasterCoin Namecoin Ethereum LitecoinCurrency Tokens Bitcoin-Cash XRP EOS Stellar Tether Cardano Monero IoTA NEO Applications IoT Econ Assets 2009 2013 2017 Payments Steemit MediChain 4th Industrial Rev. Cyber-Physical System IoT, BigData, Cloud, AI Hyper-connected society

58. Lex Cryptographia Lecture by Heung-No Lee 58

59. Problems with blockchains  Astronomical cost for mining  Smart contracts • Bugs • Compliance with the law?  Decentralization? • Mining pools are re-centralized  Not very convenient and useful as a currency (medium of exchange, storage of value) • Slow transactions speed, price fluctuation  Possibilities of cyberattacks and hacking. • Availability of renting services of mining equipment. • Astronomical amount of assets were lost due to 51% attacks, such as Monacoin, Bitcoin Gold, Zencash, Verge, Litecoin cash... Lecture by Heung-No Lee 59

60. Proliferation of ICO projects, BUT  Be careful! • 98% of ICOs done in 2017/2018 did not fulfill their obligations! • Not many research articles either!  Non blockchain solutions… • IOTA with Tangle • Hashgraph  Private blockchains… • No coin, no mining, … • Consortium of companies in competition, building trust among them using blockchain. Lecture by Heung-No Lee 60

61. Advantages of investing in ICOs  One of the foremost advantages of investing in ICOs is the chance of investing in a new or upcoming technology. Every single ICO is established to revolutionize an industry in one way or the other. A careful analysis of ICOs could help investors get on board to the right startup.  Most of the ICOs price their tokens modestly, allowing even small investors to participate in the sale. Un-like a traditional IPO, small investors have a chance to invest little money, and in the event that the underlying project does well, the investor reaps tremendous returns in the future.  ICOs follow the limited supply-demand principle, allowing their cryptocoins to gain value in the future. Its initial investors could leverage the economic prominence of the principle, increasing their chances of profiting exponentially.  In the current cryptocurrency environment, you can use crypto- tokens to purchase the services offered by the underlying company. If the cryptocurrency gains popularity and market trust, chances are that you can use it for third-party purchases, just like Bitcoin. Lecture by Heung-No Lee 61

62. What are the risks investing in ICOs? https://icowatchlist.com/education/history-and-evolution-of-icos  Starting with the risks involved in ICO investing, first one is the complete or absence of regulations. Unlike IPOs which are monitored by regulatory bodies, ICOs neither follow any regulatory requirements nor is it easy to regulate them. ICOs do not fall under any particular geographic location, making it a challenge to regulate them.  ICOs hardly go through professional due diligence or vetting. In the financial industry, due diligence is the first step taken before making any investments at all. It helps investors understand the investment risks, offers a comprehensive view of the company's financial condition, and analysis the business model of the company. ICOs, on the other hand, have an equivalent of an investment prospectus in the form of a website or whitepaper.  Most ICO projects do not have a proven business model and in most of the cases, not even a ready product. The industry experts agree that most of the ICOs are a longshot at best, which makes it risky to invest in them. ICOs are not restricted by geographical borders; in this case, if the issuer absconds with the money, there is very little an investor can do to retrieve their funds.  If you have plans to invest in ICOs, understand that these are high-risk investments with little or no guarantees. Lecture by Heung-No Lee 62

63. What are regulations in the ICO world?  When it comes to regulations in the ICO world, there are no strict laws regulating ICOs.  One of the recent regulatory developments in reference to ICOs has come from the US Securities and Exchange Commission (SEC).  In its latest ruling on July 25, 2017, the SEC described some of the “coins” offered through ICOs as securities. The SEC further released their investigation of an ICO, addressing the primary issues involving ICOs. Lecture by Heung-No Lee 63

64. Lecture by Heung-No Lee 64 Best countries for ICOs include • Singapore • Switzerland • Cayman Islands USA is not! Why?

65. Regulations in large countries tends not to make a decision yet.  Korea  USA  China  Japan  Europe  East Asia  Not consider as a legitimate currency, but treat them as digital assets for tax purpose. Lecture by Heung-No Lee 65

66. Made an attempt to give lawful definition on blockchains & smart contracts (California AB)  California AB 2658 (February 15, 2018 version) • “Blockchain technology” means distributed ledger technology that uses a distributed, decentralized, shared, and reciprocal ledger, that may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable, is auditable, and provides an uncensored truth. • “Smart contract” means an event-driven program that runs on a distributed, decentralized, shared, and replicated ledger that can take custody over, and instruct transfer of, assets on that ledger.  Approved Version (09/28/2018 09:00 PM) • “blockchain” means a mathematically secured, chronological, and decentralized ledger or database. • The Secretary of the Government Operations Agency shall appoint a blockchain working group to investigate the usages of blockchains, risks, benefits, legal implications, and best practices. Lecture by Heung-No Lee 66 Reference: https://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=201720180AB2658

67. What Regulations are Needed?  Needed are investor protection in ICO/IEO projects and crypto-exchanges • Pump and dump • Insider trading • Compliance with the law • money laundering, anti-terror funding, know-your-customer  No serious harm done?  Then let’s wait-and-see approach Lecture by Heung-No Lee 67

68. Concluding Remarks  Many Possibilities of Blockchain  Verified by the market is Bitcoin, and somewhat Ethereum  To explore new territory, experiments are needed with budgets and man power invested.  Regulations should be kept at the minimal level to promote new ideas.  Obvious regulations should be placed right away • Improved clarity on exchange business and initial coin offerings • Price manipulation practice forbidden with severe consequence • Taxation on digital asset profits. • Compliance with the current laws such as anti-terror fund and money laundering. Lecture by Heung-No Lee 68

69. Thank you! Lecture by Heung-No Lee 69

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