Finance, Fintech, Blockchain & Bitcoin: Core Concepts
Finance Overview
Core Idea: Get money from people and pay more in return.
Key Concepts: Truth & Data. Finance relies on managing money, risk, and trust (UX & UI matter).
Functions: Credit & Investments.
Main Sectors: Banks, Insurance, Trading Platforms.
Fintech (Finance + Tech)
Uses AI, Blockchain, APIs, and Digital Banks to transform finance.
Fintech’s Disruptive Potential
AI-driven risk management: Better targeting & financial inclusion (micro-credits).
Improved UI & Robo-advisors: Automated finance (e.g., Revolut).
Blockchain: Internet of Value, making transactions more efficient.
Key Players in Fintech
Big Finance: Traditional banks with licenses, customer bases, and regulated control.
Big Tech: Uses data to connect users & fintech (e.g., Google Pay, Apple Pay).
Startups: Disruptive innovators, flexible but risk-taking (e.g., Revolut).
Official sector: Support fintech growth, Ensure financial services reach unbanked populations, Prevent financial crises caused by unregulated fintechs. Ensure fair practices, Prevent fraud, money laundering, and cyber threats.
Blockchain vs. Traditional Databases
Blockchain: Decentralized, secure, transparent, but slower due to verification.
Traditional Databases: Centralized, efficient, but prone to security risks and require trust in an authority.
Database & Blockchain Models
Traditional Databases
Centralized: One entity controls data.
Client-server model: CRUD operations (Create, Read, Update, Delete). Efficient but requires trust in the authority.
Private Blockchains
Restricted access: Only approved users can view & validate transactions.
Immutable log: Secure and traceable, but no cryptocurrency needed.
Public Blockchains
Fully decentralized: Anyone can join, validate, and add transactions.
Peer-to-peer model: No intermediaries like banks. Uses native tokens (e.g., Bitcoin, Ether) for security & incentives.
Money
Ledgers are financial records tracking transactions, revenues, expenses, debts, and investments. They can be transaction-based (tracking movements), balance-based (summarizing accounts), general (overall view), or sub-ledgers (detailed insights). Accounting methods include single-entry (basic) and double-entry (ensuring balance).
A good ledger is immutable, timestamped, accurate, descriptive, and comprehensive, with clear ownership.
Payment Systems record financial transactions. Fiduciary currency has value by trust rather than intrinsic worth (e.g., checks, Bitcoin), while fiat currency is state-backed, legal tender represented by banknotes and deposits.
Banking, Money & Ledgers: Central banks regulate money flow, commercial banks manage accounts, and payments are processed via RTGS (instant) or Deferred Net Settlement (batch payments). International payments use correspondent banks.
Role & Characteristics of Money: Money is a medium of exchange, store of value, and unit of account. It must be durable, portable, divisible, uniform, widely accepted, stable, and hard to counterfeit.
Money Design: Issued by central banks or private institutions, money exists as physical (cash, coins) or digital (cryptocurrency, e-money, CBDCs). It can be public (cash/digital money) or wholesale (institutional use). Verification is token-based (peer-to-peer, prone to fraud) or account-based (secure transaction history).
Money Flower visualizes different types of money, including cash, central bank digital money, commercial bank deposits, e-money (PayPal), cryptocurrencies (Bitcoin, Ethereum), and CBDCs.
Why Early Digital Currencies Failed
They lacked merchant adoption, relied on centralized systems, were vulnerable to double spending, and had unstable consensus mechanisms.
How Bitcoin Solved These Issues
Bitcoin introduced a decentralized ledger, cryptographic security, and a peer-to-peer electronic cash system. Transactions are transparent, verifiable, and anonymous, with consensus mechanisms preventing double spending. Every participant holds a copy of the ledger, ensuring trustless transactions.
Cryptography
Cryptographic Algorithms
Standard mathematical functions known to everyone (public).
Sender & receiver must agree on the encryption method.
Purpose of Cryptography: Secures communication and data by ensuring:
Confidentiality: Prevents unauthorized access.
Authenticity: Verifies sender identity.
Non-repudiation: Ensures sender cannot deny the message.
Integrity: Confirms message remains unchanged.
Encryption: Converts plain text into unreadable cipher text using an algorithm & key.
Types of Encryption
- Symmetric Encryption (Secret Key)
Uses one key (AES) for both encryption & decryption.
Sender encrypts, transmits message over a non-secure channel, receiver decrypts with same secret key.
- Asymmetric Encryption (Public/Private Key Pair)
Uses two keys: Public key (encrypts), Private key (decrypts).
Confidentiality: The recipient’s public key encrypts the message, ensuring only they can decrypt it with their private key, preventing unauthorized access.
Authentication: The sender’s private key encrypts the message or digital signature, allowing anyone to verify authenticity by decrypting it with the sender’s public key.
Digital Signature & Security Concepts
Hash functions ensure integrity by generating a unique fingerprint (message digest) for any input. The same input always produces the same output, verifying data authenticity.
A digital signature combines integrity and authentication. The sender encrypts the hash (fingerprint) with their private key, creating the signature. The receiver decrypts it with the sender’s public key and compares it with the hash of the received message. If they match, the message is authentic and untampered.
A Digital Envelope adds confidentiality, encrypting both the message and signature with the recipient’s public key, ensuring only they can decrypt it. This process uses hash functions and asymmetric encryption twice.
Security Concepts
Confidentiality keeps data unreadable to unauthorized users. Origin authentication verifies the sender. Integrity ensures data remains unchanged. Non-repudiation prevents denial of transactions. Availability ensures system uptime, and access control restricts data to authorized users.
Bitcoin Ledger Block
Bitcoin Overview
Peer-to-peer electronic cash system for secure digital asset exchange using cryptography.
Decentralized: No central authority, relies on peer-to-peer networks.
Blockchain: Tamper-proof, decentralized ledger that records transactions securely and transparently.
Bitcoin Concepts
Max supply: 21M Bitcoins (18.82M already mined).
Distributed database: All participants (nodes) have a full copy.
Nodes: Follow fixed Bitcoin rules, remain anonymous and are verified via public key.
Transactions: Public, transparent, and verifiable, allowing anyone to check balances and history.
Solves Double-Spending: Uses cryptographic verification to prevent fraudulent reuse of the same Bitcoin.
Blockchain Technology
- Time-Stamped, Append-Only Ledger
Each block contains immutable transactions, linked via cryptographic hashes.
Secured by cryptography: Hash functions ensure integrity, digital signatures confirm consent.
- Consensus Protocol
Transactions validated through consensus mechanisms (e.g., Proof of Work).
Addresses trust issues and may use native tokens as incentives.
- Decentralized, Auditable Database
Final record is tamper-proof, transparent, and distributed across all network participants.
No central control: Censorship-resistant & fraud-proof.
Enables secure value transfers & smart contract execution in some blockchains.
How Blockchain Works
Key Components
Hash Functions: Ensure data integrity; any change in data alters the hash, signaling tampering.
Digital Signatures: Verify transaction authenticity and ownership.
Bitcoin Hash Functions
SHA-256: Generates a unique fingerprint for each input.
Integrity Check: The same input always produces the same hash; any change alters the hash.
Cryptographic Properties
Preimage Resistant: Cannot reverse-engineer the original input from its hash.
Collision Resistant: No two inputs should produce the same hash.
Avalanche Effect: A small change in input drastically changes the hash.
Bitcoin – A Chain of Blocks
Blocks are immutable due to cryptographic hashes.
New block every 10 minutes, linked to the previous block via hashes.
Distributed hash trees (Merkle Trees) maintain data integrity.
What’s Inside a Block?
Merkle Root Hash: Provides the hash of all transactions.
Combined Hash Value (#ABCD).
Hash of Previous Block: Links blocks together.
Timestamp: Records block creation time.
Nonce: A random number used for Proof of Work.
Merkle Tree Structure: Organizes transactions efficiently.
Merkle Tree & Bitcoin Transactions – Key Insights
A Merkle Tree is a data structure in Bitcoin and blockchain systems that efficiently verifies large sets of transactions. It groups transaction hashes into pairs, hashes them together, and continues until only one hash (Merkle Root) remains, ensuring integrity inside a block. If any transaction is altered, the entire chain changes, making tampering easily detectable.
How Trust & Verification Work
Bitcoin verification requires two hashes per transaction:
Hash A: Public record of the transaction, containing previous ownership proof and the new owner’s public key.
Hash B: A digital signature created with the sender’s private key. If the signature matches the hash, the transaction is valid.
Bitcoin Transaction Structure
- Input (Where Bitcoin Comes From): Includes the previous transaction ID, output index, and sender’s private key signature as proof of ownership.
- Output (Where Bitcoin Goes): Specifies the amount (in satoshis) and recipient’s public key (Bitcoin address).
How Merkle Trees Ensure Integrity
Bottom Layer: each transaction is hashed (SHA-256). At Intermediate Layers, pairs of hashes combine into parent hashes until only one hash remains at the Top Layer (Merkle Root). The Merkle Root is stored in the block header, ensuring efficient verification.
Blockchain: Immutable & Trusted
Blockchain security relies on asymmetric cryptography, where each user has a public key (shared) and a private key (secret). Transactions are signed with the sender’s private key, and anyone can verify authenticity using the public key.