Dr Asad Ali Jaffari Introduction to Fintech 4.pptx

INTRODUCTION TO FINTECH
Dr. Asad Ali Jaffari
Ph.D / FCMA / FPFA / CHRMP / IMFD / AIBP / JAIBP /
CHARTERED MANAGEMENT ACCOUNTANT / M.COM /
MBA
International Islamic University,
Islamabad

PRESENTATION SUMMARY
 Fundamentals of Block Chain Technology
 Types of Crypto-Currencies
 Smart Contracts and Decentralized Finance
 Introduction to AI and Machine Learning
 Applications in Finance (Algorithmic Trading, Fraud Detection and
Customer Service)
 Ethical Considerations and Challenges

FUNDAMENTALS OF BLOCK CHAIN TECHNOLOGY
 With the evolution of Blockchain in the last decade and its
prominence in various applications, there has been a need to
understand its concepts. We will cover the fundamentals of
Blockchain, its prominent use cases, and how "decentralization" to
its core helps challenge all things we know today.
 Blockchain is a collection of records linked to each other, strongly
resistant to alterations, protected using cryptography with a
foundation of distributed processing and persistence.
 A Block is a collection of data and a unique alphanumeric value
generated using the data called Hash. It also contains the Hash of
the previous Block.

5
UNDERSTANDING BLOCKCHAIN
The data inside a Block is dependent on the application, and
it could be anything based on the use case.
Data
It’s a code generated based on the data in the Block. It is
always unique, even though the data could still be the same.
Hash
It’s the Hash code of the previous Block. This is how a
chain of Blocks is created in a Blockchain.
Previous Hash

 Each Block contains a Hash of the previous Block to make it a chain of Blocks.
This ’Previous Hash’ helps to navigate the entire chain and makes it hard to
tamper with data of any Block.
 The first Block in the Blockchain won’t have a Previous Hash populated, and
it’s called a Genesis Block.
 Once a Block is written, it’s immutable, meaning it cannot be altered. If any
malicious actor alters a Block, its Hash changes which is already recorded in
the next chained Block.
 For instance, if a malicious actor tries to make a change to the data on Block
#2, its corresponding Hash value needs to be regenerated. If a Hash value is
regenerated for Block #2, the Previous Hash in Block #3 gets delinked, hence
breaking the chain.
 So theoretically, if someone changes a Block, the entire chain must be changed,
which requires heavy processing power.
 With today’s ever-growing capacity of processing power, it could theoretically
still be possible to change the entire chain. To avoid that, any change to the
Block must go through something called the Consensus model.

Consensus
 A Block can be added to the chain by a technique called the Consensus model.
The processing nodes which are distributed across, must reach a consensus
before adding a new Block to the chain by solving a complex problem
presented to them.
 Blockchain Networks run on thousands of computers, and to motivate people to
run them, an incentive is needed. This incentive is the cryptocurrency in the
form of Coin or Token.
Coin:
Uses its own Blockchain Network to keep track of all the data, operates
independently of any other platform.
Token:
Uses other Blockchain’s network and infrastructure and does not worry about how
it’s validated on the network. The Token just runs on other Blockchain’s network.

8
A token that is required to use a service
Usage tokens:
A token that gives users the right to contribute work to a
DAO and earn in exchange for their work.
Work tokens:
An external, tradable asset that is a representation of value
in a system
Security tokens

PUBLIC KEY / PRIVATE KEY
 Cryptocurrencies are built upon Public-Key Cryptography(PKC), a
cryptographic system that uses pairs of keys – public keys, which are publicly
known and essential for identification, and private keys, kept secret and used
for authentication and encryption.
Public Key
 A public key allows you to receive cryptocurrency transactions. It’s a
cryptographic code that’s paired with a private key. While anyone can send
transactions to the public key, you need the private key to "unlock" it and prove
that you are the owner of the cryptocurrency received in the transaction.
Private Key
 A private key gives you the ability to prove ownership or spend the funds
associated with your public address. While you can generate a public key with
a private key, doing the opposite is practically impossible because of the one-
way "trap-door" function. You can have any number of public keys connected
to a private key.

DECENTRALIZED
 Blockchain takes decentralization to an all-new level. Anything which has been centralized and
managed by a central body is being re-imagined with Blockchain networks.
 No single person, body, or entity owns any of the networks. Instead, everyone who is part of the
network owns it – whether it is infrastructure, processing, persistence, changes to the network, or
even decision making.
Infrastructure
 Nodes are decentralized and not owned by an organization. Anyone who wants to make their
systems contribute to the network can do so and get rewarded.
Processing
 A bunch of nodes are selected by the network to process a Block. Any node from the network can
be chosen to process each Block, and the selection of nodes depends on different Blockchain
networks.
Persistence
 Once distributed nodes process the Block, it’s written to the chain and is persisted on these
distributed nodes. So, no one node holds the data.
Political
 Unlike traditional organizations where CEO and the executive leadership holds the decision-making
power, Blockchain oers a decentralized way of making decisions called DAO –Decentralized
Autonomous Organization.

SAMPLE USE CASES
Currency
 Respective central banks control at currencies and their value, and governments decide the volume
of currencies to print. Cryptocurrencies on Blockchain networks can operate without the need for a
central authority.
Voting
 Voting with Blockchain carries the potential to eliminate election fraud and boost voter turnout, as
was tested in the November 2018 midterm elections inWest Virginia. Using Blockchain in this way
would make votes nearly impossible to tamper with. The Blockchain protocol would also maintain
transparency in the electoral process, reducing the personnel needed to conduct an election and
providing officials with nearly instant results. This would eliminate the need for recounts or any real
concern that fraud might threaten the election.
Property Records
 In the present day, the process of recording property rights is both burdensome and inefficient.
Today, a physical deed must be delivered to a government employee at the local recording office,
where it is manually entered into the county’s central database and public index. This process is not
just costly and time-consuming, it is also prone to human error, where each inaccuracy makes
tracking property ownership less efficient. Blockchain can eliminate the need to scan documents
and track physical les in a local recording office. If property ownership is stored and verified on the
Blockchain, owners can trust that their deed is accurate and permanently recorded.

SAMPLE USE CASES
Supply Chain
 As in the IBM Food Trust example, suppliers can use Blockchain to record the origins of
their purchased materials. This would allow companies to verify the authenticity of not
only their products but also common labels such as "Organic," "Local," and "Fair
Trade."
Healthcare Records
 Healthcare providers can leverage Blockchain to store their patients’ medical records
securely. When a medical record is generated and signed, it can be written into the
Blockchain, which provides patients with the proof and confidence that the record
cannot be changed. These personal health records could be encoded and stored on the
Blockchain with a private key, so that they are only accessible by certain individuals,
thereby ensuring privacy.
Conclusion
 Blockchain is a burgeoning technology that can potentially be integrated with many
business sectors and establish a highly-secure system for transacting and maintaining
records. Conventional and centralized systems are being challenged with Blockchain-
based applications, and large corporations are leading the research and development of
such products. With an explosive rise in the popularity and consumption of
cryptocurrencies, Blockchain technology is here to stay and kick-start a new revolution
in the market.

TYPES OF CRYPTO-CURRENCIES
Presently, there are thousands of cryptocurrencies out there,
with many more being started daily. While they all rely on
the same premise of a consensus-based, decentralized, and
immutable ledger in order to transfer value digitally
between trustless parties, there are subtle and not-so-subtle
differences between them.
 Payment cryptocurrency
 Utility Tokens
 Stablecoins
 Central Bank Digital Currencies (CBDC)

14
TYPES OF CRYPTO-CURRENCIES
The first major type of cryptocurrency is payment cryptocurrency. Bitcoin,
perhaps the most famous cryptocurrency, was the first successful example
of a digital payment cryptocurrency.
Payment Crypto-
Currency
Tokens are any cryptographic asset that runs on top of another blockchain.
Ethereum network was the first to incorporate the concept of allowing other
crypto assets to piggyback on its blockchain.
Utility Tokens
Given the volatility experienced in many digital assets, stablecoins
are designed to provide a store of value.
Stablecoins
Central Bank Digital Currency is a form of cryptocurrency issued
by the central banks of various countries.
Central Bank
Digital Currencies

PAYMENT CRYPTO-CURRENCY
 The first major type of cryptocurrency is payment cryptocurrency. Bitcoin,
perhaps the most famous cryptocurrency, was the first successful example of a
digital payment cryptocurrency. The purpose of a payment cryptocurrency, as
the name implies, is not only as a medium of exchange but also as a purely
peer-to-peer electronic cash to facilitate transactions.
 Broadly speaking, since this type of cryptocurrency is meant to be a general-
purpose currency, it has a dedicated blockchain that only supports that purpose.
It means that smart contracts and decentralized applications (Dapps) cannot be
run on these blockchains.
 These payment cryptocurrencies also tend to have a limited number of digital
coins that can ever be created, which makes them naturally deflationary. With
less and less of these digital coins can be mined, the value of the digital
currency is expected to rise.
 Examples of payment cryptocurrencies include Bitcoin, Litecoin, Monero,
Dogecoin, and Bitcoin Cash.

UTILITY TOKENS
 The second major type of cryptocurrency is the Utility Token. Tokens are any cryptographic asset
that runs on top of another blockchain. Ethereum network was the first to incorporate the concept of
allowing other crypto assets to piggyback on its blockchain.
 As a matter of fact, Vitalik Buterin, the founder of Ethereum, envisioned his cryptocurrency as an
open-sourced programmable money that could allow smart contracts and decentralized apps to
disintermediate legacy financial and legal entities.
 Another key difference between tokens and payment cryptocurrency is that tokens, like Ether on the
Ethereum network, are not capped. These cryptocurrencies are, therefore, inflationary – meaning
that since more and more of these tokens are created, the value of this digital asset should be
expected to fall, like a fiat currency in a country that is constantly running its cash printing press.
 A Utility Token serves a specific purpose or function on the blockchain, called a use case.
 Ether’s use case, as an example, is for paying transaction fees to write something to the Ethereum
blockchain or building and purchasing Dapps on the platform. In fact, the Ethereum network was
changed in 2021 to expand, or burn off, some of the Ether used in each transaction to align the use
case. You will hear these sorts of tokens referred to as Infrastructure Tokens.

STABLECOINS
 Given the volatility experienced in many digital assets, stablecoins are designed to provide a store of value. They
maintain their value because while they are built on a blockchain, this type of cryptocurrency can be exchanged
for one or more fiat currencies. So stablecoins are actually pegged to a physical currency, most commonly the
U.S. dollar or the Euro.
 The company that manages the peg is expected to maintain reserves in order to guarantee the cryptocurrency’s
value. This stability, in turn, is attractive to investors who might use stablecoins as a savings vehicle or as a
medium of exchange that allows for regular transfers of value free from price swings.
 The highest profile stablecoin is Tether’s USDT, which is the third-largest cryptocurrency by market
capitalization behind Bitcoin and Ether. The USDT is pegged to the US dollar, meaning its value is supposed to
remain stable at 1 USD each. It achieves this by backing every USDT with one US dollar worth of reserve assets
in cash or cash equivalents.
 Holders can deposit their fiat currency for USDT or redeem their USDT directly with Tether Limited at the
redemption price of $1, less fees that Tether charges. Tether also lends out cash to companies to make money.
 However, stablecoins aren’t subject to any government regulation or oversight. In May 2022, another high-profile
stablecoin, TerraUSD, and its sibling coin, Luna, collapsed. TerraUSD went from $1 to just 11 cents.
 The problem with TerraUSD was that instead of investing reserves into cash or other safe assets, it was backed by
its own currency, Luna. During its crash in May, Luna went from over $80 to a fraction of a cent. As holders of
TerraUSD clamored to redeem their stablecoins, TerraUSD lost its peg to the dollar.
 The lesson here again is to do your due diligence before even buying stablecoins by looking at the whitepaper
and understanding how the stablecoin maintains its reserves.

CENTRAL BANK DIGITAL CURRENCIES
 Central Bank Digital Currency is a form of cryptocurrency issued by the central banks of various
countries. CBDCs are issued by central banks in token form or with an electronic record associated
with the currency and pegged to the domestic currency of the issuing country or region.
 Since this digital currency is issued by central banks, the central banks maintain full authority and
regulation over the CBDC. The implementation of a CBDC into the financial system and monetary
policy is still in the early stages for many countries; however, over time it may become more widely
adopted.
 Like cryptocurrencies, CBDCs are built upon blockchain technology that should increase payment
efficiency and potentially lower transaction costs. While the use of CBDCs is still in the early stages
of development for many central banks across the world, several CBDCs are based upon the same
principles and technology as cryptocurrencies, such as Bitcoin.
 The characteristic of the currency being issued in token form or with electronic records to prove
ownership makes it similar to other established cryptocurrencies. However, as CBDCs are
effectively monitored and controlled by the issuing government, holders of this cryptocurrency give
up the advantage of decentralization, pseudonymity, and lack of censorship.
 CBDCs maintain a “paper trail” of transactions for the government, which can lead to taxation and
other economic rents to be levied by governments. On the plus side, in a stable political and
inflationary environment, CBDCs can be reasonably expected to maintain their value over time or at
least track the pegged physical currency.
 In addition to having the full faith and credit of the issuing country, buyers of CDBCs would also
not have to worry about fraud and abuse that has plagued many other cryptocurrencies.

SMART CONTRACTS
 A smart contract is a self-executing program that automates the
actions required in a blockchain transaction. Once completed, the
transactions are trackable and irreversible. The best way to
envision a smart contract is to think of a vending machine—when
you insert the correct amount of money and push an item's button,
the program (the smart contract) activates the machine to dispense
your chosen item.
 Smart contracts permit trusted transactions and agreements to be
carried out among disparate, anonymous parties without the need
for a central authority, legal system, or external enforcement
mechanism.
 While blockchain technology has come to be thought of primarily
as the foundation for Bitcoin
, it has evolved far beyond
underpinning a virtual currency.

SMART CONTRACTS
 History of Smart Contracts
 Smart contracts were first proposed in 1994 by Nick Szabo, an
American computer scientist who conceptualized a virtual
currency called "Bit Gold" in 1998, 10 years before Bitcoin was
introduced. Szabo is often rumored to be the real Satoshi
Nakamoto, the anonymous Bitcoin inventor, which he has denied.
 Szabo defined smart contracts as computerized transaction
protocols that execute the terms of a contract. He wanted to extend
the functionality of electronic transaction methods, such as POS
(points of sale), to the digital realm.

SMART CONTRACTS
 History of Smart Contracts
 In his paper, Szabo also proposed the execution of a contract for
synthetic assets, such as combining derivatives and bonds. Szabo
wrote, "These new securities are formed by combining securities
(such as bonds) and derivatives (options and futures) in a wide
variety of ways. Very complex term structures for payments...can
now be built into standardized contracts and traded with low
transaction costs, due to computerized analysis of these complex
term structures.“
 Many of Szabo's predictions in the paper came true in ways
preceding blockchain technology. For example, derivatives trading
is now mostly conducted through computer networks using
complex term structures.

USES OF SMART CONTRACTS
 Because smart contracts execute agreements, they can be used for
many different purposes. One of the simplest uses is ensuring
transactions between two parties occur, such as the purchase and
delivery of goods. For example, a manufacturer needing raw
materials can set up payments using smart contracts, and the
supplier can set up shipments. Then, depending on the agreement
between the two businesses, the funds could be transferred
automatically to the supplier upon shipment or delivery.
 Real estate transactions, stock and commodity trading, lending,
corporate governance, supply chain, dispute resolution, and
healthcare are only a few examples where smart contracts are
theorized to have use.

23
SMART CONTRACT PROS
They speed up contract execution
Efficiency
There can be no human error introduced
Accuracy
The programming cannot be altered
Immutability

24
SMART CONTRACT CONS
They cannot be changed if there are mistakes
Permanent
They rely on the programmer to ensure the code is
programmed properly to execute the intended actions
Human Factor
There may be loopholes in the coding, allowing for
contracts to be executed in bad faith
Loopholes

DECENTRALIZED FINANCE
 Decentralized finance (DeFi) is an emerging peer-to-peer financial
system that uses blockchain and cryptocurrencies to allow people,
businesses, or other entities to transact directly with each other.
The key principle behind DeFi is to remove third parties like
banks from the financial system, thereby reducing costs and
transaction times.
 In the U.S., the Federal Reserve and Securities and Exchange
Commission (SEC) define the rules for
centralized financial institutions like banks and brokerages, which
consumers rely on to access capital and financial services directly.
DeFi challenges this centralized financial system by empowering
individuals with peer-to-peer transactions.

HOW DECENTRALIZED FINANCE WORKS
 Through peer-to-peer financial networks, DeFi uses security
protocols, connectivity, software, and hardware advancements.
This system eliminates intermediaries like banks and other
financial service companies. These companies charge businesses
and customers for using their services, which are necessary in the
current system because it's the only way to make it work. DeFi
uses blockchain technology to reduce the need for these
intermediaries.
Blockchain
 A blockchain is a distributed and secured database or ledger. In a
blockchain, transactions are recorded in files called blocks and
verified through automated processes. If a transaction is verified,
the block is closed and encrypted; another block is created with
information about the previous block and information about newer
transactions.

 The blocks are "chained" together through the information in each
proceeding block, giving it the name blockchain. Information in
previous blocks cannot be changed without affecting the following
blocks, so blockchains are generally very secure if their networks
are large and fast enough. This concept, along with other security
protocols, provides the secure nature of a blockchain.
 Using applications called wallets that can send information to a
blockchain, individuals hold private keys to tokens or
cryptocurrencies that act like passwords. These keys give them
access to virtual tokens that represent value. Ownership of the
tokens is transferred by 'sending' an amount to another entity via a
wallet, whose wallet, in turn, generates a different private key for
them. This secures their ownership of the token, and the
blockchain design prevents the transfer from being reversed.

 Applications
 DeFi applications are designed to communicate with a blockchain, allowing
people to use their money for purchases, loans, gifts, trading, or any other way
they want without a third party. These applications are programs installed on a
device like a personal computer, tablet, or smartphone that make it easier to
use. Without the applications, DeFi would still exist, but users would need to be
comfortable and familiar with using the command line or terminal in the
operating system that runs their device.
 DeFi applications provide an interface that automates transactions between
users by giving them financial options to choose from. For example, if you
want to make a loan to someone and charge them interest, you can select the
option on the interface and enter terms like interest or collateral. If you need a
loan, you can search for providers, which could range from a bank to an
individual who could lend you some cryptocurrency after you agree on terms.

30
GOALS OF DECENTRALIZED FINANCE
Anyone with an internet connection can access a DeFi
platform, and transactions occur without geographic
restrictions.
Accessibility
DeFi enables any two parties to negotiate interest rates
directly and lend cryptocurrency or money via DeFi
networks.
Low Fees
Smart contracts published on a blockchain and records of completed transactions are
available for anyone to review but do not reveal your identity. Blockchains are
generally immutable, meaning they cannot be altered.
Security and
Transparency
DeFi platforms don't rely on centralized financial institutions. The
decentralized nature of DeFi protocols mitigates the need for and
costs of administering financial services.
Autonomy

DECENTRALIZED FINANCE USES
Decentralized finance, originally conceived of as a way to bring financial services like loans and
banking to those who don't have access to them, has morphed into an industry where you can take part
in many different sectors or endeavors. Here are a few of the most popular:
 Decentralized exchanges: The top preference for defi app users is accessing decentralized
exchanges. Exchanges like Uniswap and PancakeSwap have apps that let you interact with other
cryptocurrency users.
 Liquidity providers: Liquidity is the ability to sell assets quickly, a problem many cryptocurrency
users have encountered. Liquidity providers are generally pools where users place funds so
exchanges can provide selling opportunities for their users.
 Lending/Yield Farming: There are hundreds of defi apps available that provide lending. Generally,
they operate the same way as a liquidity pool, where users lock their funds in a pool and let others
borrow them, receiving interest on their loans—called yield farming. Many provide flash loans,
where no collateral is required from the borrower.
 Gambling/Prediction Markets: Everyday, millions of dollars in cryptocurrency are used in DeFi
gambling and prediction apps like Polymarket, ZKasino, Horse Racing Slot Keno Roulett, Azuro,
and JuicyBet.Prediction markets are platforms that let you place bets on the outcome of nearly any
event.
 NFTs: The market for non-fungible tokens has cooled somewhat, but they are still popular with
niche investors and collectors.

INTRODUCTION TO FINTECH
‘Work Smarter, Not Harder’
QUESTIONS
&
ANSWERS

Dr Asad Ali Jaffari Introduction to Fintech 4.pptx

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