Discusses Bitcoin's Proof-of-Work, the economic origin of Bitcoin, and the role of money in society.

1. BLOCKCHAIN
FUNDAMENTALS
BITCOIN & THE ROLE OF MONEY IN SOCIETY
Chhay Lin Lim

2. RECAP
01Testing your Blockchain knowledge so far, using Kahoot.it
Blockchain warming up
02Our expectations of the course and a general outline
Course outline and administration
03Creating a basic understanding of Blockchain
Film: The Bitcoin Gospel (part 1)
04The four perspectives of Blockchain, that we will cover:
• Technical
• Philosophical
• Economic
• Business
Introduction to Blockchain
05Working towards a final presentation of your fictional startup
Creating your fictional startup

3. How most people define Blockchain
Centralized networks vs Blockchain
Blockchain
• Centralized
• Single point of failure (SPOF)
• 3rd Party (middleman)
• Decentralized
• No SPOF
• No middleman
• Peer-2-peer
• 100% transparent
• Immutable
• Cryptographically secure
• Open source

4. Napster
Why did Napster, Kazaa, Limewire etc. fail?
Central
Index Server
1a: computer A makes
connection with CIS.
1b: computer A searches for
Michael Jackson – Billie Jean.
1c: CIS tells that computer B
possesses the song.
2a: computer A
makes direct
connection
with B.
2b: computer A
downloads
from B.
A
B
1. It was partly peer-2-peer
2. Napster was partly centralized (Central Index
Server)
3. If you shut down the CIS, you shut down Napster
Yes, but we can win a major battle
in the arms race and a new
territory of freedom for several
years.
Governments are good at cutting of
heads of a centrally controlled like
Napster, but pure P2P networks
like Gnutella and Tor seem to be
holding their own.
- Satoshi Nakamoto
07 Nov 2008

5. Agenda
01We take a look at the main school of economic thought that has
greatly influenced Bitcoin, and discuss the role of money in society
The Role of Money in Society
02Viewing the second and final part of The Bitcoin Gospel
Film: The Bitcoin Gospel (part 2)
03To understand the role of miners, hash cryptography, and what
makes Blockchain secure
Introduction to Proof-of-Work
04Using Chrome, MetaMask, and the Ethereum testnet
Practicum: create your own Cryptocurrency
05Working towards a final presentation of your fictional startup
Creating your fictional startup
06Wrap up of today’s workshop
Wrap up

6. Main Schools of Economic Thought
Marxism Keynesianism
Austrian School
of Economics
Chicago School
of Economics
Karl Marx - Das
Kapital (1867)
“Value comes
from labour”
J.M Keynes – The General
Theory … (1936)
More government
expenditures and lower
interest rates as private
consumptieto stimulate the
economy
Y = C + I + G + (X – M)
Carl Menger (1873)
“Value is subjective”
The marginal revolution
Mises
Economic
calculation (1920)
Hayek –
Denationalization
of Money (1976)
Rothbard
(libertarian
anarchist)
Cryptoanarchism (‘80)
Milton Friedman
We must have a Central Bank to
regulate the money supply
(changed opinion at end of life)
David Friedman
(libertarian
anarchist)
Patri Friedman
(libertarian
anarchist)

8. Satoshi’s main discontentments
1. Central Banking
2. Fractional Reserve Banking
The root problem with conventional currency is all the trust
that’s required to make it work. The central bank must be
trusted not to debase the currency, but the history of fiat
currencies is full of breaches of that trust. Banks must be
trusted to hold your money and transfer it electronically, but
they lend it out in waves of credit bubbles with barely a fraction
in reserve. We have to trust them with our privacy, trust them
not to let identity thieves drain our accounts. Their massive
overhead costs make micropayments impossible.
- Satoshi Nakamoto, 11 February, 2009
Satoshi on
Monetary
problems

10. Central Banking
1. Central Banking
2. Fractional Reserve Banking
Central
Banking
Central
Bank
functions
1. Monetary
policy:
set interest
rates
2. Issue
money
3. Lender of
last resort
to
government
4. Lender of
last resort
to
commercial
banks
5. Ensure
stability of
banking
system

11. Profit
InterestInterest
Government
Banking
system
European
Central
Bank
Bonds Bonds
Money Reserves
Money Creation through the purchase of
government bonds
Central
Banking

12. Reasons for Quantitative Easing Central
Banking
1. Lower interest rates, because an expansion of the money
supply lowers the price of short-term money.
2. More loans, because lower interest rates make it attractive
for consumers and companies to take out new loans.
3. More spending, because lower interest rates make it less
attractive to leave money in a savings account.
4. Less short-term unemployment, because the loans give
companies more capital. In addition, they can achieve
more sales through increased consumer spending. All this
stimulates companies to hire more employees.
5. More short-term confidence in the economy, as it is driven
by more investment and more spending.

13. Murray Rothbard on Central Banking (part 1)
If taxation is permanently short of the style of expenditures desired by
the State, how can it make up the difference? By getting control of the
money supply, or, to put it bluntly, by counterfeiting. On the market
economy, we can only obtain good money by selling a good or service in
exchange for gold, or by receiving a gift; the only other way to get
money is to engage in the costly process of digging gold out of the
ground. The counterfeiter, on the other hand, is a thief who attempts to
profit by forgery, e.g., by painting a piece of brass to look like a gold
coin. … By diluting the value of each ounce or dollar of genuine money,
the counterfeiter’s theft is more sinister and more truly subversive than
that of the highwayman; for he robs everyone in society, and the robbery
is stealthy and hidden, so that the cause-and-effect relation is
camouflaged.
…
But in that case, what are we to say when the government seizes control
of the money supply, abolishes gold as money, and establishes its own
printed tickets as the only money? In other words, what are we to say
when the government becomes the legalized, monopoly counterfeiter?
Central
Banking

14. Murray Rothbard on Central Banking (part 2)
New money injected into the economy has an inevitable ripple effect;
early receivers of the new money spend more and bid up prices, while
later receivers or those on fixed incomes find the prices of the goods
they must buy unaccountably rising, while their own incomes lag behind
or remain the same. Monetary inflation, in other words, not only raises
prices and destroys the value of the currency unit; it also acts as a giant
system of expropriation of the late receivers by the counterfeiters
themselves and by the other early receivers. Monetary expansion is a
massive scheme of hidden redistribution.
… Monetary expansion then becomes a giant scheme of hidden
taxation, the tax falling on fixed income groups, on those groups remote
from government spending and subsidy, and on thrifty savers who are
naive enough and trusting enough to hold on to their money, to have
faith in the value of the currency.
Spending and going into debt are encouraged; thrift and hard work
discouraged and penalized. Not only that: the groups that benefit are the
special interest groups who are politically close to the government and
can exert pressure to have the new money spent on them so that their
incomes can rise faster than the price inflation.
Central
Banking

15. Murray Rothbard’s books on Money and
Banking

16. Fractional Reserve Banking
1. Central Banking
2. Fractional Reserve Banking
Fractional
Reserve
Banking

17. Fractional Reserve Banking
Fractional
Reserve
Banking
Deposit
number
Amount
deposited
Loaned Reserves
1 €100.00 €98.00 €2.00
2 98.00 96.04 1.96
3 96.04 94.12 1.92
4 94.12 92.24 1.88
5 92.24 90.40 1.84
… … … …
291 0.26 0.25 0.01
Total: €4,985.93 €4,885.93 €99.75

18. Full Reserve Banking as alternative
Full
Reserve
Banking
Friedrich Hayek argued in "Choice in Currency” (1976) for free market competition
in the money issuance industry. The idea behind the privatization of money
production is that there is more competition among the different currencies and
that private money producers are stimulated to produce good money.
Under the free banking system, interest rates are not determined by a central
bank or government, but by a natural demand for and supply of available money.
Under free banking:
1. Citizens have freedom of choice, because there are no legally required means
of payment.
2. Citizens have the freedom to establish financial institutions without state
permission.
3. Citizens have the freedom to offer financial services.
4. Citizens have the freedom to issue their own currencies.

19. Free Banking as alternative Free
Banking
Friedrich Hayek argued in "Choice in Currency” (1976) for free market competition
in the money issuance industry. The idea behind the privatization of money
production is that there is more competition among the different currencies and
that private money producers are stimulated to produce good money.
Under the free banking system, interest rates are not determined by a central
bank or government, but by a natural demand for and supply of available money.
Under free banking:
1. Citizens have freedom of choice, because there are no legally required means
of payment.
2. Citizens have the freedom to establish financial institutions without state
permission.
3. Citizens have the freedom to offer financial services.
4. Citizens have the freedom to issue their own currencies.

20. The best the state can do with respect to money is to provide a framework of legal
rules within which the people can develop the monetary institutions that best suit
them… if we could prevent governments from meddling with money, we would do
better than any government has ever done in this regard. And private enterprise
would probably have done better than the best they have ever done.
- Friedrich Hayek, 1976
Free Banking as alternative Free
Banking
I don’t believe we shall ever have a good money again before we take the thing out of
the hands of government. We can’t take it violently out of the hands of government,
all we can do is by some sly roundabout way introduce something that they can’t
stop.
- Friedrich Hayek, 1984

21. Cantillon Effect: monetary policy creates inequality
CantillonNew money is not dispersed equally into the economy. This
monetary expansion is comparable to putting honey in a cup
of tea. It will first clump in the middle of the cup before
spreading out.
Those who receive the money first, benefit most from money
creation.

22. Austrian School and Bitcoin: a summary Austrians
and BitcoinAustrian School of Economics Bitcoin
1. Money is not an invention of
the state.
Bitcoin originated in the free market.
2. People should be free to
issue their own means of
payment without permission.
In addition to Bitcoin, people can issue their own
cryptocurrencies. The decentralized nature of blockchain
makes cryptocurrencies difficult to regulate.
3. Money production should be
subject to free market
competition.
Bitcoin breaks the government monopoly on money production.
Bitcoin is again introducing free banking and is an alternative to
national currency.
4. Central bank must be
abolished.
The best way to fight national currencies is to provide an
alternative that can compete. Bitcoin has the ambition to
become the new money system.
5. Citizens should have
freedom of choice.
The Bitcoin community does not force you to use Bitcoin.
Participating in Bitcoin is entirely voluntary.
6. Low inflation is good and
leads to more price stability.
Inflation for Bitcoin is pre-programmed in the protocol. There is
a halving of inflation every four years. The first four years of
Bitcoin, a miner who created a valid block still received 50
BTC. Four years later, that was cut in to 25 BTC. After that, it
halved to 12.5 BTC. The previous halving took place in May
2020.

23. Other important questions regarding Money
General
questions
on Money
1. What is money?
2. Why do we use money?
3. What happens if we eliminate the use of money?
4. Is money the root of all evil?
5. Why does Bitcoin have value?
6. Is Bitcoin money?
7. Can we really decrease wars by taking away government
monopoly over money?

24. What is Money: Mises’ Regression Theorem
General
questions
on Money

25. Why do we use Money: Double Coincidence of
Wants
General
questions
on Money1. Barter is inefficient: a laborious and time-consuming
process
2. Double coincidence of wants is a requirement for an
efficient barter system
3. Money serves as an accepted medium of exchange

26. What happens if we eliminate money or prices?
General
questions
on Money
Ludwig von Mises answers this question in Economic Calculation in the Socialist
Commonwealth (1920):
• Knowledge of prices is essential to direct available resources rationally
• Without a price system, no one knows what is in demand and what to produce
• If entrepreneurs cannot calculate profits and losses, we will have systematic
misallocation of resources
What economic calculation requires is a monetary system whose functioning is
not sabotaged by government interference. The endeavors to expand the quantity
of money in circulation in order to increase the government’s capacity to spend or
in order to bring about a temporary lowering of the rate of interest disintegrate all
currency matters and derange economic calculation. The first aim of monetary
policy must be to prevent governments from embarking upon inflation and from
creating conditions which encourage credit expansion on the part of banks.
- Ludwig von Mises, 1949

27. Is Money the root of all Evil?
General
questions
on Money

28. Why does Bitcoin have value?
General
questions
on Money
Labour theory of value vs Theory of subjective value
Labour theory of value
• The value of a commodity
depends on the amount of
labour involved in its
production
• It’s not so clear that both
people involved in an
exchange benefit
Subjective theory of value
• The value of a commodity
is subjective and differs
according to personal
needs and situations
• In exchange, people will
give up what they value
less in return for what they
value more, which is why
both sides can gain from
an exchange
• Leads to the marginal
revolution in economics

29. Is Bitcoin money? Bitcoin &
Money

31. Can Bitcoin lead to a more peaceful world? Money &
Control

34. Agenda
01We take a look at the economic school of thought that has greatly
influenced Bitcoin, and discuss the role of money in society
The Role of Money in Society
02Viewing the second and final part of The Bitcoin Gospel
Film: The Bitcoin Gospel (part 2)
03To understand the role of miners, hash cryptography, and what
makes Blockchain secure
Introduction to Proof-of-Work
04Using Chrome, MetaMask, and the Ethereum testnet
Practicum: create your own Cryptocurrency
05Working towards a final presentation of your fictional startup
Creating your fictional startup
06Wrap up of today’s workshop
Wrap up

36. Agenda
01We take a look at the economic school of thought that has greatly
influenced Bitcoin, and discuss the role of money in society
The Role of Money in Society
02Viewing the second and final part of The Bitcoin Gospel
Film: The Bitcoin Gospel (part 2)
03To understand the role of miners, hash cryptography, and what
makes Blockchain secure
Introduction to Proof-of-Work
04Using Chrome, MetaMask, and the Ethereum testnet
Practicum: create your own Cryptocurrency
05Working towards a final presentation of your fictional startup
Creating your fictional startup
06Wrap up of today’s workshop
Wrap up

37. How a Bitcoin transaction works
BLOCK
#X1. Users initiate
transaction in the network
2. Miners choose
transactions with
the highest fees
and add them to a
block
3. Miners compete
in solving a
cryptographic
puzzle
Mempool
Tx1
Tx2
Tx3
Tx...
Tx1
Tx3
Tx...
BLOCK-
CHAIN
4. Miner that
has solved
the puzzle
first, can add
the block to
Blockchain

38. Proof-of-
Work demo
Blockchain Demo
Block #1
Nonce: 212046
Transaction data:
Jim -> 100 BTC -> Jane
Previous hash:
000000000000000000000000000
000000000000000000000000000
0000000000
Block header hash:
000058ab9df5d209cdddbbd1d12
9c4d157a9b77c0ee76bacd6dcf67
47235fb8d
Block #2
Nonce: 152618
Transaction data:
Jane -> 25 BTC -> John
Previous hash:
000058ab9df5d209cdddbbd1d12
9c4d157a9b77c0ee76bacd6dcf6
747235fb8d
Block header hash:
0000ffcf3ff55ee1ce507f89cd252e
678c1d3eab002320fe4fe784137f
4715d9
Timestamp Timestamp

39. Consensus Mechanism: Proof-of-Work
• Concept first presented in 1993 by Cynthia Dwork and Moni
Naor in “Pricing via Processing or Combatting Junk Mail”
• Implemented by Adam Back in HashCash (1997)
• Within a PoW Blockchain, your chance of creating a block
is dependent on your computing power
• Requires high energy consumption
Proof-of-
Work

40. What is Hash Cryptography?
• A way to make plaintext unintelligible through mathematical
algorithms
• Bitcoin makes use of SHA-256 (Secure Hash Algorithm)
• 64 characters long
• Each character is a hexadecimal (0, 1, 2, 3, 4, 5, 6, 7,
8, 9, a, b, c, d, e, f)
• Each character is 4 bits. The hash is hence 64 * 4 =
256 bits long
Hash
Conditions for a reliable hash algorithm
1. It is deterministic.
2. Reverse engineering of an output is not possible.
3. Converting data into a hash is done quickly.
4. Changing input escalates into a radical change in
output.
5. Chances of conflicts are virtually impossible.

41. Proof-of-
Work
summary
Things you can explain now
1. What is hash cryptography?
2. What is the role of the Nonce (number used once)?
3. What do miners do, and why are they important for the
Bitcoin network?
4. What is that cryptographic puzzle that miners try to solve?
5. How are blocks cryptographically linked for security?

42. Agenda
01We take a look at the economic school of thought that has greatly
influenced Bitcoin, and discuss the role of money in society
The Role of Money in Society
02Viewing the second and final part of The Bitcoin Gospel
Film: The Bitcoin Gospel (part 2)
03To understand the role of miners, hash cryptography, and what
makes Blockchain secure
Introduction to Proof-of-Work
04Using Chrome, MetaMask, and the Ethereum testnet
Practicum: create your own Cryptocurrency
05Working towards a final presentation of your fictional startup
Creating your fictional startup
06Wrap up of today’s workshop
Wrap up

43. Your own
Crypto
Creating your own coin (30-40 minutes)
1. Install an Ethereum wallet with MetaMask
2. Create, in pairs, your own crypto token with Remix
(development environment)
3. Use the Ethereum test net (Rinkeby)
4. For the creation of your own token on Ethereum, you have
to use “gas” (ether)
5. Check out Discord for the instruction manual

44. Agenda
01We take a look at the economic school of thought that has greatly
influenced Bitcoin, and discuss the role of money in society
The Role of Money in Society
02Viewing the second and final part of The Bitcoin Gospel
Film: The Bitcoin Gospel (part 2)
03To understand the role of miners, hash cryptography, and what
makes Blockchain secure
Introduction to Proof-of-Work
04Using Chrome, MetaMask, and the Ethereum testnet
Practicum: create your own Cryptocurrency
05Working towards a final presentation of your fictional startup
Creating your fictional startup
06Wrap up of today’s workshop
Wrap up

45. Your own
Crypto
Your own fictional Startup
1. You work in pairs
2. You have created your own coins
3. Every couple receives ESS coins from me (sent to your
mutual Ethereum address)
4. Friday: first presentations of your startup website
• Pitch your startup
• Your peers use their ESS coins to invest in your
startup
• If you receive ESS coins from your peers, send them
back your own coins
5. Couple with the most ESS coins at the end of the course,
wins a prize: €20 in BCH

46. Agenda
01We take a look at the economic school of thought that has greatly
influenced Bitcoin, and discuss the role of money in society
The Role of Money in Society
02Viewing the second and final part of The Bitcoin Gospel
Film: The Bitcoin Gospel (part 2)
03To understand the role of miners, hash cryptography, and what
makes Blockchain secure
Introduction to Proof-of-Work
04Using Chrome, MetaMask, and the Ethereum testnet
Practicum: create your own Cryptocurrency
05Working towards a final presentation of your fictional startup
Creating your fictional startup
06Wrap up of today’s workshop
Wrap up

47. THANK YOUBLOCKCHAIN FUNDAMENTALS:
BITCOIN & THE ROLE OF MONEY IN SOCIETY