UNIVERSITA’ DEGLI STUDI DI PADOVA DIPARTIMENTO DI SCIENZE ECONOMICHE ED AZIENDALI “M.FANNO” DIPARTIMENTO DI DIRITTO PRIVATO E CRITICA DEL DIRITTO CORSO DI LAUREA MAGISTRALE IN ECONOMICS AND FINANCE TESI DI LAUREA “CRYPTO-CURRENCY AND BLOCKCHAIN: THE REVOLUTION OF THE WORLD ECONOMIC SYSTEM AND DIGITAL IDENTITIES” RELATORE: CH.MO PROF. ALBERTO LUPOI LAUREANDO: VALERIO DECARO MATRICOLA N. 1104252 ANNO ACCADEMICO 2016 – 2017 Il candidato dichiara che il presente lavoro è originale e non è già stato sottoposto, in tutto o in parte, per il conseguimento di un titolo accademico in altre Università italiane o straniere. Il candidato dichiara altresì che tutti i materiali utilizzati durante la preparazione dell’elaborato sono stati indicati nel testo e nella sezione “Riferimenti bibliografici” e che le eventuali citazioni testuali sono individuabili attraverso l’esplicito richiamo alla pubblicazione originale. Firma dello studente ________________ Contents Contents ........................................................................................................................... 1 List of Figures ................................................................................................................. 3 1 Introduction ............................................................................................................ 4 2 Origin and Evolution of Money: Unit of Account, Medium of Exchange and Store of Value ................................................................................................................................ 6 2.1 Money: its role and definition ....................................................................................... 6 2.2 Money across centuries: Why was money so important from the beginning? .............. 8 2.3 An interesting case study: Island of Yap ....................................................................... 9 2.4 From etymology to numismatics ................................................................................... 9 2.5 How coins are made and why these material have been chosen ................................. 10 2.6 From the first minting to the disintegration of the Roman Empire ............................. 10 2.7 Middle Ages: two separate functions of money .......................................................... 12 2.8 From the 17th to the beginning of the 20th century: the first central banks and the gold standard 16 2.9 The world changes during World Wars ...................................................................... 20 2.10 From the beginning of globalization to the present day .............................................. 21 3 Mobile Payment and Crypto-Currencies ........................................................... 26 3.1 Peer-to-Peer Revolution like the Internet Revolution ................................................. 27 3.2 Behind or beside Bitcoin: Blockchain ......................................................................... 28 3.3 The route of Fintech Investment ................................................................................. 29 3.4 Where will we end? ..................................................................................................... 30 4 Bitcoin and how it became the first crypto-currency in the world .................. 33 4.1 A brief but intense story .............................................................................................. 33 4.2 Basic Cryptography Background ................................................................................ 35 4.3 SHA-256, Hash pointers and Data Structure ............................................................... 37 4.4 Digital Signatures and Digital Identities ..................................................................... 40 4.5 From cryptography to cryptocurrency ......................................................................... 42 4.6 How Bitcoin achieves Decentralization ...................................................................... 44 4.7 Incentives and new minting ......................................................................................... 48 4.8 Bitcoin Proof-of-work: The Hash Puzzle .................................................................... 50 4.9 Mining economics, Confidence and Bitcoin Bootstrapping ........................................ 52 1 4.10 A weakness of Bitcoin: 51%-Attacker ........................................................................ 54 4.11 Bitcoin price, Wallets and Keys .................................................................................. 56 4.12 Altcoins: Main Bitcoin Competitors ........................................................................... 59 5 Blockchain: Bitcoin Security System and its countless applications ............... 61 5.1 The Core of the revolution .......................................................................................... 61 5.2 Classification, Security and other “Technical Stuff” .................................................. 63 5.3 How “real” is Blockchain Technology? ...................................................................... 67 5.4 Blockchain Technology in 2018 and beyond .............................................................. 77 6 Crypto-currency: work in progress and how they are transposed into national legal systems ........................................................................................................................... 80 6.1 Is Bitcoin legal? ........................................................................................................... 81 6.2 Historical highlights of the bitcoin normative evolution in the world ........................ 85 6.3 What about Taxation? ................................................................................................. 88 6.4 Checks, Bank Transfers and Bitcoin ........................................................................... 90 6.5 Bitcoin and requirements to replace legal currencies .................................................. 94 7 Conclusion ............................................................................................................. 99 Bibliography ................................................................................................................ 101 2 List of Figures Figure 1 - Europe 1400-1850, Average Silver Content (in grams) of 10 Currencies ............. 15 Figure 2 - Global investment activity (VC, PE and M&A) in fintech companies .................. 30 Figure 3 - SHA-256 Hash Function .......................................................................................... 37 Figure 4 - Blockchain is an example of linked list data structure built with hash pointers ...... 38 Figure 5 - "Merkle tree" is another example of data structure ................................................. 39 Figure 6 - Double Spending Attempting .................................................................................. 43 Figure 7 - Double Spending Attack .......................................................................................... 47 Figure 8 - Bitcoin Monetary Inflation ..................................................................................... 49 Figure 9 - Bitcoin Network total computation speed ............................................................... 51 Figure 10 - Mining Economics, a simplified profit equation ................................................... 53 Figure 11 - Bitcoin Bootstrapping ............................................................................................ 53 Figure 12 - An estimation of hashrate distribution amongst the largest mining pools on May 14, 2017 ......................................................................................................................................... 54 Figure 13 - Market Price (USD), Average USD market price across major bitcoin exchanges .................................................................................................................................................. 57 Figure 14 - Blockchain Security Levels ................................................................................... 65 Figure 15 - Cost per transaction, Miners revenue by the number of transactions. ................... 96 Figure 16 - Average Confirmation Time of a Bitcoin transaction. .......................................... 96 3 1 Introduction Since I was a child, I have always been fascinated by the power of money and how simple pieces of metal or printed paper could heavily affect relationships between people. Growing up I began to realize that this power went beyond simple retail trading, money was, and it is still, able to change the political forces that move an entire country. During university studies I was able to feed my curiosity by trying to deepen the knowledge in the political and macro-economic fields, studying the role played by central banks and credit institutions in general, but above all trying to find out what in the centuries had shaped the concept we have in today's currency. Then, at the end of the previous academic year, before the summer, by accident I read an article in a magazine that talks about a “new” concept of currency, without physicality that can give tangible proof of existence, without authority to govern its operation, simply relying on com- puter and math algorithms. When I went deeper in details I realized that much of what I had learned was about to change and that I had just fallen