Introduction to Blockchain, Cryptocurrencies and the Web3 - part 1

Making the world a better place with blockchain

This is the content of my first 2-hours class that opens the 12-sessions introductory course we teach with OffChain and the DLH.

The course starts with a few basic definitions, so at least everybody knows what the words we are going to use actually mean:

What is “blockchain”?

1. The term designates a set of computer programs and, by extension, the technologies allowing the building of more such computer programs.
   ¬ Note the term is not “trade marked” – anyone can call his program “a blockchain”
   ¬ Corollary: a few notions of software design and architecture are necessary and will be introduced (so you can distinguish the fake from the real deal)

Hallmarks of a blockchain-based program:

¬ “Replicated state machine” – the data is distributed, replicated in a large network of computers agreeing on a “single version of truth” through a “consensus mechanism”
¬ The history of past states is secured through cryptographic methods

1. These computer programs have, remarkably, been shown to have a significant impact on:
   ¬ Governance and novel ways of collaborating
   ¬ Transaction costs – enabling interactions that were not economic in their absence
   ¬ Productivity

What are “cryptocurrencies”?

1. The term designates a set of data objects that display a series of unique characteristics.
   ¬ They are “persisted” in distributed databases with a dedicated design, the blockchains.
   ¬ In these databases, they are typically associated with “addresses”
   ¬ The blockchain program implements rules for modifying the amount of cryptocurrency associated with an address through “transactions”.
2. These data objects have been designed to implement characteristics of money:
   ¬ Enforce “ownership” and avoid easy duplication
   ¬ Ability to serve as “unit of account” and “medium of exchange”
   ¬ A real opportunity to avoid intermediaries (peer to peer), but no obligation to do so!
   ¬ A variable degree of privacy and censorship resistance
3. Cryptocurrencies allow OffChain Luxembourg to operate “bankless”

What is “Web3”?

1. A new generation of applications leveraging blockchains and cryptocurrencies.
   ¬ Look for strong data ownership
   ¬ Look for incentives (e.g. “play to earn”)
   ¬ On the downside, user experience is unfamiliar and often subpar
   ¬ The culture of anonymity exposes to scams.
2. NFTs, P2E games and DeFi applications are today the main categories of WEB3 applications.
3. We are pioneering “Attend to earn” – encouraging you to attend this class with the OffChain Luxembourg token, OCLT. At the end of the class, you’ll be able to SELL or to BUY more.

Why is this knowledge more relevant today than it was a few years ago?

1. MiCA is here – soon, crypto will be everywhere, and that’s a good thing!
   ¬ We’ll speak about how this will impact the Luxembourg Financial place – private banking, funds industry
   ¬ We’ll speak about crypto in everyday life – payments, taxation, accounting
   ¬ We’ll speak about lighter, more entertaining things such as “crypto stamps”
2. AI is also here – soon, fakes will be everywhere. Cryptographic signatures can alleviate the pains of a transition to an AI-infested world
   ¬ Scams – how to recognize and avoid them.

Course objective: helping you identify the way the suits you best for wielding “blockchain” to “make the world a better place”

¬ New jobs will soon be emerging, requiring crypto skills
¬ Deploying crypto in your everyday life will present financial benefits
¬ Launching a blockchain start-up
¬ Championing a blockchain solution inside your organisation
¬ Investing in crypto assets
¬ Etc. …

1. Practical exercise: let’s map your personal objectives on this course
2. If you want to know more: OffChain Luxembourg (WhatsApp group)

Bridge concepts and vocabulary

1. Browser extension
2. Wallet, address, seed phrase
3. Transaction
4. Public keys, private keys, hash, signature
5. Centralized Exchange (CEx) / Decentralized Exchange
6. “Deposit” / “Withdraw”
7. Fees
8. Smart contracts
9. Coins, tokens, stablecoins

You are going to learn how to use blockchains and crypto

¬ If you don’t have an account with a Centralized Exchange, start reading up on a few of them
¬ If you don’t have a “wallet” yet, you can already install those that will be used

Plan (for the 12 sessions)

1. How did we get here, why are we discussing « blockchain »?
2. Blockchain background, principles and practice (2 sessions)
3. Blockchain features and functionalities, wallets, smart contracts and dApps (2 sessions)
4. NFTs, Web3, DAOs and practical implementations
5. Blockchain architecture – public and private blockchains
6. Blockchain, cryptocurrencies and economics
7. Crypto-assets and decentralized finance in practice (2 sessions)
8. Blockchain and law – the MiCA regulation
9. Blockchain in large organisations in practice, wrapping-up and conclusions

Opening statement:

“Blockchain” is much more than a “technology” – if you came here to learn about technology, you’ll be pleasantly surprised, because we’ll open the horizons!
You’ll learn that “blockchain” enables:

• Brand new institutional architectures
• Brand new economic organizations

What guides us: increasing the propserity and well-being of the greater number. But are the historical determinants of well-being and prosperity?

¬ A tiny bit of political philosophy – Thomas Hobbes and David Hume
¬ Game theory
¬ Crypto-anarchy
¬ Haber & Stornetta’s 1991 “time stamping server”
¬ Wei Dai’s b-money
¬ Bitcoin – without which we wouldn’t be here today, talking about “blockchain”

The philosopher Jon Elster points out that two specific human behaviours are essential to keep societies together:
¬ “Predictable behaviour”
¬ “Cooperative behaviour”

In his best-seller "Sapiens", Yuval Noah Harari makes many powerful observations:
our capacity for building civilizations stands on our ability to collaborate at large scale. Human propensity to come together around stories and transform them into shared, common myths, thus creating what Harari calls "intersubjective realities" is one of our biggest evolutionary advantages. He also calls money "the best tool humanity invented for large scale collaboration".

An historical exploration, starting from the seminal 1651 "Leviathan" of Thomas Hobbes was already present in a previous post.

I wanted here to overlay on that historical exploration the debate about decentralization, a much cherished concept in the blockchain world. And I underscored that the progress of human civilization actually correlates with centralization, that allows specialisation, division of labour and unleashes economic efficiency. In this context, decentralization acts as a control mechanism that prevents the abuse of centralized structures by bad actors. Blockchain appears as an advanced tool that shifts the equilibrium away from those in power and thus reinforces the resilience and durability of centralized systems.

Thus "centralization" is the hallmark of progress
¬ Centralization is the result of a natural search for effectiveness and efficiency.
¬ How to prevent those in positions of power, those entrusted with making decisions from making bad decisions?
¬ “Decentralization” is inefficient and leads to lower effectiveness
¬ Decentralization hampers specialization
¬ Decentralization is thus not of benefit per se, quite the contrary, it bears a cost.
¬ Blockchain makes the cost of decentralization bearable
¬ Blockchain enables new social constructs
¬ Blockchain introduces a host of granular choices of varying degrees of centralization.
¬ Blockchain weakens the power monopoly of the Nation State and reduces the cost of the "exit" strategy, thus increasing freedom.

This thoughts were already present in a post six years ago: "Understanding blockchain's social impact"

¬ When centralization is abused, the society / organization declines

Responses to decline in organization:
¬ Exit
¬ Voice
¬ Loyalty
¬ (Neglect)

¬ Parallels to psychology: Flight / Fight / Freeze / (Learned helplessness)
¬ Blockchain is a tool that helps those trapped inside a declining organization to “exit”
¬ It’s very existence reduces “dominance”

"Dominance" ("emprise" could be a good French translation) is a subtle philosophical concept which I better understood reading a recent book by the 2024 Nobel prize in economics laureats, Daron Acemoglu and James Robinson.

Acemoglu and Robinson, who I quoted extensively in my Master's dissertation on "Blockchain regulation versus innovation in the EU" (dedicated to analysing the MiCA regulation), are among the most prominent representatives of the field of institutional economics.

Institutional economics

¬ Douglass C. North – Economics Nobel Prize 1993
¬ Daren Acemoglu & James Robinson – Economics Nobel Prize 2024

¬ The “Gilgamesh Problem” - a State so powerful, it begins preying on the society
¬ Gods send Enkidu, the “Doppelgänger” – Enkidu and Gilgamesh collude
¬ Liberty and “dominance”
¬ Dominance: If someone has power, it doesn’t even need to exercise it: those subject to his power will consciously self-censor in order to avoid triggering the exercise of power
¬ Absent Leviathan, the society gets trapped in a “cage of norms”
¬ Liberty is a legitimate aspiration
¬ Dominance over society is in the State's “DNA”
¬ Societal mobilization is a critical pillar to achieving the “Shackled Leviathan”
¬ Achieving liberty is not a state, it’s a process – the “Red Queen” effect - we have to run as fast as we can just to remain in place

For the follow-up, please refer to my previous post:
Blockchain: the first 360 years - from Thomas Hobbes to Satoshi Nakamoto