 he's well suited to answering the question what is crypto economics. Let's give him a big hand. Thanks Arshal. Cool. So good morning everyone. I am Pranay and I'll be talking about crypto economics. So I work as a consultant in the blockchain space for the last five, six months and have consulted around four, five ICOs as of now. So as you all might know, Bitcoins and ICOs are the greatest now, but the real innovation according to me is in the blockchain space and how the blockchain technology is able to create the incentives so that people and the decentralized nodes can work together. So that is broadly the topic of crypto economics, which we'll be talking about. So before I go ahead, how many of you know about blockchain? Just exploring. How many of you know what is consensus mechanism? Raise of hands. Okay, good. Cool. So let's go ahead. So I guess all of you would have got a message something like this, that you have to submit your data details to your mobile provider or the bank account. Otherwise, bad things will happen to you. Either a government will penalize or things will not work. But when I see this, I wonder why should I do this? I really have no incentive to get this thing done, go to a store and give my other details. But this is the way how all these centralized organizations work. They force you to do things because they say either it will be imposed penalty or there will be some legal actions against you. But this makes me wonder, how does Bitcoin protocol work? Why do the miners in Bitcoin protocol still follow it the way it was designed originally by Satoshi Nakamoto? So Satoshi Nakamoto for whom don't know is the founder of Bitcoin, we still don't know who is the person but is the name assigned to it. So why do Bitcoin miners still follow that protocol? After all, there's no governance, there's no legal action which can be taken against them. All mining nodes are independent and they act independently. So the answer to this is incentives. So incentives is the way through which different nodes in the network or different servers are incentivized in a way that they work together to achieve the objective or what the protocol wanted to do. So incentives are very carefully aligned in this network and that's what the broad area of crypto economics is. I'll be talking about, this is the brief outline of my talk. So I'll be talking about what is crypto economics, what are the features a crypto economic system should have, how we can model those crypto economic systems and then I'll get into mechanism design which is a broader topic of how you can design incentives to make player work in a certain way. And then I'll get into examples of Casper protocol and some examples of token design in blockchain projects. So I'll take around five minutes for each of the topics. So around 30, 35 minutes I should be done and then we can break for Q&A. Sound good? Okay. So what is crypto economics? Crypto economics is the application of information incentive design mechanism design for information security problems. So this becomes particularly important for projects which involve cryptography because when they are decentralized nodes which are working, which are not controlled by a single center server, then it becomes very important because they need to trust each other and how do you ensure trust between those nodes? So that is the main area of crypto economics. And Bitcoin is a great example of a crypto economic system. So what is the problem which Bitcoin is trying to address? It is trying to solve the problem of transferring value from one peer to another, one person to another or one node to another in a trustless and decentralized manner. So basically you don't need to have any central party who is orchestrating this like the banks or anybody can come up with a node and start transferring to each other. So that's the beauty of Bitcoin. And that's the problem which is being solved through a careful design of the crypto economic system. Now for this to happen, there needs to be a few things which needs to happen. So there needs to be a global source of truth. So this is not so easy in case of a decentralized network because there's no central party which is controlling, which is open, which node is there and how they are functioning. So the nodes can act in a very dishonest way. So this problem is addressed by different consensus mechanisms, which we will talk later. But in Bitcoin, the consensus mechanism is Nakamoto consensus. Basically, what it says is that the source of truth is the longest chain of blocks. And for making the chain of blocks for making each block, a miner needs to solve some cryptographic problem. So he needs to prove that he has done some work before he adds to that source of truth, which is the blockchain or the chain of blocks which are connected to each other. So now miners are basically providing a service to this system. They are helping maintain a source of truth for the system. So we need to incentivize them in some way. So in Bitcoin, miners are incentivized through the Bitcoin tokens which is given to them for mining each block. So as of now, I think 12.5 Bitcoins are given to each of the miners if they mine a block correctly. Now the other problem which arises in case of proof of work systems, in case of decentralized network is the case of Sibyl attack. So Sibyl attack is nothing but because the network is decentralized, anybody can come up with a new node and start spamming the network because there is nobody who is stopping them to do so. So proof of work helps here because now they have to do certain work to spam the network. They can't just add blocks to the source of truth. They have to prove that they have done some work, which in a way acts as a disincentive for players who just want to act in a rogue manner. So only the correct players will do that work and it's in their incentive to act in the right manner. And the last part is that the protocol should be in equilibrium. So the players in the system should be incentivized in such a way that it's in their best interest to follow the protocol or follow how Bitcoin was designed to be functioning. We'll talk about equilibrium in a bit more. So these are the features which a crypto economic system should have. So it should be stable. Basically it means that the protocol should be in equilibrium. Equilibrium here is in the sense of Nash equilibrium, which is a game theory theoretical concept, which means that if there's a game setup in which there are multiple players with strategies and so there is in that setup, there's no incentive for a single player to change his strategy if other players are not changing their strategy. So that's what Nash equilibrium is and for a protocol to work well, it should be in that equilibrium so that each player is following that protocol. The second is persistence. That basically means that the protocol should fall into the equilibrium back, even if it is disturbed a bit. So for example, if there are changes outside the protocol, so for example, if the rate of mining in a sick miners increases, certainly. So in that case, the solving the proof of work problem becomes easier and then the blocks can be created at a easier, quicker rate. But Bitcoin protocol solves this by changing the difficulty level so that the blocks are created once in 10 minutes. So this ensures that even if there are external changes in the rate of hash mining, the blocks are even now created at the 10 minute interval. So basically the block or the protocol returns back to the stable equilibrium. The next is optimality, which basically means that the protocol should follow what it was designed to be done. So for Bitcoin, it is the transfer of value in a trustless and decentralized manner. So if the protocol is able to achieve that, then it's optimal. Next is robustness, which is a measure of how much perturbation system can sustain before it goes out of equilibrium. So for example, all of you might have heard of the 51 percent attack on Bitcoin. So Bitcoin protocol can sustain 49 percent of mining power or hash power colluding. But if it's more than 49 percent, then the protocol falls out of equilibrium. So that 49 percent is the robustness of the system. Efficiency is basically how economically efficiently the protocol is able to achieve what it was designed to achieve. So in case of Bitcoin, it's the amount of electricity basically which is consumed to enable that proof of work or to make the system work. So in a way Bitcoin protocol is inefficient because we are wasting a lot of energy in just running the protocol. So what have we learned till now? We learned that what is the crypto economic system, how Bitcoin is a good example of crypto economic system, and what are the features a crypto economic system should have? So things like stability, robustness, etc. So now I'll introduce a small problem, which is a token design problem and we'll walk through it throughout the talk. So suppose I want to create a content platform where only good contents are rewarded. We are all tired of sensational content stuff like that. So you want to create a content platform where good content is rewarded and you want to do it in a decentralized way. That is there's no central server like Facebook, which is controlling them. Anybody can contribute to this topic and they can like start acting according to the protocol. So our objective is to design this so that people following the protocol, following the incentives are able to create good content in a way. So what are the features this protocol should have? It should be optimal. That means that the good news should get highlighted. If our system is not able to achieve that then we are failed. It should be stable as in that they should not be affected by troll armies of people acting in a malicious way to destroy the protocol. And it should be robust. Robustness basically here would mean how much spam can the system sustain before it gets out of equilibrium. So crypto economic system is also like any other system in the real world. It needs to have some features and there are certain ways in which we can model it. So for example, when you go to buy a car, you look for features like what's the top speed? What's the mileage? So in the same way, crypto economic system, when you are designing a crypto economic system to achieve something, you should look for things like stability, robustness. Also any system can be modeled in different ways. So there can be components or parameters based on which we can model that system. So in that in the case of car, it can be components like the engine or the tire. While in the case of crypto economics systems, there are components like incentive design. What is the consensus mechanism? So let's look into what are those components? Right? So how we can model a crypto economic system? What are the components? What are the things we should look out for? So the key things here are what is the incentive mechanism? How the consensus is being achieved? Basically how the network is able to achieve the source of truth? What is the level of coordination of participants? Basically, how much the participant can talk to each other, collude with each other, or what type of participants there are? Then we should also take care about the budget and costs which actors can have to attack the system. So different system based on their domain in which they are operating, people may have different sort of budget to attack the system or different incentives to attack the system. And then what are the attack models can it be subjected to? So we'll get into details in each or to each of them. So first is coordination level of participants. So this is basically how much the participants are able to coordinate with each other, right? And are they able to talk to each other or not? In traditional fault tolerant research, because it's generally distributed system, we assume that most of the nodes are honest. So we can assume 51% of the participant being honest. Because these distributed systems are generally controlled by a single server, which can ensure that honesty is there. But crypto economic systems are more complex. Here you can't assume that nodes are honest. The nodes will act in malicious ways so that they get the most outcome or most incentive out of it. The next is incentives. So incentives form the backbone of any crypto economic system. Because in these systems, nobody knows each other, nobody trusts each other. People act solely for incentives. In normal world people, because they respect someone or follow certain thing, they are more acting in a proper way. But in decentralized systems, these incentives are the only thing which matters. Because they're not worrying about any legal action against them, any penalty against them, right? So what are the types of incentives which can be there? It can be payments, which is basically the rewards which miners get on mining. So in Bitcoin protocol, miners get a reward of 12.5 tokens for mining each block. Then it can, or otherwise it can be privileges, which is basically the right to collect the fees in each transaction. So in Bitcoin protocol, if you create a block, the fees attached to each transaction is given to the miner because he has successfully created that block. So incentives decide how the system will work, right? So it's very important to design it very carefully if you are making a new system to work for. The next is attack models. So attack models can be of many types. First is, I'll just describe the broader type of attack models which are possible. First is uncoordinated majority model. In this model, we assume that participants are acting independently of each other. They're not talking to each other, they're not colluding. And they're acting in their own self-interest. Also, the participants are making independent choices. They're not talking to someone and then making decisions in a group. And they don't control more than a certain amount of the network. So they're small participants who take independent decisions. The important point here is that these participants can be dishonest. They can, we can't assume them to work in an honest way because, well, of course in decentralized networks, anybody can be dishonest. The next is coordinated choice models. In coordinated choice models, the participants can talk to each other. They can collude and act in a certain way. So a good example of this is the 51% attack on Bitcoin. Basically, because Bitcoin says that the longest chain is the source of truth. If a particular group of people get more than 51% of the hashing power, they will mine blocks and that chain will become the longest chain. So that will ultimately become the source of truth. So if they are able to achieve that, they can create transactions which they can censor, basically censor transactions. They can only do those transactions which are beneficial to them. And the next is a bribing attack model. I'll just explain this through a simple game. So this is a selling coin game which I'll use to demonstrate the uncoordinated attack model and the bribing attack model. So suppose it's this game for the question, the purpose of which to find true answer for a given question. So suppose the question is, did A win the election or not? The answer can be yes or no, that is 0 or 1. The rules are such that the majority answer is taken as correct. So suppose there are n participants, so more than n by 2 plus 1 participants, if they gave a certain answer that will be considered as correct. And everyone who voted with the majority will get a reward. So they will give you a reward say P and others will get nothing. So basically this is the game. The objective is to find the true answer to a given question. So let's say how it fares for a selling coin game with uncoordinated majority model. So this will be the payoff matrix for them. If you are participating in the game and you vote 0 and others vote 0, you get P and if you vote 0 while others vote 1, you get 0. And similarly if you vote 1 while others vote 0, you get 0. So in this game, basically you have the incentive to speak the truth or vote for the truth because you think that everybody else will also vote the truth because you think that truth is the natural selling point or the natural convergence point for this game. Now why will everybody else vote the truth because they are also arguing in the same way in which you are arguing. So truth becomes the natural point of convergence and we are able to achieve the result which we wanted to because most of the people will vote for the truth and the game will be successful, the outcomes will be successful or the correct outcomes will be there. But what if there is a briber present? So suppose there's a briber present who can talk to each of the participants and say that if you take certain action, I can pay you something or give you some rewards. So suppose the briber wants to get the outcome as 1 irrespective of what was the actual outcome. So he wants to influence the result of this game. So what he will say, go to everyone and he will say vote for 1 and if others don't vote for 1 or if the majority is not 1, then I will compensate you by giving P and some more epsilon more than that. So basically he is saying that vote for 1 and I will compensate if you are not winning P. So for this game, the payoff matrix becomes like this. So you vote 0, if you vote 0 and others vote 0, you get P. But if you vote 1 and others vote 0, you get P plus epsilon. And if you vote 1 and others vote 1, you get P. So as you can see, in this case, for both the whatever others do, you have more incentive to vote for 1. So everybody, you will decide and vote for 1 because in both cases you are in a more advantageous position. So this is the dominant strategy. Now other people are also arguing in the same way. And so what happens is everybody basically votes for 1. So this becomes the output quadrant. Now the important point here is to note that the briber is able to influence the outcome without actually paying anything because if the outcome is this and everybody is voting 1, he doesn't need to pay anything. So even though he needs to have a budget of P plus epsilon to convince others to vote with him, the game can be easily influenced without having any cost. So this is the bribing attack model which I was talking about. Just the presence of a briber can influence the game. While in the case of uncoordinated majority, the game works just fine. So let's recap what we saw in the attack models because that's very important. So in attack models, we saw that this theory attack models, uncoordinated majority, coordinated choice model and bribing attacker model. And just the presence of a briber can even influence the outcome of this of any game based on how the game is designed. So now let's look into consensus mechanisms. So consensus mechanism as we discussed earlier is also very important for crypto economic system design because this is what establishes the source of truth. There's no central server or database which we can refer to get a source of truth, right? So that's a thing which we need to get out of our mind that there's a central database which can always query. So designing this source of truth becomes very important. Now, there are a few broad areas or broad techniques through which this consensus mechanism is achieved. First is proof of work. This basically considers that the longest change is the source of truth and basically Bitcoin uses proof of work as an example. But the important point to note here is that it never reaches finality because the longest chain is a source of truth. Anyone if he suddenly reveals that he has a longer chain and which was not shown to the network before that, that becomes the truth. So this network, this protocol never achieves finality. Good examples of this are Bitcoin and Litecoin which you already might know. So Bitcoin and Litecoin once on compute intensive proof of work. So the nodes need to compute something to get consensus. While ZCAS is an example of memory hard proof of work, which is basically the difficult part is in the access of memory. So it's not, it doesn't get affected by the improve is in a sick minor technology. The other is PBFT based or practical bagentine fault tolerance method. So this is a, so this works based on replication of a state machine. So basically there are configurations and for each configuration, a primary node is assigned and the other nodes are considered at replicas. So anybody who wants to get a source, get a question answered, he asks the primary and then he will relay that question to the replicas. And if the client or the questionnaire gets more than a certain number of replicas answers from the replicas, that is considered to be source of truth. That is considered to be the correct answer. So basically this achieves lot based on replication at every stage. Good examples of this are hyper ledger fabric. Stellar also uses this, which is through Stellar consensus protocol and Neo, which is a Chinese based coin and they use a version of this, which is called a delegated BFT. The other broad set of algos for consensus are proof of his take. In proof of his take, your ox, the participant asks to stake certain amount in the network. And if he acts in a rogue manner, he will be penalized. So basically he deposits some money or any value. And if he acts in a rogue manner, he will be penalized. So for this to happen, the which participants are acting in a rogue manner needs to agree. Like the network needs to know which are acting in a rogue manner. So good examples of this are Casper, which is the Ethereum proof of stake, which they are working on. The Telegram Open Editor, which many people would have heard of is also planning to use proof of stake because proof of stake has an advantage that it doesn't involve consumption of lot of electricity. So it's cheaper in that way. Also EOS, which is a famous coin uses delegated proof of stake. So what have we learned till now? So we learned that what is the cryptic economic systems? What are the features it can have? How you can model them? We can model them using incentive design, attack models. What are the different type of attack models which can be there? How the games can be affected using the just the presence of a minor, right? So let's see what happens to the content token to the end problem which we initially introduced, right? So now for this to work, we need to introduce certain incentives, right? So suppose we introduce a CP token, which is the content platform token. And we say that users can post topics and if the topics get certain amount of likes or the more likes the topic gets, they will get more reward in terms of the CP token. Also users can back certain topics which they like and if those topics get more likes, they will get more rewards. So this is the incentive mechanism which we designed. Basically we are saying that the users will act in a such a way that the good answer is achieved. Now what can be the possible attack models in this? There can be coordinated attack because players can collude with each other and try to trend a particular topic and make it famous. But there is no possibility of a bribing attack here, right? Can you see why not? So basically because it's not a binary outcome game, there are many outcomes which are there. So to mount an attack, he will need to incentivize each outcome which will become very costly for him. So bribing attack is not possible here. Now this token design which we discussed is a subset of a broader subject which is called mechanism design, which has been there even before blockchain came along or anything. So what is mechanism design? In mechanism design, the key question is how do you design a system which has strategic rational participants so that the system achieves a particular outcome? So this is basically the reverse of game theory. In game theory, you are given a certain set of rules and you are told that ask to find what will be the outcome. But in mechanism design, you are given an outcome which you want to achieve and you are asked to design the game. Auction theory is also a good example of mechanism design and Google adds heavily uses this theory to increase the revenue. Now let's take a few examples of mechanism design. So let's have a question here. So suppose we have a game where the objective is to and there is an item for sale and people can bid for it and it's a sealed bidding. Now objective is to give the items to player who has the highest valuation for item on sale. Now let's have two rules. Suppose one on two. So in rule one, the highest bidder wins but the price they have to pay is equal to the amount they bid. And in rule two, the highest bidder wins but the price he has to pay is the second highest bid. So which rule according to you is correct? I'll give you one minute to think about it. So how many people say one? Okay, 50% around. How many people say two? Okay, so 40, 60 I think. One is 60, two is 40. So actually the correct answer is two. So the intuition here is that in first price auction, because you actually have to pay whatever you bid, you will never bid your actual valuation because if you bid your actual valuation, you will not get any utility. Basically you're saying you're paying whatever you value it for, right? So you'll always value it for less than your actual valuation. While in second price auction, you can actually bid with your correct valuation because you don't have to pay that valuation, right? You will have to pay the second highest bid. So there's an actual formal proof. We say that this second price auction is the correct answer for this question. So if anybody's interested more in this, this topic called vikery auction, you can look it up and it's a very famous auction mechanism which is used throughout. The other example is Casper, right? So Casper is the proof of stake mechanism design protocol which Ethereum network is trying to develop. So the main way through which it works is it's asked you to deposit certain amounts and if it's found that the violators are not working in the right way, they are penalized, right? So one of the goals of design of this protocol is to achieve things or the consensus without spending energy like proof of work. But the question is why is penalizing violators needed? Now, Casper's proof of stake suffers from a problem called nothing at stake. So suppose there are two chains which are there. So a blockchain is getting built now, suddenly there is a small fork. So there are two chains which are there. One chain has probability of getting correct, being correct with priority of 0.9. The other chain has probability of being correct with 0.1. Now, suppose if a miner is mining blocks, then if he votes on neither, so in proof of stake a validator can vote on one of the chains and give his vote to that chain saying that I think that this chain is the correct chain, right? So if the validator votes on none of the chain, he gets a zero outcome. So he will not do that. If he votes on the chain A, this one, then he gets an expected value of 0.9. While if he votes on chain B, it gets an expected value of 0.1. Suppose if there is no penalty, then there is nothing stopping him from voting on both chains, right? So if he votes on both chain, he gets an expected value of 0.9 plus 0.1 is equal to 1, right? So if there is no penalty, he should actually vote on both chains. But that doesn't solve our problem because we are not able to ascertain which chain is correct or not. So it defeats the whole purpose of designing a consensus mechanism. Now, proof of stake solves this because it makes making blocks costly. So if he votes on one first chain, he has expected value of 0.9. If he votes on second chain, he has expected value of 0.1. But if he wants to vote on both chains, then he needs to devise his energy, right? So the priority of getting pounding blocks becomes hard. So basically it becomes 0.5. So in this case, voting on the correct chain becomes the strategy for him. While in slasher, basically the penalty, if there is penalty involved, then and suppose that this is a penalty of minus five, if it is found that the validator is acting in a rogue manner. So if he votes on both chain, his expected value becomes minus four. While if he just votes on one chain, his expected value is 0.9. So that becomes the correct, he will vote on this. And so we are able to ensure that the validators are voting on the correct chain. So this in a way ensures that truth is maintained, right? So we saw for mechanism design, we saw two examples. One was the auction theory where we saw how you can design the rules and designing those rules can have different impact. And then how Casper is being designed so that without even using electricity, it can achieve source of truth by introducing penalties. Now let's visit the token design problem again. So the way we designed it, as you might recall, is that people can vote on topics and they get rewards based on the topics which they vote on, how many likes they get, right? So this will be the scenario. If suppose there is a topic one, there is post one, which gets five likes, like post two, which has one like and post three, which has two likes, right? So now if a new person comes and tries to participate in the network, he has incentive to vote on this five likes because he thinks that people will vote it more and this will become the, this will earn him more tokens, right? So truth is not necessarily the selling point here. People will not think what is the truth, rather they will just vote on things which are getting more likes, thinking that it will give them more likes and hence vote tokens, right? So people will stake money on the topics which they find are, which they see people are voting more likes on, right? So in this case, we are the more sensational content or the content which is getting more likes will get highlighted. The truth, true content or the truth content which you wanted to promote is not getting highlighted. So basically the way we designed this mechanism has failed, right? So this is an example of bad mechanism design. So our objective was to create a system where people are voting on the truth and true content comes up. But this, this, this system design fails in achieving that. It basically promotes more sensational content, right? So this is a very popular coin call estimate which uses similar design. If you're interested, you can look into that, right? So that's all which I have to summarize. Incentives are very powerful tool and especially decentralized networks, they can make or break your system. The way you design your incentives determine how the participants will act in it. Following the protocol should be in equilibrium. As we saw in certain cases, if following the protocol is not in equilibrium, then there can be attacks on it like the bribing attack at all. Also the protocol should be robust to external incentives. So as we saw in the bribing attack model, even if there's a briber president who can bribe people, the protocol falls out of equilibrium. The game there was not able to achieve the outcome which we intended it to, right? And finally, the protocol should achieve the intent. I mean, that is the basic truth or basic goal which you should strive for. The content token design problem which you saw was not able to achieve the goal which you want, right? So incentive designs becomes very important in this case. If people are more interested, they are, they are core. So this course in Stanford, which on mechanism design, which is very interesting. If you are more interested, you can also look into proof of stake work by the CASPER team. They have done some excellent research on this topic. And I also included a reading list on crypt economics. Thank you. I am open to any questions. These are my contact details if you are, if you have any questions. Good. Four, one minute. So the question is based on the bribing attack model? Yeah. Okay. So if the assumption is that the vote of an individual is not known in public, assume it's a real election where I cast my vote and nobody knows it, wouldn't there be a probability of failure for the bribing attack model? So the simple example scenario is the objective is to get one. And if the bribe is stating that if you don't, you know, get the majority vote and then if you are not getting any reward, I'll compensate you for it. That's the whole model. So here the objective is one. What if I cast vote zero and everybody thinks alike and cast vote zero? When everybody casts vote zero, assume that everybody thinks alike and cast vote zero, then the majority is zero, which means they'll get that reward as well as the P plus epsilon because the P plus epsilon is for? No, no. He was saying P plus epsilon, if he votes one and other majority is not one. So this is the payoff matrix. I understand. The context here is that the vote is not revealed in public. Okay. So see. So even here, vote need not be revealed in public. So for me as an individual to vote, if I were to vote zero, okay. And what is the whole point here getting one, right? So if I vote zero, and if all the majority vote zero, I'll get the P reward anyway, right? You're saying you will be here. No, you'll be here. I'll be here. Okay. Okay. And what is the P plus epsilon scenario? P plus epsilon is if the outcome is not one. Okay. P plus epsilon reward is given. No, no. P plus epsilon is given if you vote one, but others vote zero. See, if you vote one, information is not revealed. See, if my vote is not revealed to you, if you are the briber. So even here, this vote need not be revealed, right? Because I will give you P plus epsilon only if you vote one and others vote zero. See, this you vote one information is not public. Guys, we're out of time. We'll have to take this offline. Oh, sorry. Thanks. No more questions. Okay. Okay. Yeah, I'll be here. I'll be walking around. Thank you. Thanks. A lot of you are new. So welcome to the Blockchain and Cryptocurrency Track at 50p. Next speaker, we have Nitin Sharma. He's going to be talking about icos, initial coin offerings, their legal and best practices, legal aspects. Okay. So let me introduce him. Nitin Sharma is an investor in the blockchain. He's going to explain how an initial coin offering is different than any other corporate fundraising. Morning, guys. It's great to be here at India's only independently curated fintech conference. I've gotten to some of the Haskeek folks and glad to be talking about icos. Before we start, we get a sense of who's here actually. So how many people are developers who have may have, how many of you have heard of icos? If everybody's heard of icos, how many of you may want to do an ico at some point in the future? All right, about half the audience. How many of you have invested in icos? Okay, good number. How many of you haven't but would like to invest in icos or the rest of the crowd? And just in terms of what you guys are doing, how many of you are developers? Okay, product people, product focus people. Any business focus people? Got it. Thank you. That gives me a good sense. So clearly everyone in this room is here because you've heard of this thing called initial coin offerings, right? And before I start, let me give you a little bit of a background about myself. I am currently spending most of my time in the blockchain in the crypto world, but I actually don't, I'm not an early investor in crypto. I wish I wasn't a minor. I wish I was, but I actually come from the traditional world of startups and venture capital. I was a VC in Silicon Valley. I came and helped set up a fund in India in 2013. I was based in Bombay, a fund called Lightbox. So traditional venture capital looking at early stage startups. How many people have worked in startups or are working in startups right now? Okay, got it. So you guys are very familiar with that world, right? And so there's a certain way of doing things, right? And, you know, VCs, we always believe that we are in the business of investing in disruptive companies, right? But I think a lot of people would say that venture capital hasn't disrupted itself, right? If you think about that user experience, right? Think of the VC funding as a UX. It's pretty bad in a lot of ways, right? And so this thing comes along and starts to boom last year and it's really very new, right? So things are changing every day. And so I got really excited about this world of blockchain, right? So we have three things happening in the world of blockchain that the way I see it, right? There is a blockchain itself or rather starting with distributed ledger technologies and then consensus mechanisms. And of course we know that that is changing every sector. Then there is a world of cryptocurrencies which is really decentralized money, right? And changing the notion of where you store your wealth or how you transfer value from one party to another. And the third thing that I look at is ICOs, which is applying that blockchain concept that distributed ledger concept to the idea of fundraising, right? And so clearly this has been a phenomenon, a phenomenon in the last 12 months especially. As you can see what has been going on in the world, different colors represent different countries. It started in 2014. The first ICO was for a project called Mastercoin. Then of course later on Ethereum itself was one of the first real ICOs that raised money and look at the value that Ethereum has created in terms of a community. So I think it's probably the best validation of an ICO that actually led to a community, a developer ecosystem, right? And then something, there was a quiet time for a couple of years and then boom, last year and this is only until November. If you actually extrapolate it to now, the numbers have somewhere between seven or eight billion dollars has been raised. And to give you a contrast that is more than blockchain funding that's going from VCs in the traditional startup. So ICOs are already more money is being raised in the ICO world than in the startup world for blockchain projects. More money is raised in the ICO world than seed stage financing for the entire universe of seed stage financing, right? So clearly this has become a massive thing. And more than that, what's crazy is this stuff, right? How quickly some things have happened. So some of these projects look at the fact that they've raised 200 million, 35 million. And the more interesting thing is how quickly look at this one, 35 million in 30 seconds. So on so forth, right? So if you're a developer or somebody who was doing a startup, it's very tempting to ask yourself, how can I get in on this? And if you're used to stories from your friends or your own experience of how long it takes to raise money and I'm just not stereotyping, but I'm assuming that most of you in this room will agree that if you're an engineer, a real core hardcore developer, product person, you don't like that experience of going and selling and raising money that way, right? It doesn't really add any value. Now, if you could focus on your project and actually raise you the capital really quickly, of course it's tempting. So what's going on? And how did this happen? Right? I would argue that just to give you background why I think this has happened is if convergence of two trends or two big things that have happened in the last five or 10 years, one is the world of crowdfunding that already existed existed for physical products from Kickstarter existed for independent movies and other projects on Indiegogo existed for social causes go fund me those kinds of things have already existed. So that's not new, right? The thing is that that was never being utilized for startup funding and specifically and why it wasn't being used is I would argue because there was no digital economy, right? So you actually now look at the next part which is the blockchain world which which came about and created a digital asset economy. So what does that mean? Right? So I think blockchain where it introduced to the world and why made it I see as possible is you know, three things essentially, right? Because you can trust a distributed ledger, you can now think of any digital good as an asset, right? Which means you can also tokenize it so you can now split it, you can trade it, you can always have an immutable auditable track of who has owned that asset at what time. So you can create a token that can be exchanged and that can be trusted without having a central party, right? So that's tokenization crypto economics, like I just did a great talk I'm sure and you've learned a lot about crypto economics but essentially now you have a new type of economics, right? You don't just have the normal supply demand curves but you also have this notion of you know, here is going to be a supply for which I already defined the supply curve. This is how much Bitcoin will exist at any time, right? And depending on certain actions more will be created or this is how it will be consumed. And essentially this idea of you know, how does that change economics, right? Is something that you already learned about. And finally I think smart contracts. Now because of smart contracts primarily on Ethereum to begin with because that's the largest ecosystem, you could now trust a system in which you could send money to a stranger and know that you will get the tokens in return. You will get something of value in return and all of this is publicly available. So there's three things that blockchain brought in which made possible the concept of ICOs. And what ICO is as most of you know is a fundraising tool where you sell a new digital currency that you create and or a token and I'll come to the difference between all coins and tokens in a bit. And it's an exchange for cryptocurrencies or fiat currency US dollar or Bitcoin ether which have immediate liquid value because those things are established, right? And the idea is that whatever you created, this will have a purpose in some ecosystem and we'll appreciate in value over time, which is the reason to perhaps get into it. Or if you're really passionate about some project, get in early as a participant in that developer ecosystem. The token does not why it's different from what traditional startup equities, right? Remember the token that you buy an ICO almost always that's called what's called a utility token. It does not confer ownership. So you actually don't own anything off of any part of that company. You own a token that's issued by the company. You own the currency that's issued by the company. And so why let's understand from the entrepreneur's perspective. I think this will be relevant to as many of you who raise your hands and then also understand from the investor perspective. And when I say investor, it means the average person. I'm not talking about venture funds or hedge funds. So why? Okay. Well, first of all, like I said, compared to the UX of venture capital, right? Long cycles, decision making and and obviously you have a lot of peers in venture capital, but I'd be the first to say that we don't make life easy for the entrepreneur, right? The system's not set up the right way. VCs aren't always the smartest people, right? VCs don't always know the right answer or have the best judgment. And so there is a lot of time that's wasted, I think in that process, which doesn't really add value to the project of the company, right? So doing this is cheaper. It's faster, certainly in the sense of the opportunity cost of the time because you can do some of these ideas in a couple of months and versus the entire process of fundraising, which usually takes place after you've created something, after you've shown and that, you know, what usually you keep getting feedback is, okay, go prove to me that you have more users and you go back and you get users. Okay, great. Prove to me that they are paying. All right, go, you go and get some revenues. Okay, now prove to me that you'll also be profitable, right? Since the cycle keeps repeating and the bar keeps getting higher. But I think in this way, you can actually raise this money before you create something, right? And you don't give up equity. So in the venture world, in the startup world, when you're raising money through venture capital, giving up equity in your company, that's not happening here. And it's also unregulated right now. So you don't have the paperwork. Now that is good and bad and I'll come to that in a little bit. So essentially, if you think about it, right? The person who's giving money to a project and the business itself, you know, earlier, you had many people in the middle, you had a broker of some sort, a banker sometimes. And what you do now is you can trust a smart token because it's written on the Ethereum public blockchain. And so you can trust that this can happen without the need for other parties in the process. But I think what I like more than anything that I've mentioned so far is this idea that this changes the creation of network effects. So all of you I'm sure are familiar with what network effect is, right? You go on Facebook because everybody else is on Facebook, you will not leave because everybody else is on Facebook, all your data is on Facebook. The more people joining that platform, the value of that platform to any given user keeps increasing. That's the idea of a network effect. Now, a lot of businesses when you're trying to create, that's your struggle. You're trying to find buyers and sellers, let's say if you're doing a marketplace of some sort, right? Or you're trying to find content and users, right? You're trying to make sure that any platform, you know, you can cultivate this thing so that buyers and sellers of whatever you are providing, get more value. That's really hard to do, which is why so few companies are real platforms. But if you can crack that, you are worth a lot, right? You change the world. And because it's so hard to do, interestingly now, the idea of ICOs, which I like a lot is that it changes the equation. So traditionally, if you're doing a network effect, what you're doing is, you know, you will have no value up until a point. And then you will have increasing value as your users increase, right? And that's, and that's the problem is that it's very hard to get to this point. Because it takes a long time, sometimes it takes capital, and it's just really hard to crack. What ICOs do is that they provide a second utility. Okay, so while you before you even started before you have users, you obviously have no utility for them because there's no product right now. In that timeframe, you can add a financial utility. You can actually provide them something which has which has some value, right? So what you do is I I want all of you guys on my platform. What if I issue your tokens? What if you believe in my project, you give me some money, it doesn't have to be large sums, I give you these tokens, and you buy into my vision. Now you want that token to increase in value, what will you do? You'll go talk to other people, you'll bring other people in the system, if you might bring other developers into the ecosystem. So essentially what you're doing is by adding another type of utility, you are solving the bootstrapping problem, right? So you're allowing an entrepreneur from day one to actually provide some sort of a network effect. So that's why some of these ICOs before they've even created something are worth a lot because a lot of people have bought into their idea, right? Now it also is interesting because if you think about it currently, if you were to go out and raise money from an angel investor, then you'll create something, then you'll go find your users, right? So many of you are product people, you do A, B testing, you're trying to find who is actually the user that who likes your product the most. And that takes time and it wastes money. So a lot of the marketing money that you spend is wasted because you don't know what's usually called a product market fit, right? You don't know who's actually interested in your offering. Now what if you could reverse this whole thing? What if you could say, let me first find the people who will like who'll be my users, just like in crowdfunding, right? And then I go raise from them and more importantly, I create a community and I create this thing that I'm creating in an open source environment where I'm getting their inputs. So that's what ICOs have also enabled, right? Is that you can actually now raise money first and build accordingly. Sure. Oh, yeah. Great question. Great question. Hold on to that thought. I'll come to it. Okay. And now some of you are not going to be interested in being a developer for an ICO project or starting an ICO yourself, but you want to, you're someone who watches great new platforms and new frameworks emerging. And so you think about like React coming out of Facebook or think of anything that has come out of Google, right? You may not have had the opportunity to participate in them, right? But now conceptually what ICOs can provide is that as an investor, you can access these opportunities. So for the first time in history, the average person who's interested in technology can actually get involved in things very early, right? It's global democratized access. So until now, large companies, most of that value went to the founders, the team, the early employees, the early investors, venture capitalists and the rest of us were just creating the value for them, right? So Facebook, who creates the content? We do. Who consumes the content? We do. Who gets the value? Facebook, right? Has anybody ever been paid for their usage of Facebook? Okay, great. So it's really democratizing the value creation, right? So whatever value is being created in the project can now be distributed among many, many more people. It's also diversification in the sense that let's say you are someone who is into cryptocurrencies, you have Bitcoin and at some point, you have let's say gained a fair amount of wealth in Bitcoin, right? Now you're looking for what's next. What are the other things that can be that are so early right now that they give me 100x or 200x in the next two or three years? So that's why some of these things could be very interesting to someone in the crypto world or someone who missed the bus, right? You say, what's the next Bitcoin? This is liquid and tradable. So if you invest in a startup in the traditional way, some of you may have, your money is usually locked up for seven, eight years, right? That's because you don't get anything back until the startup is sold or doesn't IPO or something like that. Now in the concept of an ICO, you are getting these tokens which are accessing the protocols in this project and the idea is that people will have demand for this. So you will be able to buy and sell this thing at any point. So you're always liquid and this is tradable. And like I said, for the first time, the average person can access really early stage opportunities, you know, which they may feel is the next Facebook at a global scale. So you know, another thing is that if you're sitting in India, if you want to invest in startups, you're typically only you're not restricted to opportunities in India. The world of crypto and ICOs is global from day one. Now there are a lot of nuances, regulatory and all which I'll get into, but conceptually this is amazing. And what about the developer specifically? So if you think about it, you know, you guys are more familiar with the blockchain application stack than I am, but the key thing is that the idea is that there is this is a FAT protocol, right, where you have all your data will be part of part of the protocol and you have a lot of functionality provided there itself. So the apps sitting on top are just using all of that underlying code. What this is very interesting thought that if you compare this to the way the web developed, it's very different. People would argue that in the 90s, 95, right, SMTP, HTTP, etc were being developed, rolled out and what was happening was that there were some researchers, there were some early developers, these were open source communities and they contributed and then what happened? They actually never got any value out of it, right? And protocol development kind of went dormant. The parties that actually created much more on top are the Googles and Facebooks and Microsofts and they captured a ton of value. So you know, the idea is just if you simply think about it, the applications layer is where most of the value got created. That's where all the developers went. Why? Because those companies pay well, because those companies had the resources to bring the best talent and provide that environment where people want to work. Now, arguably, blockchain can change this. Some people have argued, and this is a debate that's being had, that blockchain will look different. The protocol layer will actually capture much more of the value. So as a rough proxy, if you look at today, if you know this is a little dated, so I know the market is crashed, so this is all different now. But Bitcoin, Ethereum have bulk of the value that's there right now, and the other projects are a small sliver versus the protocols in the traditional web market are very, very small part of the value. So for the first time, as a developer, if you are excited about an ICO and they have a currency that's being used, if you are contributing to the code, you are actually a big participant in the open source environment, you could keep earning these tokens, and that's not been possible before. So I think these ideas that I'm sharing are personally the more exciting things, that's not the scenario today. Right now, it's all very murky and there's a lot of noise, but this is why I like the concept of ICOs. Okay, so really quickly, some key terms. So people use altcoins tokens interchangeably. The way I like to think about it is cryptocurrencies can be of two types, say altcoins tokens. The main difference is that altcoins are considered alternative to Bitcoin. So all of them have been initially created to say that Bitcoin is lacking in some way, whether it's privacy, whether it's speed, whether it's transaction cost, and you know just scalability. And so you have many of them and some of them derive their blockchains from Bitcoins, who's a fork, and others have their own native blockchains. And tokens are usually what people refer to when they say tokens are being referred to as things issued on top of an existing blockchain. So ERC20, the Ethereum standard, you're issuing these tokens on top of Ethereum. So as a developer, you're not coming to this blockchain and having you can leverage the existing network of nodes in that blockchain. You can leverage the programming language and anything else that it provides. So rough analogy would be, you know, the Apple releasing the developer tools for the App Store several years back. And how quickly so many developers came in because it became very easy to create these apps. Ethereum has done the same, become very easy to create new distributed apps or issue these tokens and raise money as well in a really quick way. Another distinction that I want to highlight much of what I'm talking about is utility tokens, right? Where these tokens have some value within a network. But they're also security tokens. Now, excuse me, the key distinction is that utility tokens, the idea is that this is something that's valuable within a platform. It's not something that is an investment. And that's what the people issuing these tokens are saying. So they say this is the only utility token and the reason that will be valuable is because people will want to use it in the future. And that might be the reason that it might rise in value. On the other hand, a security token is very clearly defined as an investment, right? So it's linked to owning something or having a claim on dividends, etc that the project might. So if I'm doing a fund, let's say I say all of you give me money for a fund and I will take this money and invest in other projects. And when I get some return, I'll pay them, pay something back to you, right? That's a classic security token. Now, the reason this becomes interesting is because a lot of the I told you one of the big reasons that I see was have flourished is because there's been no regulation. And what's going to happen most likely is that all of these including the utility security tokens might be considered security tokens because there is this thing called the how we test in the US. And essentially the idea is that the US law says very clearly if you are doing something which is for an investment of money in a common enterprise expectation of profits from the efforts of others, right? It is a security token. Now most of what I just described and that goes back to your question. Most of what is happening right now is people are buying these tokens, but they are not going to be the actual users. They don't sometimes don't even know what this project is about, right? So currently all of this is happening with the expectation of profits. People are not actually buying them for using this token, right? So that's why the SEC and many other countries including India, China, etc might just look at this and say, okay, you can do this, but you have to follow rules. And for example, the security tokens, a lot of paperwork you have to go through a process and you have you can only be listed on an exchange, which is you know, endorsed by the government or allowed by the regulatory authority in that country, like an SEC approved exchange in the US. So if that happens, it will become much harder to do ICOs, but it may not be a bad thing because I think these things should be regulated to some extent. So is this allowed currently in India? No regulations, but you have to be aware of all types of scams that are happening and I'll come to that in a little bit. Other countries, like I said, the US has issued some guidelines on what they think will be considered security tokens. And I think in the future you will see many countries tracking down on this idea and saying you can do this, but you have to follow rules. Currently most of the ICOs are coming out of places like Singapore and some other destinations like Estonia, Gibraltar, British Virgin Islands, etc. So if you're someone who's thinking of an ICO, that's not something I will cover in this talk because that's a longer discussion. You can find me later. But essentially the idea is you can you can be in India, but you have to structure it usually from a jurisdiction that is allowing ICOs. And so you are if you're in India, you're operating as a subsidiary of something that's based outside of India. Okay, quickly what is the process for doing it? Again, not a whole lot of detail I'm going to go into, but essentially what happens is you start with with a white paper. You describe what you want to create. You should answer why does decentralization help? Why how are you using blockchain ideally, right? And you go into topics like what is the what is this token going to actually do? Why is it needed versus just using ether? If you're building on Ethereum, let's say, and you describe your roadmap, it's usually anywhere from five pages to 30 pages. You talk about your team advisors, if you have a product, you talk about your prototypes products. But it's not even necessary to be at that stage. After you've done that, you start to do what's called a presale, you go and find some investors who are believing in your project initially, and you give them a discount. So usually how these things work is if I come in early, I get a certain discount that could be 20% that could be 50%. So if a normal person will pay $1 for this token, I might get it at 50 cents, right? And that is to get some initial momentum so that you can then go and give other people confidence that hey, somebody's already come in. Now I go to the crowd sales. There's a presale and then there's the crowd sale in the crowd sale, you go out to the general public. And you also come up with what's called a smart contract, which is essentially going to describe how the ICO will work when money is wired into a certain wallet, how the tokens will be dispersed in return, and what the various things like how what what will be the amount of tokens, the soft cap, which is the minimum that is needed for the ICO to be successful, the hard cap, which is the maximum that the that the project owner says they will raise, and they will say that won't want to raise anything more than that, so on so forth. And then you actually go out and you know there's a lot of PR. So that's why the big part of doing this is actually digital marketing. And some of these things initially had crazy conversion rates. Some of these things were getting 5 to 10 percent conversion, which is crazy if you think about if you are from the digital advertising world and Facebook and a lot of other channels were being used because people had wealth in crypto and they just wanted to diversify because they were just blindly getting into new ICO's and people are still doing that. You also have Telegram Slack being used in a big way because that's where you try to create the community. So you try to explain what your project is and people ask questions and in the ideal scenario you have some high quality discussions. And then you have a timeline for doing the crowd sale and people like we discussed wire there or send their Bitcoin or Ether whatever you have described sometimes even US dollars and at the same time as soon as a smart contract is executed they get their ERC-20 compatible tokens in their wallet. So that's essentially how you have them and usually they're credible after a certain time. So you can even go and sell them on exchange and that's what a lot of people have been doing is just making some quick money. Now let me give you an example of an ICO which I liked and which would give you a flavor for what kind of project that at least from my perspective is very interesting. So like we discussed Facebook is a good example. We create the content, we consume the content, we get no value. So from a users perspective plus your data is being used in ways you don't know and their algorithms are manipulating your behavior all the time. You don't know that I'm actually not against Facebook. I think it's a great company. I'm just pointing out the case for why something else could also exist. Now also from the advertiser perspective today you have to be on if you're an advertiser and you need to reach audiences digitally all of the growth is Facebook and Google for the last few years. So you have to be on Facebook but they even they are not sometimes happy because they see some conversion but they have no idea how people are engaging because Facebook is not giving them that all visibility. So there comes along a project called Brave Browser basic attention token. How many of you have heard of it? Okay a few and it says okay what about you decentralize this whole thing and make it peer to peer? So there's the user there's the publisher and advertiser what if we could make their interactions peer to peer? Okay which means that and they started with the product itself so it's a new browser which is is decentralized so it comes in a wither wallet and essentially tracks your behavior but the data is never passed without your permission at least that's the concept and so now if you are someone that reads a lot of NDTV or click info both sites could actually reward you for your loyalty in terms of some tokens okay. If you are an advertiser that needs to reach a specific type of audience you could reach them directly with their permission so I could just say I've watched no ads but if I am open to watching some ads for payment and I could say I'm open to watching ads from I don't know fashion sites but I get tokens from them you could now pay for specific pieces of content micro payments directly through this browser so instead of a subscribe subscription to the whole magazine or site I can buy certain articles blogs etc so essentially you think of direct peer to peer interactions rather than a central party which existed before right like a like a Microsoft or a Google or a Facebook so that's a really interesting idea in my opinion because if it works it could change the entire game and this is a good ICO because you had a good team the founders were the same people who created Mozilla this was they talked about in their white paper they laid out what I just described to you and then they also designed a token economy right so you have to actually describe the value flow from advertiser to publisher and you know you actually not going to go into details on this but essentially you are metering every piece of attention okay so on the user side you have thresholds or based on attention time spent on something you keep increasing you keep issuing you keep rewarding the user with some tokens and then you also define how that token flow will go from advertiser to a publisher and user and so they came up with the math behind it and had a successful ICO that is 35 million in 30 seconds right so this is an example which I think meets the criteria of use blockchain decentralization is better they argue has a product has users and fleshed out a token economy in a in a very comprehensive way what about if you just want to invest so many of you raise your hands so my my suggestions are the following right if you're looking at an ICO first of all look at the fundamentals is this solving a problem does the world need this token right because now I would argue that most of these things are completely useless right now because people have just gone crazy and issued new ICOs without actually and nobody's actually going into the details of why it's needed will the user find utility can you imagine large numbers of people in this token economy holding this token using this token day to day right will decentralization make something better what is broken right now that will be better with peer to peer decentralization and why do you need a specific token is it is it complex enough that you need a separate token which has its own economy versus just saying hey let me just use ether and so to your question earlier ideally what you want is that the people who are buying your tokens are the same people who will use your tokens and then they will want to hold the tokens for the long term because they're long term users is this the reality today not at all this is there's very little overlap most people have just bought these tokens because they are investing money they don't understand what they're investing in but they think it will rise in value and many many projects have no token users because they haven't even launched so right now it's it's just very very early going back to what else should you look at people first of all check that they exist you'll be surprised there have been ICOs when you know it's been a fictitious team you go back to people haven't you go on LinkedIn and see if people don't even exist so just check that they exist their background should be they should ideally have some people with blockchain experience this is not rocket science I think any smart person can figure out do they have some experience which is relevant to this have they run a business before have they run a have they built a product before even if it's fine not to have run a business before or they have they managed enough responsibility because if they're going to now be in charge of five ten million dollars then you trust them with with the confidence team versus advisors a lot of the times you'll see that the teams actually are outnumbered by advisors feels I feel like those teams just need a lot of advice and that's usually a bad sign right and sometimes these advisors are just not even participating in anything they're just taking some money and putting their name on it so you have to be cautious about these kinds of things so that you don't lose money next look at their progress do they have a prototype do they have something in testnet that will go to mainnet have they specified a timeline some of all of you I'm sure are are capable of going into github checking commits what is the frequency of updates right what you're really sensing is is this an actual live project which is an open source project where people are contributing is that increasing over time right so is there an actual traction people are really good developers believing in this project do they have a prior existing business or customers now sometimes most of the times the people who are doing the ICOs are just launching from scratch sometimes you may also have projects where we had something else but now they are bolting on blockchain now that can be terrible sometimes because they may just be bad businesses and they're like okay you know this ICO thing let's go raise some money there and we'll figure out life after that but sometimes it may be that hey this presents a new way of doing things so we can actually change the our current product or introduce a new product and we are raising money for this new product right so you have to just really understand their history and their progress the community what is the quality of discussions so if you go to telegram which is usually where these discussions are had most of the time you'll find that people enter and say hi what is this and I'm like how did you even land here right and it turns out that they just clicked some random links there are these bounty programs you know people just get paid for coming to a group or posting something on Facebook and some of sometimes they're just trying to get all these random tokens they don't even understand now it's like Facebook likes you know you can buy them you can have lots of them it may make you feel good about life for some time but they're in the end they're not worth much right so you have to you have to understand are these people who are going to be serious buyers again going that to that Venn diagram right are these at least some people believe in this project long-term or not are the founders participating themselves it's usually a good idea when you see a founder themselves at least for some time every day coming and engaging with the community on telegram and then let's look at the token sale right so how much money are they raising one nice thing about this is you may tell me hey you told me that this is better than we see in many cases so in VC I usually go I raise 1 million then I raise 3 million then I raise 7 million then I raise 15 million it goes on now here people would sometimes argue that you're doing a one time I'm like I need this money and then I will build my platform I will get my community and life will be good so I need 50 million dollars now that's fine in some cases you know if there is a big project like let's say Ethereum today something like that came about and said we will create a platform to distributed apps we need to grow this globally we need to have a developer community all of that we need to have this massive thing globally we need 50 million dollars and the team is excellent maybe that makes sense because a lot of that money those tokens could be given to incentivize new users right but then if somebody who's not run something before has a weak project comes and says I need 10 million or 15 million it's like red flag for me because the point is anything about 5 or 10 million big problem almost no business should get that money before you prove something right so it's I think the better I see those are the ones which are usually like those 5 million or smaller range where the founders are good and they're like we need some money to reach a point when we have a token economy working once that starts working we will have a self-sustaining model anyway so we will not need much more money than that we will find a way to you know monetize those transactions that will happen so we just need money to get there and for almost every project that some does not have to be larger than 5 10 million okay a few things I'll speed up a little bit so soft cap hard cap soft cap is the minimum that they believe it they need to raise to make the project viable hard cap is the maximum they'll raise economics of the team just like in startups if you see teams where a large chunk is held by them big red flag vesting versus and lock in so if you are in a startup your equity vests over time similarly there should be no reason why core teams of these projects don't have their tokens vest over time because if they're all vested on day one what stops them from running away with your money you're just telling dumping these tokens in some exchange and running away with the cash inflation versus burning on soul so because this is something where it's a token economy what you want is you want the early investor to believe that they will not keep getting diluted again and again right so if you have a project which says I will I have the right to issue x tokens at any point you just don't know if they'll keep issuing tokens and will I create more wealth for them but it will not create wealth for you because your stake will keep getting diluted usually good idea to burn the soak tokens that are not sold so if you said I'll sell 1 billion tokens but only 100 billion got sold usually what the good projects do is they burn the unsolved tokens so that the people who invested don't get diluted in the future listing on exchanges if you have something which is listed on exchange at least you know that you can trade like I mentioned the point about being liquid so that's important and good projects usually have one or two really good exchanges but if you see too many exchanges might be a red flag because maybe all they want is trading to happen not people to actually hold this token for the long term lots of scams everywhere lots of jokes these are real things there is a coin called Putin coin which has something to do with Vladimir Putin obviously it's a joke but there are many many such things so be beware there is one called Coinye for Kanye West there's one called Whoppercoin from Burger King lots of random things came about and then and you have to be careful with hacks as well a lot of the ICO projects have gotten hacked so another thing you should try to do is make sure their smart contract has a security audit which means that somebody has or verified that you know they've gone through their smart contract and it doesn't have massive security loopholes because you don't want the project to say hey we lost all your money because you don't know who took it maybe they took it in some other way also exchanges themselves can be hacked as you know so to finish it's still early days but the concept is great in my opinion and I hope it survives if you think about the web right you had the the development of TCPIP SMTP so we were in the protocol layer and at that point whether maybe 1993 95 maybe about one million people could understand these things or use these things maybe not even that then what happened over the next few years is you got fibers were laid everywhere across oceans you had ISPs in every country and the infrastructure for the internet got created and then suddenly you could have a you could have 10 million people use it right then finally you know Microsoft was not the first first GUI but first successful browser came about and suddenly you had a way where the average person did not need to understand the complexity of the protocols behind right they could just interact with something which was simple that suddenly made it possible for 100 million people and then of course over time you had social and mobile because you had web 2.0 you had decentralized I'm sorry you had web 2.0 appear and and we know that it went to a billion people and now maybe two or three billion people in the world of blockchain I think we are right now at the protocol in infrastructure stages we don't even have enough infrastructure in terms of secure storage exchanges these things are happening very quickly but it's still going to take some time we barely have cracked the you know some protocols and until we have some you know I think the killer thing will be when somebody introduces a really neat decentralized browser or a wallet that is the average person's gateway that will actually take it to the next level and then you could see that this will be relevant to a billion people so to finish powerful concept certainly creates democratization of whatever value new digital economy new crypto economics right and it separates money from advice so you can raise money from the community and you can get advice from some VC or whoever but you don't have to raise money from the same people right now the problem is that you have to raise money from those people but currently it's low quality projects this year will be very very key to follow because I think sometime in the middle of this year I think a lot of these projects will get killed because it will be one year mark they raise money they haven't done anything and hopefully this will lead to a a period of like really a turmoil but after that maybe we'll get this ICO as a concept that works very well all right thanks guys went a little bit over time hey this is Santosh is there a way that we can write a smart contract which can actually refund the money once the ICO is not raising enough cash or something like that which could actually protect the money which people have invested yeah I think that's what some projects have is that they have a soft cap which is the minimum and they they promise that if this is not reach your money can be refunded and but it doesn't always happen many projects have kind of taken a vague view of this so they don't actually code in the smart contract they leave it to the community I've seen ICOs where they discuss it in the community like say hey we are not reaching our soft cap but these are the options and then sometimes there's enough consensus among the people say okay fine we are going to be fine with you reducing the soft cap I think you bring up a good point the whole point of this world is that everything can be codified so whatever I said here right I should have mentioned very clearly all of this stuff it's not just I'm not saying this should be there I'm saying this should be in the smart contract because then you can actually trust completely but so quick answer it can be done people have done it but many people don't pay attention to it any other question all right guys okay all right thank you so we'll break we'll take a break now for tea before that I have a few announcements you guys have been given a handbook go through it and we've published some of our blog posts here to stay updated you can even go to blog.50p.in and we keep that updated with the latest trends in payments like Samsung Pay and all when it was relevant we had updated it second thing the food is available on the first floor you can go right opposite to the entrance of the Audi there is a stairs we also have setups office hours so after these speakers finish their talks we have allotted them space and if you want to interact with them offline you can join them Shadab and Pranay have already set up so when you go for breakfast or tea you can just interact with them we have allotted them a table thanks okay welcome back guys next up we have a talk on security of cryptocurrency wallets and mining the talk will be given by Ashwath Kumar he is a principal associate principal consultant at Sugital Asia and an expert in security he has some views on how cryptocurrency wallets can be hacked and techniques that you can use to stay safe you guys hear me you can start right thanks everybody um I'll probably do a quick you know survey just to find out you know how many of you guys are kind of developers how many of you have invested in cryptocurrency bitcoins ethereum okay a couple of them how many of you have kind of done something with security at all security a couple of them okay cool so let's get started before we get started quick disclaimer all of the views here do not reflect the opinion of my current or past employers it's all my opinion you know just putting the disclaimer out there so the agenda we'll go through a quick introduction very quick background because you know nithin and prana have done a fantastic job and then we'll kind of talk about wallets mining icos icos nithin covered it in detail so i'll kind of give my view on it and then we can move on and best practices for individuals so you know the talk is mostly catered towards we as individuals whenever we are getting into cryptocurrency you know what are some of the things that we can do to stay safe because it's the wild wild west right now and it's like a crazy world so we just want to make sure that what are some of the key things that you can do to say stay safe and you know finally the conclusion a quick introduction about myself i'm ashwat i work as an associate principal consultant at synopsis so i used to work for digital which got acquired by synopsis and that's you know currently where i work in so i started i did my bachelor's at nit surat kall then went on to do my masters from texas a nm worked for microsoft for a couple of years in security then decided to come back to india and you know that's when i joined sigital and synopsis so how did i get into cryptocurrency right so back in late 2012 early 2013 i heard about bitcoin mining so i just you know put it on my laptop i let it run for a while and after like say a month or month and a half you know i had like 0.05 bitcoin then i looked up it was like a couple of cents i was like okay screw this my laptop's just getting heated up there's no point it's just going to destroy my laptop deleted the wallet deleted the you know mining software reinstalled windows and yeah i lost all of it probably if i had it not like four hundred five hundred dollars i guess so and then i wrote very recently i had to do like an architecture review from a security perspective and also did a penetration tested on blockchain based project so they were trying to do something based on blockchain technology so that's when you know mine uh i started getting interested again and i was like okay what the hell is this all about that's when i became an investor wrote a couple of bots looked at some of the public and private bots to do investment on my behalf and uh also i'd written a bot where you know as soon as i get a signal from slack i go invest in a bot on a particular coin then you know the bot also kind of sells based on the signal so these were all you know just to experiment see how these things work basically to see what is out there right and uh while i was doing my research for the talk i found something very interesting so bitcoin mining based botnet analysis so this was a paper that came up and it so happened that they had the first reference that they had was a paper i'd written during for my master's thesis so it was like a full circle of research that was pretty cool i thought so background of cryptocurrency so say if you're an individual who'd like to invest on cryptocurrency then four big ways one you know you can go to something like zippie paying rupees do an aft transfer by bitcoin or ethereum and the second way is you can go to an exchange now buy an alternate coin using something like bitcoin or ethereum and the third way is mining where you know you set up a rig you can mine and then you get some cryptocurrency and the last point is payments so this is right now you know borderline illegal in India so you know we'll talk about the regulation and the legality a little later so what this says is you can use bitcoin as a payment method so japan does it a lot where you can go buy milk or eggs or what have you using bitcoin so let's let's kind of talk about wallet so this is the most important slide you know if you kind of understand this the rest of the talk will be a breeze so this is the public address so say if you know i want to buy bitcoin this is the address this is my address this you tell everybody and this is the private key this you do not tell anybody so if you if others get to know this then you lose your bitcoin irrespective of who you call nothing's going to happen you lose it you lose it that's it so there are different kinds of wallets so all they're trying to do is one way or another try to protect this private key so i have a quick video just to show you know how exactly the whole public and private key works so this is my ether wallet i'll just let you watch it then i'll kind of talk to it so if you observe here this is the address and it says this is the private key so what this is saying is print this piece of paper you can give this to anybody but please do not give this to anybody and if you go back in time so the first the very first thing that you did you gave it like a secret key right so this particular thing so what this is used for is say you know you want to store this on email or somewhere so this particular key store file is encrypted with the password i gave that that's the 50p demo wallet creation or something of that sort right so that is the secret key that i gave make sense any questions here all right so different kinds of wallets there's a hardware wallet but this is the most secure but it's a little complex you know there's some money involved and all of those things then there is the software wallets where you run it on your computer then there is the cold storage or paper so you just print it on a piece of paper you store it in a locker somewhere and finally there is the exchange so this is the easiest one to use so you go create an account on zpay or bitrex or what have you and then you know they will handle the public private key pair for you so all you have to do is transfer from this public key to another public key so that's all you have to do they will handle the private key for you so this is the easiest even if you you know lose your password you still you know you can call somebody you can say hey i forgot my password and you can still kind of get access to your account but the private key is lost you lose everything cool so you know i kind of talk about the security risks here so i'll kind of talk through some of them so if you look at the latest hardware wallet hacks right so you pay hundred dollars for it and you know there have been a lot of hardware hacks so the two big ones are treasure and ledger so this is very recent February 3rd maybe like you know five days ago where they said you this they run this wallet on your phone or a web browser so what they're saying is if somebody can be a man in the middle attack so what essentially what they're saying is say if you're sitting in starbucks and you open this wallet up then there's a potential that you know an attacker can put in their attacker address as the receiving address for the bitcoin so if you want to send currency bitcoins from your account to somebody else's account to a person a instead of the bitcoin going to person a it can go to the attacker so that's what they're saying here so that's the man in the middle attack but one way to kind of find out which address it is going to is to use this monitor button so it'll tell you the address name so even if an attacker does a man in the middle attack you're still kind of so this is treasure so this was this you know at defcon last year which is like one of the biggest hacker conferences this was kind of displayed so this was probably like seven eight months ago and what happened here was so they had a wallet and so say if you're carrying this across the border especially for us and mexico say if you're carrying this wallet across the border and if they take this for an examination within like a couple of minutes what they can do is they can read your private key out so which kind of defeats the purpose of a hardware wallet so essentially what they're doing is they're shorting the bits between the power and the reset through which they're able to extract the private key and if you observe here maybe I'll move away you observe here they're able to also dump the pin that's the secret pin that you give so it's just like I think of your phone that is locked and you have to give it a secret pin right so it's like a nine digit pin that they give here and the nine digit pin can also be pulled out using the hardware hack and these are the exchange hacks you know some of the biggest hacks you know the coin check which is like 530 million dollars and the south korean hack ubit was also shut down and they claim bankruptcy so you're like all right what you're saying is pretty much all the wallets can be hacked then where do I go put my money so this is where in what we call in the security world the risk matrix come into play so think of it this way right so for a severity of a bug or a finding or a hack there is something called impact and likelihood impact is you lose your coins so pretty much the impact for all of them is high whereas the likelihood that is how likely is it to go lose your coin so in the case of a paper wallet somebody has to come into your house get into your locker and steal that paper address or for a hardware hack they have to get into your house or they have to get hold of that hardware device that's when they can kind of hack it right or you have the attacker has to somehow follow them to a coffee shop hope that they log in hope that they're making the transaction at that point in time so likelihood is very low so that's the reason you would want to kind of move towards the hardware wallet kinds if you're investing a large part of money and also at least this is how i do it personally like say if i have one whole bitcoin i'd probably keep 20% in the exchange so that i can actively use it for exchanging coins and say if i want to like buy sell and all of those things and then maybe like 60% on the hardware wallet and another 20% on paper wallet just just you know just to kind of diversify it um so mining um i i know prana is kind of spoken about it in detail um so essentially you know there are two kinds proof of work proof of stake uh so proof of work you know there are a bunch of miners um and if you set up your rig or uh your machine as a part of it uh you know you can get some coins in exchange uh because you're a part of the network so that is the long story short i know it's super simplified uh this is a very good diagram uh put up the link here unfortunately it's not very visible but uh it's on medium uh and he he does a great job at explaining it so maybe i'll post the slides out and you know you can kind of take a look at it as well so he kind of explains how exactly the mining happens and who gets the reward in all of this in great detail um so mining process you'll have to make a lot of decisions if you get into mining so the first thing is you buy hardware you buy gpu's you buy a cpu you put up your motherboard and then you're like okay fine i have to get into mining so what do i do um so then you need to pick a coin you need to pick a wallet you maybe spoke about wallets then you need to pick an operating system uh miners mining pools and monitoring software so this is kind of optional so this is the space where at least from what i have seen there's a lot of innovation and there's still a lot of scope for innovation so you know let me give you an example so there's this guy called simple mining so all he does is he's taken the ubuntu os he's kind of broken it down and uh you know there's no gui but there is a way where you can use a web portal to send it commands you can say hey use this particular uh go mine on this coin use this particular miner and he charges like two dollars a month doesn't look like a lot but for the amount of work that he has put in you know it's a lot of money and also another reason that you know you guys might have heard of a lot of hacks and lot of software security bugs in the crypto world uh you know why why do you guys think so anybody why do you think that might have happened so one of the common reasons is you know hackers put their mouth where the money is so one of the biggest thing for hackers is the return on investment so say if i put in 10 hours of work how much money am i going to get back and cryptocurrency just by itself the whole ecosystem is very new and uh you know even traditional systems have software problems like think about the big banks and all of those things even those guys have problems but they've matured over time and they've gone through multiple security audits and multiple penetration tests architecture reviews and all of those things but in crypto world it's like if i put my code out there first then i kind of win is the way that a lot of people see it and unfortunately they don't do it the secure way and if you look at the whole security industry they're trying to move left that is you know start from the architecture phase and then kind of work towards you know while the code is being developed you know do some security audits then when finally the code is deployed and you know it's deployed on a web application also then do some security audits but unfortunately in the crypto world you know all of it is done and it's deployed into production and that's when hackers come and find it instead of you know the white hat people or the security auditors finding issues so that's the reason why you know you see a lot of hacks and that's one of the reasons why you know newspapers and everywhere the cryptocurrency is not secure that is not true it's just that it has to mature over time and it has not unfortunately so even with mining there have been a lot of hacks so i use i was a personal you know i was personally i went through a loss because i was using nice hash as my miner so essentially what nice hash did was it's a pretty cool concept where they said hey you just set up a rig and you do not have to do anything else just keep our program running we'll look for the most profitable coin and we'll transfer money in bitcoin so all you have to do is let this program run and once this program runs it'll do everything in the background and it'll just transfer bitcoin to you but what happened was they lost about i think 70 or 80 million dollars because just 60 million but yeah it keeps changing but what happened there was with nice hash you know they lost so with mining what happens is like say if there are miners 1 to 10 they don't want to transfer the amount till it reaches a certain threshold because the transaction fees are so high like say if you have if you're running five dollars and if the transaction fee is one dollar then you're losing 20 percent so you'd want to accumulate till 50 dollars and that's when you make the transfer so all of these small amounts were taken away by the hackers and they're yet to refund my money so or bitcoin so i think i lost about 0.005 bitcoin just close to like a hundred dollars so yeah they're yet to refund my money and you know the small so if we go back here if you see here the mining pools have a certain percentage fee right because if you observe this guy the noob pool so the noob pool is just like the name it's all a bunch of newbies getting together they're like hey let's create a mining pool let's have zero percent mining transaction fee they've been hacked like three or four times because they have no security controls so even my advice to you is even if you pay a little bit of a percentage fee make sure you go with a big miner big name so that you don't lose a lot of money so these are a bunch of the small names and you know they've been hacked multiple times so mining observation so i was doing mining and as a part of it you know i was doing a lot of research right and there's like absolute ridiculous advice on the internet please do not listen to so this guy who's given this advice has about 70 thousand followers so and it has like a hundred thousand views so i'm really hopeful that all of them have not taken his advice seriously so his video says how to turn off windows updates permanently and other crypto mining operations so essentially for a miner uptime is the number one metric that they care about because for every minute that your miner is not running you're losing money so that's the way miners look at it so what he was trying to say here was i want to turn off windows update so that you know the uptime goes up and there's no down time because of installing windows update and you know because of the reboot but internally what's happening is somebody else can hack into the system and you know they can take away all the bitcoin or worse what can happen is you're probably getting only 80 percent of what your miner or the rig is capable of the rest 20 percent is probably going to an attacker so that's kind of the way and also there's another operating system called ethos which is like an ethereum for it's mostly for ethereum mining so what happened here was these guys charge about 40 or 50 dollars for the os this guy's put it up on a torrent so most likely you know this torrent is you know they're probably doing taking away some mining power from you so how many of you are using an ethereum or any mining on your phone any show of hands okay let me ask you this question let me frame it another way the past like six months have you ever seen your phone heating up for no reason like you're not using it at all and is it heating up a couple of them so what happened here was there are a lot of miners on the play store and the app store so what they say is we give you 0.0 to finny a minute so one of the guys who works for me he was like hey Ashwat can you try this out I'll get a referral bonus and if you join you'll you know you will also get some ethereum on it I was like okay I did the math and it works out to about 20 dollars a day if you just run this particular program or app on your phone sounds too good to be true it's like a rig that I have that I purchased for two lakhs is probably earning about 16 17 dollars a day how can a phone you know with very less computation power and so much so then you know I started reading up some more on it essentially what they do is till you reach a certain threshold it's all in their virtual currency and the only time that they will transfer it to actual ethereum is when you reach a very high number in all probability once you reach the very high number they're gone by the way they've just taken all your computation power and in probably in all likelihood in the background what's happening is you are mining for an attacker and I just ran a plagiarism check so you can get it free of cost there are a couple of free tools that do it for you there's also Grammarly which kind of is a paid software but you know they're still pretty good at it so what I found was I looked through maybe 20 ICOs and I found like at least three of them had just tripped content of other white papers this is just like copy paste copy paste copy paste and this is like it's super easy anybody can do it so one of the things that I would do here then look for grammar checks if when you upload it on things like Grammarly it will tell you if there are any if the language is not good if there are any grammar mistakes and also look for the team so right side is like an excellent example so this guy is supposed to be the marketing head but he is like on buzzmuslim.com which is like a dating website so they have taken the picture from buzzmuslim.com they've made him the marketing head with I don't know what its name is called it's like it's a Spanish sounding name let me see if I can read his name it's marked in autos so yeah just make sure that you can run quick checks so also look at the currency split and you know how they're raising money so this is also an important piece and how many of you have seen this puzzle before one nobody else this is like a super interesting puzzle so it's been around for three years so this was done by an artist there was like 4.75 bitcoin as a bounty if you saw this puzzle it's been recently solved like say in the past month or so so this was super interesting if there were like a bunch of people to this public address and they were like what the hell is going on and then there was this guy who came and complained and said I've lost nine bitcoin from my blockchain.info address he said I've done two factor Roth I use a separate VM I do everything possible and I'm done everything right but how the hell did I lose nine bitcoin and what had happened was the place from where he lost the nine bitcoin came the additional no the guy who stole the nine bitcoin sent some additional money to this puzzle so that it would create some awareness and then he wrote like a super long blog about so okay so I'll maybe you know link on I'll put up on my slides so that you can take a look at it so essentially what he said was here's his conspiracy theory his conspiracy theory is the private key that we saw initially is derived from the public addresses in the blockchain so if you think about the blockchain you know there's transaction one public key one to public key two so he says the pub if you do a shot of 56 of the public key one then that's how I kind of arrived at the private key for this particular address is what he says so he says somebody has put in some malware or a back door in the whole blockchain through which I'm able to kind of get private keys or guess private keys so he has a repository of a lot of private keys for all of the transactions that have gone on from 2009 to 2017 and he he thinks that or he kind of claims that these are the private keys for some of the bitcoin addresses so that's how he could get the nine bitcoin and he kind of transferred some bitcoin to this then he gave it back to this guy as well so long story short you know this guy got his bitcoin back and some he donated some bitcoin to this guy and he kind of exposed some quote and quote conspiracy theory so kind of running towards the end of my slides but price manipulation how many of you have heard of pump and dump groups like pump and dump great a lot of them have heard how many of you not supposed to ask it but if you've heard of it you might have used it as well but it's not always a good story or a good ending when it comes to pump and dump so here is a pump and dump signal from a pump and dump group they say we give you the signal here but the profit is here so you get a 150 percent profit but if you look at the what has happened in the background now the owners behind the pump and dump group would have started investing here then they would have predicted the signal here so this is where all the innocent buyers buy the coin and as soon as you buy the coin it might have gone up a few percent but you know just drop a huge percentage after that so this is where they start dumping the coins so you know there are multiple examples for it and here's another story from an actual hacker or at least he claims to be an actual hacker so he's gained like a lot of bitcoins like you see 500, 140, 100,000 dollars I don't know if the story is true or not I don't know if he's the actual hacker behind all of these things so what he's kind of saying here is he started in 2013 and in 2013 when he started he said I was just sending phishing emails I was looking for people who would reuse their passwords in different places so you put in the same password in multiple places then pull the Bitcoin out so he was kind of successful pull five Bitcoin out you know the cost of one Bitcoin was probably about 100 dollars so made about 500, 600 dollars but then he was like okay I need to look for more so that's when he started you know looking at SQL injection on third-party services which would kind of support Bitcoin so he got about 100 Bitcoin there then so this is where it kind of got interesting he said I could use the mount gox and apparently this guy had like 10,000 Bitcoin at that point in time and because there was a limit of the number of Bitcoin you could transfer per day he could only transfer 140 is what he says he could kind of get his password using SQL injection on one of the websites so SQL injection is a kind of application vulnerability through which you can extract data on the database so finally he says I kind of put a Trojan in an infected wallet this is where I was like okay maybe this guy is not the real deal so he says I could pull out like 100,000 dollars because of this infected wallet so general security measures so this is for everybody so if there's one slide that you would want to take a picture of this is a slide and if you want to take away key things add two factor authentication on all of your key transactions and make sure that you know even if it's a little painful do it because it's going to save you a lot of money and you know IP whitelisting some of the depends on the exchanges like say if you log in from a different IP they'll say hey is this really you and they'll ask you to kind of click on a link on your email this you know you cannot do anything but it's mostly the providers use a strong password and do not reuse your passwords between like say your email and you know an exchange and notifications on transactions like if the exchange enables it you know just go click it so that at least if a transaction has happened you'll know about it then for pc this is general advice so if you have a pc you know set up a vm on it and have a dedicated vm where you do the bank transactions and have another vm where you do email browse and whatever you would want to do and do not do any actions on the host machine because it kind of defeats the purpose and here's an excellent article to kind of set up this machine and finally to the legality you know Mr Ranjit we are finance minister has said cryptocurrencies cannot be used as legal tender but what some of the expert says gold is also not a legal tender does it mean it's illegal to buy gold no so we do not know what the regulations are going to be so they're still figuring it out and finally you know blockchain technology is here to stay legality let them figure it out but we can only do so much you know how much we can do so make sure you stay safe while you're operating on the cryptocurrency that's pretty much it any questions we're out of time okay if you have questions he'll be around please find when some of you checked in this morning some of the badges were not printed we have gotten the fresh badges please go and collect them during the breaks next up we have a birds of feather session let's like we'll take five minutes to set up