Cryptography and Economics: Interactions and Implications

Declaration
Data used in this assignment was obtained from yahoo finance. The data relates to the BTC,
ETH, XRP , LTC and NASDAQ trade between Feb 15, 2017 and Feb 15, 2019.
Question 1
Cryptography and Economics
Theoretically, Cryptography refers to techniques applied in protecting information and
communications by use of codes. The approaches ensure that only the intended parties can read
and process information within a given communication system. The techniques that constitute
Cryptography are largely derived from mathematical concepts with application of special
algorithms that transforms messages into cipher text, through encryption; and extract messages
from cipher text through decryption. Modern cryptography primarily focuses on ensuring
confidentiality; ensuring that information is not exposed to unintended parties, integrity; ensure
information cannot be altered while on transit or in storage, non-repudiation and authentication.
On the other hand, is defined as a social science that focuses on the “production, distribution, and
consumption of goods and services”. Economics endeavors to satisfy needs and wants, “through
the allocation of scarce resources which have alternative uses”. The subject is founded on the fact
that resources are finite, and choices have to be made in order to utilize available resources,
prudently; creating a balance between demand and supply. Economics finds usage in all facets of
life. As such, its use in cryptography comes in naturally.
From a technological standpoint, Cryptography and economics interacts in a number of ways.
Since cryptography is the engine behind the production, distribution and use of currency within
the digital economy, it has to be governed by some economics rules and protocols. The two
disciplines therefore interact to establish rules and protocols, which governs the production,

distribution and consumption of goods and services within the decentralized digital economy.
The interaction between cryptography and economics has led to the birth of Cryptoeconomics; a
field of study that focuses on the design of principles for governing the block-chain technology.
Blockchain Technology
A blockchain can be defined as a distributed ledger, that’s holds and preserves an ever increasing
list of openly shared and accessible records, which are cryptographically secured from tampering
and alteration (Ahram et al. 2017). A node in a blockchain network holds a copy of the
blockchain. Blocks in a blockchain is linked to another by use of a hash pointer, and are
cryptographically secured. The linkage between one block to another consists of a hash pointer,
transactional data and a timestamp. The chain facilitates the creation of a continually growing
public ledger that is persistent, immutable and can only be updated by appending additionally
information by use of cryptographic digital signatures (Lemieux, 2017).
By design, blockchain technology makes it almost impossible to alter any data. As such, it
provides a near permanent approach to maintain historical transaction records between two
parties, while ensuring that such information is permanent, openly accessible, distributed and
verifiable. The technology therefore, facilitates the creation of a permanent, distributed ledger
than can hold transaction data. Where the technology is used as a distributed ledger, a blockchain
is normally administered by a peer-to-peer network, where each and every node in the network
adheres to a set of rules that guide the validation of new blocks.
Data recorded in any block of a blockchain cannot be changed, without changing all the other
blocks. Changing a single block requires a decentralized consensus between all or most of the
nodes in the network. These restrictions make it almost impossible to change information

recorded on a block, and makes blockchain technology to be highly secure. The constraint also
makes the technology ideal for recording critical information such as land ownership, identity
management, medical records and other transactional data.
Blockchain technology was first conceptualized by Satoshi Nakamoto in 2008 and implemented
as a distributed blockchain in 2009. The initial implementation was in form of a public ledger
which forms the core of the Bitcoin digital currency.
Question 2: Key events for Cryptocurrencies from January 31, 2018 till January 31, 2019
The year 2018 had numerous events and occurrences that affected the cryptocurrencies around
the world. Top on the news was mainly about hacks that were orchestrated on the major
currencies. The events had a significant impact on the performance of various cryptocurrencies.
However, the overall price meltdown of Bitcoin cannot be co-related to any single events.
Among the key events for the period, hacks, collapts of bitconnect, tighter regulations by
governments around the world were among the major negative events, while the main positive
were with regards to the announcement by Fidelity Investment of their intension to open a
cryptocurrency trading desk as well as the anticipated launch of Bakkt platform, which is
expected to attract corporate investments into cryptocurrency. The table below summarizes some
of the key events.
Date Key Event
31-Jan-18 Shutdown of Bitconnect
1-Feb-18 BitGrail exchange hacked
5-Feb-18 News Coincheck hack
10-Feb-18 Ban of ICO and Cryptocurrency Ads by Facebook
18-Feb-18 South Korea regulatory tightening
30-Mar-18 Bithumb Hack
24-May-18 News of 51% Attacks Bitcoin Gold

15-Oct-18 Fidelity Investments intension to open a cryptocurrency
trading desk
24-Oct-2018 Coinbase Gets Approval to Offer Crypto Custody
Services
15-Nov-18 Bitcoin Cash hard fork
15-Jan-2019 Anticipated Launch of Bakkt
Figure 1.0 Graphical timeline of all key events for crypto-currencies
A graphical observation of the reactions of BTC trade shows that whenever a major negative
effect hit cryptocurrency, and in particular the Bitcoin currency, the price of BTC tends to
fluctuate downwards. As seen in the Time series plot below, there way steep drops in BTC price
when an incidence occurred, during the events dates.