Foundations of FinTech (FNCE30012)Assignment 1: Blockchain and Smart ContractsP. Bossaerts F. Fattinger C. Murawski N. YadavSemester 2, 20191 General InformationTo solve and submit your assignment, you have to do the following:1. Download (“fetch”) the assignment file to your Jupyter account2. Solve the assignment using Jupyter notebook3. Submit your assignment notebook onlineNo worries, we will practice these steps in the third tutorial. Note, you can sub-mit multiple times. However, only your final submission will be considered.The organizational details for assignment 1 are listed below:• New submission deadline: September 2, 2019, before 23:59• Weighting: 10% of your final mark• IndividualWe will check your work for signs of plagiarism and/or collusion, both are con-sidered academic misconduct and attract severe penalties. Hence, only submityour own work!2 SettingLet’s assume you have recently moved out of the city, since you prefer to resideclose to the beach. Your new home is only minutes away from a great surfingspot, which is amazing of course. However, the drawback is that, due to lousyconnections, it takes you forever to go to university by public transportation.1Hence, you have decided to buy a car. However, you currently only have $110to spend. Since you are on a tight budget, you can only afford a used ratherthan a new car.2.1 The Markets for Used CarsThere only exist two types of used cars: low-quality cars with a value of $50, so-called “lemons”, and high-quality cars with a value of $100, so-called “peaches”.In contrast to peaches, lemons have a higher risk of breaking down, which wouldmake you miss the next “Foundation of FinTech” class. :-(To keep things simple, we assume that a given car is of high quality, if ithas been inspected and serviced over its lifetime. You can assume that everyinspected car has also been properly serviced. In contrast, if a car has not beeninspected, it is of low quality. The important consequence of this assumptionis that all remaining properties of a car have no effect on its quality. Forexample, neither the brand nor the mileage of a car are relevant to its quality.2.2 Your Utility from Owning a Used CarTo make things explicit, we further assume that your utility from owning alemon corresponds to $65. In contrast, owning a peach is worth $127 to you.Importantly, you only need one car to drive to university. More specifically,should you purchase a second car, its utility to you would be $0, independentlyof its quality. Hence, you are always better off keeping your money instead ofbuying a second car.Finally, you evaluate any (remaining) cash in your wallet at a 1:1 ratio.For example, your utility from owning $110 is equal to $110. If, after thecar purchase, you end up with, e.g., $10 in your wallet, the utility from thisremaining amount of cash is equal to $10.2.3 Two Marketplaces to Choose fromTo purchase a used car you have two options: You can either go to a “tradi-tional marketplace” for used cars, or, alternatively, you can access a “blockchainmarketplace” that also offers used cars. In contrast to the traditional mar-ketplace, in the blockchain marketplace all attributes of the available cars arestored on a public blockchain.2In both marketplaces, you as a buyer get randomly matched with a po-tential seller of a used car. Of course, each seller exactly knows the quality ofher car, however, you do not! Moreover, there exists no possibility for you toverify a car’s quality. As a general rule, every seller in both marketplaces willalways accept to sell her car for a price equal or higher than its true quality.For instance, if you are matched with the owner of a lemon, she will agree tosell her car at price of $50 or higher. Similarly, if you are matched with theowner of a peach, she will only agree to sell her car for a price of at least $100.The differences between the two marketplaces are summarized below:• Traditional marketplace:– Infinitely many sellers– There are at least as many lemons as there are peaches– No other available information about properties of offered cars– No entry restrictions• Blockchain marketplace:– 150 sellers– Properties of offered cars stored on blockchain– Cars can only be purchased via a smart contract– To execute a smart contract you need to pay one BMM coinThe blockchain marketplace’s smart contract is very simple. In addition tothe standard input variables, you have to specify the price you are willing to payin return for a randomly selected car. Importantly, the smart contract allowsyou the make this price conditional on the car’s quality. More specifically,you can choose two different prices for lemons and peaches. Hence, the smartcontract allows you to offer $x, if the information recorded on the blockchainsays that the car is a peach, but only $y, if it says that the car is a lemon. Youcan rest assured that each car’s quality (inspection history) is always correctlyrecorded on the blockchain. To summarize, your two options are displayed inFigure 1.2.4 Initial Coin Offering (BMM ICO)In total, there exist exactly 150 BMM coins, i.e., equally many as there aresellers offering their cars in the blockchain marketplace.3Figure 1: Traditional (top) vs. Blockchain Marketplace (bottom)Starting on Tuesday August 27 at 14:15, we will conduct a 24-hourICO of our 150 BMM coins. During this time you have the chance to placeyour bid for one of those coins. You are not allowed to buy more than one coin.Therefore, if you submit multiple bids, only your highest bid will be considered.At the end of the ICO, the 150 highest bids (offers) will receive one BMM coineach. Overall, there are roughly twice as many car buyers (students) than thereare coins.To give you a specific example, if you bid $z and there are no more than149 bids higher than $z, you will pay $z and receive one coin in return. If therehappen to be 150 bids higher than yours, you will be repaid your money but willnot receive any coin. In case there are multiple bids at the same price, prioritywill be given to earlier bids.Of course, you should think carefully about how much to bid for a BMMcoin, as it can only be used to execute a smart contract in the blockchainmarketplace and is otherwise of zero value to you. The various questions ofthe assignment will guide you in making this decision.2.5 QuestionsPlease log on to your Jupyter account and follow the above instructions to accessyour assignment notebook. Your assignment notebook contains all the questionsthat you need to answer for this assignment.4
