Foundations of FinTech (FNCE30012)
Assignment 1: Blockchain and Smart Contracts
P. Bossaerts F. Fattinger C. Murawski N. Yadav
Semester 2, 2019
1 General Information
To solve and submit your assignment, you have to do the following:
1. Download (“fetch”) the assignment file to your Jupyter account
2. Solve the assignment using Jupyter notebook
3. Submit your assignment notebook online
No 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
• Individual
We will check your work for signs of plagiarism and/or collusion, both are con-
sidered academic misconduct and attract severe penalties. Hence, only submit
your own work!
2 Setting
Let’s assume you have recently moved out of the city, since you prefer to reside
close to the beach. Your new home is only minutes away from a great surfing
spot, which is amazing of course. However, the drawback is that, due to lousy
connections, it takes you forever to go to university by public transportation.
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Hence, you have decided to buy a car. However, you currently only have $110
to spend. Since you are on a tight budget, you can only afford a used rather
than a new car.
2.1 The Markets for Used Cars
There 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 would
make you miss the next “Foundation of FinTech” class. :-(
To keep things simple, we assume that a given car is of high quality, if it
has been inspected and serviced over its lifetime. You can assume that every
inspected car has also been properly serviced. In contrast, if a car has not been
inspected, it is of low quality. The important consequence of this assumption
is that all remaining properties of a car have no effect on its quality. For
example, neither the brand nor the mileage of a car are relevant to its quality.
2.2 Your Utility from Owning a Used Car
To make things explicit, we further assume that your utility from owning a
lemon 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, independently
of its quality. Hence, you are always better off keeping your money instead of
buying 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 the
car purchase, you end up with, e.g., $10 in your wallet, the utility from this
remaining amount of cash is equal to $10.
2.3 Two Marketplaces to Choose from
To 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 “blockchain
marketplace” that also offers used cars. In contrast to the traditional mar-
ketplace, in the blockchain marketplace all attributes of the available cars are
stored on a public blockchain.
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In 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 of
her car, however, you do not! Moreover, there exists no possibility for you to
verify a car’s quality. As a general rule, every seller in both marketplaces will
always 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 to
sell her car at price of $50 or higher. Similarly, if you are matched with the
owner 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 coin
The blockchain marketplace’s smart contract is very simple. In addition to
the standard input variables, you have to specify the price you are willing to pay
in return for a randomly selected car. Importantly, the smart contract allows
you the make this price conditional on the car’s quality. More specifically,
you can choose two different prices for lemons and peaches. Hence, the smart
contract allows you to offer $x, if the information recorded on the blockchain
says that the car is a peach, but only $y, if it says that the car is a lemon. You
can rest assured that each car’s quality (inspection history) is always correctly
recorded on the blockchain. To summarize, your two options are displayed in
Figure 1.
2.4 Initial Coin Offering (BMM ICO)
In total, there exist exactly 150 BMM coins, i.e., equally many as there are
sellers offering their cars in the blockchain marketplace.
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Figure 1: Traditional (top) vs. Blockchain Marketplace (bottom)
Starting on Tuesday August 27 at 14:15, we will conduct a 24-hour
ICO of our 150 BMM coins. During this time you have the chance to place
your 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 coin
each. Overall, there are roughly twice as many car buyers (students) than there
are coins.
To give you a specific example, if you bid $z and there are no more than
149 bids higher than $z, you will pay $z and receive one coin in return. If there
happen to be 150 bids higher than yours, you will be repaid your money but will
not receive any coin. In case there are multiple bids at the same price, priority
will be given to earlier bids.
Of course, you should think carefully about how much to bid for a BMM
coin, as it can only be used to execute a smart contract in the blockchain
marketplace and is otherwise of zero value to you. The various questions of
the assignment will guide you in making this decision.
2.5 Questions
Please log on to your Jupyter account and follow the above instructions to access
your assignment notebook. Your assignment notebook contains all the questions
that you need to answer for this assignment.
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