The Blockchain Identity - Fuqua School of Businesscharvey/Teaching/697... · 2020-01-14 ·...

Blockchain Decoded

Campbell R. HarveyDuke University and NBER

January 2020

FUQINTRD 697: Innovation and Cryptoventures

Campbell R. Harvey 2020

Blockchain is a technology

There is no “the” blockchain… blockchain is a technology. • Concept invented by Haber and

Stornetta (1991) in the context of time-stamping digital documents.

• Also, blockchain is not bitcoin. Bitcoin uses a blockchain technology.

Campbell R. Harvey 2020https://medium.com/@taodust/blockchain-history-part-1-idea-and-birth-5c8b560b9827

https://medium.com/@taodust/blockchain-history-part-1-idea-and-birth-5c8b560b9827

Blockchain is a ledger

A very special ledger…• Quickly and easily accessed and

shared by many -- distributed• Various levels of transparency

depending on application• Immutable (you can only add to it

– you cannot alter history)


Removes single point of failure

Blockchain is a ledger

A very special ledger…• Quickly and easily accessed and

shared by many -- distributed• Various levels of transparency

depending on application• Immutable (you can only add to it

– you cannot alter history)• Cryptographically secured


What can blockchain technology do?

Solves many problems• Verification of ownership (quickly check the immutable history recorded on

a blockchain to see if someone owns something)• Efficient exchange of ownership (direct transactions without middle person,

everybody treated the same whether customer, retailer or banker).


Imagine …

Buying and selling stock with t0 settlement• Today is t+2 not much

different than the 1920s• All stock transactions would

reside in a secure ledger devoted to a company’s equity


Imagine …

Closing on a property with• No title insurance• Minimal legal• No title search• Simply consult a secure ledger

that establishes the person you are buying the house from actually owns it


Imagine …

Instantly transferring funds between accounts• Transfers are not immediate

today – even within your own bank!

• Transfers are secure and inexpensive

• Financial institutions constantly being cyber-attacked:

https://carnegieendowment.org/specialprojects/protectingfinancialstability/timeline

Campbell R. Harvey 2020 https://www.ft.com/content/e3bfdd54-21b2-11e6-aa98-db1e01fabc0c

https://carnegieendowment.org/specialprojects/protectingfinancialstability/timeline

https://www.ft.com/content/e3bfdd54-21b2-11e6-aa98-db1e01fabc0c

Imagine …

The end of counterfeiting• Massive number of counterfeit bills

in circulation


Imagine …

Starting your car with your thumb print or your face• A secure ledger is checked to verify that you own the car


Prime targets of disruption

Any situation with a thick layer of middle people• Blockchain is fundamentally a P2P technology.


Types of blockchains

Public blockchains• Trustless. Original example bitcoin blockchain. Open source code.• Ethereum blockchain allows for contracting and is the main choice for

most corporate applications. Contracts can be conditional, if then statements. Bitcoin blockchain cannot do this.

• Variety of mechanisms to ensure security (Proof of Work, Proof of Stake, Proof of Authority, Zero Knowledge Proof, etc.)


Types of blockchains

Private blockchains• Trust required. • Need to determine if the cost of trustlessness is worth it. Most

applications today involve trust. Combining blockchain technology with trust allows for much more efficient transactions (think of payments)


Original blockchain

Let’s start with the bitcoin blockchain:• A distributed, secure, transparent, public ledger that establishes

ownership and allows for the efficient exchange of ownership• Available to anyone for download on the Internet (decentralized)• Does not depend on trust (controlled by no one – monitored by

everyone)• Backed by strong cryptography secured by the world’s most powerful

network of computers• Miners provide security and are rewarded with new cryptocurrency


Original blockchain

How powerful?• #1 supercomputer is IBM Summit

(June 9, 2018) ≈3,300 PetaFLOPs• Currently 80,704,290 PetaFLOPs• The bitcoin blockchain uses specialized hardware.

Cost of 50% of the network power is about $3 billion

http://bitcoincharts.com/bitcoin/ http://www.top500.org/ https://www.top500.org/statistics/perfdevel/Campbell R. Harvey 2020

mFLOP=1 million operations per second

http://bitcoincharts.com/bitcoin/

http://www.top500.org/

https://www.top500.org/statistics/perfdevel/

Hashing 101

A simple hashSuppose I send an email to Sasha. However, she needs to verify that what I sent her is exactly what he received. • My email contains a single word “hello”.• Encode the word (a=1, b=2, …, z=26), so 8 5 12 12 15.• Multiply the numbers to get 86,400.• I post the hash on my website. Importantly, the has does not reveal information

about my message. After Sasha gets my email, she does the same hash of the message and checks my website to verify.

• If the message was corrupted the hash will not match, for example, “hallo”= 8x1x12x12x15=17,280 which does not match the original.

• However, this hash is too simple (e.g. hello=ohell) and causes a “collision”Campbell R. Harvey 2020

Hashing 101

SHA-256 (Secure Hashing Algorithm)https://emn178.github.io/online-tools/sha256.html

Hashing is a one-way function. Hashing is not “encryption” because you can’t decrypt.For example, passwords are routinely stored on websites in hashed form.The output of a SHA-256 is 256 bits no matter how big the inputLet’s do some examples:


https://emn178.github.io/online-tools/sha256.html

Hashing 101

SHA-256 (Secure Hashing Algorithm)https://emn178.github.io/online-tools/sha256.html

Let’s hash the phrase: “Hello, world!” with a special number appended. No spaces. Do it three times for three different strings.Hello, world!0 Hello, world!1 Hello, world!4250


https://emn178.github.io/online-tools/sha256.html

Hashing 101


Output of program

Hashing 101

How many combinations in a SHA-256 hash?• Need 2255 = 1.15*1077 guesses• Which is roughly the number of atoms* in the known universe!

Campbell R. Harvey 2020*Number of atoms between 1078 to 1082 http://www.universetoday.com/36302/atoms-in-the-universe/

http://www.universetoday.com/36302/atoms-in-the-universe/

Hashing 101

SHA-256 hashes widely used for email and file transfer• Returning to the email example, I want to send a file to Sasha• I SHA-256 the file• I send Sasha the original file• Sasha does her own SHA-256 hash of the file• Sasha checks to see if her hash of the file matches the hash that I have on my

website• If there is any difference, the file has been corrupted• This all happens automatically and is called “checksum”


Hashing 101SHA-256 appears in Wall Street Journal


Hashing 101Three pre-releases


How does the bitcoin blockchain work?

Every transaction ever made on this blockchain is public• Ledger is append-only and immutable• Serves as a basis of trust• Can store (limited) metadata as well as transactions



Ledger broken up into 10 minute “blocks”● Every block contains a hashed reference to the block before it so you can

trace every transaction all the way back to 2009



Example. In block 1000, I buy a car (for 17 BTC) from John



Suppose I edit the block on my computer – to give me 17 BTC!I then broadcast to the network

Campbell R. Harvey 2020Nefarious action


Even making that small change results in a very different block hash. It no longer matches what is stored in block 1001.



Blockchain clients automatically compute the hash themselves - if no match, they reject the block - Check other peers in the network for correct block



But there is more to it! Here is where the miners come in.• Miners group the current transactions together and take a hash of the

transactions plus a “magic number” – called a “nonce”.



But there is more to it! Here is where the miners come in.• Miners try different nonces to get a special hash that has a certain number

of leading zeros• More leading zeroes means fewer solutions – and more time to solve the

problem• Think of shuffling 5 decks of cards. You goal is to turn over 5 aces of spades

in the first five cards! That will be a lot of shuffling.



But there is more to it! Here is where the miners come in.• Current difficulty is 19 leading zeros! Probability = (1/16)19

• Odds of winning two Powerball jackpots* in a row approx (1/16)15

• Someone finds the winning hash approximately every 10 minutes• System is immune to increases in computing speed – the difficulty

automatically adjusts if the hash is found in less than 10 minutes

*Probability of one Powerball win = 3.4223E-09; two Powerball wins in a row = 1.17122E-17; 19 zeroes in winning hash 1.3E-23

Campbell R. Harvey 2020** https://blockchain.info/charts/hash-rate Note 1 gigahash=1 billion hashes

https://blockchain.info/charts/hash-rate


But there is more to it! Here is where the miners come in.• It is easy to verify the hash is correct• Anyone can take the hash of the transactions + nonce and get the hash with

the 19 leading zeros• However, any change in any transaction – no matter how trivial – will lead to

a completely different hash (and unlikely to have any leading zeros)• Miners are rewarded with cryptocurrency for finding the winning hash and

verifying transactions. There are also small transaction fees.


Distributed public ledger

Bitcoin blockchain:• Anyone can write to ledger and anyone can mine, i.e., no “censorship”• Network determines “settlement”• Having extreme “difficulty” is expensive (power consumption) but reduces

or eliminates the possibility of any single person (or miners) from doing anything nefarious.


Cryptocurrencies are deeper than bitcoin

1. First Gen/Gold 2.0: Bitcoin (BTC), Litecoin (LTC)



1. First Gen/Gold 2.0: Bitcoin (BTC), Litecoin (LTC)2. Distributed Computation Tokens: Ethereum (ETH), Tezos (XTZ), EOS, and DFinity


https://medium.com/@fluence.sh/blockchain-performance-comparison-eb47d94249b5

https://medium.com/@fluence.sh/blockchain-performance-comparison-eb47d94249b5


1. First Gen/Gold 2.0: Bitcoin (BTC), Litecoin (LTC)2. Distributed Computation Tokens: Ethereum (ETH), Tezos (XTZ), EOS, and DFinity3. Utility Tokens: Programmable blockchain assets: Storj, Golem (GNT), Sia (SC), FileCoin



4. Security Tokens: Represent stocks, bonds, other assets, ASX initiative• STO=Security Token Offering; ETO=Equity Token Offering

https://medium.com/@nisc/list-of-security-token-offerings-stos-32b75e079884


https://medium.com/@nisc/list-of-security-token-offerings-stos-32b75e079884



5. Fungible Tokens: ERC-20, Decentraland (MANA), REP




5. Fungible Tokens: ERC-20, Decentraland (MANA), REP6. Non-fungible Tokens: ERC-721, Dharma debt agreements, Decentraland (LAND), Cryptokitties



7. Stablecoins:• Fiat Colleralized: USDT, TUSD, USDC, PAX, JPMCoin, Libra, AmaCoin?• National Cryptofiat: Fedcoin, Petro, Eurocoin, CADCoin,… • Natural Asset Collateralized: Digix Gold (DGX), Tiberius Coin (TCX), Swiss Rea

Coin (SRC)• Non-Collateralized: Basecoin



Resources• https://coinmarketcap.com• https://coin360.com/• Fuqua miner 1: https://ethermine.org/miners/ff65F352156D2c69F9AbbF1AEF18E6d85314Ecce/dashboard

• Fuqua miner 2: [S17 to be set up]


https://coinmarketcap.com/

https://coin360.com/

https://ethermine.org/miners/ff65F352156D2c69F9AbbF1AEF18E6d85314Ecce/dashboard

Cryptocurrency vision

• Secure, efficient, immutable, and indisputable transactions• Removal of many middle people• A world of near zero transactions costs creates new assets• Trust in the network rather than the Central Bank - but Central

Banks will likely introduce their own cryptocurrencies• Tokenization of almost any asset• Financial inclusion for the unbanked


Cryptocurrency risks

• Technology is complicated and hard to understand• The wild west of ICOs and bandwagon investors• Extreme volatility• Regulatory risk• The privacy debate


Private blockchains

Example: 3 banks, 2 customers

Campbell R. Harvey 2020http://gendal.me/2015/04/27/how-to-explain-the-value-of-replicated-shared-ledgers-from-first-principles/

http://gendal.me/2015/04/27/how-to-explain-the-value-of-replicated-shared-ledgers-from-first-principles/

Private blockchains

Example: 3 banks, 2 customers + 1 blockchain

Campbell R. Harvey 2020http://gendal.me/2015/04/27/how-to-explain-the-value-of-replicated-shared-ledgers-from-first-principles/

http://gendal.me/2015/04/27/how-to-explain-the-value-of-replicated-shared-ledgers-from-first-principles/

Application to Back Office

JP Morgan’s Quorum• Ethereum based chain• Blockchain includes encrypted versions of all contracts• For a specific contract, only the parties to the contract have the ability to

decrypt the contract• So their blockchain includes all history, is immutable, but you can only see

the transactions you are a party to• Disrupts back office functions – large cost savings


Blockchain applications

Voting• Each citizen registered to vote is issued a voting token • The token cannot be sold and it can be used only once• It expires after the election• Voter needs to provide proof of identity (thumb print)

to vote• Blockchain is checked to see if that voter has the

token to “spend” • Your vote can be anonymous even though you provide

proof of identity with “zero knowledge proof”

Campbell R. Harvey 2020https://crypto.stanford.edu/pbc/notes/crypto/voting.html


Internet of Things• Only you can control your thermostat• Provide proof of identity (blockchain

is checked) and IoT device works for you

• Strong protection against hacking because the hacker would have to rewrite the entire blockchain and take over the majority of computing



Internet of Things• Only you can control your car• Provide proof of identity (blockchain

is checked) and IoT device works for you

• Driverless cars are a “no go” unless they are hack proof.



Prescriptions• Widespread fraud• Blank scripts are stolen from doctors’ offices

or forged• Some doctors abuse the system• Token issued to patient: it cannot be resold

and has an expiration• Patient presents token to pharamacist and

blockchain is checked to make sure patient owns the token (and has not already spent it)



Medical records• You enter a health facility (not your home facility)• You provide proof of identity verified with a blockchain• Your “private key” unlocks encrypted data related only your health records• Also provides a much stronger privacy protection

• Instead of a medical database being encrypted with one key (which might be lost or discovered), each patient’s record has its own key. Hence, to compromise the database you would need to guess potentially millions of keys



Real time financial statements• New role for Deloitte, E&Y, PwC, etc. in validating

company ledger transactions in real time• API would allow selected transparency (same categories as in the usual

financial statements) in real time• The end of quarterly reporting – and potentially some of the incentives that

are created to engage in short-termism



Digital Twins• Example: Jet engine• Every part, every replacement part,

every electronic sensor reading for the complete life of engine in a blockchain-based construct

• Easily monitored and easily transferred if the plane is sold



Fedcoin• 79% of the value of US currency is in

$100 bills• Large denomination bills method of

choice for criminal activity



Fedcoin• 80% of the value of US currency is in $100 bills• Large denomination bills method of choice for

criminal activity• Fedcoin is a digital USD currency where the

complete history of all transactions is visible to the Fed via a Fed blockchain

• Instant monetary policy, see Rogoff (2016)


El Chapo’s cash stash

https://www.federalreserve.gov/paymentsystems/coin_currcircvalue.htm

https://www.federalreserve.gov/paymentsystems/coin_currcircvalue.htm


Central banks


Blockchain landscape


Key Takeaways• There is no one blockchain – it is a technology.• There are different methods of consensus – energy intensive mining is

not necessary.• Cryptocurrencies are but one application. Most blockchain applications

don’t include cryptocurrencies• Technology has two fundamental implications:

• Unprecedented security – information is set in stone and unable to be altered by a nefarious actor or a government

• Effective end to transactions costs meaning near instant, cheap, secure microtransactions and exchange of ownership. Dramatic implications for new types of assets and substantial cost savings.


Future work

Forthcoming...

#DeFi: The World of Decentralized FinanceCampbell R. Harvey


Coursera


https://www.coursera.org/learn/blockchain-business-models

https://www.coursera.org/learn/blockchain-business-models

Contact – Follow me on Linkedin!

[email protected]@camharveyhttp://linkedin.com/in/camharveySSRN: http://ssrn.com/author=16198PGP: E004 4F24 1FBC 6A4A CF31 D520 0F43 AE4D D2B8 4EF4


http://linkedin.com/in/camharvey

https://urldefense.proofpoint.com/v1/url?u=http://ssrn.com/author%3D16198&k=p4Ly7qpEBiYPBVenR9G2iQ%3D%3D%0a&r=VNI6hqoacD20I%2BG8cYL2Z9WyVhNtYnfll35nbmk%2BbnHoTDNlbytR4zP0V1pk4xHu%0a&m=aeR43wjTpabb9erSDduaJNrdwMBxSUqCfxglMzR/qaI%3D%0a&s=31eb02e3791ba64afcd048ad7b159386fc10f0881cd066cc597f005333f89d4f


Blockchain business categories*

Transactions & Payment Services:• Startups whose primary use cases involve buying, selling, or storing

cryptocurrencies without a financial intermediary. The term cryptocurrency refers to a digital asset which functions as a medium of exchange on a distributed ledger. Smart contracts are programmable, transparent transaction contracts which self-execute upon the fulfillment of its terms of agreement. Wallets are software programs which interact with various blockchains to let users store, send, and receive crypto-assets and monitor their holdings. Some wallets extend services internationally and specialize in low-fee cross-border remittances. Merchant services enable vendors or organizations to participate in crypto-transactions. Finally, micropayment startups offer payments for metered content in small denominations. Campbell R. Harvey 2020

*Source: PitchBook


Cryptocurrency Exchanges & Trading:• Crypto-exchanges are platforms for exchanging cryptocurrencies into other

cryptocurrencies, fiat currencies, or vice versa. Peer-to-peer marketplaces enable two parties to directly exchange goods and services without an intermediary, while peer-to-peer lending platforms enable peers to extend and receive credit/loans through a blockchain. This segment includes crypto-investment companies who invest in cryptocurrencies with the intent to generate a return via value appreciation, as well as tools used to manage crypto-investments. Accordingly, startups providing clearing and settlement blockchain platforms for crypto-trading, forex and crypto-derivative markets are also included. Prediction markets involve speculation trading based on forecasts of economic and political events. Finally, fundraising platforms allow startups to complete blockchain-based fundraising and help prospective investors find such startups.

Campbell R. Harvey 2020*Source: PitchBook


Identity, Authentication, & Security:• An inherent characteristic of a blockchain is the immutability of transaction

records. Startups here use digital ledger software to verify the authenticity of data, as well as assets or documents, using blockchain identifiers to represent and/or authenticate tangible assets. Additionally, these startups leverage identity verification methods to track the cryptographic identity of an individual, entity, device, item, etc. Although blockchains themselves are secure by nature, blockchain-based applications are still vulnerable to cyber-attack. Startups in the security category create secure foundations for transactions, data storage, and network communication.



Enterprise Blockchain Solutions:• Startups in this category provide enterprise-level blockchain

solutions to entities operating in sectors such as financial services, healthcare, insurance, and supply chain. This includes the development of industry-specific software as well as subscription leasing of proprietary blockchain platforms.



Social, Games, & Gambling:• In this category, startups leverage decentralized networks to enable

social and networking platforms used for recruiting, classifieds, dating, and loyalty programs, among other use cases. One of the primary benefits such companies provide is the ability to share data and content without allowing a centralized third-party to assume any level of ownership of such content. Blockchain games include applications and tournament gaming platforms where users can compete for prize pools. Gambling startups allow users to place bets from anywhere around the world via blockchain peer-to-peer networks. Campbell R. Harvey 2020

*Source: PitchBook


Ecosystem:• This category includes startups furthering blockchain technology via

underlying infrastructure improvements and software development tools. The issues such companies address include those related to scalability, interoperability and governance, among others. While some of these companies could also be listed under “Enterprise Blockchain Solutions,” they are included here for the contribution of their open-source technology to the ecosystem. Mining companies provide products and services which assist in the computational process of solving cryptographic problems to earn cryptocurrency units. Data storage and hardware companies cater to the operational necessities of blockchain services.


ConclusionsBlockchain will first disrupt financial services• Still early going but change will happen quickly• Low hanging fruit in financial applications• Next applications based on other types of property like real estate, digital media,…• Blockchain may be crucial to IoT applications that are at risk from hacking In the

short-term, I see the growth of a diverse set of blockchain types• Bitcoin blockchain is the strongest – but many applications do not require

censorship resistance; sidechains offer interesting opportunities• Alternative blockchains such as the one proposed by Ethereum allow for simple

contracts to be embedded in the blockchain and offer great promise• Blockchain not going away


More information


Fuqua Blockchain Club(Andrew Sears, Alicia Pumpian)

Fuqua Fintech Club(Alice Wang, Jordan Katz)

Duke Blockchain Lab

Blockchain on Courserahttps://www.youtube.com/watch?v=qtoHpmk3VHg&t=62s [Teaser]https://www.coursera.org/learn/blockchain-business-models?=

https://www.youtube.com/watch?v=qtoHpmk3VHg&t=62s

https://www.coursera.org/learn/blockchain-business-models?=

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