Bitcoins, Kryptowährung und Blockchain – was bringt die
Zukunft?
23rd October 2018, 2. Forum „Das gute Geld – Investieren mit MehrWert“
Evgeniia Filippova, Senior Scientist @Cryptoeconomics Institute WU Vienna
Ledgers are used to:
- record economic activities;
- prove the ownership;
- prove the transfer of value of assets(tangible / intangible) among variousstakeholders
Ledgers
Bank Accounts Land Registries Academic Certificates
Hotel Reservations Medical Records Citizenship Records
Every ledger youknow is
centralizedwith a ‚trusted‘ record-keeper
If you had to define Blockchain in 3 words?
A distributed ledger
Curios case of the Rai Stones
500 AD, Island of Yap (now Micronesia)Yappies had a problem: a strange form of currency (fei stones)
Solution: Decentralized Ledger:- Distribution of Fei stone ownership across all Yappies- When a Fei stone was spent, the new transaction was shared
across everyone
Basic Idea Behind (Bitcoin) Blockchain
• Peer-to-peer electronic transactions and interactions• Without financial institution• Cryptographic proof instead of central trust• Put trust in the network instead of in a central
institution
BLOCKCHAIN
So … What is Blockchain?
TECHNICAL Back-end database that maintains a distributed ledger, openly
BUSINESS Exchange network for moving valuebetween peers
LEGAL A transaction validation mechanism, not requiring intermediary assistance
Blockchain is a bundle of distributed ledger technologies that can beprogrammed to record and track anything of value without involvement of thethird trusted party
NETWORK Layer DATABASE Layer
STATELayer time
What is Blockchain?
NETWORK Layer DATABASE Layer
STATELayer time
A B
1. Transaction event
Digital signature
What is Blockchain?
NETWORK Layer DATABASE Layer
STATELayer time
A B
1. Transaction event
Digital signature
2. Bundledtransaction data
What is Blockchain?
NETWORK Layer DATABASE Layer
STATELayer time
A B
1. Transaction event
Digital signature
2. Bundledtransaction data
3. Validation
Consensus algorithm
B
What is Blockchain?
NETWORK Layer DATABASE Layer
STATELayer time
A B
1. Transaction event
Digital signature
2. Bundledtransaction data
3. Validation
Consensus algorithm
4. Updated, distributed, historicalledger
B B
What is Blockchain?
Digital keys are created and stored offline and consist of a mathematically-related Private-Public key pair, created using theElliptic Curve Digital Signature Algorithm (ECDSA).
Private Key (K priv) and Public Key (K pub)
Public key is generated from the Private Key using a one-waycryptographic hash function
Public Key Cryptography – Digital Signatures
Cryptography
The sender encrypts the message M using therecipient‘s public key: C=encrypt(M, Kpub)
The recipient decrypts message C using his ownprivate key: M=decrypt(C, Kpriv)
Where: C is the result of encryption (or„ciphertext“) and M is the decrypted message (or„plaintext“)
Kpub and Kpriv can are interchangeable: C=encrypt(M, Kpriv) then M=decrypt(C,Kpub)
Public Key Cryptography – Digital Signatures
Cryptography
To make a transaction:1. Create a transaction T2. Select subset M of
transaction (ex. Transaction instructions, etc.)
3. Compute hash H of M: H = sha256(M)
4. Compute a signature S byencrypting hash H with thesender‘s private key: S=encrypt(H, Kpriv)
5. Send the signature S and thepublic key along with thetransaction to miners
Public Key Cryptography – Digital SignaturesTo verify a transaction T received withsignature S and public key:1. Select subset M of the information
in transaction T2. Compute hash H of M: H =
sha256(M)3. Decrypt signature S with the public
key: H‘=decrypt(S, Kpub)4. Compare H and H‘. If they match,
then the signature is valid and thetransaction is valid.
Cryptography
Both the public and private keys are stored in a Bitcoin wallet
Bitcoin wallet does not contain any Bitcoins, only the Private-Public keypairs as mechanisms that allow you to access your funds
Example:
Public Key Cryptography – Digital Signatures
Cryptography
To add a new block to the chain, a miner has to finish what is called a cryptographic proof-of-work problem.
This proof-of-work problem:
a. Is different for every block in the chain;
b. Involves a particular kind of algorithm called a hash function.
How is the new block added to the chain?
Input OutputHash function1. SHA-256, 64 characters long2. One-way3. Changing input a little bit
changes output dramatically
D35F0A9DA54EFE7F5ACEAE1B0E3427E65F08651A3A2A2C5A8D501B2812EE75D4Evgeniia Hash function
Evgenia EF34097BA51FC87FFA044E4F75EBC2E69ABA8C93BF249C653FA6890312E7F0E5Hash function
Cryptography
Game
Theory
Proof-of-work problem:
How is the new block added to the chain?
A hash of the contents of the current block (all of transactions, some meta-data, reference to theprevious block)
A random number that can be used just once(= nonce)
Goal: to find a hash that has at least a certain number of leading zeroes.
Example:
00000002a5c46af8c3442b8ce70fb5fcb053f2334ce0e518b48ed1d20000000000000000fce920a9266470c7c9292e8e4a5a816eee86fe7e1d06c6d72f21487bfac6cc91533acfbb1900db99456c6f69000000800000000000000000000000000000000000000000000000000000000000000000000000000000000080020000
000009ff7ff1fc53b92dc18148a1d65dfc2d4b1fa3d677284addd200126d9069
Cryptography
Game
Theory
+
Find the nonce to get this output (hash):
When a miner finally finds a nonce that works:
a. He wins the block
b. Nonce gets appended to the end of the block, along with theresulting hash
c. The block gets sent out to other miners in the network
d. The miners run the hash function with the nonce in order to verifythat it works
e. If majority of miners accept it, the block gets added to the chain
How is the new block added to the chain?
Cryptography
Game
Theory
Problems with mining
Some statistics about mining
Hashrate distribution
The system is based on the assumption that themajority of computing power (i.e. at least 51%) will come from hones nodes
Mining performance is measured in hashes/sec.
The Hashrate of Bitcoin network: >20,000,000 Tera Hashes/sec. to mine one block per day the speed of mining pool should be 833 Tera Hashes/second
Solo mining/mining pools
Mining hardware: from CPU mining (on a user’s PC) to ASIC mining (Application-Specific Integrated Circuits)
Global Bitcoin Nodes Distribution
Alternative consensus mechanismsConsensus Mechanism = a crucial aspect of Blockchain platformEnables decentralized nodes to agree on the state of a ledger, without trusting each other/withoutthird party
Proof-of-work Proof-of-stake
Proof of elapsed time
PAXOS
- All miners in the blockchaincompete to generate the nextblock by solving extremelydifficult cryptographic puzzles
- The node that solves the puzzle first may propose the nextblock which is checked forvalidity and the correct solutionof the puzzle by other nodes
- Pseudo-randomselection of the node tovalidate a creation of thenew block, based on therespective stake in theBlockchain
Proof of Importance
Others
Proof of capacity
Summary: what is Blockchain?
„Genesis“ block
The network storesall information incryptographicallysecured data piecescalled blocks
Blocks storeinformation aboutthe previous block, thus, they arechained togetherusing cryptography
Each block haslimited storage size
New blocks get added toBlockchain network by consensusof network miners at even time intervals
Miners get rewarded forvalidating transactions andadding new blocks
Each node (computer) on the networkstores a copy of the entire Blockchain
Cryptography
P2P Networks
Game Theory
Foundations of Blockchain
BLOCKCHAIN
P2P Networks
Game Theory Cryptography
Is used to provide security for a Blockchain networkBasic concepts: hashing, keys, digital signatures, homomorphic encryption
Incentive models are included in the Blockchain through a consensus mechanism
Every node of Blockchain network is a client as well as a server, holding identical copies of the application state
4 Disruptive Benefits of Blockchain
Disintermediationof Trust Smart Contracts
Immutability of Record
Single source of truth
Smart Contracts
- The concept first introduced by Nick Szabo in 1994, technologically enabledby Ethereum- Self-enforced & self-executed contracts- Software programs that live on a Blockchain and form the basis of many of the new Blockchain applications- Essentially automated systems that can provide services in exchange forcryptocurency- Smart Contracts are NOT limited to money movements
Smart Oracles: off-chain data sources (ex. identity, address, certificate etc.) that a smart contract can use to modify its behavior.
- They may automatically enforce power equality of all parties involved
- They protect an individual‘s rights by enforcing reasonable expectationsfor the signee
- They eliminate the possibility of any signatory defaulting on theirobligations
In a traditional centralized system: parties seek remedial action throughthe legal system
Benefits of Smart Contracts
Types of Blockchains
More elaborated Blockchain taxonomy
Different classification criteria, forex.:
- Transaction capability- Security & Privacy- Identity Management- Consensus algorithm
Blockchain has applications in…
Banking & Payments
Supply Chain Management
Energy
Charity
Media
Healthcare
Cybersecurity
Forecasting
Internet of Things
Crowdfunding
Insurance
Real Estate
Government
Retail
Music
Online Data Storage
Ride Sharing
Publishing
Art
Voting
„Blockchain can find applications in anyindustry, where the transactions take place“
(Sultan et al. 2018)
Blockchain & EnergyHard facts:Top 3 countries: Netherlands, Germany, USMost common use case: P2P energy trading
AustraliaSOLARA‘s Blockchain platform creates a trustless PV energy provenance records
USP2P Solar energy trading withincommunity of Brooklyn
ChinaP2P platform for a distributedenergy system, focus on microgridsActive in Philippines andChina
GermanyPlatform that allows the car to process transactions autonomously and in real-time via the Blockchain
Blockchain & Insurance
Hard facts:More than 200 use cases for Blockchain in insurance currently available
FranceInsurance against flight delay for any causeAutomatical reimbursement of eligible passengers
GermanyBlockchain-based parametric insurance
UKA permanent record on the Blockchain of valuable assets to reduce insurance fraud
Blockchain & FinTechsHard facts:Financial Services = >50% of Blockchain use-cases currently
Hong KongKnow Your Customer Use CaseBlockchain-based self-sovereign identityprotocol!Customer is in possession of his identity
KenyaCross-boarder business payments„Bring cryptocurrencies to Africa“
SingaporeCrypto-debit cardsCross-boarder payments
SwitzerlandCrypto Wealth ManagementCustomized management of crypto-assetportfolio
Blockchain & Academic Certificates
Immutable records – Digital fingerprints (hashes) of the individual certificates issued are placed permanently in a blockchain transaction
Ease and instant authentication by interested parties even if theapplication used or the institution‘s website no longer exists
University of Nicosia (Blockchain Initiative) Frankfurt School of Finance
Blockchain & Media
A social media platform, where usersare rewarded for posting interestingcontent
Basic Attention Token (BAT)Blockchain-based digital advertisingCurrent problem: up to 50% of the average user‘smobile data is for adsUsers are rewarded with BATs for their attention & advertisers achieve better targeting without thirdparties
Use Case: Supply Chain Transparency
Tuna Blockchain ProjectWWF New Zealand, WWF Australia, WWF Fiji & Consensys
Illegal, unreported & unregulated fishingSlave labor
Possibility for tracking fish,Buying fish only from sustainable companies withno abusement of human rights
Blockchain
Origintrail„First purpose-build protocol for supply chains based on Blockchain“
Various use cases within food industry & logistics
Use Case: Traceability of Donations
Aidcoin
43% of people do not trust in traditional charity any more
Real-time tracking of funds
Releasing funds where neededwithout sophisticated bankinginfrastructure
Blockchain
Initiative „Building Blocks“
Quickly, safely aid (food & cash) delivery to the needySuccessfully tested in Pakistan
Use Case: Land registry on Blockchain
- Vulnerability in developing countries- A large number of intermediaries (brokers, government property databases, notaries etc.)- No single, centralized depositorymore resilient recors (ex. Haiti 2010 earthquake)- Immutable records
BUT: PREREQUISITES
1. Identity solutions (ex. SecureKey in Canada, uPort, Civic etc.)2. Digitized records (you cannot hash a paper document)3. Multiple signature wallets (what if you lost your pair of keys?)4. Type of Blockchain (issue: storing a large amount of data)5. Accurate data6. Connectivity & a tech-aware population7. A trained professional community
CHANCES
Use Case: Public Integrity
Iniciativa BlockchainHACKMSMexicoBlockchain-based application for publiccontracting
Corruption adds up to 25% of the costs of contracts in developing countries
Immutable trail of transactionsNo central authority needed
Blockchain
Smart DubaiDubaiBlockchain-based application for public services
Use case: Inclusion of Undocumented & Underbanked
Estimated 2 billion people worldwide are unableto prove their identity
- No national & international mobility- No access to banks & loans- No inclusion in economic activities
Blockchain
Self sovereign identity solutions
Immutable information (no documentfalsification), confirmations & proofs of identity from the first time the identity was ever recorded
Hyperledger Indy (Linux Foundation)Tools, libraries, and reusable components for creating and using independent digital identities rooted on blockchains or other distributed ledgers so that they are interoperable across administrative domains, applications
Blockchain-based cash transfers forrefugees in Jordan
Use Case: Incentivizing energy consumptionreduction
Energi Mine
electric vehicle and other Energy-efficient product owners are rewarded with ETK tokens
ETK tokens can be used to: ex. settle energy bills; buy some services from partners
Solar Coin
Alternative digital currency that works like air-miles for solar electricity generation
Energo
P2P platform for a distributedenergy system, focus on microgrids
Learning ResourcesWhite Paper: „Bitcoin: A Peer-to-Peer Electronic Cash System“
White Paper: „Ethereum: A Secure Decentralized Generalized Transaction Ledger“
Credit Suisse Report „Blockchain – a Trust Disrupter“
Mougayar „The Business Blockchain“
Solidity language (for Smart Contracts): https://solidity.readthedocs.io/en/v0.4.24/
Oraclize Dev Center: https://dev.oraclize.it/
Tapscott & Tapscott „Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business andWorld“
Visualisation of live Bitcoin transactions: https://bitbonkers.com/
Szabo (1994): Smart Contracts
Lamport, Shostak, Pease (1982): The Byzantine Generals Problem
Please feel free to reach out
Evgenia Filippova
http://wu.ac.at/cryptoeconomics