Making finance serve society Understanding Blockchain Technology ‘Teach-In’ & Introduction Tony Willenberg, Co-founder/CTO, Neocapita Finance Watch, FinTech Workshop #1 tony.willenberg@neoapita.com Leopold Hotel, Rue du Luxembourg 35, 1050 Brussels, Belgium PGP: 716E E331 2D94 51AC 6FFE 9B67 5772 7AB5 F78A 4920 09:00-10:30, 14th November 2017
Outcomes • Understand what got us to this point. I The Bitcoin Story Distributed Ledger Technology • Understand the implications this technology has for II our world. • Understand the key concepts, su ffi ciently well, so as III to think through the impact on citizens, businesses, Key Concepts and governments. • Understand the current issues in the debate. IV Issues to Explore
I. The Bitcoin Story
A long time ago… (in Internet time, that is)
Transactions • Trusted third parties intermediate long-range transactions (strangers). • Trust is centralised: Visa, Sony, SWIFT, central bank, government. • These actors provide us with valuable services. • Intermediation involves clearance, settlement, verification, escrow, privacy, integrity, authentication, non-repudiation. • Intermediation is friction. Friction is ine ffi cient. Friction can be frustrating. • Data and logic are independent.
Transaction Networks Centralised Decentralised (e.g. Web Sites, e-Government) (e.g. Skype, SWIFT, BitTorrent, Intel)
Then…
August 2008 bitcoin.org is registered
November 2008 Bitcoin paper is published
January 2009 First bitcoin transaction takes place Satoshi Nakamoto → Hal Finney, 10 BTC “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
January 2009 • Bitcoin software, free/open source. • a.k.a. Node, Bitcoin Software, W allet M iner Node Software, Wallet Software, Reference Client, Satoshi Client. • Originally called: Bitcoin, then Bitcoin-Qt, then Bitcoin Core. B lockchain N etwork • Need about 145 GB of disk space.
Bitcoin “Bitcoin is a collection of concepts and technologies that form the basis of a digital money ecosystem. Units of currency called bitcoin are used to store and transmit value among participants in the bitcoin network.” Source: Antonopoulos, M. (2014)
Revolutionary • Mathematical relationships to relate transactions to people/machines • Arrange transaction data so transactions are tamper-proof • Algorithm to replicate the ledger of transactions globally • Method for arriving at a consensus on the global state of the ledger • Become a user of bitcoin by downloading a wallet • Proving you have done “work” shows your investment in the network • Transaction fees mean it costs you to be mean to the network
Now…
Adoption • Bitcoin (BTC); Litecoin (LTC); Ethereum (ETH); Zcash (ZEC); Dash (DASH, formerly Darkcoin); Ripple (XRP); Monero (MXR); more than a thousand digital currencies now in existence • Total market capitalisation: US$ 200B (or in the top 25 on the S&P 500) • Chicago Mercantile Exchange establishes a cryptocurrency futures trading fund (US), the Bitcoin Reference Rate (BRR) and the Bitcoin Real Time Index (BRTI) • Commodities Futures Trading Commission sets up Derivatives Clearing Organisation with Swap Execution Facility for fully collateralised digital currency swaps (USA) Source: https://coinmarketcap.com, updated: November 8 2017 @ 6:02 pm
Adoption • One can buy bitcoin in all post o ffi ces (source) (Austria) • FinCEN Fines levied $700,000 fine against Ripple Labs Inc. for violation of requirements under the Bank Secrecy Act (source) (USA) • Regulatory limitations on use of cryptocurrencies to prevent money flight (China) • Countries encourage cryptocurrencies for legal commerce (Japan, South Korea, Russia) Source: https://www.blockchain-austria.gv.at/; https://blockchainhub.net/blog/tag/blockchain/
Extended Bitcoin Network Source: Figure 8-3, Antonopoulos, M. (2014)
From Bitcoin came…
Transaction Networks Today Centralised Decentralised Distributed (e.g. Web Sites, e-Government) (e.g. Skype, SWIFT, BitTorrent) (e.g. Bitcoin, Ethereum, etc.)
II. Distributed Ledger Technology (DLT)
DLT [one] How many copies? e.g. personal bank account [many] [group of owners] e.g. a clearing and settlement Who can use the copies? network [anyone] e.g. Ripple (XPR) (a global [trusted ledger owners or by validation] Who integrates the ledger? financial transactions system), consortium chains [any user, by untrusted consensus] Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Monero (XMR) Source: Based on Birch (2016) cited in “Distributed Ledger Technology: Beyond Blockchain”, Government O ffi ce for Science, Government of the United Kingdom.
Functional Components Distributed Ledger Technology 1. Shared Ledger 2. Smart Contracts 3. Tokens
Shared Ledger • Transactions are linked together into blocks (Merkle Tree | Binary Hash Tree). • Blocks are chained together into the blockchain. • Tampering with a transaction, invalidates the block and the blockchain from the falsified transaction onwards. • The blockchain is replicated (think of BitTorrent). • Every record in the ledger is timestamped and cryptographically signed, thus making the ledger an auditable history of all transactions in the network. • Transactions can be anything, but there is a size limitation. • It is not necessarily a database.
Smart Contract • A.k.a. cryptocontract . • Is a program that contains instructions for transfer of cryptocurrency. Data inside the program & logic for how to change the data are now indivisible, sealed in a cryptographic unit on the blockchain. • Live on the blockchain at a unique global address, are open for reading, but cannot be tampered with. • Transactions represent either: (a) transfer of token to a person, or (b) transfer of token to a cryptocontract to execute.
Smart Contract 10 ETH Alice Smart Contract Bob 0xa0c5E63Fb3a15d9495d086e4a31fC8265E2F9C0b 0x9a9A5a2A5a3D72fC85172BF4F0F7CaD12be341fb 0xAf8DC764af536cEA2f35Ec7BF79145C932929384
Tokens • Bitcoin is a token. • You get tokens by mining them, receiving them in transaction fees, created in a smart contract, or someone sends (pays) them to your A • Virtually implemented by virtue of the UTXO and wallet software. • Private keys enable spending, public keys enable receiving. • The ERC20 token standard can represent anything that can be digitised.
III. Key Concepts
The Double-Spend Problem • Is the Byzantine General’s Problem (1982): solutions attempted before, largely centralised solutions. • Solved with novel tools (at least 4): • (a) proof-of-work (game theory), • (b) cryptography (mathematics), • (c) peer-to-peer database replication (computer science), • (d) transaction fees (economics). Source: http://marknelson.us/2007/07/23/byzantine/
Proof-of-Work • A way of signalling an investment in and concern about the best interests of the ecosystem. • Do a computation and if you find the solution first, the network mints Bitcoin and gives it to you as a reward. • “A proof-of-work (POW) system (or protocol, or function) is an economic measure to deter denial of service attacks and other service abuses such as spam on a network by requiring some work from the service requester , usually meaning processing time by a computer.” Source: https://en.wikipedia.org/wiki/Proof-of-work_system
Proof-of-Stake • In Proof-of-Stake-based cryptocurrencies the creator of the next block is chosen via various combinations of random selection , wealth , and age (i.e. their stake in the ecosystem). • Those guarding the coins, own the coins. • NXT, Blackcoin, Peercoin, Ethereum
Private-Public Key • Symmetric Cryptography = both parties must 4R Caesar’s Cipher know a shared secret first; Source: ABCDEFGHIJKLMNOPQRSTUVWXYZ Encoded: WXYZABCDEFGHIJKLMNOPQRSTUV • Asymmetric Cryptography = parties keep a FINANCE WATCH IS AWESOME personal secret (private key) linked mathematically BEJWJYA SWPYD EO WSAOKIA to something that can be shared (public key). • Private keys are just big numbers: 1 up to ≈ 2 256 -1. Your Private Key The size of bitcoin’s private key space, (2 256 ) is an unfathomably large number. It is approximately 10 77 in decimal. For comparison, the visible universe is estimated to contain 10 80 atoms.
Private-Public Key Public Private ECDSA
Elliptic Curve Multiplication • Using a special set of curves, move from initial point k to a final location on the curve K => trapdoor function. k K A Elliptic Curve Multiplication Hashing Function Private Key Public Key Bitcoin Address • Can be performed on mobile and IoT devices. We have used it in WAP security. NIST/Certicom Corp. Source: https://en.bitcoin.it/wiki/Secp256k1; Standard for E ffi cient Cryptography 2 (SEC 2), Certicom Corp. (2010).
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