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

Evgeniia.filippova@wu.ac.at

Evgenia Filippova

http://wu.ac.at/cryptoeconomics