Blockchain&Bitcoin sathish vj

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Agenda

Definitions Bitcoin Payment Why Bitcoin?

Networks & Data Crypto Hashes Pvt/Pub Key Crypto

Consensus Mining Regulation Trading

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Definitions Some terms we’ve heard in the papers.

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Blockchain

A blockchain is a distributed database that maintains a continuously growing list of records called blocks secured from

tampering and revision. Each block contains a timestamp and a link to a

previous block.

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Bitcoin

A distributed, decentralized, digital cryptocurrency that relies

on Blockchain technology.

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Ethereum

A blockchain-based distributed computing platform, featuring smart contract functionality. It provides a decentralized virtual machine that

can execute peer-to-peer contracts using a cryptocurrency called ether.

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Blockchain : Bitcoin : Ethereum

Core Tech

Gen 1: Special Purpose Apps

Next Gen: Platform for Apps

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A Bitcoin Payment What is a typical bitcoin flow?

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Creates BTC Wallet (software)

Unique wallet address: 1F1t...xaN

Buy BTC for USD/INR

Alice

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Alice’s wallet ‘signs’ the transaction.

Txn sent out on Bitcoin Network

1F1t...xaN 1a1b...79F

Bob

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‘Miners’ collect transactions.

Cryptographically validates them.

Transactions grouped into block.

Adds ‘fees’ for txn.

New BTC reward for mining block.

Miner

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New block sent out on network.

Other nodes validate.

Connects new block to previous block.

Thus forming a chain of blocks.

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BTC shows up in Bob’s wallet.

No central, controlling, approving authority was involved.13

Anticipated Questions

● Why use Blockchain?● Can Alice send a copy of the same coins to Chanakya?

○ The double-spend problem.● What if two miners create a block at the same time.

○ Who wins?● What if the miners cheat?

○ Byzantine Generals problem

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Why Use Blockchain? What issues does the blockchain

solve?

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Current Issues● Trust is centralized

○ Centralized ledger

● Power and abuse at the center● Deniability with alteration● Long Time for Transactions● Hefty charges● Non-resilient● Cost of maintaining software● Security breaches on ‘one truth’

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With Blockchain● Trust without a central figure

○ Decentralized ledger

○ Transact with anybody on the network

○ Confirms: spender has the money

○ Confirms: Not a fraudulent transaction

● Immutability● Resilient

○ Works with intermittent connectivity

● Fast● Cheap● Micro-transactions

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Bitcoin: A Peer-to-Peer Electronic Cash System

“We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power... The network itself requires minimal structure.”

bitcoin.org/bitcoin.pdf - Satoshi Nakomoto 18

‘On the Shoulders of Giants’

● Distributed Systems● Peer-Peer Networks● Hashing Functions● Cryptography

The astonishing innovation was in bringing it all

together in a way that it works.

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Networks & Data Decentralized networks and storage.

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Centralized, Decentralized, Distributed

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BitTorrent Protocol

● Distributed● Resilient● Owned by no one person● BitTorrent client required● Once started, lives on its

own● Uses computing

resources

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A Database & A Linked List

A database is an organized collection of data.

1 2 3

A Singly Linked List can be traversed in one direction.

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Analogy: Hop Route

1.2.3.4

1.2.3.41.2.3.5

1.2.3.41.2.3.51.2.3.6 1.2.3.4

1.2.3.51.2.3.61.2.3.7

1.2.3.41.2.3.51.2.3.61.2.3.71.2.3.8

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Transactions & Blocks

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Cryptographic Hashes A hash as a unique identifier.

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Hash Function● Used to map data of arbitrary size to

data of fixed size● Used in data structures like

hashtable/dictionary/map

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Cryptographic Hash● Fixed length output● Must be fast● Pre-image resistance: it should be

computationally hard to reverse a hash function

● Second Pre-Image Resistance: given an input and its hash, it should be hard to find a different input with the same hash

● Collision Resistance: it should be hard to find two different inputs of any length that result in the same hash.

blockchain

the competition creating new blocks is known as mining

a blockchain consists of blocks that hold batches of valid transactions. each block includes the hash of the prior block in the blockchain, linking the two. the linked blocks form a chain. variants of this format were used previously, for example in git, and it is not by itself sufficient to qualify as a blockchain.

CMPDLDIBJO

UIF DPNQFUJUJPO DSFBUJOH OFX CMPDLT JT LOPXO BT NJOJOH

B CMPDLDIBJO DPOTJTUT PG CMPDLT UIBU IPME CBUDIFT PG WBMJE USBOTBDUJPOT. FBDI CMPDL JODMVEFT UIF IBTI PG UIF QSJPS CMPDL JO UIF CMPDLDIBJO, MJOLJOH UIF UXP. UIF MJOLFE CMPDLT GPSN B DIBJO. WBSJBOUT PG UIJT GPSNBU XFSF VTFE QSFWJPVTMZ, GPS FYBNQMF JO HJU, BOE JU JT OPU CZ JUTFMG TVGGJDJFOU UP RVBMJGZ BT B CMPDLDIBJO.

9184ae16

8e347c28

a3a928ee

source Simple Cipher Crypto Hash

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blockchaim CMPDLDIBJN a598fc4b9

Block with TransactionsField Purpose Updated When ... Bytes Example

version Block Version No. s/w upgrade 4 02000000

Prev Block # 256bit # of prev block header A new block arrives 32 c12959edab

Merkle Root # 256bit # of all Txns in Block A Txn is accepted 32 d3f4bac86b2

Timestamp Current Timestamp Block Creation 4 358a2903

Bits Current Difficulty Target Difficulty is adjusted 4 f3591e20

Nonce 32bit number Proof of Work Nonce 4 537629132

Txn Count Count of Txns Each Block 63

Coinbase Txn, User Txn 1, User Txn 2, User Txn ...

# Entire Block 29

Block 23

Block 24Block 25

Merkle Tree

● Each transaction is hashed● Hash values are combined

and hashed● Final hash added to block

header● If any transaction is tampered

with, final header hash will not match

Txn α Txn β Txn γ Txn δ

#α #β #γ #δ

#αβ #γδ

Prev Block 25 #αβγδ Timestamp

+ Nonce

Current Block 26

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Private/Public Key

Cryptography How do we ensure authenticity of the spender?

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Private Key → Public Key → Wallet Address

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Asymmetric Key Cryptography

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Address + Signature Verifies Authenticity

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Consensus Trust on a non-trusted network.

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Consensus?

● No central authority to verify● Then who verifies?● Everybody?

○ Maybe, but how many nodes are there?● A few specific nodes?

○ Maybe, but will they abuse power?● Sybil attack?

○ Reputation system subverted by forged identities.

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Byzantine Generals Problem

● Generals of army surround enemy city● Action in unison required to win● Some generals may be traitors

○ Prevents loyal generals from reaching

agreement

○ Sabotages the collective action with

misinformation

○ Fail to act

● Distributed systems must cope with failure/sabotage of its constituents

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Proof of Work

● Effort is Investment● In exams, directly giving final

answer could be fraudulent○ must give long proof

● Uses computer cycle time to validate transactions

● Costly - hardware, energy wastage

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Proof of Stake

● Personal Stake is Investment

● Parents → Children; Shares → CEO

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Mining Why do miners do what they do?

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Mining Process● Free software. Run it. Get Bitcoins!!

○ Not really.

● #(Rand No. + Prev Block#) < 0x00012● Because # is unpredictable, only way

to generate fitting value is to keep trying in a loop for Rand No. (nonce)

● Consumes huge amount of processing power - hardware + electricity

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Bitcoin Mining Farms

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Mining ‘Difficulty’ Value● Measure of difficulty in finding hash

value below target value (256 bit number)

● Mining Difficulty α 1/Target Value

● Average mining time is about 10min per block

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Resolving Multiple Chains● Mine on ‘longest’ chain

○ I.e. add block to the longest valid chain

● Other chains have to kept for a while● Significant resources/time goes into each block● Tampering with transactions will require

rebuilding many blocks again before others add new block

○ Hence immutable

● Each added block is a ‘confirmation’ that Txn is accepted

● Wait multiple confirmations if Txn is large

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Mining Payout● Every 210k blocks BTC

reward halves● Started with 50 BTC/block● Today: 12.5 BTC/block● Fees for txns adds up with

more txns

fees

btc reward45

Regulations What is the legality in India?

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RBI Report

● December 2013: RBI warns investors about volatility● Not specifically regulated as of now

○ But they are keeping an eye on it○ Could/Will be regulated eventually

● Have to follow contract laws, pay income or capital gains taxes, only do legal activities as per other laws

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Trading Can I trade cryptocurrency like stock and currency?

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BTC/USD

jul 19, 2010: 0.07$ -> oct 13, 2016: 635.02$ = 907,171% appreciation

1 Lakh -> 90.71 Crores49

Costly Pizzas

In 2010, a Florida programmer paid 10,000 BTC for 2 Pizzas

Oct 2016: $ 6,297,500 | ₹ 42,51,66,196.50

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Poloniex, EthexIndia, BTCxIndia, GDAX

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Key Tech Takeaway All this is overwhelming.

ELI5 please.

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Blockchain is a storage technology.

(with multiple benefits: tamper-proof, forward growing, resilient, etc.)

Bitcoin is one application of it in the area of currencies. It can also be used in insurance, banking, retail, logistics, owner identification, authenticity validation,

medical records, etc.

There will be platforms (like Ethereum) that you can use to build your own apps.

Unmasking the Blockchain

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thank you Questions

@sathishvj

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References & Courtesy● http://blockstrap.com/en/a-complete-beginners-guide-to-blockchain-technology/● Types of Blockchains - https://blockchainhub.net/blockchains-in-general/● http://www.economist.com/news/briefing/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-tr

ust-each-other-build-dependable ● http://ethereum.stackexchange.com/questions/118/whats-the-difference-between-proof-of-stake-and-proof-of-work ● https://www.igvita.com/2014/05/05/minimum-viable-block-chain/ ● http://www.economist.com/news/briefing/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-tr

ust-each-other-build-dependable ● http://www.flaticon.com/ - for many of the free icons

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References & Courtesy● http://ethereum.stackexchange.com/questions/268/ethereum-block-architecture● http://ethereum.stackexchange.com/questions/700/what-are-the-differences-between-bitcoin-blockchain-and-ether

eum-blockchain?noredirect=1&lq=1

● http://ethereum.stackexchange.com/questions/4351/are-there-any-drawbacks-of-being-turing-complete?noredirect=1&lq=1

● http://ethereum.stackexchange.com/questions/2286/what-diagrams-exist-to-illustrate-the-ethereum-blockchain-creation-process?noredirect=1&lq=1

● http://ethereum.stackexchange.com/questions/6400/what-is-the-exact-data-structure-of-each-block?noredirect=1&lq=1

● http://ethereum.stackexchange.com/questions/1294/what-is-actually-removed-during-a-contract-suicide-and-why-doesnt-this-cause-t?noredirect=1&lq=1

● https://ethereum.stackexchange.com/questions/315/why-are-suicides-used-in-contract-programming● http://blockstrap.com/en/a-complete-beginners-guide-to-blockchain-technology/

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