block-chains: insights and issues...part i: the birth of bitcoin part ii. the block-chain bubble...

Part I: The Birth of BitcoinPart II. The Block-Chain Bubble

Part III: Crypto-Economics vs System EngineeringPart IV: Do I need a Block-Chain?

Block-Chains: Insights and Issues

Ahto Buldas Märt Saarepera

Oct 18, 2018

Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues



Agenda

The Birth of Bitcoin

Motivation behind Bitcoin

Money, Payments and Banks

Description of the Bitcoin

Todays situation: block-chains, cryptocurrencies

Block-chains and engineering paradigms

Do I need a block-chain?




The Birth of Bitcoin

November 2008:Satoshi Nakamoto published the paper:

Nakamoto, S.: Bitcoin: a peer-to-peer elec-

tronic cash system

January 2009:Bitcoin code released on SourceForge

January 3, 2009:Start of Bitcoin-based payment service:

Creation of the genesis block of the

Bitcoin ledger




Nakamoto’s Motivation in 2008

Electronic commerce covered from the dotcom bubble and shows signs ofrapid growth

Banks are almost completely digitized

Electronic payment methods boom

mobile payments

Internet payments

debet cards

Nakamoto still thinks that payment systems will a bottleneck for thegrowth of electronic commerce

The reason by Nakamoto: banks




Ideal Electronic Payment System

Electronic cash is sent from Payer to Merchant

Payment is irreversible




Electronic Payment System with Banks

Money is just a number




Electronic Payment System with Banks

Cash is not sent directly




Nakamoto’s Concerns

Banks use trusted third party technology, similar to Estonian ID-card

Fundamental weakness: payment reversal cannot be excluded:Payment disputes are inevitable and this increases the costSmall payments become infeasibleMerchants start requiring too much data from buyers




Nakamoto’s Idea

Get rid of trusted third parties




Nakamoto’s Idea

Construct a payment system that:




Nakamoto’s Idea

Construct an automatic payment system that:

Is itself a bank with its own currency (bitcoin) inside the system




Nakamoto’s Idea

Construct an automathic payment service that:

Is itself a bank with its own electronic currency - bitcoin

Every client of which is also:

a Cheif Accountanta Chief Auditor

All the rules of the payment system are enforced by Cryptographyand economic incentives




Nakamoto’s Idea Gets Viral

Registries based on Trusted Third Parties: human factor

Processing increases price

Big Idea (Nakamoto on steroids): Let’s replace humans with robots!

Evey registry can be robotized in a similar way.

The birth of Cryptoeconomics




Bitcoin as a Machine




Where is the Money?

Ledger contains all the money emitted by the system

Money is divided between the clients

Clients’ identities are not disclosed, pseudonymes are used instead

The amount of money belonging to a client has:

Proof of emission

Proof of ownership

Smallest unit is satoshi

A derived unit is bitcoin = 100 M satoshis




How to Change Ownership?

Essence of payment is the change of ownership

Payment is initiated by tranaction orders

A transaction order contains:

Reference to money in the ledger

Proof of authority to change the ownership

Identity of the merchant

Transaction order is processed by the Bitcoin machine.

If proof of authority matches the proof of ownership in the ledger, thetransaction order will be included in the next version of the ledger.

This becomes as a new proof of ownership.




Cryptographic Attributes

Digital signature proves theorigin of transaction orders, i.e.the will of the payer to changethe ownership

Audited ledger consists of signedtransaction orders. These ordershave filered out by the Bitcoinmachine.

Proof of work proves the originof the ledger, guaranteesirreversibility




Nakamoto’s Payment Irreversibility Argument

Creating the proof of work requires large amount of computationalpower

The necessary effort is so high, that only one such ledger can bebuilt in the Universe

It is impossible to create competing versions of the ledger or modifyit afterwards

Therefore, no transactions can be deleted from the ledger

Hence, payments are irreversible




Implications and Observations

A Bitcoin-like system can be irreversible only if it is unique. Two systemsmake it questionable, three systems are meaningless.

The estimated electricity consumption of Bitcoin is 5 to 35 TWh peryear, which is comparable to the electricity consumption of Estonia




How Bitcoin System Started?

Bitcoin software is available in a freeware site





Everyone can download the software





Nodes who run the software form the Bitcoin’s network




Bitcoin’s Network

Arbitrary connected graph

Nodes are not identified

Nodes can come and go




Bitcoin’s Network as a Machine




But where is the ledger?

Every node produces and holds a copy of the same ledger




Four Components of Bitcoin Software

Transaction generator: creates transactions (payment orders)

Emission transaction generator: enables to emit new currency

Transaction processor:

filters out matching transactionsincludes them into blocksmakes blocks irreversible

Balance check: for checking all cryptographically enforced rules




Transaction Order

Public key = account number = pseudonym




Transactions

Payer of the transaction is the payee of the previous transaction

Amount of the transaction ≤ amount of the previous transaction




Emission Transactions

Does not refer to any previous transaction

Does not contain payer’s signature

Is created following the public rules of Bitcoin’s ledger




Blocks and Mining

Noce: an arbitrary number

Reference: hash of the previousblock

Emission transaction: miningincentive (currently 12.5 BC)

Proof of Work: Check that:

h(Nonce,T ,Reference,Emission,List) < T

Work (Mining): Find the nonce!




Minig is Parallelizable




Transaction Processing

Transaction broadcast: Every node broadcasts all transactions to othernodes

Block-formation: Every node:

1 Selects a list of transactions and includes them into a new block

2 Mines the block3 After finding a proper nonce, or receiving a mined block:

stops miningstores the new block into its ledger, and starts from 1




Evolution of Electronic Money and Payments




Bitcoin’s Sons and Daughters

LiteCoin: “cryptocurrency silver”

DogeCoin: “We love (Akita) dog”

Aurora Coin: Icelandic national currency

Bitcoin Cash: Bitcoin fork

Bitcoin Gold: Bitcoin fork

...

There are now 500+ cryptocurrencies based on proof of work

Their total electricity consumption = electricity consumption of Ireland




Back to the Irreversibility Argument

Irreversibility argument: the world has computational power to create oneledger but not two

The adversarial computational power A never exceeds the creativecomputational power W .

What if we have N Bitcoin-type cryptocurrencies in the world?

For all of them being safe against the adversarial power, we have toassume that the adversarial power does not exceed the mining power ofany of the cryptocurrencies

NB! We know from observations that N ≥ 500.




Back to the Irreversibility Argument

Say we have N block-chains B1,B2, . . . ,BN , where Bi uses creativecomputational (mining) power Wi . Let

W = W1 + W2 + . . . + WN

be the total computational power used by the block-chains.

Let A denote the total adversarial power.

All block-chains are safe, if A ≤ Wi for every i . This means:

A ≤ mini

Wi ≤W

N,

because Wi ≤ WN for some i .

Conclusion: Adversarial computational power must not exceed a 1500fraction of the creative power.




POW Alternatives

Widely witnessed publishing. Used since 1990.

Proofs of Stake (POS)

Distributed POS

Leader-Elected Consensus

Round-Robin

N2N - Bilateral consensus

Federated Consensus

Proof of Byzantine Fault Tolerance

Proof of elapsed time

...

There are now 1500+ tradable cryptocurrencies alltogether

The world still trusts proof of work based cryptocurrencies!




Cryptocurrency Market: coinmarketcap.com




Smart Contracts

Nick Szabo, 1994

Smart Contract is: “... a computerized transaction protocol thatexecutes the terms of a contract.”

Ethereum: block-chain based computing platform (and operating system)featuring smart contract functionality

Smart Contract is a program code:

Stored in the ledger

Executed by the miner

Input: the contents of the ledger

Output: the contents of the ledger

Has no direct influence to outside world




Applications

Finance

Internet of Things

Electricity sourcing and pricing

(Sports) Betting

ICO: Initial Coin Offering (Crowdfunding)

Digital Rights Management

Prediction Markets




Example: MegaDice

Was SatoshiDice

Gambling website which uses the digital currency bitcoin

2012: the leading bitcoin gambling site in terms of amount wagered

Participants store their Bitcoin money to a virtual account

The winners are selected based on the random content of the ledger




Where are we today?

Business:

Thousands of block-chains in commercial use

1500+ publicly tradable cryptocurrencies

Technology:

20000 pages of whitepapers describing solutions, all made of similarcomponents

In the hearth of every solution is some sort of cumulative archieving

Trend: to replace all centralized rule-based systems withdecentralized ones

Ideology:

Decentralized organization is better than centralized, but why?

Crypto-economics as an emerging science




Are Decentralized Systems Really Better?

Everybody seems to believe that decentralization is the future

How they know that?

Bitcoin has been working for about ten years

Does crypto-economics give the answer?

Crypto-economics says that any rule-based data processing system can beimplemented similar to Bitcoin, enforcing the rules by

Cryptography

Economic incentives

Crypto-economics does not provide a theory how to compare datacollection solutions?




System Engineering Approach

Specification:

1 What kind of data needs to be collected?This is a mathematical problem.

2 How should data be collected?This is a physics problem

The “How” questions involve: speed, reliability, fault tolerance, attacktolerance, communication, etc.

Order of questions is important: Semantical restrictions may haveinfluence and set requirements on how we must collect the data.




System Engineering vs Crypto-Economics

System engineering:

Always starts with spec: What and why to collect? How to collect?

Formalizes the requirements in the technical specification

Is open on the choice of the physical components and architecture

Is open on the type of the solution: central service, distributedservice

Crypto-Economics:

Uses fixed architecture: Internet + Software app




Requirements for Cumulative Archieving

Storing data into a ledger, so that we have the next properties:

Availability: Authorized users can store data into the ledger

Integrity: It is impossible to delete or modify the ledger

Uniqueness: It is impossible to maintain two parallel ledgers




Degrees of Impossibility

Mathematical: against axioms of mathematics

Physical: against laws of nature

Astronomical: the Universe is too small

Economical: non-beneficial

Social: for some other reasons will not happen in the society

Good cryptography uses astronomical impossibility

Distributed ledger technologies use much weaker impossibilities:economical or social




Conclusions

We have 1500+ solutions that use block-chain technology

Most of them based on non-scientific wihitepapers, describing just howthe solutions work

Much less is available on:

the problems they solve

analysis, why they work and will stay working in the near future

Most of these solutions are not yet in the product phase

Using civil engineering terms: they build buildings:

Without konowing their purpose

Without proper stress calculations, measurements and inspection

And surprisingly, we all want to live in these buildings!




Block-Chain Types




Do I need a Block-Chain?




Examples




Examples


Part I: The Birth of BitcoinPart II. The Block-Chain BubblePart III: Crypto-Economics vs System EngineeringPart IV: Do I need a Block-Chain?

block-chains: insights and issues...part i: the birth of bitcoin part ii. the block-chain bubble...

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