Block-Chains: Insights and Issues

Transcription

1 Ahto Buldas Märt Saarepera Oct 18, 2018

2 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?

3 The Birth of Bitcoin November 2008: Satoshi Nakamoto published the paper: Nakamoto, S.: Bitcoin: a peer-to-peer electronic 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

4 Nakamoto s Motivation in 2008 Electronic commerce covered from the dotcom bubble and shows signs of rapid 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 the growth of electronic commerce The reason by Nakamoto: banks

5 Ideal Electronic Payment System Electronic cash is sent from Payer to Merchant Payment is irreversible

6 Electronic Payment System with Banks Money is just a number

7 Electronic Payment System with Banks Cash is not sent directly

8 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 cost Small payments become infeasible Merchants start requiring too much data from buyers

9 Nakamoto s Idea Get rid of trusted third parties

10 Nakamoto s Idea Get rid of trusted third parties

11 Nakamoto s Idea Construct a payment system that:

12 Nakamoto s Idea Construct an automatic payment system that: Is itself a bank with its own currency (bitcoin) inside the system

13 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 Accountant a Chief Auditor All the rules of the payment system are enforced by Cryptography and economic incentives

14 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

15 Bitcoin as a Machine

16 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

17 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, the transaction order will be included in the next version of the ledger. This becomes as a new proof of ownership.

18 Cryptographic Attributes Digital signature proves the origin of transaction orders, i.e. the will of the payer to change the ownership Audited ledger consists of signed transaction orders. These orders have filered out by the Bitcoin machine. Proof of work proves the origin of the ledger, guarantees irreversibility

19 Nakamoto s Payment Irreversibility Argument Creating the proof of work requires large amount of computational power The necessary effort is so high, that only one such ledger can be built in the Universe It is impossible to create competing versions of the ledger or modify it afterwards Therefore, no transactions can be deleted from the ledger Hence, payments are irreversible

20 Implications and Observations A Bitcoin-like system can be irreversible only if it is unique. Two systems make it questionable, three systems are meaningless. The estimated electricity consumption of Bitcoin is 5 to 35 TWh per year, which is comparable to the electricity consumption of Estonia

21 How Bitcoin System Started? Bitcoin software is available in a freeware site

22 How Bitcoin System Started? Everyone can download the software

23 How Bitcoin System Started? Everyone can download the software

24 How Bitcoin System Started? Nodes who run the software form the Bitcoin s network

25 Bitcoin s Network Arbitrary connected graph Nodes are not identified Nodes can come and go

26 Bitcoin s Network as a Machine

27 But where is the ledger? Every node produces and holds a copy of the same ledger

28 Four Components of Bitcoin Software Transaction generator: creates transactions (payment orders) Emission transaction generator: enables to emit new currency Transaction processor: filters out matching transactions includes them into blocks makes blocks irreversible Balance check: for checking all cryptographically enforced rules

29 Transaction Order Public key = account number = pseudonym

30 Transactions Payer of the transaction is the payee of the previous transaction Amount of the transaction amount of the previous transaction

31 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

32 Blocks and Mining Noce: an arbitrary number Reference: hash of the previous block Emission transaction: mining incentive (currently 12.5 BC) Proof of Work: Check that: h(nonce, T, Reference, Emission, List) < T Work (Mining): Find the nonce!

33 Minig is Parallelizable

34 Minig is Parallelizable

35 Transaction Processing Transaction broadcast: Every node broadcasts all transactions to other nodes Block-formation: Every node: 1 Selects a list of transactions and includes them into a new block 2 Mines the block 3 After finding a proper nonce, or receiving a mined block: stops mining stores the new block into its ledger, and starts from 1

36 Evolution of Electronic Money and Payments

37 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

38 Back to the Irreversibility Argument Irreversibility argument: the world has computational power to create one ledger but not two The adversarial computational power A never exceeds the creative computational 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 to assume that the adversarial power does not exceed the mining power of any of the cryptocurrencies NB! We know from observations that N 500.

39 Back to the Irreversibility Argument Say we have N block-chains B 1, B 2,..., B N, where B i uses creative computational (mining) power W i. Let W = W 1 + W W N be the total computational power used by the block-chains. Let A denote the total adversarial power. All block-chains are safe, if A W i for every i. This means: A min i W i W N, because W i W N for some i. Conclusion: Adversarial computational power must not exceed a fraction of the creative power.

40 POW Alternatives Widely witnessed publishing. Used since 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 tradable cryptocurrencies alltogether The world still trusts proof of work based cryptocurrencies!

41 Cryptocurrency Market: coinmarketcap.com

42 Smart Contracts Nick Szabo, 1994 Smart Contract is:... a computerized transaction protocol that executes 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

43 Applications Finance Internet of Things Electricity sourcing and pricing (Sports) Betting ICO: Initial Coin Offering (Crowdfunding) Digital Rights Management Prediction Markets

44 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

45 Where are we today? Business: Thousands of block-chains in commercial use publicly tradable cryptocurrencies Technology: pages of whitepapers describing solutions, all made of similar components In the hearth of every solution is some sort of cumulative archieving Trend: to replace all centralized rule-based systems with decentralized ones Ideology: Decentralized organization is better than centralized, but why? Crypto-economics as an emerging science

46 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 be implemented similar to Bitcoin, enforcing the rules by Cryptography Economic incentives Crypto-economics does not provide a theory how to compare data collection solutions?

47 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, attack tolerance, communication, etc. Order of questions is important: Semantical restrictions may have influence and set requirements on how we must collect the data.

48 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, distributed service Crypto-Economics: Uses fixed architecture: Internet + Software app

49 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

50 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

51 Conclusions We have solutions that use block-chain technology Most of them based on non-scientific wihitepapers, describing just how the 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!

52 Block-Chain Types

53 Do I need a Block-Chain?

54 Examples

55 Examples