block-chains: insights and issues...part i: the birth of bitcoin part ii. the block-chain bubble...
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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
-
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?
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?
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Ideal Electronic Payment System
Electronic cash is sent from Payer to Merchant
Payment is irreversible
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Electronic Payment System with Banks
Money is just a number
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Electronic Payment System with Banks
Cash is not sent directly
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
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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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Nakamoto’s Idea
Get rid of trusted third parties
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Nakamoto’s Idea
Get rid of trusted third parties
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Nakamoto’s Idea
Construct a payment system that:
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Nakamoto’s Idea
Construct an automatic payment system that:
Is itself a bank with its own currency (bitcoin) inside the system
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Bitcoin as a Machine
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
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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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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.
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
How Bitcoin System Started?
Bitcoin software is available in a freeware site
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
How Bitcoin System Started?
Everyone can download the software
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
How Bitcoin System Started?
Everyone can download the software
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
How Bitcoin System Started?
Nodes who run the software form the Bitcoin’s network
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Bitcoin’s Network
Arbitrary connected graph
Nodes are not identified
Nodes can come and go
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Bitcoin’s Network as a Machine
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
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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?
But where is the ledger?
Every node produces and holds a copy of the same ledger
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Transaction Order
Public key = account number = pseudonym
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Transactions
Payer of the transaction is the payee of the previous transaction
Amount of the transaction ≤ amount of the previous transaction
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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!
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Minig is Parallelizable
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Minig is Parallelizable
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Evolution of Electronic Money and Payments
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
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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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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.
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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.
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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!
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Cryptocurrency Market: coinmarketcap.com
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Applications
Finance
Internet of Things
Electricity sourcing and pricing
(Sports) Betting
ICO: Initial Coin Offering (Crowdfunding)
Digital Rights Management
Prediction Markets
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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?
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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.
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
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!
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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-Chain Types
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Do I need a Block-Chain?
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Examples
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
-
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?
Examples
Ahto Buldas, Märt Saarepera Block-Chains: Insights and Issues
Part I: The Birth of BitcoinPart II. The Block-Chain BubblePart III: Crypto-Economics vs System EngineeringPart IV: Do I need a Block-Chain?
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