smart contracts

When machines take decisions on their own:

Introduction to

Smart Contracts

[email protected]

Dreamlab 28 of August 2015

Bern, Switzerland

2

“As another example, consider a hypothetical

digital security system for automobiles. The smart

contract design strategy suggests that we

successively refine security protocols to more fully

embed in a property the contractual terms which

deal with it. These protocols would give control of

the cryptographic keys for operating the

property to the person who rightfully owns that

property, based on the terms of the contract. In

the most straightforward implementation, the car

can be rendered inoperable unless the proper

challenge-response protocol is completed with

its rightful owner, preventing theft.”

Nick Szabo

3

A smart contract is a program which execution is autonomous and

totally transparent.

In particular this execution cannot be reverted and its trace is public

and immutable.

A smart contract can send, receive and store money. It can also

interact with other smart contracts or any computational systems

connected to the internet.

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«Traditional» contract

Contract

Execution

Audit (Control)

Definition

Interaction between human and objects.

Possible application of punishments

Definitions can be interpreted (trial)

Paper

(semi-) manual

data recollection

5

Smart contract

Contract

Execution

Audit (Control)

Definition

Program execution

(Only one interpretation)

Not reversible, autonomous

Software

program Real time

Immutable

6

Agenda

• Bitcoin

• Change of paradigm

• Bitcoin is more than money

• Smart contracts

• Examples

• Ethereum

Objective:

understading the

principles behind this

technology

Objective:

Have a feeling of the

impact and challenges

related to this

technology

7

From 1 USD to 1000 USD in 3 years

8

http://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/

Netscape

cofounder

Investor

9

The first five times you think you

understand it, you don’t.

http://dankaminsky.com/2011/08/05/bo2k11/

12

Solución #0

Is it possible to

create a

decentralized digital

currency?

Centralized systems

have limitations…

14

Arreglo #1

Banks Trust in institutions

Bitcoin Trust in source code

(open source) +

mathematical laws

V/S

= +

15

¿But who did invent Bitcoin?

No one knows...

Anyways trust should

not depend on this.

http://www.newsweek.com/2014/03/14/face-behind-bitcoin-247957.html

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Solution #1

1 BTC

2 BTC 1 BTC

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I can spend my bitcoins

several times

(double spending).

19

Fix #2

The Bitcoin network shares a database

of all the transactions

20

Audit

Not only the banking industry is

going to be impacted by Bitcoin,

but also the audit industry

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Solution #2

Origin Destination Amount

Homer Lisa 1 BTC

Homer Bart 2 BTC

Lisa Bart 1 BTC

… … …

The Bitcoin network

checks that an

account has enough

funds before

accepting a

transaction.

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Every transaction needs to be public.

Nobody will want to use such a system that

reveals all this information!

24

Fix #3

The user identifier is replaced by a random number

Bitcoin address: 31uEbMgunupShBVTewXjtqbBv5MndwfXhb

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Solution #3

Origin Destination Amount

HhY67j81 Jh89HF8m 1 BTC

HhY67J81 LaU4V6uU 2 BTC

Jh89HF8m LaU4V6uU 1 BTC

… … …

Note: every user can

create multiple

accounts / addresses

26

Bitcoin y Anonymity

• Bitcoin is not totally

anonymous by default

• Some attempts to improve anonymity

zerocash-project.org Blockchain.info

Dilemma: privacy

v/s crime

27

Every account is public so I can spend

money from any of them

(I can spend other people’s

bitcoins).

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Fix #4: Digital Signatures

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Solution #4

Origin Destination Amount Signature

HhY67j81 Jh89HF8m 1 BTC Djsh767

HhY67J81 LaU4V6uU 2 BTC 8988dd

Jh89HF8m LaU4V6uU 1 BTC djDhd7n

… … …

Bitcoin addresses are

computed from the public

key

Message

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What does it mean when I say

“I own 30 BTC”?

You know the private key related to a

public key (≈bitcoin address)

and its balance is 30 BTC.

You are the only person to know this

private key.

1

2

Implicit contract

You know the key => you are the owner

(Being owner = having the hability to

transfer)

34

¿Future of banking?

YCombinator

70+ millionsde USD

39 000 businesses

served

40 millions USD

Wences Casares

Debit card that can be

paid in BTC

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Pagar con bitcoin

Paying with bitcoin is very easy

but cannot be reverted

My bitcoin address:

1Ask9dvcJHEyjiVm5L9vjxYTU3i8Q1Q1zV

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I still can do evil things....

What about publishing a

fake history of transactions?

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Fix #5:

Cryptograhic Hash Functions

H

01110001110001110

10001010100010010

00110101010010110

01100111100011100

10000101000101110

1101101011010010

Big size input

Fixed size output

(e.g.: 256 bits)

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Solution #5

H H H

Tx1;

Tx2;

Tx3…

Initial value

(coinbase)

Tx34;

Tx35;

Tx36…

Tx54;

Tx55;

Tx56…

Block of

transactions

Blockchain

…

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But who will compute the next block?

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Proof of Work

00000

00001

00010

00011

00100

00101

00110

00111

01000

01001

01010

01011

01100

01101

01110

01111

10000

10001

10010

10011

10100

10101

10110

10111

11000

11001

11010

11011

11100

11101

11110

11111

H 1001101|| x 000||10

Find value x so

that the output

begins with 3 zeros.

The only way (*) to compute

this value so that the output

starts with 𝒏 zeros is to try at

random around de 𝟐𝒏 times.

(*) If you find another way you can

(1) become rich, (2) famous (Turing Award), or (3) both (start with (1) then (2)...

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Solution #5

• The first node that manages to

solve this puzzle/equation wins

the block

• The bitcoin network extends this

chain with the new block

• The network always chooses to

extend the largest chain

Grrr!

I need to control

51% of the computational

power of the network (*)

(*) It is not that simple… => Majority is not Enough: Bitcoin Mining is Vulnerable

http://arxiv.org/abs/1311.0243

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Computational power of the Bitcoin

network

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Sounds good… but why would

people waste their CPU cycle?

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Mining

• The winnner of a block receives a

reward of 25 BTC

Indeed this is how the bitcoins are

«created»

• This process is called mining

46

Solution to the consensus

problem (Proof of work)

Simple tools

(Hash functions +

digital signature)

Economic incentive

Why is Bitcoin’s design so brilliant?

47

Bitcoin is a

smart contract!

49

Bitcoin is a smart contract

• It is a program

• Its execution is autonomous • because of the decentralized network

• Every transactions are public

• It is not possible to modify the history of transactions • The execution cannot be reverted

• A few clauses/statements of this contract • No more than 21.000.000 de bitcoins

• A new block every 10 minutes

• Mining difficulty is ajusted to the power of the network

• Only a subset of possible transactions are allowed

• …

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Bitcoin transaction

https://bitcoin.org/en/developer-guide#signature-hash-types

Much more complex

than a simple signed

message…

It is a smart

contract!

51

Sure, a smart contrat that

executes another smart

contract….

52

Innovation v/s Fragmentation

http://mapofcoins.com/bitcoin#

Bitcoin

Litecoin

Litecoin

53

Ethereum

• Platform similar to Bitcoin but: • The language for writing smart

contracts is more expressive (Turing-Complete)

• Avoids to reinvent the wheel by forking an existing cryptocurrency

• All the smart contracts use the same blockchain

• Crowdfunding (sept. 2014) • 31531 BTC = US$18,439,086

• Launching: • it’s live since July 30th 2015!

Vitalik Buterin

Ethereum founder

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Sales contract

http://etherscripter.com/0-5-1/

Hard problem

solved: who

pays/sends the

product first?

55

More examples of smart contracts

• Decentralized DNS

• Autonomous companies • Define the shares at the beginning

• Dividends can be distributed automatically

• One could buy and sell stock instantly

• Insurance

• Heritance

• Direct democracy

• IOT (IBM+ Samsung using Ethereum => https://www.youtube.com/watch?v=U1XOPIqyP7A)

Great video, only 8

minutes

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Challenges

• Scalability (current problem with Bitcoin)

• Privacy v/s Criminality

• A bug can be very expensive

• A breach can lead to a loss of all funds of the contract

(which could be a whole company!)

• Generalized bug

• Fork Bitcoin in 2013

• Security?

Still relying on the

break-and-fix cycle

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Using smart contracts for crime

• Enable to do business without relying on trust

• => perfect for cybercrime

• Example of evil businesses

• Selling secrets

• DoS

• Assassination

• Defacement

• Relies on very sophisticated cryptography on top of

smart contracts

http://www.arijuels.com/wp-content/uploads/2013/09/public_gyges.pdf

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Thank you!

smart contracts

Technology