Blockchain Demystified - ACAMSfiles.acams.org/pdfs/2018/ACAMS_Cyprus_Chapter_Dr_Mourouzis.pdfThe...

Blockchain Demystified DR THEODOSIS MOUROUZIS

(CIIM, UCL CBT, CYPRUS BLOCKCHAIN TECHNOLOGIES)

Cyprus Blockchain Technologies Centre The Cyprus Blockchain Technologies Ltd. is a non-profit organization established as a collaboration among academic institutions, financial institutions, banks and technology companies.

Members so far are:

We are open for more members and advisors if you are interested (either as company or individual).

Link: www.cybt.eu

BLOCKCHAIN DEMYSTIFIED: A LEVEL-SET BY DR THEODOSIS MOUROUZIS 2

http://www.cybt.eu/

Cyprus Blockchain Technologies Centre


Presentation Overview The Blockchain: From a Crypto Perspective

Public vs Private Blockchain and Consensus Algorithms

Introduction to Smart-Contracts

Initial Coin Offerings (ICOs)

4 BLOCKCHAIN DEMYSTIFIED: A LEVEL-SET BY DR THEODOSIS MOUROUZIS

Evolution of Money https://www.youtube.com/watch?v=CfNF9q34Sig


https://www.youtube.com/watch?v=CfNF9q34Sig



The Blockchain: From a Crypto Perspective Blockchain technology was firstly introduced in 2008 by Satoshi Nakatomo (unknown person or group of persons) in the paper “Bitcoin: A Peer-to-Peer Electronic Cash System”

(Ref: https://bitcoin.org/bitcoin.pdf).

It became Open Source in 2009.

6

BLOCKCHAIN DEMYSTIFIED: A LEVEL-SET BY DR THEODOSIS MOUROUZIS

https://bitcoin.org/bitcoin.pdf



The Blockchain: From a Crypto Perspective Bitcoin is the first complete e-cash system with the following characteristics:

- Peer-to-peer (P2P) network in which users can transact without the need of a central authority or trusted third party.

- Pseudo-anonymous (identified via public key) and anyone can join the network.

- Rules and incentives are enforced through consensus mechanisms for approving transactions. The majority always wins.

- All data are public and stored in a publicly distributed ledger called the Blockchain.

- Full utilization of cryptographic primitives (digital signatures, hash functions) to solve e-cash challenges and ownership/provenance issues.


The Blockchain: From a Crypto Perspective

Problems addressed in Bitcoin architecture that gave rise to the generalization of Blockchain as a more generic technology for transacting and tracking assets:

No Counterfeiting: Nobody can increase the money (or any other asset) supply at will.

No Double Spending: Nobody can spend the same value more than once.

Transaction Irreversibility/Immutability: Nobody can undo a Transaction.


The Blockchain: From a Crypto Perspective What is a Blockchain? A shared, distributed, append-only, cryptographically secure database/ledger used to record either transactions or account balances for a set of assets and users.

A copy of this ledger is maintained on every node in the network.

Ownership of an asset or right to perform an action is guaranteed via digital signatures (provenance).

Appending on the ledger requires the ecosystem to reach to a consensus via some consensus algorithms that are either computationally hard problems (public/open/permissionless) or based on access permissions (private/permissioned).

It is claimed that Blockchain will do for transactions what Internet did for information.




"The technology most likely to change the next decade of business is not the social web, big data, the cloud, robotics, or even artificial intelligence. It’s the blockchain...“

— Harvard Business Review

"The Impact of Blockchain Goes

Beyond Financial Services,"

May 2016


The Use Cases for Blockchain:

Storage for digital records

Exchange & Tracking of digital (or physical) assets (tokenization aspect)

Crowdfunding via Initial Coin Offerings (ICOs)

- Forms of tokens: utilities, securities or equities, currencies

Execution of smart-contracts

- Terms & Conditions are encoded into the code

- Distributed network executes contract and checks compliance

- Outcomes are automatically validated without the need of a third party



Figure 1: How Blockchain works (Ref. PWC).



All transactions are visible on the ledger (Example: blockexplorer.com).



Figure 2: Business networks before and after Blockchain (Ref. Blockchain for Dummies by IBM).

Blockchain revolutionizes the traditional business: Cost effective, Efficient, Secure & safe


The Blockchain: From a Crypto Perspective Ownership guaranteed by Public Key Cryptography (Digital Signatures).

Each user has two pairs of keys; the public and the private key. Public key is related to the public address of the user over the network while the private key is used either to prove ownership of an asset or right to access or initiate a transaction.

Public Key can be also used to prove that the user has the access to perform an action or transfer an asset. All history can be checked on the ledger if the public key is associated with a person.

Addresses looks like 16UwLL9Risc3QfPqBUvKofHmBQ7wMtjvM and it is calculated from a Public Key. This offers pseudo-anonymity since nobody knows who owns this address.


The Blockchain: From a Crypto Perspective A user uses his/her private key to initiate a transfer/transaction/access request.

This transaction gets an identifier based on the content of the transaction (exact amount, recipient’s address) and then signed by the secret key of the originator.

Identifiers are derived via cryptographically strong hash functions.

Validity of the signature is derived via originator’s public key.


The Blockchain: From a Crypto Perspective A hash function is a one way function that takes as input text of arbitrary length and outputs fixed-length string.

Flipping one bit in the input results in a randomly distributed output.

Hard to construct same identifiers with different inputs in the transactions which means it is computationally infeasible to alter/modify the content of a transaction.


The Blockchain: From a Crypto Perspective SHA-256 is a cryptographically secure one way hashing algorithm that takes any input value and converts to a 32 byte output:

SHA-256 “Secret” 7e32a729b1226ed1270f282a8c63054d09b26bc9ec53ea69771ce38158dfade8

SHA-256 ”Sacret” fdbd74c69cc87718c1c9cdffd517e0daed9c56d896ecc97e 4f9c94f88068ae93


The Blockchain: From a Crypto Perspective Transactions are populated in one block and then send for verification to the miners/verifiers who have to solve a computationally hard problem and come up with a solution called the difficulty statement (proof-of-work)

Each block that hosts the transactions contains the following information

1. Timestamp

2. The hash of the previous block as a reference

3. At least one transaction

4. The Merkle Root (Tree) : all transactions hashed together in a pre-defined way

5. The block’s own hash

6. Difficulty statement



Figure 3: Hashchain used to link different blocks in Blockchain.


The Blockchain: From a Crypto Perspective Because the network is P2P there is no single point of truth.

Forks occur as temporary inconsistencies between versions of the block, which are resolved by eventual re-convergence as more blocks are added to one of the forks.



Soft forks versus Hard forks

A “soft fork” is a forward-compatible change to the consensus rules that allows un-upgraded clients to continue to operate with the new rules.


The Blockchain: From a Crypto Perspective In contrast to a temporary fork, a “hard fork” does not re-converge to a single chain.

Instead the two chains evolve independently.

Hard forks occur on several occasions :

- Change on the consensus rules

- Spinoff coin (Bitcoin Cash, ERC20 tokens)

- Bugs on the software


The Blockchain: From a Crypto Perspective Where are these tokens/digital assets stored?

Cold vs Hot wallets

- Cold wallets: The private key is stored offline.

- Hot wallets: The private key is stored online and usually maintained by the exchange operator


Public vs Private Blockchain and Consensus Algorithms We have public/open/permissionless and private/permissioned Blockchains.

Both are decentralized, peer-to-peer networks where each participant maintains a copy of a shared append-only ledger of digitally signed transactions. They maintain the copies in sync through a protocol referred to as consensus.

The basic difference is related to who is allowed to participate in the network, execute the consensus protocol and maintain the shared ledger.


Public vs Private Blockchain and Consensus Algorithms Public network is open and anyone can join and participate in the network. The network has an incentivizing mechanism to encourage more participants to join the network.

Public blockchain requires substantial amount of computational power to maintain a distributed ledger at a large scale. Each node must solve the computationally incentive proof-of-work problem.

A private blockchain network requires an invitation and must be validated by either the network starter or by a set of rules put in place by the network starter. Businesses who set up a private blockchain, will generally set up a permissioned network.



Enterprise-Focused → Increased Ownership & Control →

← Increased Anonymity of Participants / Validators

Public Federated Caretaker consortium

Private

Blockchain Technologies Bitcoin, Ethereum Hyperledger Fabric, R3 Corda

Network Ownership Open To All By Invitation One entity controls all nodes

Participation Anonymous fully

decentralized participation Pre-authorized participation in Read/Write or Read-Only

mode

Separation of Concern No Yes, via specific channels

Consensus Mechanism Proof of Work or Stake

Protocols (e.g. Mining)

Various Pluggable Mechanisms such as Simplified Byzantine Fault Tolerance, etc

Transactions throughput 7-15/sec 100’s -1000’s/sec


Public vs Private Blockchain and Consensus Algorithms Consensus Mechanisms Explanation

Proof of work Computationally intense problem to be solved; requires large computations and involves computing many hashes

Proof of stake Validators are chosen deterministically based on the stake they have in the system

Proof of capacity Based on the availability of hard drive allocating for mining/verification

Multi-signature

Several stakeholders that own secret keys could provide permission by ALL signing the transaction

Practical Byzantine Fault Tolerance (PBFT)

An algorithm designed to settle disputes among computing nodes (network participants) when one node in a set of nodes generates different output from the others in the set


Intro to Smart Contracts A contract is a relation between two or more parties which includes legally enforceable obligations between them.

Current paper-based systems drive $18T in transactions per year.

Contracts can be converted into a programmable code.

This enable peer-to-peer trading of everything from renewable energy to automated hotel room bookings.


Intro to Smart Contracts


Figure 4: Processes in smart contracts (Ref: BlockGeeks).

Intro to Smart Contracts Figure 5: Tracking vehicle ownership without and with Blockchain/Smart Contracts (ref. Blockchain for Dummies by IBM).


Initial Coin Offerings (ICOs) An ICO is a fundraising (crowdfunding) event, known as token coins, effected using Blockchain Technology, in which a “token” or “coin” is offered to a participant in return for either cash (fiat currency) or cryptocurrency, such as Ether or Bitcoin.

Investors can contribute as much money as they wish in a very similar way as in crowdfunding campaigns (i.e. Kickstarter or Indiegogo).

Instead of shares of stock, investors of individuals buy tokens (a digital asset or technology-based contract) that is assigned a certain monetary value that is expected to surge over time (hopefully).


Initial Coin Offerings (ICOs) The name ICOs was inspired by the the IPOs (Initial Public Offerings) that companies conduct in order to sell stock to investors.

Unlike stock offerings, ICOs are generally designed so that investors don’t get an ownership stake in the start-ups. People buy these tokens because they want to use the services on which the coin will be used.

If the coin does provide an ownership stake, the Securities and Exchange Commission has said, the companies must comply with all securities law since it is considered as security. A few coins have done this, but most have tried to avoid it.


Initial Coin Offerings (ICOs) A new cryptocurrency is created on a protocol such as Counterparty, Ethereum (via forking), or Openledger.

The value is arbitrarily determined by the startup team behind the ICO based on what they think the network is worth at its current stage.

Then, via price dynamics determined by market supply and demand, the value is settled on by the network of participants, rather than by a central authority or government.


Initial Coin Offerings (ICOs) Types of Tokens

Utilities: The token can be used to access a particular service.

Securities or Equities: The token represents stake into the company.

Currencies: The token can be used to purchase items from retailers.


Initial Coin Offerings (ICOs) Consumer Risks Market Risks Technology Risks

Unclear regulatory space Undefined legal obligations Lack of understanding the

technology Inadequate security

knowledge Tax risks Risk of uninsured losses Phishing scams

Price volatility Lack of liquidity Possible market manipulation

by stakeholders not acting fairly (whales, pump-and-dump, spoofing, front running)

Market movements attributed to ICO cash outs

Exchanges not acting fairly Exchanges with limited

understanding of technology risks

Weakness or flaws in the Blockchain infrastructure

Weaknesses, bugs or flaws in the smart-contracts codes

Weak passwords used for protecting wallets

Weak security protections when tokens are held on exchanges or cold wallets


Initial Coin Offerings (ICOs) Scam vs Investment? To invest or not? Tips

Understand the regulatory framework in the jurisdiction where the ICO is conducted

Do they explain why the need the amount of money the claim and is there proper allocation of funds?

Check the company’s history (track records, patents, publications, financials)

Conduct background checks of core team members and advisors

Are there any partners or industry associations related to the ICO?

Is there a real need about this product?

Does decentralization really needed?

Is there any code published in open source repositories such as github?

Is the team active in the proper communication channels?

Is the team complete with respect to all important roles?

Are there any escrow mechanisms in place to return the funds in case something goes wrong (e.g. sofcap not needed)?


End of Presentation


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