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Entrepreneurial Opportunities with Fintechs & Blockchain

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Entrepreneurial Opportunities with Fintechs & Blockchain Bitcoins, Kryptowährung und Blockchain – was bringt die Zukunft? 23rd October 2018, 2. Forum „Das gute Geld – Investieren mit MehrWert“ Evgeniia Filippova, Senior Scientist @Cryptoeconomics Institute WU Vienna Ledgers Ledgers are used to: - record economic activities; - prove the ownership; - prove the transfer of value of assets (tangible / intangible) among various stakeholders Bank Accounts Land Registries Academic Certificates Every ledger you know is centralized with a ‚trusted‘ Hotel Reservations Medical Records Citizenship Records record-keeper If you had to define Blockchain in 3 words? A distributed ledger Curios case of the Rai Stones 500 AD, Island of Yap (now Micronesia) Yappies had a problem: a strange form of currency (fei stones) Solution: Decentralized Ledger: - Distribution of Fei stone ownership across all Yappies - When a Fei stone was spent, the new transaction was shared across everyone Basic Idea Behind (Bitcoin) Blockchain • Peer-to-peer electronic transactions and interactions • Without financial institution • Cryptographic proof instead of central trust • Put trust in the network instead of in a central institution BLOCKCHAIN So … What is Blockchain? Blockchain is a bundle of distributed ledger technologies that can be programmed to record and track anything of value without involvement of the third trusted party TECHNICAL Back-end database that maintains a distributed ledger, openly BUSINESS Exchange network for moving value between peers LEGAL A transaction validation mechanism, not requiring intermediary assistance What is Blockchain? NETWORK Layer DATABASE Layer STATE Layer time What is Blockchain? NETWORK Layer DATABASE Layer 1. Transaction event A B Digital signature STATE Layer time What is Blockchain? NETWORK Layer DATABASE Layer 1. Transaction event A B Digital signature 2. Bundled transaction data STATE Layer time What is Blockchain? NETWORK Layer DATABASE Layer 1. Transaction event 3. Validation Consensus algorithm A B Digital signature 2. Bundled transaction data STATE Layer time What is Blockchain? NETWORK Layer DATABASE Layer 1. Transaction event 3. Validation Consensus algorithm A B B Digital signature 2. Bundled 4. Updated, transaction data distributed, historical STATE ledger Layer time Public Key Cryptography – Digital Signatures Digital keys are created and stored offline and consist of a C r mathematically-related Private-Public key pair, created using the y Elliptic Curve Digital Signature Algorithm (ECDSA). p t o g Private Key (K priv) and Public Key (K pub) r a p Public key is generated from the Private Key using a one-way h y cryptographic hash function Public Key Cryptography – Digital Signatures C The sender encrypts the message M using the r recipient‘s public key: C=encrypt(M, Kpub) y p The recipient decrypts message C using his own t private key: M=decrypt(C, Kpriv) o g r Where: C is the result of encryption (or a „ciphertext“) and M is the decrypted message (or p h „plaintext“) y Kpub and Kpriv can are interchangeable: C=encrypt(M, Kpriv) then M=decrypt(C,Kpub) Public Key Cryptography – Digital Signatures To make a transaction: To verify a transaction T received with 1. Create a transaction T C signature S and public key: r 2. Select subset M of 1. Select subset M of the information transaction (ex. Transaction y in transaction T p instructions, etc.) t 3. Compute hash H of M: H = 2. Compute hash H of M: H = o sha256(M) sha256(M) g r 4. Compute a signature S by 3. Decrypt signature S with the public a encrypting hash H with the key: H‘=decrypt(S, Kpub) p sender‘s private key: h S=encrypt(H, Kpriv) 4. Compare H and H‘. If they match, y 5. Send the signature S and the then the signature is valid and the public key along with the transaction is valid. transaction to miners Public Key Cryptography – Digital Signatures Both the public and private keys are stored in a Bitcoin wallet Bitcoin wallet does not contain any Bitcoins, only the Private-Public key C r pairs as mechanisms that allow you to access your funds y p t Example: o g r a p h y How is the new block added to the chain? To add a new block to the chain, a miner has to finish what is called a cryptographic proof-of-work problem. C G r a This proof-of-work problem: y m p e a. Is different for every block in the chain; t o T b. Involves a particular kind of algorithm called a hash function. g h r e 1. SHA-256, 64 characters long a o Input Hash function Output 2. One-way p r 3. Changing input a little bit h y changes output dramatically y Evgeniia Hash function D35F0A9DA54EFE7F5ACEAE1B0E3427E65F08651A3A2A2C5A8D501B2812EE75D4 Evgenia Hash function EF34097BA51FC87FFA044E4F75EBC2E69ABA8C93BF249C653FA6890312E7F0E5 How is the new block added to the chain? Proof-of-work problem: A hash of the contents of the current block (all of A random number that can be used just once C G transactions, some meta-data, reference to the + (= nonce) r a previous block) y m p e t Goal: to find a hash that has at least a certain number of leading zeroes. o T g h Example: r e a o 00000002a5c46af8c3442b8ce70fb5fcb053f2334ce0e518b48ed1d20000000000000000fce92 p r 0a9266470c7c9292e8e4a5a816eee86fe7e1d06c6d72f21487bfac6cc91533acfbb1900db9945 h y 6c6f6900000080000000000000000000000000000000000000000000000000000000000000 y 0000000000000000000080020000 Find the nonce to get this output (hash): 000009ff7ff1fc53b92dc18148a1d65dfc2d4b1fa3d677284addd200126d9069 How is the new block added to the chain? When a miner finally finds a nonce that works: C G a. He wins the block r a y m b. Nonce gets appended to the end of the block, along with the p e t resulting hash o T c. The block gets sent out to other miners in the network g h r e d. The miners run the hash function with the nonce in order to verify a o p r that it works h y y e. If majority of miners accept it, the block gets added to the chain Problems with mining Some statistics about mining The system is based on the assumption that the majority of computing power (i.e. at least 51%) will come from hones nodes Mining performance is measured in hashes/sec. The Hashrate of Bitcoin network: >20,000,000 Tera Hashes/sec. to mine one block per day the speed of mining pool should be 833 Tera Hashes/second Solo mining/mining pools Mining hardware: from CPU mining (on a user’s PC) to ASIC mining (Application-Specific Integrated Circuits) Hashrate distribution Global Bitcoin Nodes Distribution Alternative consensus mechanisms Consensus Mechanism = a crucial aspect of Blockchain platform Enables decentralized nodes to agree on the state of a ledger, without trusting each other/without third party Others Proof-of-work Proof-of-stake Proof of Importance - All miners in the blockchain - Pseudo-random compete to generate the next selection of the node to Proof of elapsed time block by solving extremely validate a creation of the difficult cryptographic puzzles new block, based on the respective stake in the PAXOS - The node that solves the puzzle Blockchain first may propose the next Proof of capacity block which is checked for validity and the correct solution of the puzzle by other nodes Summary: what is Blockchain? The network stores New blocks get added to C all information in Blockchain network by consensus r cryptographically of network miners at even time y secured data pieces intervals p called blocks t o Blocks store Miners get rewarded for g information about validating transactions and r the previous block, adding new blocks a thus, they are p chained together „Genesis“ block h using cryptography y Game Theory Each block has limited storage size Each node (computer) on the network stores a copy of the entire Blockchain P2P Networks Foundations of Blockchain Every node of Blockchain network is a client as well as a server, holding identical copies of the application state P2P Networks BLOCKCHAIN Game Theory Cryptography Incentive models are included in the Blockchain Is used to provide security for a Blockchain through a consensus mechanism network Basic concepts: hashing, keys, digital signatures, homomorphic encryption 4 Disruptive Benefits of Blockchain Disintermediation Immutability of Single source of Smart Contracts of Trust Record truth Smart Contracts - The concept first introduced by Nick Szabo in 1994, technologically enabled by Ethereum - Self-enforced & self-executed contracts - Software programs that live on a Blockchain and form the basis of many of the new Blockchain applications - Essentially automated systems that can provide services in exchange for cryptocurency - Smart Contracts are NOT limited to money movements Smart Oracles: off-chain data sources (ex. identity, address, certificate etc.) that a smart contract can use to modify its behavior. Benefits of Smart Contracts - They may automatically enforce power equality of all parties involved - They protect an individual‘s rights by enforcing reasonable expectations for the signee - They eliminate the possibility of any signatory defaulting on their obligations In a traditional centralized system: parties seek remedial action through the legal system Types of Blockchains More elaborated Blockchain taxonomy Different classification criteria, for ex.: - Transaction capability - Security & Privacy - Identity Management - Consensus algorithm „Blockchain can find applications in any industry, where the transactions take place“ Blockchain has applications in… (Sultan et al. 2018) Banking & Payments Healthcare Insurance Online Data Storage Media Crowdfunding Music Voting Supply Chain Cybersecurity Real Estate Ride Sharing Management Energy
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