UPTEC F 17041 Examensarbete 30 hp Juli 2017 Distributed ledger technology in the capital market Shared versus private information in a permissioned blockchain Alessandro Piccolo Abstract Distributed ledger technology in the capital market Alessandro Piccolo Teknisk- naturvetenskaplig fakultet UTH-enheten This master thesis explores how blockchain technologies can be utilized within the financial sector with focus on how to store both private and Besöksadress: public information on the blockchain. The capital market is looking into Ångströmlaboratoriet Lägerhyddsvägen 1 ways of cutting down administrative work through streamlining the financial Hus 4, Plan 0 process by using blockchain technologies. Public key encryption together with hash functions and a consensus mechanism make up the basis for creating Postadress: a shared trustless database system. The thesis was conducted by extensive Box 536 751 21 Uppsala research concerning cryptographic topics, and a literature study was made to compare existing solutions. This was done in order to come up with a new Telefon: design which suggests how to utilize blockchain technologies in order to 018 – 471 30 03 create private transactions. The design solves issues regarding key Telefax: management and how to handle both private and public information on the 018 – 471 30 00 blockchain. The proposed design is an extension of Visigon's existing permissioned blockchain, and it introduces different roles within the peer Hemsida: to peer network as well as a concept of having regulating nodes that http://www.teknat.uu.se/student together with the involved bank's nodes handle the process of private transactions. Private transactions are encrypted by using symmetric keys and thereafter recorded on the blockchain. In conclusion blockchain technology might not be the most suitable database system for banks to keep transactions private. Future solutions should consider the best attributes of blockchain technologies and create a new system with the single purpose of being a tool for the financial market. Handledare: Gustav Ekeblad Ämnesgranskare: Tjark Weber Examinator: Tomas Nyberg ISSN: 1401-5757, UPTEC F 17041 Popul¨arvetenskaplig sammanfattning Detta examensarbete ¨ar gjort i samarbete med Visigon f¨or att b¨attre kunna f¨orst˚a hur man kan lagra b˚adeprivat och publik finansiell information med hj¨alp av block- kedjeteknik. Syftet med blockkedjeteknik f¨or banker ¨ar att revolutionera post-trade delen av deras system f¨or att minska administrativa kostnader och s¨akerhetsst¨alla att alla banker har samma ¨overblick av det finansiella landskapet. Examensarbetet fokuserar p˚ahur banker inom den den nordiska kapitalmarkna- den kan nyttja blockkedjeteknik f¨or att lagra tillg˚angari en gemensam databas. Blockkedjeteknik ¨ar en distribuerad databas som garanterar att lagrad data ¨ar of¨or¨anderlig, vilket inneb¨ar att de som delar p˚adatabasen inte beh¨over ta h¨ansyn till att n˚agonskulle kunna ¨andra p˚abefintlig information. Blockkedjetekniken kan komma att ers¨atta bepr¨ovade tekniker inom transaktionshantering som f¨or exem- pelvis v¨arde-pappershandel. F¨or att en transaktion ska bli lagrad p˚ablockkedjan s˚askall transaktionen f¨orst godk¨annas av majoriteten av bankkonsortiet som styr blockkedjan. Andra anv¨andningsomr˚adenf¨or blockkedjeteknik ¨ar vid lagring av personliga upp- gifter s˚asomID, e-H¨alsa, kontrakt och l˚an.Det finns ¨aven m¨ojlighet att sk¨ota micro-transaktioner mellan maskiner. Ett krav som banker har ¨ar m¨ojligheten att d¨olja inneh˚alletav en transaktion f¨or andra deltagare i n¨atverket. Detta medf¨or sv˚arigheter,d˚ablockkedjetekniken ¨ar designad med ¨andam˚aletatt all information skall vara publik f¨or de involve- rade akt¨orerna. Examensarbetets syfte ¨ar att unders¨oka alternativa l¨osningar och f¨oresl˚aen design p˚ahur detta problem kan l¨osas. Designen grundar sig p˚as¨aker kommunikationsprotokoll och kryptografi. Avslutningsvis ¨ar slutsatsen att blockkedjeteknik har m¨ojligheten att vara kataly- satorn f¨or att skapa ett nytt paradigm f¨or hur vi hanterar och lagrar information. Contents 1 Introduction 1 1.1 Problem Discussion . 2 1.2 Objective & Research Questions . 2 1.3 Methodology . 3 2 Background 4 2.1 Basic Cryptography . 4 2.2 Bitcoin Overview . 5 2.3 Bitcoin Cryptography . 6 2.4 Bitcoin Transactions . 7 2.5 Consensus . 8 2.6 Merkle Tree . 9 2.7 Forks . 9 2.8 Double Spending Attacks . 10 2.9 Permissioned Chains . 11 3 Theory 11 3.1 Smart Contracts . 12 3.2 Merkle-Patricia Trie . 13 3.3 Advanced Cryptography . 14 3.3.1 RSA . 15 3.3.2 Elliptic Curve Cryptography . 16 3.3.3 Lamport Signature . 18 3.3.4 Paillier Cryptosystem . 19 3.4 Future Solutions . 19 3.4.1 Cryptographic Obfuscation . 19 3.4.2 Zero-Knowledge Proof . 20 3.4.3 Bitcoin: Account Linking Problem . 20 3.4.4 Ring Signature . 20 3.4.5 Homomorphic Encryption . 21 3.5 Key-Management . 21 3.5.1 Wallet . 21 3.5.2 Flooding . 21 3.5.3 Bitmessage . 21 3.5.4 Internet Certificate . 22 3.5.5 Secure Sockets Layer & Transport Layer Security . 23 4 Literature Review 23 4.1 Ethereum . 24 4.2 Quorum . 25 4.3 Corda . 27 4.4 Ripple . 28 5 Design 30 5.1 Visigon's Blockchain Project . 30 5.2 Design Aims & Requirements . 32 5.3 Design Choices . 33 5.3.1 Observer, Voter, Creator & Regulating Nodes . 33 5.3.2 Account & Storage Sharding . 34 5.3.3 Public & Private Transactions . 35 5.3.4 Transaction & Block information . 35 5.3.5 Transaction Process . 36 5.3.6 Consensus . 37 5.3.7 Key Management . 38 5.3.8 Malicious Attacks . 40 6 Discussion 41 6.1 Existing projects . 41 6.1.1 Bitcoin . 42 6.1.2 Ethereum . 42 6.1.3 Quorum . 42 6.1.4 Corda . 43 6.1.5 Ripple . 44 6.1.6 Comparison between Design Choices . 45 6.2 Proposed Design . 48 6.2.1 Main Design Features . 48 6.2.2 Difficulties & Trade-Offs . 49 7 Conclusions 50 1 Introduction The Nordic capital market uses a centralized backend system for keeping track of transactions and who owns what. This system requires a huge amount of adminis- trative work to function properly. The administrative process can be automated by using a technology called blockchain, which is a trustless distributed ledger tech- nology. It is estimated that a decentralized database system such as blockchain would save banks up to 10 billion dollars annually, due to the fact that processes would be streamlined which in its turn reduce administrative work [42]. This is a conservative estimate and there are those who claim that it can cut costs even more [35]. However, the system is not truly trustless since it requires some level of trust by the user in the system. Blockchain technology has the possibility to be the next disruptive technology, which could be used for any type of data storage. The current financial system depends on a central security deposit as shown in Figure 1 for data access and storage. This thesis suggests that the Nordic capital market should use a permissioned blockchain which would imply that only a small number of appointed major banks and institutes would manage the blockchain, in contrast to the popular technology that the cryptocurrency Bitcoin uses. Ba- sically, the peer to peer (P2P) network would facilitate data access by reducing administarive work [36]. Figure 1: The left side represents the financial market with a centralized database, the central security deposit in the center. The right side shows a financial market using a distributed P2P ledger technology. The information flow is displayed by the connecting lines. 1 1.1 Problem Discussion Blockchain technology offers a solution to the problem of knowing that different databases are synchronized. The current financial market can be viewed in more detail in Figure 2 and the same market using an integrated blockchain can be seen in Figure 3. A permissioned blockchain has great potential in cutting down admin- istrative work. Although, there are technical difficulties that needs to be resolved before a revolution in the financial market can occur. One of these problems is that banks want to keep some data private from other actors in the blockchain. The original blockchain technology, created by the Bitcoin founder, provides trans- parency which is an unwanted attribute for the financial market. Figure 2: The current system for trading assets. The red, blue and orange repre- sents agents, principals and exchange platforms respectively. 1.2 Objective & Research Questions This thesis focuses on the Nordic capital market and discuss questions such as, how can distributed ledger technology store both public and private information. Other questions are, what data should be shared among participants and what data should be private, aspects regarding key management and technical methods for reporting to authorities. 2 Figure 3: The permissioned blockchain overview system that would replace the current system. The red, blue and orange represents agents, principals and ex- change platforms respectively. 1.3 Methodology The information gathering for this thesis has been done through extensive research about the subject as well as a literature review to understand current solutions to how to store both public and private information on the blockchain. This thesis also proposes guidelines of how Visigon can adapt their current blockchain plat- form to the capital market. The first topic of the thesis is to give the reader an overview of how Bitcoin's blockchain architecture works. It looks into topics such as the transaction process, consensus mechanism, how to handle forks, double spending attacks, immutability through hashes and permissioned chains. The following section is about advanced concepts such as smart contracts, Merkle-Patricia trie, different encryption meth- ods, key-management and Internet certificates. Thereon, a literature review of existing solutions on how to hide private information on the blockchain is intro- duced.