Fundamentals of Blockchain Technology
- 1. Blockchain 101 Brandon Bailey CEO/Co-Founder of NOLAscape brandon@nolascape.io
- 2. Objectives ● Build an intuitive understanding of Blockchain technology ● Understand the problems Blockchain seeks to address ● Ability to easily understand any new blockchain based technology
- 3. What is Blockchain? ● Literally nothing but a “chain of blocks”! ● Simple list of items where each item refers to the previous item ● 2 key properties: 1. Age of any item determined by position in the list 2. Each item’s history easily traced by traveling backward through the list
- 4. Why might a blockchain be useful? Let’s imagine a scenario… ● Immutability so that past records cannot be changed What do we require to ensure trust in our system? ● Verification of account balances ● Protection against copying or counterfeiting leading to Double Spending ● Authentication to prove ownership of assets
- 5. Verification of Balances No central authority so how do we make sure no one over spends? ● We need a ledger or list of transactions (Tx) to track who owns what over time ➢ For efficiency periodically group temporally adjacent transactions into a single unit or block ➢ Each block or list of Tx’s refers to the block that came immediately before it ● All transactions verified independently by all participants ● This list must be publicly available or distributed to everyone equally ● Radical departure from traditional privacy!
- 6. Double Spending Problem We have several BIG problems so far: 2. How can we come to a consensus or agreement? 1. How to decide who get to add a new block? 3. How can we prevent history from changing once we agree?
- 7. Double Spending: Who gets to make changes? ● Node must prove how much computing power or how many CPU’s it has ● Each node’s share of vote determined by processing power ● To protect “minority rights” we introduce a bit of luck So far we have a very democratic system so let’s vote! “One man, one vote” -> “One CPU, one vote” How can “one CPU, one vote” be enforced while remaining fair?
- 8. One CPU, One Vote Proof-of-Work = Guessing Game! Rules for Guessing Game: 1. Choose a number 1-10 2. Multiple guesses (one at a time) allowed 3. First to guess correct answer win Properties of the Guessing Game: 1. No better strategy than to guess randomly many times 2. Probability of winning proportional to speed of guessing
- 9. About the Graph7 6 5 4 3 2 1 0 Proof of Work: Hashing Each node proves completion of computational work by inverting a hash function Properties of Hash Functions: 1. Maps any size input to output of fixed size 2. One-way function3. Deterministic output but appears random 4. Easily
- 11. First node to provide a valid guess is allowed to add the next block Difficulty adjusts so that speed of block creation remains constant Block Reward given to block finder as incentive for completing work Consensus when each node independently verifies the block’s hash by adding it to the chain Proof of Work
- 12. About the Graph Lid est laborum dolo rumes fugats untras. Etharums ser quidem rerum facilis doloresLid est laborum dolo rumes fugats untras. Etharums ser quidem rerum facilis dolores Lid est laborum dolo rumes fugats untras. Etharums ser quidem rerum facilis doloresLid est laborum dolo rumes fugats untras. Etharums ser quidem rerum facilis dolores 7 6 5 4 3 2 1 0 7 6 5 4 3 2 1 0 Difficulty vs. BTC Price
- 13. About the Graph7 6 5 4 3 2 1 0 Double Spending: How do we agree on changes? - Chain with most PoW is definitive - All Tx’s in orphaned block sent back to unconfirmed or discarded What if 2 nodes simultaneously submit valid blocks? Temporary Chain Splits: - Caused when 2 valid blocks refer to the same previous block - Results in Double Spending since Tx’s in each block are included in both blocks - Longest chain rule resolves situation when next block arrives Longest Chain Rule:
- 14. Double Spending: How to prevent tampering? 1. To modify a block I must recompute its hash 2. But changing the hash of 1 block changes the hash of every following block 3. Since longest chain wins I must do more work than the entire network in the same time 4. Every time network adds a new block I fall further behind - Gambler’s Ruin Why require PoW at all? Surely there must be easier ways! Thus older blocks have (exponentially) greater assurances of immutability Consider the predicament of an attacker in PoW regime:
- 15. T/F - Does BTC guarantee with 100% certainty that no one can Double Spend? FALSE
- 16. We required a system that provides the following: ❖ Verification of Balances ➢ Provided through public blockchain ❖ Prevention of Double Spending ➢ Secured through PoW competition ❖ Prevention of Tampering ➢ PoW confirmations - Notice we still have not mentioned any particular currency - Also we have yet to provide provide authentication
- 17. About the Graph ● Oldest and perhaps simplest public blockchain ● Specified in 2008 by mysterious Satoshi Nakamoto ● Continuously operating since Jan. 2009 without any successful attacks on the network as a whole ● $100+ Billion Total Value (as of Oct. 2018) ● Supply capped at 21 million BTC ● Worth more than every other cryptocurrency combined (as of Oct. 2018) 7 6 5 4 3 2 1 0 7 6 5 4 3 2 1 0 Bitcoin Basics
- 18. ● Each UTXO is unique and has a definite indivisible value denominated in Satoshi (1 BTC = 100,000,000 Satoshis) ● UTXO’s used to facilitate transactions ● UTXO’s only unlocked with corresponding Private Key ● Set of all UTXO’s controlled by a single private key = Total Balance ● Set of all UTXO’s = Total Bitcoins in circulation UTXO’ s Unit of value in Bitcoin (BTC) called Unspent Transaction Outputs (UTXO’s)
- 19. ● Used as Input(s)/Output(s) of Transactions ● Multiple UTXO’s can be combined as inputs to transactions ● Input UTXO’s (+ fees) >= sum of Ouput UTXO’s ● Every transaction produces at least 1 UTXO controlled by recipient and at most 2 UTXO’s (1 for recipient, 1 for “change” returned to sender) ● One time use: Once a UTXO is “spent” it is deleted UTXO Mechanics
- 20. T/F - When a transaction is sent the input UTXO(s) are broken up and change returned to sender. FALSE
- 21. BTC Block Creation 1. New Tx “tweeted” out to all miner nodes 2. Nodes validate each Tx & gathers them into a block 3. Each node repeatedly hashes candidate blocks to find valid PoW 6. Nodes begin working on next block implicitly accepting previous new block by including its hash in next block (block created, on avg, every 10 mins.) 5. Nodes independently validate new block and all Tx’s in it 4. When valid PoW found, block tweeted to all nodes Let us trace a new Tx through the BTC Network:
- 22. Benefits: 1. Authentication - Ability to decrypt with Public Key implies only Private Key holder could have generated data 2. Integrity - If message changed in any way decryption will fail Transaction Creation: Public-key Cryptography ● Message encrypted with Private Key may ONLY be decrypted with corresponding Public Key Public-key cryptography: ● Random number generated called Private Key ● This number must be kept private! E.g. Password ● ECC algorithm used to generate a unique Public Key from Private Key ● Public Key may be shared. E.g. Username or wallet address
- 23. Transaction Creation 1. Tx Sender uses Private Key to unlock input UTXO(s) 3. Tx sender attaches receiver’s Public Key to signed Tx 2. Sender hashes Tx data and digitally signs Tx with Private Key
- 24. 1. Reject Tx if any input UTXO has been is used twice (2x Spending) 2. Reject Tx if any input UTXO never existed 3. Reject Tx if sum of input UTXO’s < sum of output UTXO’s Transaction Validation Every node independently checks each Tx for 20 criteria including:
- 25. Block Hashing ● Nonce appended to block data to prevent replay attack ● Block data + nonce must be < current difficulty level
- 27. Block Validation Every node independently checks each new block for 19 criteria including: 1. Must have at least 1 Tx in list of Tx’s2. Must have valid PoW3. Each Tx in list must be valid4. Max size of Block <= 1MB5. Verify previous block hash6. Verify Merkle root hash of
- 28. BTC Blockchain
- 29. BTC Pitfalls ● Gift and curse of immutability and irreversibility ● Private key based authentication ● Climate change and useless work ● Relatively long 10 minute confirmation time ● Illegal usage ● High fees
- 30. How to Get Involved ● ICO: Moderate/High Risk, High Potential Reward, High barrier for high quality ● dApp Development: Moderate Risk, Talent Rare/Expensive ● Mining: Less risk, (Nearly) as easy as Investing, Medium initial investment ● Investing/Speculating: High risk, Lowest barriers to entry From Least to Most Technical:
- 31. Blockchain Brandon Bailey CEO/Co-Founder of NOLAscape brandon@nolascape.io