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Introduction into blockchains and cryptocurrencies

Sergey Ivliev, profile picture
Sergey Ivliev

The document provides a comprehensive overview of blockchains and cryptocurrencies, detailing the digital assets ecosystem, key concepts such as Bitcoin, smart contracts, and DeFi, and the mechanisms of transaction processes. It discusses challenges like double spending and the evolution of blockchain technology, including the introduction of various consensus mechanisms and scaling solutions like the Lightning Network. Additionally, the document analyzes the use cases, market metrics, and the significance of decentralized financial systems in bypassing traditional intermediaries.

Technology
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Introduction to blockchains and cryptocurrencies Sergey Ivliev
• Digital assets ecosystem • Bitcoin • Other blockchains • Smart contracts • DeFi • Other DApps Agenda
Digital Assets Ecosystem
7 ~$265B MCap ~$8B 24h volume~2500 assets ~260 exchanges ~3M NFT-tokens Digital assets ecosystem Bitfinex hack SegWit2x/UASF Crypto winter Libra https://coinmarketcap.com/charts/
World money $ bln
Ecosystem overview • Custodial • Private • Hardware • Centralized • DEXes • Fiat on-ramps • ICO/STO • Stablecoins • DeFi • Collectibles • Bitcoin • Ripple • Monero • Ethereum • EOS • TRON • Bitmain • Nvidia • Infura • BloXroute
Bitcoin
"I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A" Milton Friedman, a Nobel Prize Laureate in Economics (1999)
• You are not able to physically give a coin or a bill to two people at the same time • Electronic payment system should be able to prevent double spending, because it is easy to copy electronic records • The centralized payment system is based on a trusted middleman (bank, central bank, PSP, etc.) The double spending problem
The challenge: • Develop a secure and reliable method for updating a public ledger of which there are myriad copies distributed throughout the world • Create the necessary incentives for users to contribute resources to verifying transactions The double spending problem
Centralized payment system Decentralized payment system Centralized vs. Decentralized
• Symmetric encryption (Diffie, Hellman, Merkle, 1975) • Asymmetric encryption (Rivest, Shamir, Adelman, 1977) • Blind Signature Technology (Chaum, 1989) • Digital Signatures (Schnorr, 1989), ECDSA (NIST, 2000) • HashCash, Proof-of-Work (Back, 1997) • Bit gold (Szabo, 1998) • Smart contracts (Szabo, 2003) History
The story behind https://bitcoin.org/bitcoin.pdf Bitcoin whitepaper 31 Oct 2008 Genesis block 3 January 2009 Bitcoin code released 9 January 2009 Pizza Day 22 May 2010
Step 1 — Agreement on transaction Alice is a private person who has bitcoins Bob is an entrepreneur who sells digital content online and accepts bitcoins Alice agreed with Bob to purchase a digital art object for 0.05 BTC How it works…
http://cointemporary.com
Step 2 — Creating a transaction message Alice creates a message that contains: • A link to previous transactions in which she received bitcoins • Recipient address (Bob's address) and • The amount to be paid ...and may contain other conditions (e.g. time delay) How it works…
Alice's private key L5Ptvbbh6hpXMChRoqLUQAzQn6YoV5Hpi97aGBbjTYfh837fCXp3 Alice's public key 025cdade7165c4683e968d6b66459d3c42aa26232e1a7f88d34d0bc283418dd741 Alice's wallet address 1DgM5xyFxUyAVrAhxR1KY2r5uyiGXrKmGc How it works…
Bob's wallet address 1KsGhiAotJxzRPH52EV25d2XFWkcv3bLCC How it works…
Step 2 — Creating a transaction message Inputs: • 0.1 BTC from Alice. Outputs: • 0.05 BTC to Bob • 0.0001 BTC is a fee for transaction validation • 0.0499 BTC is a change back to Alice's address How it works…
Inputs Outputs https://coinb.in How it works…
Outcome: transaction How it works…
Step 3 — Signing a transaction As soon as the message is created, Alice signs it to prove that she manages the sender's address. Alice encrypts the message with her private key. This message can be decrypted with a public key, which is also sent with the transaction. How it works…
https://coinb.in Outcome: signed transaction How it works…
Step 4 — Broadcasting Alice distributes her message over the network to validate. How it works… https://blockchain.info/address/1DgM5xyFxUyAVrAhxR1KY2r5uyiGXrKmGc
Validating nodes (miners) are organized into a peer-to-peer network. The message propagates along the fastest path from the node to its closest neighbors… How it works…
On average, 8-10 thousand full nodes are active daily How it works…
The first 1,000 nodes receive a transaction in 2 seconds on the average… How it works…
https://bitcoinchain.com/mempool/ The transaction is put on the waiting list (mempool) How it works…
The number of transactions in the mempool can be up to 20,000 or more How it works… https://www.blockchain.com/charts/mempool-count
Step 5 — Transaction verification (mining) Miners receive Alice's transaction and add it along with other transactions to the candidate block. Miners compete with each other who will verify the new block faster. Verification of the block means: • Validation of transactions in the block • Reaching consensus How it works…
Reaching consensus is a time-consuming process and requires from each miner to demonstrate computing resources, the so- called work (Proof of Work, PoW). How it works… Hashrate ~80 . 1018 H/s 500x top supercomputer
Introduction into blockchains and cryptocurrencies
How it works… Mining allows you to reach consensus on what transactions took place and in what order. When branching (forking), the chain will be selected, which has the largest amount of work for the verification, i.e. the longest one
Step 6 — Success Clara is a miner, who successfully verified the block with Alice's transaction, receives a reward for the extracted block (12.5 BTC), as well as a commission for the block's transactions. Clara spreads her output among other miners and they add this block to the chain. Bob receives confirmation that the payment has been sent by Alice and initiates the delivery. How it works…
How it works… The first 1,000 nodes receive a block in 1.1 seconds on the average…
Outcome Step 6 — Success How it works…
Viewing the transaction in the blockchain explorer by the hash number How it works…
The hashrate exceeds 80 million TH/s. Power consumption ~13.5 GWh Energy cost 13.5 GW * $0.05/KWh = $675k /hour ($5.9b /yr) Equipment replacement cost 6.4 mln S9 * $2000 = $12,8 b Mining Mining award for 6 blocks * 12.5 BTC = 75 BTC / hour Transaction fee for 6 blocks * 1400 tx * 0.00013 BTC = 1.1 BTC / hour Revenue of miners of 76.1 BTC * $10k ~ $761k / hour ($6.6b /yr)
Mining https://blockchain.info/pools Consolidation of miners into pools
12.5 BTC is a block award, 6 blocks per hour => 1,800 BTC are issued daily ($18m) Halving every ~4 years, maximum of 21 million BTC 17.89 million BTC issued => Mcap = $10k * 17.89 million = $178b Mining
Average transaction volume: ~$1 bln/day $73m (2015) $62m (2014) $40m (2013) $1.6m (2012) Metrics $158m (2016)$1.1m (2011) https://blockchain.info/charts/estimated-transaction-volume-usd?timespan=all $1b (2017) Max=$5.6bWU $0.2 bln/day (2016) Paypal $1.25 bln/day (Q3 2017) VISA $24 bln/day (2016) SWIFT $5 trln/day (2016) $1b (8m2019) $1b (2018)
Transaction rate: ~3.8 tps (max 7 tps) 125k (2015) 69k (2014) 53k (2013)23k (2012) Metrics 226k (2016) 5k (2011) https://blockchain.info/charts/n-transactions?timespan=all 285k 3.3 tps (2017) Max=425k 4.9 tps WU 9 tps (2016) SWIFT 130 tps (2016) Paypal 200 tps (2016) Visa 4470 tps (2017) 222k 2.57 tps (2018) 335k 3.9 tps (8m2018)
Metrics Average transaction fee: ~$1.5 WU >$10 (5-10%) Paypal $2.9+0.3% VISA ~0.2% SWIFT $20-40 https://bitcoinfees.info/
Use cases Alternative payment system: ~600k daily active addresses https://bitinfocharts.com/comparison/bitcoin-activeaddresses.html
Use cases Store of value Bitcoin Gold Cash Bank deposit Durable Portable Fungible Verifiable Divisible Scarce Established history Censorship resistant
Use cases Non-correlated asset https://coinmetrics.io/correlations/#assets=btc-gld,btc-s&p_period=90
Use cases Non-correlated asset https://www.cmegroup.com/trading/ equity-index/us-index/bitcoin.html CME futures market ~$100-500m / day
Use cases Escape from the devaluation of the national currency https://coin.dance/volume/localbitcoins
Use cases https://coin.dance/statshttps://trends.google.com/trends/explore?q=bitcoin New generation money (57% under 34)
Use cases Purchase of illegal goods (~10% of payments) https://papers.ssrn.com/abstract=3102645 Foley, Sean et al. Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies? (January 15, 2018).
Use cases Gateway to crypto + unit of measure for crypto-assets https://coinlib.io/exchange/bittrex
Use cases https://www.ezonomics.com/ing_international_surveys/mobile-banking-2018- cryptocurrency/
Use cases
• Killer app – money • Open protocol, everyone can participate • Operates without trusted parties, censorship is not possible • Strong cryptography and PoW energy secure network • Transactions are (pseudo-)anonymous • Fungible, divisible, portable, scarce (!) • High price volatility: >3% / day • Poorly scalable: <10 tps Summary
Other blockchains
GHOST Y. Sompolinsky, A.Zohar “Secure High-Rate Transaction Processing in Bitcoin”, 2013
SPECTRE/PHANTOM Y. Sompolinsky, A.Zohar “PHANTOM: A Scalable BlockDAG protocol”, 2017
Proof-of-Stake • NXT (2012) • Ouroboros (Cardano) • Casper (Ethereum) • Algorand • Based on staking • Lower energy consumption • Wider attack surface
Proof-of-Identity • Idena (2019) • Time-synced Turing test • 1 human = 1 vote • Use cases: governance, serverless messenger, direct marketing Filter for Live Intelligent People (flip)
Horizontal scaling • Big blockers: Bitcoin Cash, DASH, Waves (NG) 100 tps • DAG: Byteball 17 tps, IOTA 100 tps, Nano 300 tps • Committee: Algorand 1k tps • Sharding: Zilliqa 2.5k tps • DPoS: Bitshares, EOS 8k tps • aBFT: Hedera Hashgraph 200k tps
Permissioned blockchains Permissionless Permissioned Bitcoin, Ethereum, ZCash,… Fabric, Quorum, Corda, Libra Open access (PoW, PoS, …) Membership (consortium) Many validators Few validators Wide range of users Small range of users (B2B) Relatively low performance Relatively high performance Managed by ecosystem Managed by stakeholders “Internet” “Intranet” The subject of this course is open (public) protocols and crypto markets
Vertical scaling Lightning Network • Micro-payment channel network (Level 2) • Many hubs with many open channels • A channel is a multisig address with a frozen collateral • Micro-payments are made as the exchange of commitment transactions (off-chain), payments can be locked between hubs • Any party can close the channel by publishing the last transaction and receiving the balance to his or her address Joseph Poon, Thaddeus Dryja. The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments, 14 Jan 2016 https://lightning.network/lightning-network-paper.pdf
Vertical scaling Advantages: • The transactions are carried out in milliseconds • Safety is guaranteed by blockchain • Does not require trust between the participants • Scalability is up to 1 million per second or more • Low transaction costs • The possibility to carry out micro-transactions (<$1) • Crosschain atomic swaps, non-custodial DvP trading
https://explorer.acinq.co Vertical scaling Lightning Network
Vertical scaling https://bitcoinvisuals.com/lightning Lightning network: <$10 mln capacity
Vertical scaling Disadvantages: • Opening and re-opening channels requires transaction costs • The hub needs to keep the frozen capital in the channels https://www.trustnodes.com/2019/08/20/guy-makes-20-a-month-for-locking-5- million-worth-of-bitcoin-on-the-lightning-network • The average amount of collateral in the channels is small ($20), payments over $5 can be a problem • "Sending payments using the Lightning Network is cheaper than the regular Bitcoin network, but suffers from routing errors and wallet bugs that make it impractical even for highly technical users” https://news.bitcoin.com/a-look- at-what-it-was-like-to-operate-the-lightning-networks-largest-node/
• Bank of England – The emergence of digital currencies (2014) http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/ qb14q3digitalcurrenciesbitcoin1.pdf • WEF – The future of financial infrastructure (Aug 2016) http://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf • D.Fantazzini, E.Nigmatullin, V.Sukhanovskaya, S.Ivliev. "Everything you always wanted to know about bitcoin modelling but were afraid to ask". Applied Econometrics (2017) https://mpra.ub.uni-muenchen.de/71946/ • European Parliament. “Virtual currencies and central banks monetary policy: challenges ahead” (2018) http://www.europarl.europa.eu/cmsdata/149900/CASE_FINAL%20publication.pdf • J.Song. “Why blockchain is hard” (2018) https://medium.com/@jimmysong/why- blockchain-is-hard-60416ea4c5c • http://www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy- Statements/Speeches/2018/Crypto-Tokens-The-Good-The-Bad-and-The-Ugly.aspx Useful links
Smart Contracts
Smart contracts Unlike Bitcoin, which stores only the transaction log (UTXO = Unspent Transactions Output), Ethereum stores both transactions and ledger states. In addition to ledger state (balances), Ethereum can store the state of smart contract variables. Technical details https://hackernoon.com/getting-deep- into-ethereum-how-data-is-stored-in- ethereum-e3f669d96033
Smart contracts Smart contracts are created in a high- level language (Solidity), they are then compiled into low-level machine code (bytecode). Bytecode is loaded into Ethereum by sending a transaction of a special type using "Contract creation". The loaded smart contracts can be performed on the Ethereum Virtual Machine (EVM). https://etherscan.io/addres s/0xbdf6a89f7c50b15d6b9 b6f35dba58fc240c1bb89# code
Smart contracts The Ethereum Virtual Machine (EVM) is a decentralized computer that can process smart contracts, confirming the changed state of variables on the blockchain. All EVM nodes perform smart contract and validate a definite output.
Smart contracts The code is executed up to 100 times slower than locally The cost of using memory and storage is at the level of 50-ies of the 20th century The outputs can be changed in the first 60 seconds
Smart contracts It is the world's first single computer for the entire planet It cannot be stopped and it is independent of states and corporations Available wherever there is Internet It can perform any calculation that is possible to perform (Turing completeness), including infinite loops
Smart contracts Gas is a metric to evaluate and limit the use of resources for the EVM. Each operation (command, variable, etc.) requires a certain amount of gas. The more there are calculations and storage use, the more gas is required. When calling any smart contract function, the sender should specify GasLimit and GasPrice. If the transaction goes out of GasLimit, it will fail, but a fee will be charged to the sender: Fee = Amount of Gas * GasPrice
Useful links Minimum viable token Crowdfunding DAO (Decentralized Autonomous Organizations) Dapps (distributed applications) https://ethereum.org/token https://ethereum.org/crowdsale https://ethereum.org/dao https://www.stateofthedapps.com/
DeFi
#DeFi Decentralized Finance (#DeFi) is the movement that leverages open source software and decentralized networks to transform traditional financial products into trustless and transparent protocols that operate without unnecessary intermediaries. Among its core principles are transparency, accessibility and financial inclusion. Decentralized Finance participants are able to reduce counterparty risk via cryptographic verification on public blockchains.
#DeFi • Payments (cryptocurrencies, stablecoins) • Funding (ICO, IEO, STO) • Borrowing • Lending • Decentralized exchanges (DEX) • Prediction markets • Asset management / Investments • Insurance #DeFi
Tokens ERC20 Tokens ERC = Ethereum Request for Comment Standard interface to call such functions as checking balance, transfer and withdrawal of tokens https://github.com/ethereum/ei ps/issues/20 The vast majority of Ethereum tokens is compatible with this standard Matrix of balances: {0x1, 100; 0x2, 250; 0x3, 0,….} Token transfer function: transferFrom (0x2, 0x3, 100) will change the state of the balances variable as follows: It was {0x1, 100; 0x2, 250; 0x3, 0,….} It is now {0x1, 100; 0x2, 150; 0x3, 100,….} Balance inquiry function: balanceOf(0x2) will give 250 back
Stablecoins Stablecoins combined: ~$5 bln supply https://coinmetrics.io/charts/#assets=dai,gusd,pax,usdc,tusd,usdteth,usdt_log=f alse_left=SplyCur_zoom=1508378538572.8643,1571795370814.0703
Stablecoins Ex-USDT stablecoins: ~$1 bln https://coinmetrics.io/charts/#assets=dai,gusd,pax,usdc,tusd,usdteth,usdt_log=f alse_left=SplyCur_zoom=1508378538572.8643,1571795370814.0703
Funding 5250 ICO (583 in 2019) 1722 successful (33% success) $26.4b raised ($3.3b in 2019) https://www.inwara.com/report/ blockchain-crypto-report-h1- 2019 https://icobench.com/reports/IC Obench_ICO_Market_Analysis _June_2019.pdf ICO: party is not over!
Funding $37m (2018) $1.5b (6m2019) https://icobench.com/reports/ICObench_ICO_Market _Analysis_June_2019.pdf Exchanges in the ICO game: >$1.5b raised in 2019
Funding 2 STO $22m (2017) 28 STO $442m (2018) https://cryptovalley.swiss/wp-content/uploads/ch- 20190308-strategyand-ico-sto-report-q1-2019.pdf https://www.inwara.com/report/blockchain-crypto- report-h1-2019 57 STO $420m (5m2019) STO ramps up: >$400m in 2019
Funding https://www.sec.gov/news/press- release/2019-150 Happy founders
Funding https://twitter.com/lawmaster/status/1159130591209689088 Angry investors Median ROI -87% <11% ICOs ROI>0% Top-5 ICOs: - BNB (5,902%) - IOTA (1,744%) - Ethereum (1,339%) - Lambda (962%) - ChainLink (668%)
#DeFi on Bitcoin https://defipulse.com/lightning-network
#DeFi on Ethereum https://defipulse.com/ ~$450m locked in Ethereum DeFi
Dai: Stablecoin + Borrowing MakerDAO $78 mln Dai issued 1.3 mln ETH locked in collateral (1.29% of ETH) Collateral ratio 320% 13.9k CDPs 105k Dai Holders ~20% lending rate https://mkr.tools/system
xDai: Stablecoin Payments xDai Sidechain with 4 validators 2-way bridge to Ethereum (POA) 5s block time Capacity up to 1500 tps 13k xDai addresses <$0.001 fee per tx paid in Dai ZK for privacy (AZTEC) https://poa.network/xdai
Borrowing & Lending Compound, InstaDapp, Dharma, dYdX, Nuo $129m value locked 396k ETH locked in compound as collateral (0.37% of ETH)
Borrowing & Lending Compound Deposits are tokenized as cTokens (e.g.cDai) Rate of cToken to underlying asset varies with the interest rate Interest rate varies dynamically with supply & demand Interest accrued ~15s
Borrowing & Lending https://loanscan.io/reference-rates?interval=3m
Decentralized exchanges Uniswap, Bancor, Kyber Onchain orderbook Zero-KYC Delivery vs. payment The spot-swaps of ERC20 tokens via the underlying asset (ETH, BNC) Automated price reserves for liquidity provision ~$3m/day traded volume
Decentralized exchanges
Asset management Set protocol Tokenized strategies Non-custodial baskets of assets (Dai, WBTC) Rebalancing with modified dutch auction Integration with DEX
Aggregators Zerion Access to various protocols DeFi Portfolio management Others: InstaDapp, Settle
Asset management
Summary • Bitcoin wholesale payment and SoV (aka digital gold) is a strong use case • Ethereum DeFi is vibrant, but still a proof of concept • Advantages: - Inclusive (zero KYC, no censorship) - Non-custodial (no counterparty credit risk) - Transparent and price efficient - Global, low cost, fast finality • Disadvantages: - Overcollateralized (doesn’t help unbanked to get loans) - Technical barrier (e.g. Metamask, keys, …) - Bridge problem - Still in beta
Useful links A curated list of awesome decentralized finance projects, software, and resources. https://github.com/ong/awesome-decentralized-finance DeFi metrics https://defipulse.com/ Binance Research report on DeFi https://info.binance.com/en/research/marketresearch/defi-1.html
Other DApps
Collectibles Cryptokitties Digital collection Slowed down the Ethereum network: 14k DAU, $12 million (11.12.17) The collection includes over 900 thousand tokens The ERC-721 standard (Non- fungible token, NFT) for digital assets created VC (2018): $12 million (a16z) Dragon 600 ETH (~$170,000)
Markets > 1.2 million token cryptocollectibles (game characters, digital art, etc.) VC (2018): $2 million (YC)
Prediction markets Augur, Stox Betting on the outcome of sports, political and economic events Bets and payouts in tokens and ETH Competitors: Augur, Gnosis ICO (2018): 147k ETH (~$33m, 34 hours)
Social media Peepeth Distributed Twitter No advertising No censorship No ability to change or delete anything Funding cancelled
Fog Computing SONM p2p-marketplace of computing capacity Machine learning Video rendering Web hosting service Scientific computing and so on Payment in SONM tokens ICO (2017): $42 million (4 days, 8,774 participants)
Decentralized storage STORJ p2p-marketplace of disk space Backups, archives Media content Transfer of large files Logs 19k farmers, 20k API users Payment in STORJ tokens ICO (2017): $30 million (7 days)
Governance Aragon DAO/Digital democracy Unstoppable organizations Voting Multisignature wallet Dividend distribution
Digital identity uPort Self-sovereign identity (SSID) Claims are stored on the blockchain Recovery in case of key loss Integration with the state ID (Zug) Similar projects: Civic, Self-Key
Decentralized applications Summary: • 2,000 dapps and several millions of smart contracts on Ethereum alone • Most popular dapps are DeFi, collectibles, games and gambling • The total audience of dapps is not very significant yet (~10-50k /day) • Biggest issues poor user experience, poor token economy, poor scalability
Thank you! ivliev@gmail.com

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Introduction into blockchains and cryptocurrencies

  • 1. Introduction to blockchains and cryptocurrencies Sergey Ivliev
  • 2. • Digital assets ecosystem • Bitcoin • Other blockchains • Smart contracts • DeFi • Other DApps Agenda
  • 4. 7 ~$265B MCap ~$8B 24h volume~2500 assets ~260 exchanges ~3M NFT-tokens Digital assets ecosystem Bitfinex hack SegWit2x/UASF Crypto winter Libra https://coinmarketcap.com/charts/
  • 6. Ecosystem overview • Custodial • Private • Hardware • Centralized • DEXes • Fiat on-ramps • ICO/STO • Stablecoins • DeFi • Collectibles • Bitcoin • Ripple • Monero • Ethereum • EOS • TRON • Bitmain • Nvidia • Infura • BloXroute
  • 8. "I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A" Milton Friedman, a Nobel Prize Laureate in Economics (1999)
  • 9. • You are not able to physically give a coin or a bill to two people at the same time • Electronic payment system should be able to prevent double spending, because it is easy to copy electronic records • The centralized payment system is based on a trusted middleman (bank, central bank, PSP, etc.) The double spending problem
  • 10. The challenge: • Develop a secure and reliable method for updating a public ledger of which there are myriad copies distributed throughout the world • Create the necessary incentives for users to contribute resources to verifying transactions The double spending problem
  • 11. Centralized payment system Decentralized payment system Centralized vs. Decentralized
  • 12. • Symmetric encryption (Diffie, Hellman, Merkle, 1975) • Asymmetric encryption (Rivest, Shamir, Adelman, 1977) • Blind Signature Technology (Chaum, 1989) • Digital Signatures (Schnorr, 1989), ECDSA (NIST, 2000) • HashCash, Proof-of-Work (Back, 1997) • Bit gold (Szabo, 1998) • Smart contracts (Szabo, 2003) History
  • 13. The story behind https://bitcoin.org/bitcoin.pdf Bitcoin whitepaper 31 Oct 2008 Genesis block 3 January 2009 Bitcoin code released 9 January 2009 Pizza Day 22 May 2010
  • 14. Step 1 — Agreement on transaction Alice is a private person who has bitcoins Bob is an entrepreneur who sells digital content online and accepts bitcoins Alice agreed with Bob to purchase a digital art object for 0.05 BTC How it works…
  • 16. Step 2 — Creating a transaction message Alice creates a message that contains: • A link to previous transactions in which she received bitcoins • Recipient address (Bob's address) and • The amount to be paid ...and may contain other conditions (e.g. time delay) How it works…
  • 17. Alice's private key L5Ptvbbh6hpXMChRoqLUQAzQn6YoV5Hpi97aGBbjTYfh837fCXp3 Alice's public key 025cdade7165c4683e968d6b66459d3c42aa26232e1a7f88d34d0bc283418dd741 Alice's wallet address 1DgM5xyFxUyAVrAhxR1KY2r5uyiGXrKmGc How it works…
  • 19. Step 2 — Creating a transaction message Inputs: • 0.1 BTC from Alice. Outputs: • 0.05 BTC to Bob • 0.0001 BTC is a fee for transaction validation • 0.0499 BTC is a change back to Alice's address How it works…
  • 22. Step 3 — Signing a transaction As soon as the message is created, Alice signs it to prove that she manages the sender's address. Alice encrypts the message with her private key. This message can be decrypted with a public key, which is also sent with the transaction. How it works…
  • 24. Step 4 — Broadcasting Alice distributes her message over the network to validate. How it works… https://blockchain.info/address/1DgM5xyFxUyAVrAhxR1KY2r5uyiGXrKmGc
  • 25. Validating nodes (miners) are organized into a peer-to-peer network. The message propagates along the fastest path from the node to its closest neighbors… How it works…
  • 26. On average, 8-10 thousand full nodes are active daily How it works…
  • 27. The first 1,000 nodes receive a transaction in 2 seconds on the average… How it works…
  • 28. https://bitcoinchain.com/mempool/ The transaction is put on the waiting list (mempool) How it works…
  • 29. The number of transactions in the mempool can be up to 20,000 or more How it works… https://www.blockchain.com/charts/mempool-count
  • 30. Step 5 — Transaction verification (mining) Miners receive Alice's transaction and add it along with other transactions to the candidate block. Miners compete with each other who will verify the new block faster. Verification of the block means: • Validation of transactions in the block • Reaching consensus How it works…
  • 31. Reaching consensus is a time-consuming process and requires from each miner to demonstrate computing resources, the so- called work (Proof of Work, PoW). How it works… Hashrate ~80 . 1018 H/s 500x top supercomputer
  • 33. How it works… Mining allows you to reach consensus on what transactions took place and in what order. When branching (forking), the chain will be selected, which has the largest amount of work for the verification, i.e. the longest one
  • 34. Step 6 — Success Clara is a miner, who successfully verified the block with Alice's transaction, receives a reward for the extracted block (12.5 BTC), as well as a commission for the block's transactions. Clara spreads her output among other miners and they add this block to the chain. Bob receives confirmation that the payment has been sent by Alice and initiates the delivery. How it works…
  • 35. How it works… The first 1,000 nodes receive a block in 1.1 seconds on the average…
  • 36. Outcome Step 6 — Success How it works…
  • 37. Viewing the transaction in the blockchain explorer by the hash number How it works…
  • 38. The hashrate exceeds 80 million TH/s. Power consumption ~13.5 GWh Energy cost 13.5 GW * $0.05/KWh = $675k /hour ($5.9b /yr) Equipment replacement cost 6.4 mln S9 * $2000 = $12,8 b Mining Mining award for 6 blocks * 12.5 BTC = 75 BTC / hour Transaction fee for 6 blocks * 1400 tx * 0.00013 BTC = 1.1 BTC / hour Revenue of miners of 76.1 BTC * $10k ~ $761k / hour ($6.6b /yr)
  • 40. 12.5 BTC is a block award, 6 blocks per hour => 1,800 BTC are issued daily ($18m) Halving every ~4 years, maximum of 21 million BTC 17.89 million BTC issued => Mcap = $10k * 17.89 million = $178b Mining
  • 41. Average transaction volume: ~$1 bln/day $73m (2015) $62m (2014) $40m (2013) $1.6m (2012) Metrics $158m (2016)$1.1m (2011) https://blockchain.info/charts/estimated-transaction-volume-usd?timespan=all $1b (2017) Max=$5.6bWU $0.2 bln/day (2016) Paypal $1.25 bln/day (Q3 2017) VISA $24 bln/day (2016) SWIFT $5 trln/day (2016) $1b (8m2019) $1b (2018)
  • 42. Transaction rate: ~3.8 tps (max 7 tps) 125k (2015) 69k (2014) 53k (2013)23k (2012) Metrics 226k (2016) 5k (2011) https://blockchain.info/charts/n-transactions?timespan=all 285k 3.3 tps (2017) Max=425k 4.9 tps WU 9 tps (2016) SWIFT 130 tps (2016) Paypal 200 tps (2016) Visa 4470 tps (2017) 222k 2.57 tps (2018) 335k 3.9 tps (8m2018)
  • 43. Metrics Average transaction fee: ~$1.5 WU >$10 (5-10%) Paypal $2.9+0.3% VISA ~0.2% SWIFT $20-40 https://bitcoinfees.info/
  • 44. Use cases Alternative payment system: ~600k daily active addresses https://bitinfocharts.com/comparison/bitcoin-activeaddresses.html
  • 45. Use cases Store of value Bitcoin Gold Cash Bank deposit Durable Portable Fungible Verifiable Divisible Scarce Established history Censorship resistant
  • 48. Use cases Escape from the devaluation of the national currency https://coin.dance/volume/localbitcoins
  • 50. Use cases Purchase of illegal goods (~10% of payments) https://papers.ssrn.com/abstract=3102645 Foley, Sean et al. Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies? (January 15, 2018).
  • 51. Use cases Gateway to crypto + unit of measure for crypto-assets https://coinlib.io/exchange/bittrex
  • 54. • Killer app – money • Open protocol, everyone can participate • Operates without trusted parties, censorship is not possible • Strong cryptography and PoW energy secure network • Transactions are (pseudo-)anonymous • Fungible, divisible, portable, scarce (!) • High price volatility: >3% / day • Poorly scalable: <10 tps Summary
  • 56. GHOST Y. Sompolinsky, A.Zohar “Secure High-Rate Transaction Processing in Bitcoin”, 2013
  • 57. SPECTRE/PHANTOM Y. Sompolinsky, A.Zohar “PHANTOM: A Scalable BlockDAG protocol”, 2017
  • 58. Proof-of-Stake • NXT (2012) • Ouroboros (Cardano) • Casper (Ethereum) • Algorand • Based on staking • Lower energy consumption • Wider attack surface
  • 59. Proof-of-Identity • Idena (2019) • Time-synced Turing test • 1 human = 1 vote • Use cases: governance, serverless messenger, direct marketing Filter for Live Intelligent People (flip)
  • 60. Horizontal scaling • Big blockers: Bitcoin Cash, DASH, Waves (NG) 100 tps • DAG: Byteball 17 tps, IOTA 100 tps, Nano 300 tps • Committee: Algorand 1k tps • Sharding: Zilliqa 2.5k tps • DPoS: Bitshares, EOS 8k tps • aBFT: Hedera Hashgraph 200k tps
  • 61. Permissioned blockchains Permissionless Permissioned Bitcoin, Ethereum, ZCash,… Fabric, Quorum, Corda, Libra Open access (PoW, PoS, …) Membership (consortium) Many validators Few validators Wide range of users Small range of users (B2B) Relatively low performance Relatively high performance Managed by ecosystem Managed by stakeholders “Internet” “Intranet” The subject of this course is open (public) protocols and crypto markets
  • 62. Vertical scaling Lightning Network • Micro-payment channel network (Level 2) • Many hubs with many open channels • A channel is a multisig address with a frozen collateral • Micro-payments are made as the exchange of commitment transactions (off-chain), payments can be locked between hubs • Any party can close the channel by publishing the last transaction and receiving the balance to his or her address Joseph Poon, Thaddeus Dryja. The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments, 14 Jan 2016 https://lightning.network/lightning-network-paper.pdf
  • 63. Vertical scaling Advantages: • The transactions are carried out in milliseconds • Safety is guaranteed by blockchain • Does not require trust between the participants • Scalability is up to 1 million per second or more • Low transaction costs • The possibility to carry out micro-transactions (<$1) • Crosschain atomic swaps, non-custodial DvP trading
  • 66. Vertical scaling Disadvantages: • Opening and re-opening channels requires transaction costs • The hub needs to keep the frozen capital in the channels https://www.trustnodes.com/2019/08/20/guy-makes-20-a-month-for-locking-5- million-worth-of-bitcoin-on-the-lightning-network • The average amount of collateral in the channels is small ($20), payments over $5 can be a problem • "Sending payments using the Lightning Network is cheaper than the regular Bitcoin network, but suffers from routing errors and wallet bugs that make it impractical even for highly technical users” https://news.bitcoin.com/a-look- at-what-it-was-like-to-operate-the-lightning-networks-largest-node/
  • 67. • Bank of England – The emergence of digital currencies (2014) http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/ qb14q3digitalcurrenciesbitcoin1.pdf • WEF – The future of financial infrastructure (Aug 2016) http://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf • D.Fantazzini, E.Nigmatullin, V.Sukhanovskaya, S.Ivliev. "Everything you always wanted to know about bitcoin modelling but were afraid to ask". Applied Econometrics (2017) https://mpra.ub.uni-muenchen.de/71946/ • European Parliament. “Virtual currencies and central banks monetary policy: challenges ahead” (2018) http://www.europarl.europa.eu/cmsdata/149900/CASE_FINAL%20publication.pdf • J.Song. “Why blockchain is hard” (2018) https://medium.com/@jimmysong/why- blockchain-is-hard-60416ea4c5c • http://www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy- Statements/Speeches/2018/Crypto-Tokens-The-Good-The-Bad-and-The-Ugly.aspx Useful links
  • 69. Smart contracts Unlike Bitcoin, which stores only the transaction log (UTXO = Unspent Transactions Output), Ethereum stores both transactions and ledger states. In addition to ledger state (balances), Ethereum can store the state of smart contract variables. Technical details https://hackernoon.com/getting-deep- into-ethereum-how-data-is-stored-in- ethereum-e3f669d96033
  • 70. Smart contracts Smart contracts are created in a high- level language (Solidity), they are then compiled into low-level machine code (bytecode). Bytecode is loaded into Ethereum by sending a transaction of a special type using "Contract creation". The loaded smart contracts can be performed on the Ethereum Virtual Machine (EVM). https://etherscan.io/addres s/0xbdf6a89f7c50b15d6b9 b6f35dba58fc240c1bb89# code
  • 71. Smart contracts The Ethereum Virtual Machine (EVM) is a decentralized computer that can process smart contracts, confirming the changed state of variables on the blockchain. All EVM nodes perform smart contract and validate a definite output.
  • 72. Smart contracts The code is executed up to 100 times slower than locally The cost of using memory and storage is at the level of 50-ies of the 20th century The outputs can be changed in the first 60 seconds
  • 73. Smart contracts It is the world's first single computer for the entire planet It cannot be stopped and it is independent of states and corporations Available wherever there is Internet It can perform any calculation that is possible to perform (Turing completeness), including infinite loops
  • 74. Smart contracts Gas is a metric to evaluate and limit the use of resources for the EVM. Each operation (command, variable, etc.) requires a certain amount of gas. The more there are calculations and storage use, the more gas is required. When calling any smart contract function, the sender should specify GasLimit and GasPrice. If the transaction goes out of GasLimit, it will fail, but a fee will be charged to the sender: Fee = Amount of Gas * GasPrice
  • 75. Useful links Minimum viable token Crowdfunding DAO (Decentralized Autonomous Organizations) Dapps (distributed applications) https://ethereum.org/token https://ethereum.org/crowdsale https://ethereum.org/dao https://www.stateofthedapps.com/
  • 76. DeFi
  • 77. #DeFi Decentralized Finance (#DeFi) is the movement that leverages open source software and decentralized networks to transform traditional financial products into trustless and transparent protocols that operate without unnecessary intermediaries. Among its core principles are transparency, accessibility and financial inclusion. Decentralized Finance participants are able to reduce counterparty risk via cryptographic verification on public blockchains.
  • 78. #DeFi • Payments (cryptocurrencies, stablecoins) • Funding (ICO, IEO, STO) • Borrowing • Lending • Decentralized exchanges (DEX) • Prediction markets • Asset management / Investments • Insurance #DeFi
  • 79. Tokens ERC20 Tokens ERC = Ethereum Request for Comment Standard interface to call such functions as checking balance, transfer and withdrawal of tokens https://github.com/ethereum/ei ps/issues/20 The vast majority of Ethereum tokens is compatible with this standard Matrix of balances: {0x1, 100; 0x2, 250; 0x3, 0,….} Token transfer function: transferFrom (0x2, 0x3, 100) will change the state of the balances variable as follows: It was {0x1, 100; 0x2, 250; 0x3, 0,….} It is now {0x1, 100; 0x2, 150; 0x3, 100,….} Balance inquiry function: balanceOf(0x2) will give 250 back
  • 80. Stablecoins Stablecoins combined: ~$5 bln supply https://coinmetrics.io/charts/#assets=dai,gusd,pax,usdc,tusd,usdteth,usdt_log=f alse_left=SplyCur_zoom=1508378538572.8643,1571795370814.0703
  • 81. Stablecoins Ex-USDT stablecoins: ~$1 bln https://coinmetrics.io/charts/#assets=dai,gusd,pax,usdc,tusd,usdteth,usdt_log=f alse_left=SplyCur_zoom=1508378538572.8643,1571795370814.0703
  • 82. Funding 5250 ICO (583 in 2019) 1722 successful (33% success) $26.4b raised ($3.3b in 2019) https://www.inwara.com/report/ blockchain-crypto-report-h1- 2019 https://icobench.com/reports/IC Obench_ICO_Market_Analysis _June_2019.pdf ICO: party is not over!
  • 86. Funding https://twitter.com/lawmaster/status/1159130591209689088 Angry investors Median ROI -87% <11% ICOs ROI>0% Top-5 ICOs: - BNB (5,902%) - IOTA (1,744%) - Ethereum (1,339%) - Lambda (962%) - ChainLink (668%)
  • 89. Dai: Stablecoin + Borrowing MakerDAO $78 mln Dai issued 1.3 mln ETH locked in collateral (1.29% of ETH) Collateral ratio 320% 13.9k CDPs 105k Dai Holders ~20% lending rate https://mkr.tools/system
  • 90. xDai: Stablecoin Payments xDai Sidechain with 4 validators 2-way bridge to Ethereum (POA) 5s block time Capacity up to 1500 tps 13k xDai addresses <$0.001 fee per tx paid in Dai ZK for privacy (AZTEC) https://poa.network/xdai
  • 91. Borrowing & Lending Compound, InstaDapp, Dharma, dYdX, Nuo $129m value locked 396k ETH locked in compound as collateral (0.37% of ETH)
  • 92. Borrowing & Lending Compound Deposits are tokenized as cTokens (e.g.cDai) Rate of cToken to underlying asset varies with the interest rate Interest rate varies dynamically with supply & demand Interest accrued ~15s
  • 94. Decentralized exchanges Uniswap, Bancor, Kyber Onchain orderbook Zero-KYC Delivery vs. payment The spot-swaps of ERC20 tokens via the underlying asset (ETH, BNC) Automated price reserves for liquidity provision ~$3m/day traded volume
  • 96. Asset management Set protocol Tokenized strategies Non-custodial baskets of assets (Dai, WBTC) Rebalancing with modified dutch auction Integration with DEX
  • 97. Aggregators Zerion Access to various protocols DeFi Portfolio management Others: InstaDapp, Settle
  • 99. Summary • Bitcoin wholesale payment and SoV (aka digital gold) is a strong use case • Ethereum DeFi is vibrant, but still a proof of concept • Advantages: - Inclusive (zero KYC, no censorship) - Non-custodial (no counterparty credit risk) - Transparent and price efficient - Global, low cost, fast finality • Disadvantages: - Overcollateralized (doesn’t help unbanked to get loans) - Technical barrier (e.g. Metamask, keys, …) - Bridge problem - Still in beta
  • 100. Useful links A curated list of awesome decentralized finance projects, software, and resources. https://github.com/ong/awesome-decentralized-finance DeFi metrics https://defipulse.com/ Binance Research report on DeFi https://info.binance.com/en/research/marketresearch/defi-1.html
  • 102. Collectibles Cryptokitties Digital collection Slowed down the Ethereum network: 14k DAU, $12 million (11.12.17) The collection includes over 900 thousand tokens The ERC-721 standard (Non- fungible token, NFT) for digital assets created VC (2018): $12 million (a16z) Dragon 600 ETH (~$170,000)
  • 103. Markets > 1.2 million token cryptocollectibles (game characters, digital art, etc.) VC (2018): $2 million (YC)
  • 104. Prediction markets Augur, Stox Betting on the outcome of sports, political and economic events Bets and payouts in tokens and ETH Competitors: Augur, Gnosis ICO (2018): 147k ETH (~$33m, 34 hours)
  • 105. Social media Peepeth Distributed Twitter No advertising No censorship No ability to change or delete anything Funding cancelled
  • 106. Fog Computing SONM p2p-marketplace of computing capacity Machine learning Video rendering Web hosting service Scientific computing and so on Payment in SONM tokens ICO (2017): $42 million (4 days, 8,774 participants)
  • 107. Decentralized storage STORJ p2p-marketplace of disk space Backups, archives Media content Transfer of large files Logs 19k farmers, 20k API users Payment in STORJ tokens ICO (2017): $30 million (7 days)
  • 109. Digital identity uPort Self-sovereign identity (SSID) Claims are stored on the blockchain Recovery in case of key loss Integration with the state ID (Zug) Similar projects: Civic, Self-Key
  • 110. Decentralized applications Summary: • 2,000 dapps and several millions of smart contracts on Ethereum alone • Most popular dapps are DeFi, collectibles, games and gambling • The total audience of dapps is not very significant yet (~10-50k /day) • Biggest issues poor user experience, poor token economy, poor scalability