Introduction to Blockchain
- 1. 1 Demystifying Blockchain Shyam Kamadolli Managing Partner LinkedIn: www.linkedin.com/in/shyam Twitter: @kamadoll
- 2. 2© 2018, Shyam Kamadolli, AVG Blockchain Fund What is: BITCOIN? A DISTRIBUTED LEDGER? A CRYPTOCURRENCY? BLOCKCHAIN?
- 3. 3 Blockchain is a new technology paradigm; Bitcoin is one of its applications (just the first among many) © 2018, Shyam Kamadolli, AVG Blockchain Fund Internet SMTP (E-Mail) HTTP (Web Browsing) Blockchain Monero Ethereum Distributed Apps Distributed Apps Distributed Apps Protocols Global network of connected computers Applications EOS Bitcoin G-Mail Outlook Chrome Safari • Blockchain is a collection of protocols and cryptographic techniques to create a new form of transactional computing (more on this later) • Bitcoin uses Blockchain technology to securely move economic value from one person/place to another: a digital currency • Bitcoin is to Blockchain, what E-Mail is to the Internet: just the first among many applications of a new technology
- 4. 4© 2018, Shyam Kamadolli, AVG Blockchain Fund But WHY blockchain?
- 5. 5 DAY ZERO Monday Sep 15, 2008! First of many headlines announcing the arrival of the global financial crisis © 2018, Shyam Kamadolli, AVG Blockchain Fund
- 6. 6 3 weeks later... a mysterious person posts a seminal paper on making financial institutions obsolete © 2018, Shyam Kamadolli, AVG Blockchain Fund
- 7. 7 3 months later… the same person posts the first implementation of a cryptocurrency © 2018, Shyam Kamadolli, AVG Blockchain Fund On 3 January 2009, the bitcoin network came into existence with Satoshi Nakamoto mining the first block, which had a reward of 50 bitcoins. Embedded in this block was the text: The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
- 8. 8© 2018, Shyam Kamadolli, AVG Blockchain Fund Satoshi’s response to the financial crisis: à to create a new model for securing transfer of value à by brilliantly combining well known algorithms and cryptographic techniques à to combat centralized banking regimes (which we still use) Proposed a Blockchain Architecture with a few Guiding Principles • Decentralized : Immunity to censorship, single entity influence, bad actors, collusion • Secure: Practically impossible to hack • Immutable: An absolute and trusted system of record • Trustless: Eliminates the need for trusted intermediaries
- 9. 9© 2018, Shyam Kamadolli, AVG Blockchain Fund HOW DOES A BLOCKCHAIN WORK?
- 10. 10 Securing Data Key concept: Hashing Functions © 2018, Shyam Kamadolli, AVG Blockchain Fund Hashing functions are designed to have a few esoteric properties but to keep it simple: if the input changes in ANY way, the output value is measurably different
- 11. 11 Lets create a NEW ”block” of transactions © 2018, Shyam Kamadolli, AVG Blockchain Fund BLOCK HEADER New Block: identified by hash of block header Raw transaction data Hashing functions operate such that even one comma or number changed in the transaction changes the hash values all the way up the Merkle Tree and hence the block header à renders the block as a whole invalid à Transactions cannot be changed once recorded in a block
- 12. 12 A Blockchain is a mathematically linked chain of Blocks © 2018, Shyam Kamadolli, AVG Blockchain Fund à If any ONE block gets compromised, the entire chain becomes invalid
- 13. 13© 2018, Shyam Kamadolli, AVG Blockchain Fund What we have now is a Secure Immutable Database Ledger GREAT!! We still need to address • Decentralized : Immune to censorship or single entity influence • Secure: Practically impossible to hack • Immutable: An absolute and trusted system of record • Trustless: Eliminates the need for trusted intermediaries
- 14. 14 Key concept: De-centralization © 2018, Shyam Kamadolli, AVG Blockchain Fund Each computer running a blockchain is called a NODE Each node runs software code that implements a security and communication protocol – generally called BLOCKCHAIN PROTOCOL -- to add new blocks to the chain Having just one such NODE makes it no different from the database at your bank (Centralized Ledgers) Copying Blockchain data and computation to several individual and independent nodes ensures no single node can control the network à de-centralization Every node now has a copy of every block added to the blockchain on any other node
- 15. 15© 2018, Shyam Kamadolli, AVG Blockchain Fund What we have now is an Immutable Distributed Ledger GREAT!! We still need to address • Decentralized : Immune to censorship or single entity influence • Secure: Practically impossible to hack • Immutable: An absolute and trusted system of record • Trustless: Eliminates the need for trusted intermediaries
- 16. 16 Securing the creation of new blocks – two popular methods © 2018, Shyam Kamadolli, AVG Blockchain Fund Make it hard to cheat: Proof of Work • Nodes compete to solve puzzles – these are special nodes called “miners” • Typically involve repeated hashing of random numbers till a criterion is met • The first person that solves the puzzle gets a ”block reward” and gets to add a block to the blockchain; the blockchain is said to reach consensus on the origin of the next block • Used by Bitcoin, Ethereum, etc. • Generally considered very inefficient • consumes large amounts of electricity • if multiple miners solve the puzzle before a new block has been accepted, only 1 wins • being addressed by modern protocols Make you pay : Proof of Stake • Nodes put up a stake (usually currency, but could be storage or compute resources) to vote on new blocks – these are special nodes called “validators” • Voting algorithms are many but mainly focus on preventing collusion • The stake deposited gets debited if there is evidence of collusion or not participating in voting • Used by Nxt, EOSIO, Algorand, Ethereum’s Casper etc. • Generally considered more efficient but sparks endless debate about security compromises made
- 17. 17 Secure Messaging between Nodes Key concept: Public Key Encryption © 2018, Shyam Kamadolli, AVG Blockchain Fund A cryptographic technique such that encryption keys are generated as a mathematically linked pair with a unique property: anything encrypted with one key can be decoded with the other key (and vice a versa) PUBLIC AND PRIVATE KEYS • Alice shares one of her keys freely, usually called the Public Key, so Bob has a copy of her Public Key • Alice keeps the other key securely to herself - this is her Private Key SECURE POINT TO POINT DATA TRANSFER • When Bob wants to send a document securely to Alice, he encrypts it with Alice’s Public Key. Only she has the corresponding private key to decrypt the content AUTHENTICATING A SENDER • If Alice sends Bob a message, see can digitally sign it using her private key • A digital signature is a block of data encrypted with the Alice’s Private Key that contains: a hash of the original message + identifier for hashing algorithm used • When Bob receives the message, he uses Alice’s public key to verify the signature à authenticating the message as being from Alice and nobody else
- 18. 18 The Blockchain Network is now secure © 2018, Shyam Kamadolli, AVG Blockchain Fund • All messages between nodes are encrypted and authenticated by public key encryption • Each node has data secured by a chain of hashed blocks that is tamper-evident if hacked • Every node always has a copy of the entire ledger; any tampered node is immediately inconsistent with the rest of the network and the protocol can isolate it • An attacker would have to compromise more than 50% of the millions of nodes at once to break a blockchain’s security model • Theoretically impossible; especially with quantum safe security models already being designed
- 19. 19© 2018, Shyam Kamadolli, AVG Blockchain Fund What we have now is a Secure Immutable Distributed Ledger GREAT!! We still need to address • Decentralized : Immune to censorship or single entity influence • Secure: Practically impossible to hack • Immutable: An absolute and trusted system of record • Trustless: Eliminates the need for trusted intermediaries
- 20. 20 A basic transaction: Alice wants to pay Bob $10 © 2018, Shyam Kamadolli, AVG Blockchain Fund Alice Bob $10 BANK Alice writes a check (or presents a credit/debit card) Bob is trusting the bank to make sure he gets paid
- 21. 21 Bob could trust Alice, without using a bank, by using public key encryption © 2018, Shyam Kamadolli, AVG Blockchain Fund But verifiable messages do not guarantee that: • Alice has $10 • Or that she did not spend it already Image credit: https://medium.com/@preethikasireddy/eli5-what-do-we-mean-by-blockchains-are-trustless-aa420635d5f6
- 22. 22 The Blockchain creates trust more elegantly © 2018, Shyam Kamadolli, AVG Blockchain Fund • The Blockchain ensures that Alice has $10 in her wallet • And even if she tries to launch two transactions to spend it, only one registers on the block chain • The Proof-of-Work or Proof-of-Stake consensus mechanism for adding new blocks ensures that every node is in agreement with the rest of the network à only one version of the truth • The truth is: a) Alice has $10 b) she paid Bob via blockchain transaction c) After the blockchain has reached consensus and recorded the transaction, Alice has $0 and Bob has $10 Image credit: https://medium.com/@preethikasireddy/eli5-what-do-we-mean-by-blockchains-are-trustless-aa420635d5f6
- 23. 23© 2018, Shyam Kamadolli, AVG Blockchain Fund Blockchain is more than cryptocurrencies: à Each block can also contain blocks of executable code, or data à Code can conditionally and programmatically transfer value or messages to others à Secure and “smart” contracts on the blockchain enable all kinds of applications à E.g. A “mow my lawn smart contract” can make sure a homeowner pays a landscaper without using a bank cheque or credit card, if and only if the lawn was actually mowed If ( every blade of grass is less than 4” ) then transfer 0.004 BTC from home-owner-wallet to landscapers-wallet Blockchain applications (examples) • Governance : Tax collections, voting, legislation • Financial services: Payments, corporate finance, remittances, credit • Operations: Supply chain management, food and drug safety • Medicine: Healthcare data, genomics, clinical research • Entertainment: Music, video distribution,
- 24. 24© 2018, Shyam Kamadolli, AVG Blockchain Fund Thank you Shyam Kamadolli Managing Partner LinkedIn: www.linkedin.com/in/shyam Twitter: @kamadoll