2. “BLOCKCHAIN” Has Many Meanings
“To understand the power of blockchain systems,
and the things they can do, it is important to
distinguish between three things that are
commonly muddled up, namely the bitcoin
currency, the specific blockchain that
underpins it and the idea of blockchains in
general.”
The Trust Machine, THE ECONOMIST, Oct. 31, 2015
7. Blockchain (Over)simplified
•A blockchain is a historical record of transactions, much like a database
•Blocks in a chain = pages in a book. Each page in a book contains:
The text: the story
Each page has information about itself: title of the book, chapter title, page
number, etc. (e.g. the “metadata”)
•Similarly, in a blockchain, each block has:
A header which contains the data about the block: e.g. technical information, a
reference to the previous block, and a digital fingerprint (aka “hash”) of the data
contained in this block, among other things. This hash is important for ordering
and block validation.
The contents of the block, e.g. information about the transaction(s)
8. Blockchain (Over)simplified
• Blockchain is a distributed ledger that…
can contain financial and/or non-financial transactions
is replicated (distributed) across a number of systems in near real-time
over a peer-to-peer network
• Every participant “owns” the same copy of the ledger and gets updates when any
transaction is added
• Every participant helps determine the intrinsic “immutability” of all existing records
uses cryptography and digital signatures to prove identity, authenticity
and enforce read/write access rights
has mechanisms to make it hard to change historical records, or at least
make it easy to detect when someone is trying to change it
9. The origins of Blockchain – the
Bitcoin currency and payment
system
• Blockchain was created to enable Bitcoin
• Bitcoin is the first decentralized digital
currency as it does not rely on a central
government authority
• Bitcoins are a “scarce asset”
Created through a “digital mining”
process
Finite number of Bitcoins (21m), mined
and unmined
• Is Bitcoin a real currency?
Currency = A store of value, medium of
exchange, and unit of account
(Economists say “no, not yet”)
Why is there any sort of intrinsic value in
a bitcoin?
Bitcoin is still an inherently volatile asset
Can it be collected, traded, and….
SPENT?
10. Blockchain: How do they work?
• A blockchain is a sequence of hash-chained records
Once you’ve seen record N, you can’t change anything in the past.
• Some procedure for adding blocks to blockchain
Who gets to add blocks? How is it done?
• Validity conditions for new blocks
Are transactions valid? Are digital signatures correct? Etc.
Enforced by consensus-–chains with invalid blocks won’t be accepted.
• Some procedure for deciding between alternative candidate
blockchains.
When Alice and Bob have different pictures of history, there’s some way
for them to eventually come to agreement about who is right.
11. Building Block: Cryptographic hash functions
• A cryptographic hash function:
Takes any bit string as an input* (Like a 10 MB file)
Produces a fixed-length output (Typically 256 or 512 bits)
Nobody can find collisions.
Examples: SHA256, SHA512, SHA3-256, RIPEMD-160
• Sometimes there’s a (really huge) maximum input length.
13. What’s a hash chain?
A hash chain is a sequence of records in which
each record contains the hash of the previous
record in the chain, and the hash of all the
current record’s contents.
14. What does that buy us?
• We’re using a cryptographic hash function like SHA256.
• That means nobody can find two inputs with the same hash
value.
• ...and that means that record N contains a commitment to
record N-1
• ...which contains a commitment to record N-2, which contains
a commitment to record N-3, and so on.
17. Building Block: Validity Conditions
What will the world accept as the next block?
• We don’t have some trusted entity to decide what may be added to block
chain
• ...so we have to decide what blocks are valid.
• Block must contain correct proof-of-work
• A proposed additional block that doesn’t meet these conditions won’t be
accepted by the rest of the network.
• Enforced by consensus
18. Adding new blocks to the chain
• Adding new blocks to the chain
Any blockchain system has to determine who can add new
blocks to the chain, and how it’s done.
• Two main ideas:
Proof of work
Permissioned blockchain
19. Building Block: Proof of work
• I want you to do a big computation.
I want you to prove you did it.
I don't want to do much work checking the proof.
• Why is this useful?
Limits the rate of new blocks
Makes attempts to add invalid blocks to the chain expensive
Provides a clear way to decide between competing chains when there is
a disagreement—the one with the most work wins.
Note: Not all blockchains use proof of work
20. Hash-based proof of work
• I give you challenge C and limit L = 2220
.
• Ask you to find N such that
SHA256(C||N) < L
• Expected work = 236
• Each new N has prob2-36
of success
• When you succeed, only takes me one hash to check.
22. Permissioned Blockchain
• An alternative to proof-of-work
• We have set of somewhat-trusted entities who can work
together to add records to the blockchain.
• For example, we could have five trustees, and if any 3/5 vote
in favor of accepting a block on the chain, then the block is
added.
• Validity condition for adding a block = 3/5 signatures
• Resolution for conflicting chains = look for longest chain
(means most votes)
With 3/5 there shouldn’t be any forked chains—someone
would have to vote for two competing blocks!
23. Wrapup1: Blockchains let us
agree on history
• We don’t have to trust each other
• We don’t have to have a trusted third party
• System is distributed
• Agreeing on history ->agreeing on state of
system
24. Wrapup2: Blockchains and hash chains
• The Nth record in the hash chain commits to
all previous records.
• Can’t change any previous record without
making hash chain invalid.
25. Wrapup3: Permissioned vs
Proof-of-work
• Most blockchains in use now use proof-of-work
• Many new proposals use permissioned blockchains
Some set of somewhat-trusted entities
27. Blockchain adoption
Sectors leading the way in blockchain implementation:
• Consumer products
• Manufacturing
• Technology
• Media
• Telecommunications
• Health care
• Life sciences
Thirty-nine percent of the senior executives at large U.S. companies initially surveyed
indicate they have little or no knowledge about blockchain technology. Many deemed it
to be crucial for their companies and industries. Forty-two percent believe it will
disrupt their industries.
“Blockchain Adoption Varies by Industry”, CIO Journal, The Wall Street Journal
28. Financial Services Industry
• As noted by A. Michael Smith in “Creating Assurance in Blockchain,” trust and
efficiency are the main value drivers for any use case. The finance world is driven
by technology.
• Tracking risk and monitoring compliance with laws and regulations within an
increasingly complex cybersecurity environment requires considerable time and
resources.
• The financial services industry immediately saw opportunities in blockchain and
has been investing heavily in its usage, primarily as a part of private
implementations
Creating Assurance in Blockchain, Volume 2, 2017, by A. Michael Smith
29. Identity Management
The IT audit is broadly concerned with
identity management concerns.
Protecting access to data, and the systems
that are in place to process, store, and
report on that data, requires ongoing
resource dedication.
Multiple solutions are available, all of
which require configuring and managing
multiple identifiers for an individual’s
various identities.
Identity management is an area that will
certainly be impacted by widespread use
of private keys to secure transactions.
30. Distributed Access Management
• Creating an identity on blockchain can give individuals greater control
over who has their personal information and how they access it
• Areas impacted include passports, e-residency, birth certificates, wedding
certificates, IDs, online account logins, etc
• Digital ID’s can provide digital watermarks that can be assigned to every
online transaction of any asset
“21 Companies Leveraging Blockchain for Identity Management and Authentication” by Elena Mesropyan,
https://letstalkpayments.com/22-companies-leveraging-blockchain-for-identity-management-
and-authentication/
31. Protecting Private Keys
• Within the blockchain, trust relies on the safekeeping of private keys, in
support of a truly distributed identity management
• Ultimately, that safekeeping resides with the actions taken by individuals to
secure their private key
• For cryptocurrency traders, one frequently sees the recommendation to write
one’s private key down on a piece of paper and put it up for safekeeping in,
for example, a safe deposit box
33. BLOCKCHAIN
“APPLICATIONS”
The applications of blockchain technology are still under research as the technology is very new.
Most of the work till now has been done on the applications related to bitcoin and less preference
is given to non-financial applications. Some of the major applications include the following:
• Financial Application
Private Securities
Insurance
Banking
• Non-Financial Applications
Notary Public
Applications of Blockchain in the Music Industry
Decentralized proof of exis
tence of documents
Decentralized Storage
Decentralized IoT
Blockchain based Anti-Coun
terfeit Solutions
34. Applications: Private Securities
• NASDAQ Private Equity: NASDAQ has joined hands with a San
Francisco based Start-up callBlockChained chain.com to implement
private equity exchange on top of.
Chain.com is implementing BlockChain based smart contracts to
implement exchange functionality. This product is expected to be fast,
traceable and efficient.
• Medici is being developed as a securities exchange that uses the
Counterparty implementations of Bitcoin 2.0.
• Coinsetter is a New York based bitcoin exchange. It is working on a
Project Highline, a method of using the blockchain to settle and clear
financial transactions in T+ 10 minutes rather than the customary T+3 or
T+2 days.
35. Applications: Insurance
• Everledger is a company which creates permanent ledger of
diamond certification and the transaction history of the
diamond using blockchain.
• The characteristics which uniquely identify the diamond such
as height, width, weight, depth, color etc are hashed and
registered in the ledger.
36. Applications: Notary Public
Verifying authenticity of the document can be done using blockchain and
eliminates the need for centralized authority.
• Stampery is a company which can stamp email or any files using blockchain.
It simplifies certifying of emails by just emailing them to an email
specifically created for each customer.
• Viacoin is one of the companies which uses clearing house protocol for
notary service.
• Block Notary is an iOS app which helps you create proof of existence of any
content (photo, files, any media) using TestNet3 or a Bitcoin network.
• Crypto Public Notary uses Blockchain of Bitcoin to notarize documents by
using trivial amount of bitcoins to record the file’s checksum in a public
blockchain.
• Proof of Existence is another service which uses blockchain to SHA256
digest of the document in bitcoin blockchain.
37. Applications of Blockchain in the Music Industry
The technology can help mantain a comprehensive and accurate distributed
database of music rights ownership information in a public ledger. In
addition to rights ownership information, the royalty split for each work, as
determined by Smart Contracts, could be added to the database. This Smart
Contracts would in turn define the relationships between different
stakeholders (addresses) and automate their interactions
38. Applications: Decentralized Storage
• Cloud file storage solutions such as Dropbox, Google Drive or One Drive
are growing in popularity to store documents, photos, video and music
files. Despite their popularity, cloud file storage solutions typically face
challenges in areas such as security, privacy and data control. The major
issue is that one has to trust a third party with one’s confidential files.
• Storj provides a blockchain based peer-to-peer distributed cloud storage
platform that allows users to transfer and share data without relying on a
third party data provider.
39. Applications: Decentralized IoT
• The Internet of Things (IOT) is increasingly becoming a popular
technology in both the consumer and the enterprise space.
• The blockchain technology facilitates the implementation of decentralized
IoT platforms such as secured and trusted data exchange as well as record
keeping.
• IBM, in partnership with Samsung, has developed a platform ADEPT
(Autonomous Decentralized Peer To Peer Telemetry) that uses elements of
the bitcoin’s underlying design to build a distributed network of devices, or
decentralized Internet of Things (IOT).
• Filament is a startup that provides a decentralized IoT software stack that
uses the bitcoin blockchain to enable devices to hold unique identities on a
public ledger.
