Bitcoin, Blockchai

n & CryptoCon

tractsPart 2

the shared ledger

Prithwis Mukerjee, PhD, Praxis Business School, Calcutta, India

Establishing Ownership & Transfer of an AssetProblem with any non-material, or dematerialised asset is the question of ownership

Arup can write a cheque to Bina without having money in the bank

Or can write two cheques of Rs 1000 each to Bina and Dipa while having only Rs 1000 in the bank

Arup may not have a house to sell

Or may try to sell the same house twice

Ownership verified with a central ledgerEach transaction is validated or allowed by a bank, or a share depository or a land registry office depending on the “balance” available in the central ledger

Name Bal

Arup 1000

Bina 2000

Chandru 1500

Dipa 200

Esha 4000

Arup transfers 600 to Bina

Bina transfers 1500 to Chandru

Chandru transfers 2500 to Dipa

Dipa transfers 100 to Esha

The Distributed LedgerName Bal

Arup 1000

Bina 2000

Chandru 1500

Dipa 200

Esha 1000

Arup xfers 600 to Bina

Bina xfers 1500 to ChandruChandru xfers 2500 to Dipa

Dipa xfers 100 to Esha

Name Bal

Arup 1000

Bina 2000

Chandru 1500

Dipa 200

Esha 1000

Name Bal

Arup 1000

Bina 2000

Chandru 1500

Dipa 200

Esha 1000

Everyone can keep a copy of the ledger.

All copies are updated simultaneously.

Anyone can verify any transaction.

However everyone need not do so.

Does not maintain ledger, only transacts

In reality, not balance but are storedKPuA 800

KPuA 200

KPuB 1500

KPuB 500

KPuC 700

KPuC 800 KPuD 200

KPuE 1000

Arup xfers 600 to Bina

KPuA 800 KPuA 200

KPuB 600 KPuA 400

KPuA 800

KPuA 200

KPuB 1500

KPuB 500

KPuC 700

KPuC 800 KPuD 200

KPuE 1000

KPuB 600 KPuA 400

Dipa xfers 100 to Esha

KPuD 200

KPuE 100 KPuD 100

KPuA 800

KPuA 200

KPuB 1500

KPuB 500

KPuC 700

KPuC 800 KPuD 200

KPuE 1000

KPuB 600 KPuA 400 KPuE 100 KPuD 100

Chandru xfers 2500 to Dipa

KPuA 800

KPuA 200

KPuB 1500

KPuB 500

KPuC 700

KPuC 800 KPuD 200

KPuE 1000

KPuB 600 KPuA 400 KPuE 100 KPuD 100

KPuC 700

KPuC 1000 KPuD 2500

The ledger stores public key, not name. Hence anonymous

UTXO - Unspent Transaction Output

KPuC 800 KPuB 500

What is a public key? See this slide deck!

Verification : When can an UTXO not be used?1. When UTXO does not belong to

the “person” [ or the “wallet” or the “public key” ] who is transferring the assetthis can be easily checked from the signature used to sign the transfer.

2. If the UTXO does not exist in the database!

KPuA 800

KPuA 200

KPuB 1500

KPuB 500

KPuC 700

KPuC 800 KPuD 200

KPuE 1000

KPuB 600 KPuA 400 KPuE 100 KPuD 100

KPuC 700

KPuD 2500

KPuC 800 KPuB 500

sigC

sigC sigC

sigC

Suppose Arup “Double Spends”KPuA 800

KPuA 200

KPuB 1500

KPuB 500

KPuC 700

KPuC 800 KPuD 200

KPuE 1000

Arup xfers 600 to Bina

KPuA 800 KPuA 200

KPuB 600 KPuA 400

KPuA 800

KPuA 200

KPuB 1500

KPuB 500

KPuC 700

KPuC 800 KPuD 200

KPuE 1000

KPuB 600 KPuA 400

Arup xfers 800 to Esha

KPuA 400

KPuA 500 KPuE 800

KPuA 800

KPuA 200

KPuB 1500

KPuB 500

KPuC 700

KPuC 800 KPuD 200

KPuE 1000

KPuB 600 KPuA 400

KPuA 100

KPuA 500 KPuE 800 KPuA 100

Arup creates a fake transaction and publishes a corrupt version of the ledger

Will his fake transaction be accepted?

Network has full nodes and light nodes (wallets)

ledger

ledger

ledger

ledger

The ledger is huge ( ~ 50GB+) and growing. Not everyone can afford to have the ledger on his or her own machine

for verification & transaction

only transaction

Whose ledger is correct?Suppose Arup has “friends” who agree to take a copy of his “corrupt” ledger and declare that this is the ledger that they will follow

Can this copy of the corrupt ledger become the accepted ledger?

Yes, if a “sufficient” number of members of the network agree that this is indeed the true ledger and start using it

What is a “sufficient” number?

Say 51% but then .. total number of members in a peer-to-peer network is never known!

So it is technically possible for a group of people acting in concert to inject fake UTXOs into the system thus

creating a “parallel” ledger

undermining the credibility of the “real” ledger

Verification

A>B V1

C>D V2

P>Q V6

A>B V1

C>D V2

M>N V7

G>K V8

C>D V2

M>N V7

A>B V1

C>D V2

P>Q V6

Pool of unverified transactions

Multiple full nodes verify some transactions and assemble them into a BLOCK

Block

234: id w

xd

Block

235: id esf

Block

236

BLOCK CHAINOrdered set of verified, valid transactions. Shared with all and cannot be changed.

Which of these 4 blocks will be accepted as #236?

Proof of Work

A>B V1

C>D V2

P>Q V6

A>B V1

C>D V2

M>N V7

G>K V8

C>D V2

M>N V7

A>B V1

C>D V2

P>Q V6

Block

234: id w

xd

Block

235: id esf

A>B V1

C>D V2

M>N V7

Prev Block ID = esf“nonce” = 1,2,3 …set of valid txns

hash

keep trying various values of the nonce until you get a hash value that begins with a defined number of 0s

A>B V1

C>D V2

M>N V7

whoever wins “the race” gets to place his block into the blockchain and then the race starts again for the next block

verifying a block is easy, but locating the proof of work is computationally hard - you need a lot of raw CPU power

the only way a false transaction can get into the block chain if a group of “criminals” control more than 50% of the computing power of the network

“If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains” Satoshi Nakamoto

Reward! - the Coinbase transaction

A>B V1

C>D V2

M>N V7

Block

234: id w

xd

Block

235: id esf

A>B V1

C>D V2

M>N V7

miner R

Why should anyone use his computational resources AND electric power to verify transactions for the network?

Winner is allowed to add one coinbase transaction into the block chain that has

No INPUT ONLY OUTPUT favouring winner

This add value to the economy in general

the wallet of the winner that he can use in subsequent transactions

The Mining ProcessA self-sustaining mechanism

1. Validate Transactions

2. Demonstrate Proof-of-Work

3. Collect Rewards

Keeps the Crypto-Economy running forward

Block 234: id wxd

Block 235: id wst

Block 236: id qlp

Block 237: id bre

time >>>

Block 238: id ???

Pool of unvalidated transactions

BlockChain of of validated transactions

Latency, Simultaneity and the ForkSince the size of the network is large, there is definite, non-zero time lag between the discovery of a new block and its announcement or detection in a “distant” node

In this interval there is a finite, non-zero probability of another new block being discovered and hence detected before the other new block

The block chain is “forked” and both parts of the chain (with the red block and the blue block) are kept as candidates UNTIL ….

Block 234: id wxd

Block 235: id wst

Block 236: id qlp

Block 237: id bre

Block 238: id opx

Block 238: id wer

Note :Each block is chained to and defined by its predecessor

Until … the next new block is detected!If the new block is derived from the red block then it elongates, the red fork of the chain. Otherwise it elongates the blue fork of the chain.

Whichever chain is longer, has more “proof of work” and is generally accepted by the majority of nodes.

Now all miners will try to locate the next block that will be derived from the latest block (239) and the blue fork ( containing 238) will be dropped or forgotten

Block 234: id wxd

Block 235: id wst

Block 236: id qlp

Block 237: id bre

Block 238: id opx

Block 238: id wer

Block 239: id sur

Block Chain -- the Shared LedgerThe block chain is a read-only database of validated transactions that is shared by all but cannot be changed by anyone except the one who “discovers” the next block at the “head” of the chain.

❖ Can non-asset data be stored in transactions?

❖ Yes! Bitcoin is just one application

The size of the Bitcoin blockchain in Feb 2015 is 55GB and is growing exponentially.

It can be pruned, compressed and otherwise compacted but it is estimated that even if Bitcoin transactions exceed Visa card transactions, scalability will not be an issue because of Moore’s law.

Block 234: id wxd

Block 235: id wst

Block 236: id qlp

Block 237: id bre

Block 238: id opx

Block 238: id wer

Block 239: id sur

Bey

ond

So what does the shared ledger store?A new kind of

1. Crypto Currency

2. Crypto Commodity

3. Crypto Corporation

Prithwis Mukerjee, PhD, Praxis Business School, Calcutta, India

This question will be addressed next. See next presentation