QTMA 2015 - 2016 1

Alex Kiriakou

Block Chain & Beyond

September 2015

QTMA 2015 - 2016 2

Definitions1

Today’s Payment Protocols2

Cryptographic Solutions4

Problem With Online Currencies3

Block Chain & Bitcoin5

6 Other Consensus Protocols: Ripple

7 Comparison of Block Chain to Other Protocols

QTMA 2015 - 2016 3

Term Definition

AddressA ledger address is similar to a physical address or an email. It is the only information

you need to provide for someone to pay you with

Block

A record in the block chain that contains and confirms many waiting transactions. For

Bitcoin this is roughly every 10 minutes on average, but for other consensus based

protocols this could be seconds

Block Chain

The block chain is a public record of Bitcoin transactions in chronological order. The

block chain is shared between all Bitcoin users. It is used to verify the permanence of

Bitcoin transactions and to prevent double spending

Confirmation/ConsensusA transaction that has been processed by the network and is highly unlikely to be

reversed. Transactions receive confirmation when they are included in a block/ledger

Cryptography Mathematical proofs that provide high levels of security

Double SpendIf a malicious user tries to spend their bitcoins to two different recipients at the same

time, this is double spending

Hash Tree (Merkle Tree)

A tree in which every non-leaf node is labelled with the hash of the labels of its children

node. Hash trees are useful because they allow efficient and secure verifications of the

contents of large data structures. In Bitcoin, the leaves are transactions from one block

Ledger

Record of the amount of currency in each user’s account and represents the “ground

truth” of the network. The ledger is repeatedly updated with transactions that

successfully pass through the consensus process

Last-Closed LedgerMost recent ledger that has been confirmed by the consensus process and thus

represents the current state of the network

QTMA 2015 - 2016 4

Term Definition

Mining

The process of making computer hardware do mathematical calculations for the

network to confirm transactions and increase security. As a reward for their services,

miners collect fees for the transactions they confirm along with new currency

Node Any computer that connects to the network

Open Ledger

Current operating status of transactions initiated by end users (nodes) of a given server,

which are then applied to the ledger of that server. Transactions are not considered final

until they have passed consensus and then becomes the last-closed ledger

P2P

Peer-to-peer refers to the systems that work like an organized collective by allowing

each individual to interact directly with the others. In the case of Bitcoin, the network is

built in such a way that that each user is broadcasting the transactions of other users

without any bank or third party required

Private Key

A secret piece of data that proves your right to spend bitcoins from a specific wallet

though a cryptographic signature. Private keys must never be revealed as they allow

the owner of the account to spend bitcoins from their respective account

ServerA server is an entity running the protocol software, which participates in the consensus

pool

SignatureA cryptographic signature is a mathematical mechanism that allows someone to prove

ownership, such as a Bitcoin wallet and its private keys

Wallet

A digital wallet is loosely the equivalent of a physical wallet on a cryptocurrency’s

network. A Bitcoin wallet contains your private key(s) which allow you to spend Bitcoins

allocated to it in the block chain

SWIFT Payment Protocol

Today’s Protocol

6QTMA 2015 - 2016

2-5 Days of Settlement Time For FX Transaction

QTMA 2015 - 2016 7

SWIFTA Financial “Message”

ChallengesCurrent Use

Society for Worldwide Interbank Financial

Telecommunications (SWIFT) provides a network for

financial institutions worldwide to send and receive

information about financial transactions, went live in 1977

SWIFT does not facilitate funds transfers

It sends payment orders that must be settled by

corresponding accounts the institutions have with

each other

In December 2014 announced that they would be looking

into a real-time settlement solution using new P2P

technologies

Remittance fees average around 7% which is very costly to

send money abroad

These fees and restrictive practices are costing

people in the developing world up to $16 billion/year

Transfers can take up to a week or more to be deposited

into the beneficiary’s account

Regulatory initiatives have become a burden when trying to

upgrade the current infrastructure to process transactions

faster

Regulatory reforms have been a big contributor to the

increases in costs

Links 10,800 financial institutions in over 200 countries

Averages over 23 million messages per day

Majority of messages are for either payments or

securities

Many people in the developing world depend on money

transfers to maintain living standards

Philippines received $25 billion in remittances last

year, which was more than the country’s electronics

industry ($22 billion)

In Vietnam, cash transfers were valued at $11 billion,

which almost equaled country’s petroleum exports

($12 billion)

QTMA 2015 - 2016 8

QTMA 2015 - 2016 9

No intrinsic way of determining from two transactions which came earlier, which has plagued currencies before Bitcoin

Risk that original holder could make copy of the digital token and send it to another party while retaining the original

Buyer

Buyer

SellerOwns 1 CoinCopy

Original

QTMA 2015 - 2016 10

Collision-ResistantThree Main Properties

Puzzle-FriendlinessHiding

1. Its input can be a string of any size

2. It produces a fixed size output (i.e. 256-bit)

3. It is efficiently computable. For any given

string, you can figure out what the output

of the has function is in a reasonable

amount of time

A hash function, H(), is said to be collision

resistant if it is infeasible to find two values, x

and y, such that x ≠ y, yet H(x) = H(y)

H(x) = H(y)

y

x Don’t Want

Because the number of inputs exceeds the number of

outputs, we are guaranteed that there will be one output

which has more than one input (collisions)

A hash function is hiding if: when a value r is chosen from a

probability distribution that given x, it is difficult to find H (r |

x)

If every possible 256-bit output value y, if target k, is

chosen from a distribution, then it is infeasible to find x such

that H (k | x) = y in a time significantly less than 2^256

If someone wants the target hash function to come out a

certain way (output y), if that target (k) is chosen in some

random way, it is very difficult to find another value that hits

that output y

Makes finding collisions very difficult to happen by accident

(unless you want them to happen)

Asymmetrical security is mainly used with collisions

Example of Hash Function in Block Chain

11QTMA 2015 - 2016

Only Public Key can decrypt Private Key message and vice-versa

Decrypting Private Key messages with Public Key to match unencrypted

message broadcasted on network verifies it’s authentic (manufactured collision)

Private Key allows you to spend your Bitcoins

Buyer > Seller

1 BTC

Buyer > Seller

1 BTC Encrypt

Seller Uses

Buyer Public

Key

Buyer Private

Key

Decrypt

QTMA 2015 - 2016 12

The Longest Chain With Hash Pointers

Orphan Blocks ExampleA block chain is a linked list of blocks that is built with hash

pointers H( )

Each block tells us the value of the previous block as well

as a value to tell us that the value hasn’t changed

The hash pointer that points to the previous block is

stored in the head of the list of the new block

Takes 10 minutes to verify a block

Verify blocks with mining

Orphaned blocks are blocks that are not part of the longest

chain and must be verified again (1 in every 60 blocks)

Blocks in blue have created the longest chain while

blocks in pink have become orphaned

All Linked Together

Trans TransTrans

Prev: H( ) Prev: H( ) Prev: H( )Block #1 Block #2 Block #3

H( )

QTMA 2015 - 2016 13

Simplified Consensus Algorithm

The Block Reward

Mining Creates Proof of Work

Incentives in Mining

Cryptocurrencies require that users contributing to the

verification process must demonstrate a cryptographic “proof

of work” to show that they have paid a cost in computation

time before their proposals are accepted

If hash value produced is below threshold, the proof of work

is complete

Miners keep trying different nonce values via trial

and error until this is reached

Miner that finds the nonce value can then suggest the next

block in the block chain

1. New transactions are broadcasted to all nodes

2. Each node collects new transactions into a block

3. In each round a random (one that produces proper

hash value) gets to broadcast its block

4. Other nodes accept the block only if all transactions in

it are valid (unspent, valid signatures)

5. Nodes express their acceptance of the block by

including its hash in the next block they create

Year BTC Reward

2009-2013 50 BTC

2013-2017 25 BTC

2017-2021 12.5 BTC

2021-2025 6.25 BTC

2025-2029 3.125 BTC

2029-2033 1.5625 BTC

Creates honest miners by rewarding miners that created

the blocks in the longest consensus chain

Miner to create latest block is rewarded “newly minted”

bitcoins in a transaction to their account

Value of reward halves every 4 years

However mining is zero-sum

If miner solves block N and doesn’t tell anyone while

working on block N+1 then other miners who are still

working on N lose resources

If miner joins pool but doesn’t share proof of work,

pool shares revenue with attacker but doesn’t receive

anything in return

QTMA 2015 - 2016 14

Correct Tree Inconsistent Tree

H(d8ca)

H(2f9c)

H(d063)H(48a5)

H(e74b) H(a8b5)

H(12c5)

Buyer > Seller

1 BTC

H(d187)

H(d8ca)

H(2f9c)

H(d063)H(48a5)

H(f96q) H(a8b5)

H(4a2f)

Buyer > Buyer

1 BTC

H(d187)

Change in

Merkle Tree

QTMA 2015 - 2016 15

Block Size

Price Volatility – 5% BTC vs 1% FiatThe Miner’s Dilemma

Plans of block size increase are a subject of heated debate in the Bitcoin community

The subject has gained attention since the beginning of 2015, when the size of blocks started to approach the current hard

limit of 1 megabyte

Current block size limits only allow for 7 transactions per second

Visa and MasterCard perform hundreds of thousands of transactions per second

If the blocks reach their hard limit transaction processing could take much longer than previously and provide disincentives

for users to transact in Bitcoins as well as increases the chance of an orphan block/chance to double spend

If Bitcoin wants to position itself as a replacement for current payment services, it must be able to handle an increased

amount of transactions

Other benefits are that it will keep transaction fees small and more transactions for systems built on top of Bitcoin

Some other problems for larger block sizes are that it will increase hardware requirements to min

Each minor seldom generates a block

Miners would have to wait for an extended period to create

a block and earn actual Bitcoins

Therefore miners form mining pools where all

members mine and share their revenue when one of

them creates a block

Mining is only profitable using dedicated hardware in

cutting edge mining rigs; otherwise costs > revenue

Expected revenue of pool vs. mining solo for a miner is the

same except that a pool allows for stable income

16QTMA 2015 - 2016

QTMA 2015 - 2016 17

Ripple XRP Creates Liquidity A New Consensus Protocol: Ripple

Ripple FX Transaction

Ripple is an open-standard Internet Protocol (IP)

technology for banks to clear and settle transactions in real-

time via a distributed network

Banks can use Ripple to make faster payments in more

currencies to more markets – al with lower risks and costs

than is possible today

Computers on network reach a global consensus

and close ledger within seconds

Ripple does not look to replace existing networks but

enables them to become faster and more interconnected

Real-Time Settlement For FX Transaction

QTMA 2015 - 2016 18

Block ChainRipple

Does Not Require a Transaction Fee

You can generally get a Bitcoin transaction for

free if you are patient enough. However, Ripple

transactions always have an XRP cost, which is

destroyed in Ripple network and not paid to

anyone

Does Not Need Reliable Gateways

Ripple uses gateways, companies that make

settlement agreements with users (hold IOUs)

If you hold currency in Ripple, you have

trusted someone to hold your money

Block Chain requires no trust as it is

decentralized and not distributed

Bitcoins Not Classified As Liabilities

Currencies in Ripple represented as debts

(IOUs), much like how traditional banking works

today

Bitcoins on other hand are in possession of

owner

1

3

2

Speed of Consensus

Transactions on Ripple are confirmed in real-

time, usually around 15 seconds. Block Chain

transactions could take up to an hour to receive

probable confirmation as each block of

transactions takes 10 minutes on average

Ability to Look For Cheapest Path to Transact

Scalability

Currently Block Chain tied to only 7 transactions

per second and downloading entire block chain is

now ~41,000MB in size as of today to check all

transactions

Ripple has scalability features such as not

needing to keep transaction history

1

3

2