Blockchain &

Money

Class 4
September 18, 2018
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Class 4 (9/18): Study Questions
• What is the Byzantine Generals problem? How does proof-of-work and
mining in Bitcoin address it? More generally how does blockchain
technology address it?

• What other consensus protocols are there? What are some of the
tradeoffs of alternative consensus algorithms – proof-of-work, proof-of-
stake, etc.?

• How do economic incentives work within blockchain technology to

maintain decentralized ledgers and avoid double spending? What are the
incentives of consensus protocols and mining? (Moved from 9/20)

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Class 4 (9/18): Readings

• ‘Geneva Report’ Chapter 1 (pages 1 – 7); Casey, Crane, Gensler, Johnson, and Narula

• ‘Blockchain Technology Review’ NIST (pages 23 - 32, sections 3 & 4)

• ‘The Byzantine Generals Problem’ Lamport, Shostak, & Pease (382-387)

• ‘A Short Guide to Consensus Protocols’ CoinDesk

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Class 4 Overview
• Review of Blockchain Design

• Consensus through Proof of Work

• Bitcoin Mining
• Native Currency
• Network

• Other Consensus Protocols

• Conclusions
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Review - Blockchain Technology
timestamped
auditable database network consensus protocol
append-only log

Secured via cryptography Addresses ‘cost of trust’

• Hash functions for tamper (Byzantine Generals problem)
resistance and integrity • Permissioned
• Digital signatures for consent • Permissionless
Consensus for agreement
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Bitcoin – Technical Features
• Cryptography & Timestamped Logs
• Cryptographic Hash Functions
• Timestamped Append-only Logs (Blocks)
• Block Headers & Merkle Trees
• Asymmetric Cryptography & Digital Signatures
• Addresses
• Decentralized Network Consensus
• Proof of Work
• Native Currency
• Network
• Transaction Script & UTXO
• Transaction Inputs & Outputs
• Unspent Transaction Output (UTXO) set
• Scripting language 6
 Cryptography:
Communications in the presence of adversaries

Scytale Cipher Enigma Machine Asymmetric Cryptography

Ancient Times 1920s - WWII 1976 to today
© Luringen on Wikimedia Commons. License CC BY-SA. All rights
Image by the CIA and is in the public domain via Image is in the public domain via Wikipedia.
reserved. This content is excluded from our Creative Commons license.
Wikimedia Commons.
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Cryptographic Hash Functions
One-Way Data Compression

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Timestamped Append-only Log - Blockchain

9
Image is in the public domain.
Merkle Tree – Binary Data Tree with Hashes

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Image is in the public domain.
 Asymmetric Cryptography & Digital Signatures
Guarding against Tampering & Impersonation

Digital Signature without Hash

Shyam Nandan Kumar et al. Review on Network Security and Cryptography. © Science
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Asymmetric Cryptography & Digital Signatures
Guarding against Tampering & Impersonation
Digital Signature with Hash

Shyam Nandan Kumar et al. Review on Network Security and Cryptography.

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Bitcoin Address
Determined by – but not identical to - Public Key

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 Decentralized Networks
Permissionless Blockchains -
Byzantine Generals Problem
Unknown participants
Attack!
Attack! ? ?

Retreat ?
?
Retreat

Security based on:

Attack!
• Consensus protocol &
• Native currency
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Hashcash – Proof of Work (Adam Back, 1997)
Proposed to address E-mail Spam and Denial of Service attacks

• Requires computational work to find a hash within predetermined range

E-mail
or
Header

Hash

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• Difficulty defined by Hash outputs’ # of leading zeros

• Proof of Work can be Efficiently Verified 15
Blockchain – Proof of Work
Innovation – Chained Proof of Work for Distributed Network Consensus & Timestamping

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Blockchain – Proof of Work

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Image by Anders Brownworth. Used with permission.
Blockchain – Proof of Work

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Image by Anders Brownworth. Used with permission.

Blockchain – Consensus supports Longest Chain

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Image by Meek Mark on Wikipedia . CC BY.

Bitcoin Proof of Work Difficulty
• Targets 10 minute average block generation time

• Defined by the # of leading zeros Hash output requires to solve proof of work

• Adjusts every 2016 blocks - about every two weeks

• Currently, > 18 leading zeros (out of 64 hexadecimal characters)

• Block 541974 (9/18/18)- 18 leading zeros

0000000000000000001104a863046dfbad1a2941128815669623ff93c2a3945f
• Genesis Block (1/3/09) – 10 leading zeros, though only required 8
000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f
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Bitcoin Mining Difficulty

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Source: Blockchain.com Courtesy of Blockchain Luxembourg S.A. Used with permission.

Bitcoin Network Hash Rate

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Source: Blockchain.com Courtesy of Blockchain Luxembourg S.A. Used with permission.

 Bitcoin Mining Evolution

Application Specific Integrated Circuit

(ASICs) 2013 – 2018
4 – 16 TH/S
Image by InstagramFOTOGRAFIN on Pixabay.

Graphics Processing Units

(GPUs) 2010 – 2013
20 - 300 MH/S
Central Processing Units Image is in the public domain.
(CPUs) 2009 – 2010
Modern Mining Factory
2 - 20 MH/S
Image by Axel Castillo. CC0 Public Domain.
Image by MiNE on flickr. CC BY 23
Bitcoin Mining Hashrate Distribution

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Courtesy of Blockchain Luxembourg S.A.
Source: Blockchain.com – 9/18/18 (4 day avg.) Used with permission.
Native Currency
Economic Incentive System
‘Monetary Policies’ vary widely
• Bitcoin - BTC
• Created through Coinbase Transaction in each block
• ‘Monetary Policy’ preset in Bitcoin Core
• Creation originally 50 Bitcoin per block
• Reward halves (1/2s) every 210,000 blocks
• Currently 12.5 BTCs created per block – thus ‘inflation’ 4.1%
• Currently 17.3 million BTC; capping at 21 million BTC in 2040
• Market based transaction fee mechanism also provided for in Bitcoin Core
• Ethereum
• Currently 3 ETH per block – thus ‘inflation’ 7.4%
• Recent proposal to decline to 2 ETH per block in 11/18
• Fees paid in Gas (109 Gas per ETH) for computation are credited to miners
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Network

• Full Nodes – Store full Blockchain & able to Validate all Transactions
• Pruning Nodes – Prune transactions after validation and aging
• Lightweight Nodes - Simplified Payment Verification (SPV) nodes – Store
Blockchain Headers only
• Miners – Performs Proof of Work & Create new Blocks - Do not need to be a
Full Node
• Mining Pool Operators
• Wallets – Store, View, Send and Receive Transactions & Create Key Pairs
• Mempool – Pool of unconfirmed (yet validated) Transactions
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Alternative Consensus Protocols
Generally Randomized or Delegated Selection of Nodes to Validate next Block
• May have added mechanism to confirm Block Validators’ Work
Randomized Selection May be Based upon:
• Proof of Stake – Stake in Native Currency
• Proof of Activity - Hybrid of POW and POS
• Proof of Burn – Validation comes with Burning of Coins
• Proof of Capacity (Storage or Space) – Based upon Hardware Space

Delegated Selection May be Based upon Tiered System of Nodes

Major Permissionless Blockchain Applications still use Proof of Work – though:
• DASH is a hybrid of POW with a tiered system of ‘Masternodes’
• NEO uses a Delegated protocol of ‘Professional Nodes’
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Class 5 (9/20): Study Questions
• How does Bitcoin record transactions? What is unspent transaction
output (UTXO)? What is script code embedded in each Bitcoin
transaction and how flexible a programming language is it? (Moved
from 9/18)

• As many design features – public key cryptography, hash functions,

append-only timestamped logs, digital cash, and proof-of-work – pre-
date Bitcoin, what was the novel innovation of Santoshi Nakamoto?

• Who is Satoshi Nakamoto? (Only kidding a bit.)

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Class 5 (9/20): Readings

• ‘Bitcoin’s Academic Pedigree’ Narayanan and Clark

• ‘Making Sense of Cryptoeconomics’ CoinDesk

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Conclusions
Reviewed Bitcoin Design Features
• Timestamped Append-only Logs (Blocks)
• Secured through Cryptographic Hash Functions & Digital
Signatures
Decentralized Network Consensus
• Consensus through Proof of Work
• Native Currency
• Network
Transactions Ledgers
• Transaction Inputs & Outputs
• Unspent Transaction Output (UTXO) set
• Scripting language
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15.S12 Blockchain and Money

Fall 2018

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15.S12 Blockchain and Money

Fall 2018

For information about citing these materials or our Terms of Use, visit: https://ocw.mit.edu/terms.

32