Paolo ColettiFaculty of Economics – Free University of Bozen Bolzano

Cryptocurrencies and blockchain technology

What is petroleum?

Bitcoin is not an

investment

What is Bitcoin?

• Bitcoin is a decentralized cryptocurrency:

• Wikipedia (June 2019): Bitcoin is a cryptocurrency, a form of

electronic cash. It is a decentralized digital currency without

a central bank or single administrator that can be sent from

user-to-user on the peer-to-peer bitcoin network without the

need for intermediaries

• It is cash/currency

• It is electronic

• It is decentralized and it does not need intermediaries

Do we really need

electronic cash?

Do we really need a

decentralized currency

without intermediaries?

Current situation

• Bank system is decentralized but under institutional control

• Paper cash transfer is without intermediaries

• Electronic cash transfer is always with intermediaries

WhatsApp / Facebook / Instagram

• Centralized and with intermediary

• Imagine what happens if Mark decides that you do not use them

anymore

• 20 minutes your parents call the police

• 3 days your girl/boyfriend forgets about you

• 2 weeks all your best friends disappear

E-mail

• decentralized and without intermediaries

• Imagine what happens if Aruba decides that I do not use it

anymore

• I can change e-mail provider

• I can set up my own e-mail server connected to at least one

node of the e-mail network

Back to money…

• For everyday usage currently having intermediaries is fine

• but…

• Reduce or zero fees

• Illegal transactions

• Dissenters’ funding in dictatorial government

• Overcome censorship: WikiLeaks in 2011

• Control your own money

Why is all this relevant for you

Very basic cryptography for dummies

How does the blockchain work

Advantages and future visions

Disadvantages and criticisms

How does a remote cash transaction work?

… imagine a world where you can send the picture of a banknote…

trust

Check ownership ?Guarantee arrival ?

Lock funds ?

How does a bank transaction work?

trust

trust

trust

Check ownershipGuarantee arrival

Lock funds

Check ownership with cryptography

Very basic cryptographyfor dummies

Military technique to make text unreadable

• Encryption: BITCOIN → DKVEQKP

• move letter forward by +2 places

• Decryption: move letter by -2 places

• DKVEQKP → BITCOIN

• Algorithm is well-known

• The keys +2 and -2 are secret and change for every message

Problems

• Even with a complicated algorithm, the encryption system can be

broken using computers who try all the combinations

• It is symmetric: it is easy to deduce a key (-2) once you know the

other one (+2)

1978, RSA algorithm published on Communications of the ACM

Verifying my signature

encrypt with my private key

documentencrypted

document

signed

document

decrypt second part with my public key

signed

document

If the two parts are the

same, signature was

really done with my

private key.

• Generate a couple of keys• Keep my encryption key private: private key• Distribute my decryption key (e.g. on my website): public key

Placing my signature

If the two parts are

different, signature

was not done with

my private key

What has all this to do withcryptocurrencies?

How does Bitcoin work?

How a Bitcoin transaction works 1

• Each user has one or several addresses (moreorless as your IBAN

number) identified only by his public keys, e.g.

1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2

• There is a shared public ledger which records all the transactions

among addresses , called blockchain

How a Bitcoin transaction works 2

• Marco (1BvBmS…) want to send to Felix (1L7nAh…) 3 bitcoins

• Marco writes in his blockchain a transaction of 3 bitcoins from

address 1BvBmS to address 1L7nAh and signs it using the private

key corresponding to 1BvBmS.

• Felix sees the transaction appearing in his blockchain and can

check, using Marco’s public key 1BvBmS, whether the signature is

genuine. This means that it was really the owner of 1BvBmS who

did it.

• Moreover, Felix can determine whether Marco’s money is good

checking all the history of those 3 bitcoins from their creation

until the arrival on Marco’s account.

Privacy in the blockchain

• Every transaction is completely public

• Everybody can trace back the history of every bitcoin from its

creation to its current owner

• Everybody is aware of the amount of money in each address.

• Therefore, no privacy at all!

• Addresses are only public keys, they do not disclose the name of

the person/persons who know the private key.

https://www.blockchain.com/explorer

SystemDoes money really belong to Marco?

Is money reallytransferred to Felix?

Can Marco spend the same money twice?

Marco has the bill in his hand

Marco gives the bill in Felix’s hand

Would need a very good photocopy

Marco’s bank guarantees

Felix’s bank guarantees that transfer has arrived

Marco’s bank guarantees

Digital signatures on all previous transactions guarantee

Felix sees the transfer appearing in the blockchain with Marco’s digital signature

After 1 millisecondMarco can transfer the same money to another address of himself

Comparison of payment systems

Double-spending problem

• Who keeps the books? Who controls the blockchain?

• If the blockchain is controlled by a central authority, double-

spending would be prevented…

• … but then, why not using traditional banks?

• Peer-to-peer: every user has his copy of the blockchain.

• Each new transaction is inserted by the user in his blockchain

and transmitted to all other users…

• … but it takes some seconds of time

• … in the meantime the original owner can double-spend the

money!

• And which transaction is the right one?

Problem unsolved until 2008

http://www.bitcoin.org/bitcoin.pdf

Brief history of Bitcoin

• 1st November 2008: Satoshi Nakamoto publishes his article

• 3rd January 2009: Satoshi Nakamoto starts the blockchain

• 12th January 2009: Satoshi Nakamoto sends 10 bitcoins to Hal

Finney

• 22nd May 2010: Laszlo Hanyecz buys two pizzas for 10000 bitcoins

• 12th December 2010: Satoshi Nakamoto disappears

• June 2011: Wikileaks accepts donations in bitcoins

• October 2013: FBI seizes the Silk Road

• February 2014: Mt.Gox is hacked for 500000 and goes bankrupt

• Autumn 2017: Bitcoin skyrockets and gains media attention

How to timestamp transactions 1

• Transactions are inserted in the blockchain as unconfirmed

• Money is yours, but you are not sure that it wouldn’t be

double-spent

• Users are invited to solve a very difficult mathematical puzzle

which can be solved only by trial-and-error

• e.g. calculating 7843070540877985475847111340036

• Difficulty self-adjusts itself to make the problem being solved on

average in 10 minutes

How to timestamp transactions 2

• Who solves it first (proof-of-work) has the right to confirm a block

of transactions and attach it to the previous block

• He decides which transactions go inside! (max 1 MB)

• Block may not contain transactions which are in conflict with

previous blocks

• Everybody can easily check whether the solution is

correct: 28005482571950062 = 7843070540877985475847111340036

• He receives as prize 50 new bitcoins!

• This activity is called mining

What if 2 different confirmed blocks appear and they contain conflicting transactions?

• The one with more blocks after it wins!

Block 51 Block 52Block 53 Block 54 Block 55

Block 53 Block 54

And if I want the red branch to prevail?

• Solve the puzzles as fast as you can and add blocks to your branch

• Computational power decides who wins!

• The older the transaction’s confirmation, the more difficult to

reverse it!

Blockchain recap:

• The blockchain is a ledger containing all the bitcoin transactions

• All transactions are signed with digital signature of the sender

• Transactions are inserted as unconfirmed

• Who solves a difficult mathematical puzzle receives 50 bitcoins

and can add a block of confirmed transactions

• Once a transaction is confirmed, that money becomes difficult to

double-spent. Each 10 minutes after confirmation another block

is added and double-spending becomes nearly impossible.

Who are the miners?

• Originally nerds who kept their computer

running for the sake of cooperation

in maintaining the blockchain clean

• Now huge computer farms or

associations of nerds who turned

their basement into farms

Fees and total bitcoins supply

• Currently each mined block (on average each 10 minutes) has a

reward of 12.5 bitcoins…

… plus all the fees of people who want to be confirmed soon!

• Reward halves every 4 years and will stop in 2140 at 21 millions

bitcoins.

• From 2140 only fees will reward mining activity.

• https://bitcoinfees.earn.com

The block limit problem

• Currently each block has a size limit of 1 MB

• It can contain maximum 7000 transactions

• Bitcoin blockchain can handle maximum 7000 transactions

per 10 minutes, i.e. less than 11 transactions per second

(Paypal 200, VISA 24000; source https://www.valuewalk.com/2018/01/transactions-

speeds-cryptocurrencies-stack-visa-paypal/)

• When blockchain is overcrowded, fees skyrocket

• Lightening network is starting

2216 cryptocurrencies (1 Jun 2019)

Famous alt-coins

• Ethereum: allows smart contracts

• Tether: stable coin pegged to USD, used as USD with fast transactions

• Ripple: supported by banks

• Bitcoin Cash: fork of Bitcoin with 32 MB blocks

• IOTA: feeless micropayments for Internet of Things

• Monero: privacy coin, addresses and amounts are secret

How to get cryptocurrencies

• First of all, set up a wallet on your computer or smartphone

• Mining famous cryptocurrencies at home in 2019 is not possible:

electricity costs more than the obtained coins

• Buying from exchanges, web sites which sell cryptocurrencies for money

• www.coinbase.com www.bitstamp.com www.therocktrading.com

• choose only famous big exchanges which ask for your ID

• Trading for money from private individuals www.localbitcoins.com (stopped 1 Jun)

• beware of scams and robberies

• Finding a job paid in cryptocurrency www.xbtfreelancer.com

• beware of scams

• Disclaimer: do not buy cryptocurrencies

Advantagesand future visions

Advantages

• You HAVE your own money

• Almost anonymous and almost instantaneous transfers anywhere

anytime

• The end of banks’ monopoly of money transfers

• The end of governmental control over money

• Known money supply distribution

• Possibility to transfer money for people without a bank account

Smart contracts

• It is a transaction with conditions, practically a program

• Felix wants to buy a product from Marco

• Felix sends coins to a smart contract address

• The smart contract locks the coins

• If nothing happens for one month, Felix may ask the smart contract to get his coins back

• If instead the smart contract receives delivery notification from the shipper, it sends the

coins to Marco

• Everything is done automatically, sometimes with the use of

external information

• Contract is self-executing, no legal intervention is possible, only

the computer code written on the smart contract matters

ICO Initial Coin Offering

• ICO is a form of crowd-financing in which a company offers

tokens which can be:

• a new cryptocurrency

• services (utility token)

• shares (security token)

• donations.

• Tokens must be paid in Bitcoin or, more frequently, in Ethereum

• Tokens are handled through a blockchain and can be traded

• Investors typically hope for capital gain rather than token’s use

• Some fails, some are scams (source WSJ 2018 and Fortune 2018)

from coinsst.io 2018: https://www.coinist.io/biggest-icos-chart

ICO NameAmount Raised

ICO NameAmount Raised

Filecoin [Futures] 257 millions LatiumX 51 millions

Tezos 232 millions TenX 51 millions

SIRIN LABS Token 157 millions NAGA 50 millions

Bancor 153 millions Paragon 50 millions

Status 108 millions Kyber Network 48 millions

QASH 105 millions SALT 48 millions

Aragon 73 millions Loopring 46 millions

Bankex 70 millions Enigma 45 millions

TRON 70 millions ICON 45 millions

DomRaider 65 millions indaHash 42 millions

WAX 64 millions SONM 42 millions

Gnosis 63 millions INS Ecosystem 41 millions

Nebulas 60 millions Finom NOM Token 41 millions

MobileGo 53 millions Etherecash 40 millions

Cosmos 53 millions Grid+ 38 millions

Using blockchain for other applications

• Blockchain stores data which are

• immutable,

• with controlled access,

• with certified date,

• public or partially public

Examples of blockchain alternative use cases

• Storage for permanent data with certified date (OpenTimeStamp)

• Ownership ledger for cars, real estate, patents, digital art, …

• Stamps

Examples of blockchain alternative use cases

• https://techcrunch.com/2017/12/03/people-have-spent-over-1m-

buying-virtual-cats-on-the-ethereum-blockchain/

• National e-currencies (Venezuela, China, Russia, Estonia, …)

• Digital identity: birth, marrying, etc.

• Insurances

• Online voting

• Medical data

Blockchain for other applications

Disadvantagesand criticisms

What are they used for? Everyday currency?

User’s disadvantages

• It is not possible to reverse a wrong/stolen transaction

• Losing private keys means losing the coins

• It is still complex for many people to buy true cryptocurrencies

• Confirmation’s waiting time and fees are a problem for many

cryptocurrencies

Technical threats

• A cryptocurrency’s set of rules are very difficult to change in case

of technical problems

• If mathematicians discovers the secrets of prime numbers or

technicians build really working quantum computers,

cryptography won’t work anymore

• Difficulty to scale: Bitcoin 10 tx/s, Ethereum 20, Bitcoin Cash 200

• Blockchains grow exponentially

Social criticisms

• Favourite payment method on the dark web

• Payment method for ransoms (e.g. cryptolocker and wannacry viruses)

• Cannot be confiscated

• Mining uses a lot of electrical power (claim unverified)

• Mining is in the hands of few companies

It could be the future.

It seems to be in mid 90s…

• Mass media talked about “the Internet” once a month

• Educated and young people knew about “the Internet”

• Few people had really an Internet connection at home

• Almost nobody was really using it!

• Mass media talk sometimes about Bitcoin

• Most educated and young people have heard about Bitcoin

• Few people actually own them

• Almost nobody uses them for purchases!

Documentary films to watch

• The Rise and Rise of the Bitcoin (2014)

• Available on Amazon Prime Video and iTunes

• Historical, produced by a first-time miner

• Banking on Bitcoin (2016)

• Available on Netflix and YouTube https://youtu.be/rEz4a-Z83gU

• Similar but more aloof

• Bitcoin: The End of Money as We Know It (2015)

• Available on Youtube https://youtu.be/tUqq3Ug05h0

• Oriented towards theoretical economical aspects

• Magic Money: The Bitcoin Revolution (2017)

• Availabe on YouTube https://youtu.be/PVo5wCSnmSs

• Short and contains use cases

• Trust Machine: The Story of Blockchain (2018)

• Availabe on YouTube https://youtu.be/ZKwqNgG-Sv4

• Very short and technical