Blockchain Tech Big PictureCampbell R. HarveyDuke University and NBER

FUQINTRD 697: Innovation and Cryptoventures

Campbell R. Harvey 2019

Tech Big Picture

Key ingredients• Hashing function: provide the chain (the entire last block as the header

of the next). Bitcoin SHA-256; Ethereum Keccak-256 (SHA-3). One way cryptographic function (infeasible to go the other way)

• We will do demonstrations on the main hashing algorithms• Optional Wednesday lunch session on mechanics of SHA-1

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Tech Big Picture

Key ingredients• Private keys/Public keys: Private key is just a

random number. The public key is mathematically linked to the private key. It is easy to go from the private key to the public key – but very difficult to go from public to private. Current technology uses Elliptic Curve Cryptography (ECC)

• We will spend a session on how these work with simple examples

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Tech Big Picture

Key ingredients• Public Address: This is either identical to the public key (e.g., Ethereum)

or a function of the public key (e.g., Bitcoin). • We will detail how bitcoin public addresses are derived

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Tech Big Picture

Key ingredients• Digital Signatures: When doing a

transaction, you “sign over” your cryptocurrency to someone else using a Digital Signature Algorithm (DSA). The signature proves that you are the owner of the private key. Anyone observing the signature and the public key can verify that you have the private key (without revealing the private key).

• We will spend a session on DSA pointing out future vulnerabilities

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Tech Big Picture

Key ingredients• Transaction mechanics: For many cryptocurrencies like bitcoin, we deal

with unspent transaction outputs (UTXOs). If I have an UTXO of say 10 units and I want to send 7 to Jenna, Jenna generates a private key (and a public key). I generate a (potentially) new private key (and public key). In a single transaction, I sign over 7 to Jenna and 3 to myself (think of this as “change”). I have a new UTXO of 3 units. The old one resides in a blockchain but has no value. Ethereum uses a different system of account balances.

• Cryptocurrency doesn’t move anywhere. Everything remains on the associated blockchain.

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Tech Big Picture

Key ingredients• Cryptography: This is widely used in all aspects of blockchain. It is

particularly important in deriving the public key and the DSA. We will also see that other types of cryptography are used in certain blockchainapplications (for example, you might find it useful to have a contract codified in a blockchain – but you only want it visible to the contracting parties.

• Introduction to Cryptology session will introduce some simple ciphers

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Tech Big Picture

Key ingredients• Consensus Mechanisms: Consensus is

the mechanism by which nodes agree on both the historical blockchain as well as the new additions to the historical blockchain.

• We will initially talk about Proof of Work (PoW) which is currently used in Bitcoin and Ethereum. We will also talk about Proof of Stake (PoS) and some other mechanisms.

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Tech Big Picture

Key ingredients• Incentives: In Proof-of-Work systems, miners are incentivized to verify

transactions and to do the work that allows new blocks. However, there is no incentive to run a node.

• It is possible to introduce incentives for Level 2 systems (Lightning Network for bitcoin)

• Some newer technologies incentivize nodes

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Tech Big Picture

Key questions• Latency: Blockchains have complete redundancy. How can blockchains

compete with Visa with 24,000 transactions per second – and go beyond as blockchain applications grow?

• Transactions are but one level – what happens when smart contracts become more mainstream

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Tech Big Picture

Key questions• Data: Blockchains are stored on multiple nodes. If large amounts of data

are associated with transactions, it may be infeasible to store petabytes of data on each node.

• Possible for blockchains to store summaries of data rather than original data

• Cost of storage declining exponentially

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1981 - $300,000 1987 - $50,000 1990 – $10,000 1994 - $1,000 1997 - $100 2000 - $10 2004 - $1 2010 - $0.1 2018 - $0.01

Cost per GB

Tech Big Picture

Key questions• Connection: Are we headed to a world of millions if not billions of

blockchains – or will there be one Masterchain. • Sidechains will be studied in the course

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Tech Big Picture

Key questions• Privacy: Delicate balance needs to be achieved. No one has worked it out

yet.• This is not just a blockchain issue!

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Tech Big Picture

Key questions• Real world verification: How do we verify events

in the real world trustlessly on a digital and siloedblockchain?

• Much work needs to be done on oracles (software, hardware, inbound, outbound, and consensus based). How do we trust the oracle?

• RFID tags?

Campbell R. Harvey 2019 15https://blockchainhub.net/blockchain-oracles/

Tech Big Picture

Key questions• Immutability: This is a crucial characteristic of a blockchain. What are the

guarantees on my transaction?• Block confirmations• The issue of forks

• Bitcoin Cash 1 Aug 2017• Bitcoin Gold 24 Oct 2017• Bitcoin SV 15 Nov 2018

Campbell R. Harvey 2019 16https://hackernoon.com/blockchain-forks-b0dca84db0b0 https://www.investopedia.com/tech/history-bitcoin-hard-forks/

Tech Big Picture

Key questions• Governance: We are only now thinking about decentralized governance.

This is very much related to consensus mechanisms – but broader in that the computer programs that generate current blockchains will surely need improvement and enhancements in the future. Who will do this? (BIP/EIP for example.)

• Much research on consensus mechanisms.• What will the world look like with potentially millions

of DAOs?

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Tech Big Picture

Key questions• Use Case: Blockchain is not the panacea for all business applications. In

addition, even if a business application is suited for blockchaintechnology – there are a myriad of potential blockchain choices.

• Technology needs to match the needs of the application

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Tech Big Picture

Key questions• Regulation: Regulators are at a disadvantage because blockchain is not

currently part of the law. In addition, there is a steep learning curve for regulators

• How do we classify tokens?• Regulatory risk may cause

innovation to move off shore to jurisdictions that are less strict

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Tech Big Picture

Key questions• AI: Is there a nexus between AI and blockchain?

• Think of Federated Learning being moderated by Smart Contracts.

• Singularity NET; DeepBrain Chain; Namahe;

Campbell R. Harvey 2019 20https://blockonomi.com/ai-blockchain/