Blockchain meetup

Location:
QuantUniversity Meetup
November 14th 2017
Boston, MA
Blockchain Technology Workshop
2017 Copyright QuantUniversity LLC.
Presented By:
Duru Turkoglu, PhD
www.QuantUniversity.com

Blockchain Technology
Cryptocurrencies, Applications, Limitations

• Public
• Distributed
• Immutable
• Trustless
What is Blockchain?
Open to everybody
Audited by everybody
Append only
No central authority
Blockchain is an accounting system that is:
Briefly: Distributed Ledger
Introduced by: Bitcoin

• 1970s/80s --- Public key cryptography
• Guardtime --- Application of public key cryptography
• 1990 --- Digicash/ecash
• 1992/1997 --- Hashcash/Proof-of-work
• 1998 --- b-money, bitgold
History of Blockchain

• 2008 --- Satoshi Nakamoto, creator of the Bitcoin Network
Think: Store of value
• 2013 --- Vitalik Buterin, creator of the Ethereum Network
Think: Smart contracts and Worldwide computer
• 2017 --- ERC20 Tokens/ICOs using the Ethereum Platform
First ICO actually took place in 2013
Think: Stocks/assets (not fully clarified yet)
• Ongoing --- Private blockchains, State channels, etc.
History of Blockchain

Ownership
Easy to Verify and Hard to Fabricate
Ledger
Easy to Transact and Hard to Modify
Essential Qualities of a Functioning Ledger

Cash
How do you make people
believe that some cash
out there is yours?
Verifying Ownership
Bearer’s Instrument
If you have it in your
wallet, then it is yours!

Cash
What if you have a LOT of
cash? It would be very
hard/risky to carry it.
Verifying Ownership
?
Bearer’s Instrument
If you have it in your
wallet, then it is yours!

Cash
What if you have a LOT of
cash? It would be very
hard/risky to carry it.
Verifying Ownership
Place it in a Trust
The bank has your funds,
but you can withdraw!

Car & Home
What about other kinds of
physical assets, such as
cars, real estate, etc?
Verifying Ownership
Government Record
Ownership is registered with
DMV and Recorder’s Office.

Verifying Ownership
Conventional Methods Rely on a Single Trusted Party
• Banks, government offices, etc.
• Problems arise when trust is broken:
▫ Access may be restricted or denied
▫ Prone to mistakes in recordkeeping
▫ Bank runs result in loss of funds (due to fractional reserve)
• Transfer of ownership may require multiple parties involved
• High transaction fees to be paid to each party involved
Blockchain does not place trust in a single entity

Double Spending
Cash in Wallet
Can you double spend the
cash in your wallet? NO!
(Unless you are a magician)
Issues
Cannot transact with
large amounts. Actually,
you can but very risky.

Cash in Bank Account
Can you double spend the
funds in your bank account.
No, banks do not clear funds
twice, but you can try!
Double Spending
Issues
Transaction fees are high.
Clearance of funds may
take several days.

Car & Home
Can you double sell a car?
Or a house? No! (In general)
Fraudulent sales exist!
Double Spending
Issues
Many parties are involved to
prevent such fraudulent sales.
Very high transaction fees.

Double Spending
Conventional Methods Are Prone to Such Frauds
• If the amount is too small there is no incentive (e.g., cash)
• There are prevention methods for larger amounts/real assets
▫ Central parties managing the funds disallow double spend
▫ Third intermediary parties check validity of ownership
• Requires trust in central or intermediary parties
• Transfer of ownership may require multiple parties involved
• High transaction fees to be paid to each party involved
Blockchain prevents double spend via its ledger

Transactions and Ledger
Physical Cash
Very easy transactions.
Very hard to modify ledger.
Need physical exchange.
Issues
Theft is relatively easy.
Physical cash is not the
only source of money.

Fiat Money
Relatively easy to transact
within the same bank but not
so easy with others. Hard to
modify ledger from outside.
Issues
Transaction fees are high.
Money supply can be
diluted relatively easily.

Car & Home
Not very easy transactions.
Relatively hard to modify
ledger from outside.
Issues
Many parties are involved in
transactions leading to high
fees.

Conventional Methods
• I
Blockchain is not easy to modify
Transactions require some time

Cryptography
&
Distributed Systems
Blockchain Solution

Easy to Verify
Hard to Fabricate

Story:
Alice would like to send a very important message to Bob.
She wants him to know that it is indeed her who sent the message.
How can Alice accomplish this?
Answer:
One way functions and public key cryptography!
Private and public keys to encrypt and to decrypt.
Applications:
Communications of any kind: internet, military, etc. Developments in
cryptography created the field of computer science back in the 1940s.
Public Key Cryptography

Illustration:
• Alice produces private and public keys.
• She publishes her public key to everyone.
• Private key encrypts, public key decrypts.
• Nobody can produce the same encryption
without knowing the private key of Alice.
Alice sends a message M to Bob:
She encrypts M using her own private key: M ⟶ MA
Bob decrypts the message from Alice:
He decrypts message using Alice’s public key: MA ⟶ M

Guarantees:
Using Alice’s private key ensures that message is sent by Alice.
Nobody else could have written it!
Digital signatures:
Encryption using a private key is called a “digital signature”.
Digital signatures are enforceable in a court of law!
Alice cannot claim that she did not send the message.
Application in blockchain:
Digital signatures are used to authenticate ownership.
Payment addresses are generated by public keys.

Verifying Ownership in Blockchain
Public Key Cryptography to Prove Ownership
• User creates a pair of public and private keys
• Public key to generate and publish payment addresses
• Private key to digitally sign for the funds in those addresses

Security of Public Key Cryptography
• Brute force is a possible attack, but infeasible in general
• One-way functions for encrypting, cannot invert the function
• Best to avoid spending from the same address many times
• It is extremely hard to forge a signature even with observation
• If your private key is exposed, your address is compromised
. . .

Anybody Can Verify Ownership in a Transaction
• Address of the funds being spent unlocks the transaction
• Verification similar to the process between Alice and Bob
• Nobody else but the owner of the address must have signed
• Owning an address is equivalent to owning its private key
• If your private key is exposed, ownership is lost forever
As long as the private keys are secured
It is practically impossible for someone to steal

Easy to Transact
Hard to Modify

Consists of several
computers called nodes
Each node has its
own private memory
Nodes communicate with
each other by messages
Network structure is
not known in advance
Distributed Systems
Nodes in the network
may fail or may exhibit
malicious behavior

Client-server: Designated
servers accept clients
Three-tier/n-tier: More
organized structure
Peer-to-peer: Every node
can be a server or a client
Distributed Systems
Computation by a master node or by using a shared database
Blockchain itself is the shared database

Consensus required:
• Who holds correct data
• Who can make changes
• How are these rules
enforced between nodes
Let's not forget, there may
be malicious nodes
Distributed Systems
Blockchain approach: Publicly verifiable data
requires (hard) proof Tampering with data
becomes exponentially harder as time passes

Advantages:
• No need to trust any particular (central) node
• Collective computation effort more powerful
than what can be done by one central entity
• Rules to be agreed on collectively
• More resilient to certain forms of attacks
Challenges:
• Scalability in the number of transactions
• Providing incentives for honest behavior
and/or penalties for malicious behavior
Distributed Systems

• Block number (height)
• Latest transactions
• Resulting changes to data
• Pointer to previous block
• Proof of validity
Structure of the Blockchain
…

• Each block stores a
list of transactions
• Similar to chain of
title in real estate
trxs, if we assume
one trx per block.
• For correctness,
the entire chain
must be valid
Structure of the Blockchain

• Transactions require
digital signatures
• How to verify the
entire history of
transactions in the
blockchain?
• Any message can be
digested into a short
string using a hash
function
• One-way functions
Cryptographic Hash Functions

• Cryptocurrency
Bitcoin, Ethereum, Litecoin, etc.
There are over 1000 different altcoins
• Smart contracts
Legal contracts which are enforced automatically
• Asset management
• Identity verification, notary, voting
• Decentralized exchanges
• Many more…
Applications of Blockchain Technology

Cryptography
&
Distributed Systems
Main Components of Blockchain

Cryptography:
• Validity of transactions can be verified quickly
• Ownership is tied to the private keys
• Each block can be digested into a string
which proves the validity of the entire history
Distributed Systems:
• Trustless distributed public ledger
• Creating a block is hard, so it is much harder
to modify earlier blocks in the blockchain
• Constantly audited by peers
Main Components of Blockchain

Smart Homes, Smart Cars:
• Ownership information can be recorded on the blockchain
• Exchange of the ownership, money, keys (authority to use),
can be transferred in the same single transaction
• Crucial information related to the asset can also be recorded
on the blockchain: past insurance claims, previous owners
• Very reliable: any crucial information recorded on the
blockchain cannot be modified later

Identity, Notary, Voting:
• Self identifying information is required in any business
transaction: photo ID, passport, etc
• This information can be stored on the blockchain and the proof
of identity can be produced without any government backing
• One can prove identity by just simply using the private key
• Claims about the identify of Satoshi Nakamoto was made
based on the use of one of his/their private keys

Decentralized Exchanges:
• Exchange of two assets is generally carried out by a trusted
third party that acts as escrow
• Central entity controlling the exchange can be the subject of
an attack resulting in the loss of deposits
• Such incidents can be eliminated via exchanging the assets by
using an escrow for the transaction on the blockchain itself
• Swap will be carried out when both parties sign the transaction

Private Blockchain:
• Even though the main motivation to introduce the blockchain
technology was to remove trust, settings where there is a
trusted entity can still enjoy the benefits of using a blockchain
• Automated maintenance and auditing of records
• No need for consensus. The blockchain is truly an append
only ledger. Once written, the past is indeed set in stone
• Requires full trust in the centralized node(s) issuing the blocks

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• Coming in 2018 to Boston, NYC, Chicago, San Francisco and online!
• Sign up at www.analyticscertificate.com/Blockchain-ML for updates!
Blockchain workshop

Thank you members and CIC!
Checkout our programs at:
www.analyticscertificate.com
Sri Krishnamurthy, CFA, CAP
Founder and CEO
QuantUniversity LLC.
srikrishnamurthy
www.QuantUniversity.com
Information, data and drawings embodied in this presentation are strictly a property of QuantUniversity LLC. and shall not be
distributed or used in any other publication without the prior written consent of QuantUniversity LLC.
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