Definitions Flashcards
How can you prove that you have created digital
content at a certain point in time?
You could register your data with something like a patent
office: You bring your data, they store it and issue a
receipt, record the storing time in a ledger, post it online
(like SSRN).
Can you propose a solution that does not require a
trusted third party?
• Print the digital content out and put it in a ledger
• Distribute the ledger so that everybody can verify the data for themselves
– the stamp on the envelope can serve as time-stemp
– Wide distribution of the ledger is important because otherwise somebody can establish an alternative ledger by distributing the ledger
more widely.
What is the problem with printing out digital ledger and distributing it?
1) Creating and sending out ledgers extremely costly
2) People would have to be incentivized to keep and store the ledger
Hash digital content and post it in newspaper
- An algorithm called the hash-function is applied to any digital document that needs to be time-stamped
– The outcome is a short code
– Information about time and date is added - A stack of hashes of digital documents is hashed again and
the resulting code is posted in the NYT for everybody to see.
-> Distributed ledger
What does a hash function do?
Input is converted to a hexi-decimal “hash”
by scrambling it in a way that is impractical to
invert
What are the possible input to a hash function?
Anything that can be stored in digital form – Text – Data – Video, music, photographs – Fingerprints, irises – Etc.
What’s the purpose of the hash-code?
– It maps out digital content of any length into a unique, short string.
– Registering this short string is equivalent to registering the whole digital
content.
What’s the purpose of the distributed ledger?
– It makes faking the ledger if not impossible at least very costly.
– The originality of the ledger need thus not be guaranteed by a third
party.
– (Nevertheless, a third party is involved in the process, thus it’s not a fully
decentralized solution)
What is electronic cash?
Basically, a digital version of cash
Fungibility
One unit of digital cash is indistinguishable
from any other unit of the same digital cash.
– Owner is whoever is in possession
– Even if units of cash have a serial number, you do not have a claim to a specific unit of cash.
What can you credibly establish using the ledger??
o The person owning electronic cash
o The amount of electronic cash owned by that person
o A record date at which that person owned electronic cash
The ledger cannot provide
o A mechanism that allows us to verify the identity of the other person
o A cryptographic way of fully digitally recording data that ensures the integrity of the data
o A check whether that person has spent the electronic cash since the record date (double-spending problem)
Innovations brought together by
Nakamoto (2008)
Digital signatures: Using double-key cryptography to make secure transfers of assets from one wallet to another (British intelligence,1970s)
• The Blockchain: Recording new data sequentially in a write-only, indelible ledger (IBM, 1976)
• Proof-of-work: Validating new data by cryptographic “consensus” proof, in recurring 10-minute open competitions, instead of relying
on a trusted third party (Nakamoto, 2008)
Who updates the blockchain?
• Haber and Stornetta (1991)
– A trusted third party codes blocks
– The chain is public, becoming a distributed ledger that can be verified by anyone
• Nakamoto’s (2008) crowd-sourcing solution
– Network members compete to create new blocks
• The competition is called proof-of-work
• Proof of work: Solve a puzzle that solely requires computing power
• Node which solves the puzzle first creates the block
• Node earns a reward IF block is accepted as correct by the network
– Anyone can join the network and take part
Who updates the blockchain?
• Haber and Stornetta (1991)
– A trusted third party codes blocks
– The chain is public, becoming a distributed ledger that can be verified by anyone
• Nakamoto’s (2008) crowd-sourcing solution
– Network members compete to create new blocks
• The competition is called proof-of-work
• Proof of work: Solve a puzzle that solely requires computing power
• Node which solves the puzzle first creates the block
• Node earns a reward IF block is accepted as correct by the network
– Anyone can join the network and take part
Proof-of-work competition
- Create a hash of the above four components that satisfies a predefined condition
- For example: “The first four digits of the hash need to be zeros”
- Challenge: Find a “nonce” (number) that creates such a hash.
Incentive mechanism
The expected return from mining is higher for
creating correct blocks than for creating manipulated blocks.
When does incentive mechanism fails?
One party holds onto more than 51% of the nodes and can thus validate an incorrect block
What makes the blockchain brilliant?
• It is impossible to change one entry in the
blockchain w/o having to change the entire chain.
• The blockchain essentially is an easy-to-handle and
fool-proof transaction recording technology.
• It naturally offers a feature that is essential for the
functioning of markets: trust.
Bitcoin
is a virtual currency traded and recorded by
a peer-to-peer network on a “blockchain”
– Peers are equally privileged, equipotent participants in the application.
– They form a peer-to-peer network of nodes.
– One node == Bitcoin client
Bitcoin consensus algorithm
- New transactions are broadcast to all nodes
- Each node collects new transactions into a block
- In each round, proof-of-work determines a random node to broadcast its block
- Other nodes accept the block only if all
transactions in it are valid - Nodes express their acceptance of the block by
including its hash in the next block they create
Mining
is the process of adding a new block of
transactions to the blockchain
proof-of-work
Puzzle that needs to be solved to mine a block
Consensus mechanism needs to prevent
– Stealing bitcoins
– Denial-of-service attack - when miners do not put a transaction through and it does not happen.
– Double spend attack
