A distributed ledger is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, or institutions.
It has no central authority.
A blockchain is a decentralized, distributed, digital ledger consisting of records called blocks.
Any involved block cannot be altered retroactively without altering all subsequent blocks.
Trust in Distributed Systems
In a distributed database, trust is generally required between the nodes on the network.
However, in the case of Bitcoin, Ethereum, and Algorand, trust between nodes is not required.
Examples where trust is necessary: Google Drive, Google Documents, Dropbox (shared files).
Blockchain eliminates the need for trust.
Byzantine Generals Problem
The Byzantine Generals Problem is a computer problem about reaching consensus in situations where errors are possible.
It involves finding an agreement between different components, communicating only through messages, when there is conflicting information.
Leslie Lamport conceived the problem in 1982 and initially considered using "Albanian generals" to avoid causing offense, but ultimately chose "Byzantine generals" to ensure no group felt targeted.
Byzantine Fault Tolerance
It is related to army and coordinated attack.
Deals with uncoordinated attacks and traitors.
Handling Incorrect Transactions
If a node propagates an incorrect transaction (by mistake or dishonesty), the system must NOT validate it.
This is achieved through consensus mechanisms.
Bitcoin
Bitcoin is an electronic currency created in 2009 by Satoshi Nakamoto (pseudonym).
It is one of the first cryptocurrency implementations.
Bitcoin is a decentralized digital currency based on cryptography to validate transactions and generate money.
Keywords Related to Blockchain
Consensus mechanism for lack of trust.
Decentralized database.
Cryptography.
Generation of new money.
Decentralization in Bitcoin
Politically decentralized: Bitcoin is not controlled by a specific entity.
Architecturally decentralized (or distributed): Bitcoin lives on machines spread across the entire planet.
Logically centralized: All machines that Bitcoin lives on agree on a shared status (e.g., how many bitcoins each has).
A blockchain is a distributed (or architecturally decentralized) and politically decentralized database managed by a peer-to-peer network through distributed consensus mechanisms to agree on a shared state (logically centralized).
Bitcoin Explorer
blockchain.com/explorer is a tool for exploring Bitcoin transactions, blocks, and operations.
Transaction Details
Includes transaction hash, age, import amount in BTC and USD.
Transaction
A transaction is a Bitcoin transfer included in the Blockchain.
It is identified by two addresses (counterparties) and the amount exchanged.
The cryptographic private key signature of the counterparties provides proof of identity and ensures that the Bitcoins come from the real owner.
The signature also prevents transaction alteration after execution.
The two addresses are publicly identified by a code.
How a Blockchain Works
Involves private and public keys, Bitcoin addresses, miners, and nodes.
Includes the latest block, orphan block, and genesis block.
Finding the nonce for a block would now take years on most laptops.
Blocks
Height, age, transactions, miner, and dimension (bytes).
Block
A block is a part of the Blockchain that contains a set of Bitcoin transactions.
On average, a new block is added to the Blockchain every ten minutes.
Confirmation
To be included in a block and the Blockchain, a transaction must be confirmed by several nodes (miners), i.e., processed by the network.
Mining
It is a mathematical process performed by the Blockchain nodes on the candidate block.
Once solved, the block (and all transactions) is confirmed and inserted into the Blockchain.
Miners receive newly created Bitcoins (and transaction fees) as a reward.
Miner Activity
Miners accumulate transactions, selecting them based on criteria like highest fees.
When they have enough transactions to fill a block (fixed size), they try to solve the mining problem.
The first miner to solve the problem propagates the block in the network, which is verified by other nodes and added to their copy of the blockchain.
Bitcoin Transaction Lifecycle
Scenario: Rob sending 0.3 BTC to Laura.
Steps include Rob opening his bitcoin wallet, scanning Laura's address, filling the amount and fee, and sending.
The wallet signs the transaction using Rob's private key.
Miners include the transaction in the next block to be mined.
The transaction is propagated and validated by network nodes.
The miner who solves the Proof of Work propagates the new block to the network.
Nodes verify the result and propagate the block.
Laura sees the first confirmation, and new confirmations appear with each new block.
Blockchain Home
Provides grafici, statistiche, mercati, API, and portafoglio.
Shows the most recent blocks produced in the Bitcoin blockchain.
Cryptography
Cryptographic signature: It is a mathematical mechanism that proves identity and ownership of Bitcoins.
When Bitcoin software marks a transaction with a private key, the entire network can recognize the user (as an ID) and verify that the Bitcoins spent are in their possession.
The transaction becomes public with respect to the code.
There is currently no way for other nodes to guess your private key or steal your Bitcoins.
Digital (Cryptographic) Signature
Asymmetric (or public key) encryption for secure communication between Alice and Bob
Involves the use of public and private keys for encryption and decryption of messages.
Digital Signature Process
Signer creates a digital signature for a document using a hash algorithm and their private key.
Verifier decrypts the signature using the signer's public key and compares the hash values to validate the signature.
Public-Private Key Generation
Alice generates a public-private key pair.
Bob uses Alice's public key to encrypt a message.
Only Alice, with her private key, can decrypt the message.
Elliptical Encryption
Bitcoin uses Elliptical Cryptography among asymmetric cryptographies.
Public keys are based on creating a difficult mathematical problem to solve without specific information (the private key).
The user publicly distributes the problem (the public key) and keeps the additional information hidden (the private key).
RSA Encryption Example
Two prime numbers are chosen (e.g., 13 and 7) and multiplied to get n = 91.
A public key (e.g., 5) is chosen.
The Extended Euclidean Algorithm is used to derive the private key (e.g., 29).
Result: n = 91, public key 5, private key 29.
RSA Encryption Process
Alice and Bob know n = 91, Alice's public key is 5, and her private key is 29.
Bob wants to send the message "3" to Alice.
Bob calculates 3^5 \,mod\, 91 = 61.
The public message is 61.
RSA Message Decoding
Encoding: Associate each letter with a number.
Encryption Example: Cloud = 67, 76, 79, 85, 68.
Encrypted Cloud → 58, 20, 53, 50, 87.
RSA Security
Alice and Bob know n = 91.
Everyone knows the public key (5).
Only Alice knows the private key (29).
Knowing the public key is insufficient to decrypt the message.
Security relies on the difficulty of prime factorization.
Limitations of RSA
Prime factorization is not the most difficult problem on a bit-to-bit basis.
Specialized algorithms like Quadratic Sieve and General Number Field Sieve exist.
These algorithms become more efficient with larger numbers.
The gap between factoring large numbers and multiplying large numbers narrows as the key bit length increases.
RSA is not ideal for low-power devices, so techniques based on Elliptical Curves are preferred.
Asymmetric Algorithms and Digital Signatures
Asymmetric algorithms guarantee confidentiality.
Encrypting with the recipient's public key ensures only the recipient can decrypt the message.
Reversing the use of keys (encrypting with the sender's private key) guarantees authentication.
The digital signature is based on this principle.
The message is encrypted with the private key, so anyone can decrypt it using the public key.
Role of Miners
Miners check digital signatures, prevent double spending, and verify transactions.
Their main job is to build the Blockchain by concatenating blocks together through solving a computationally intensive mathematical problem.
This difficulty is essential for Blockchain security.
Proof of Work (PoW)
The Bitcoin Blockchain is based on proof-of-work.
PoW is used by cryptocurrencies like Bitcoin to reach a decentralized agreement between different nodes when adding a block to the blockchain.
Hashcash (SHA-256) is the Proof of Work feature used by Bitcoin.
Cryptocurrency forces miners to solve complex mathematical problems to add blocks to the blockchain.
Hash Function
A hash function takes an input of any length and creates a fixed-length output.
It produces a message digest, also known as a digital fingerprint.
Types of Hash Functions
Examples include MD5, RipeMD128, SHA-1, and SHA-256.
Block Hash Calculation
To calculate the hash of a block, we need the previous block hash, Merkle root, and timestamp.
Every transaction has a hash associated with it.
In a block, all transaction hashes are hashed (complex process), resulting in the Merkle root.
The Merkle root is the hash of all transaction hashes in the block.
Hashing Importance
Hashing is fundamental for the blockchain; Bitcoin's PoW is based on this operation.
The goal is to find a variation of the input that SHA-256 hashes to a value starting with '000'.
An integer called a nonce is added to the end of the string and incremented each time.
Proof of Work System
A POW system discourages attacks by enforcing certain jobs that require high processing time.
The work must be moderately hard but easy to control.
Game theory: Nodes compete to register new blocks and obtain compensation.
Most nodes are incentivized to behave legitimately and contribute to the blockchain.
Proof of Stake (PoS)
Proof of Stake is an alternative consensus method.
The number of digital currency tokens held by each user is important.
The greater the stake, the greater the chances that the system is not being breached.
Blocks are not mined but minted.
Participants with a significant stake are selected on a pseudorandom basis to mint the blocks.
Ethereum Proof of Stake
Ethereum moved from PoW to PoS.
Proof of stake replaces miners with validators.
Validators invest in the native coins of the system and stake their tokens in a smart contract.
Becoming a Validator in Ethereum
Validators lock up (stake) their tokens in a smart contract.
To become a validator, you put up 32 ether.
If you don't have enough, you can join a staking service.
An algorithm selects validators based on the amount of funds they have locked up.
Validators are awarded newly minted ether if their block is accepted.
Economic Incentives in PoS
Proof of stake offers an economic incentive to play by the rules.
If a node validates bad transactions or blocks, the validators face “slashing,” which means all their ether are “burned.”
Blockchain as a Public Ledger
The Blockchain is a public ledger of Bitcoin transactions in chronological order.
It permanently stores Bitcoin transactions and prevents double spending.
The Blockchain is a set of interlinked blocks: each block is identified by a code, contains transaction information, and contains the code of the previous block.
All nodes store all blocks and the whole Blockchain.
PoW - How it Works
Consider Bitcoin
A Merkle tree stores all the transactions in a block by producing a digital fingerprint of the entire set of transactions.
Merkle trees are created by repeatedly calculating hashing pairs of nodes until there is only one hash left.
This hash is called the Merkle Root, or the Root Hash.
The Merkle Trees are constructed in a bottom-up approach.
Every leaf node is a hash of transactional data, and the non-leaf node is a hash of its previous hashes.
Merkle trees are in a binary tree, so it requires an even number of leaf nodes. If there is an odd number of transactions, the last hash will be duplicated once to create an even number of leaf nodes.
Merkle Tree Integrity
The Merkle Tree maintains the integrity of the data.
If any single detail of transactions or order of the transaction's changes, then these changes reflected in the hash of that transaction.
This change would cascade up the Merkle Tree to the Merkle Root
M = Merkle Root: bab222cddaebc65ddbf2afd6d1e9a9fbbce29771b6e5bbc71ea8d40d60d89215
There are small adjustments being made after each difficulty epoch since the computational power on the network fluctuates.
The most notable change in network difficulty was during the summer of 2021 when China announced that it was banning mining activity in the country.
Mining firms switched off their machines and scrambled to move them to other territories.
This lead to a temporary drop in hashrate on the network and through the next difficulty adjustments the network self regulated by dropping the difficulty by a whopping 28% - the biggest downward adjustment in the history of the network.
Then as mining firms resumed their activity in their new locations, the difficulty steadily adjusted back upwards.
Ethereum switched on its proof-of-stake mechanism in 2022 because it is less energy-intensive, and better for implementing new scaling solutions compared to the previous proof-of-work architecture
To participate as a validator, a user must deposit 32 ETH into the deposit contract and run three separate pieces of software: an execution client, a consensus client, and a validator.
On depositing their ETH, the user joins an activation queue that limits the rate of new validators joining the network.
Once activated, validators receive new blocks from peers on the Ethereum network. The transactions delivered in the block are re-executed, and the block signature is checked to ensure the block is valid. The validator then sends a vote (called an attestation) in favor of that block across the network.
Whereas under proof-of-work, the timing of blocks is determined by the mining difficulty, in proof-of-stake, the time is fixed. Time in proof-of-stake Ethereum is divided into slots (12 seconds) and epochs (32 slots). One validator is randomly selected to be a block proposer in every slot. This validator is responsible for creating a new block and sending it out to other nodes on the network. Also in every slot, a committee of validators is randomly chosen, whose votes are used to determine the validity of the block being proposed.
Ethereum Validator Responsibilities and Risks
Running a validator is a commitment. The validator is expected to maintain sufficient hardware and connectivity to participate in block validation and proposal. In return, the validator is paid in ETH (their staked balance increases).
Participating as a validator also opens new avenues for users to attack the network for personal gain or sabotage. To prevent this, validators miss out on ETH rewards if they fail to participate when called upon, and their existing stake can be destroyed if they behave dishonestly.
There are two primary behaviors that can be considered dishonest: proposing multiple blocks in a single slot (equivocating) and submitting contradictory attestations.
When the network performs optimally and honestly, there is only ever one new block at the head of the chain, and all validators attest to it. However, it is possible for validators to have different views of the head of the chain due to network latency or because a block proposer has equivocated. Therefore, consensus clients require an algorithm to decide which one to favor. The algorithm used in proof-of-stake Ethereum works by identifying the fork that has the greatest weight of attestations in its history.
51% Attack on PoS
The threat of a 51% attack still exists on proof-of-stake as it does on proof-of-work, but it's even riskier for the attackers. An attacker would need 51% of the staked ETH.
They could then use their own attestations to ensure their preferred fork was the one with the most accumulated attestations. The 'weight' of accumulated attestations is what consensus clients use to determine the correct chain, so this attacker would be able to make their fork the canonical one.
However, a strength of proof-of-stake over proof-of-work is that the community has flexibility in mounting a counter-attack.For example, the honest validators could decide to keep building on the minority chain and ignore the attacker's fork while encouraging apps, exchanges, and pools to do the same. They could also decide to forcibly remove the attacker from the network and destroy their staked ETH. These are strong economic defenses against a 51% attack.
Chain Uniqueness
The chain is unique: if two different chains are created (for example, due to a delay in updating the blocks), the '' incorrect '' one is automatically deleted and overwritten by the correct one.
To determine the correct chain, there are automatisms: the chain considered correct is always the longest one (longest chain rule).
Consensus and Incentives
Generally, the longest chain is also the one stored by the majority of the network nodes (50% + 1 rule), given that miners are constantly incentivized to create valid blocks through the fees and bitcoins generated at each resolution of the mining problem.
From a game theory perspective, collaborating on the longest chain is a balance, as no one can achieve a better result for themselves (without collaborating with others) by creating invalid blocks (PoWs). This makes it very difficult for a hacker to change even the last block.
Distributed Consensus
An example of distributed consensus (or maybe not) BTC Guild can choose: «longer chain rule» VS «50%+1» rule
Forks in Blockchain
Forks are modifications to the blockchain’s network algorithm that leads to the primary blockchain network to split.
Hard Fork
A hard fork is a backward-incompatible upgrade to the blockchain.
In the hard fork new nodes can only communicate with others that operate the new version.
As a result, the blockchain splits, creating two separate networks: one with the old rules, and one with the new rules.
So there are now two networks running in parallel. They’ll both continue to propagate blocks and transactions, but they’re no longer working on the same blockchain.
All nodes had an identical blockchain until the point of the fork (and that history remains), but they’ll have different blocks and transactions afterward. Because there’s that shared history, you’ll end up with coins on both networks if you were holding them before the fork.
Soft Fork
A soft fork is a backward-compatible upgrade, meaning that the upgraded nodes can still communicate with the non-upgraded ones.
What you typically see in a soft fork is the addition of a new rule that doesn’t clash with the older rules.
A good real-life example of a soft fork was the Segregated Witness (SegWit) fork, which occurred shortly after the Bitcoin/Bitcoin Cash split. SegWit was an update that changed the format of blocks and transactions, but it was cleverly crafted. Old nodes could still validate blocks and transactions (the formatting didn’t break the rules), but they just wouldn’t understand them. Some fields are only readable when nodes switch to the newer software, which allows them to parse additional data.
Creating New Bitcoin
The system itself pays the nodes by generating new Bitcoins and providing fees for each planned transaction.
Bitcoin Generation and Mining
The bitcoins generated and given to the miners as a reward are established in advance and do not depend on the computing power of the network (they halve each tot) and at some point the only reward that the miners will receive will be the fees.
What depends on computing power is the complexity of the mining problem.
This complexity is adjusted in such a way that it takes an average of 10 minutes for the network as a whole to create a new block.
On average, given the computing power of the network and its own computing power, each miner can calculate how often he will be able to mine a block, and thus understand if mining is a profitable game for him (considering energy costs and bitcoin value. in that time).
Bitcoin in Circulation
Bitcoin Genesis Block was created on 1/3/2009.
Bitcoin supply is capped at 21,000,000.
The block reward halving dates include 11/28/2012, 7/9/2016, and 5/11/2020.
The next halvings are projected for 2024 and 2028.
Cost of Producing Bitcoin
Producing (mining) Bitcoin now requires thousands of powerful processors and graphics cards.
Computers with specific processors called ASICs (application-specific integrated circuits) have been developed.
These processors have a high cost and high electricity consumption.
The energy required to validate a single transaction can reach up to 215 Kwh.
Summary of Blockchain Benefits
Security: all-over-the world distributed database + encryption (all thanks to Blockchain technology)
Without intermediary (trust): automatic consensus (thanks to technology and Bitcoin → Currency On The Ledger)
Automatic remuneration of miners: generation of new Bitcoins
Ethereum
It is another platform based on blockchain technology
In order to run on the peer-to-peer network, Ethereum's addresses pay for the use of its computational power through a unit of account, called Ether, which therefore acts as both cryptocurrency and fuel.
Ethereum is different from the Bitcoin blockchain in that it allows you to create Smart Contracts. Even in Bitcoin, elementary smart contracts can be created. The peculiarity in Ethereum is that they are based on a complete Turing language
Blockchain in Business
Notarization (immutability)
Supply Chain Management (immutability)
Smart Contracts (automatic payments)
Notarization
A hash containing the fingerprints of the files is recorded in the blockchain.
All parties having access to the blockchain can individually verify the authenticity of these files.
How it Works
The document is hashed, summarizing its content into a 64-character string (256bit).
The 64-character string is placed into a Bitcoin (or other) blockchain transaction using the OP_RETURN field.
A small Bitcoin payment is made to process the transaction and register it on the blockchain (you can also make a 0 bitcoin transaction, so paying only the cost of the transaction - variable but around 0.00001 bitcoin).
Supply Chain Management
Supply chains are complex, and managing them takes hours upon hours of time from businesses and their teams, especially when different links in the chain are in different states or countries.
A blockchain’s immutable record-holding technology solves many issues associated with supply chain management by eliminating the lack of transparency
Hashing and Notarization in Blockchain
The blockchain is like a ledger with a transaction order distributed among many entities where only data can be added and each one keeps an identical copy.
Each register in the accounting book has a time stamp, is immutable and can be checked individually.
Notarization: A hash containing the fingerprints of the files is recorded in the blockchain. All parties having access to the blockchain can individually verify the authenticity of these files.
Blockchain Certification
Leaders in blockchain-based data certification leverage blockchain technology to ensure the existence, integrity, and attribution of communications, processes, and data important for your organization.
Acronis Notary uses blockchain technology to demonstrate the authenticity of the file and the absence of changes from the moment of backup.
OP_RETURN Field in Bitcoin Transactions
OP_RETURN is a "free" field presented in every Bitcoin transaction: free, but limited in size.
For this reason, it is necessary to devise a method to compress the document you want to notarize into a string, using HASHING
HASH function: function that takes an input and returns a 64-character string as output. The input can be text, a photo, etc.
Hashing is irreversible since knowing the hash, it is mathematically IMPOSSIBLE to deduce the original text.
Timestamping Proof Standard
OpenTimestamps aims to be a standard format for blockchain timestamping. The format is flexible enough to be vendor and blockchain independent.
Eternity Wall - Messages lasting forever
Hash Function
A hash function takes an input of any length and creates an output of fixed length.
It takes an input string and created a string of letters and numbers “a0680c04c4eb53884be77b4e10677f2b” This is referred to as the message digest. It is also known as the digital fingerprint.
Fingerprint and Hash Collisions
It is possible that two different files report the same Hash.
The hash projects a theoretically infinite sequence of data, in a finite hash and usually much shorter than the original file, so duplicates can happen.
Possible, but unlikely!
With the most advanced hashing techniques, it is difficult (if not impossible) to use this vulnerability (known as Collision) to modify documents for illegal purposes.
And then … there is the avalanche effect, a property where a small variation in input produces a considerable variation in the hash.
Contract Example
A contract is registered on the blockchain via notarization
A person wants to change a part of the contract and then prove that the changed part is the original contract. How could it do?
It should a) Modify the contract according to its purposes BUT SO THAT b) The hash of the new contract is the same as the old one
It seems particularly unlikely that it will satisfy both a) and b) !!!!
The answer is that it is NOT infinitely unique but the secret sauce is that it would take something like all the computers since the beginning of time a billion years to find a collision. ie two different inputs resulting in the same hash output. And that is good enough.”
DLT and Financial Services
It is not yet possible to think of a DLT that completely replaces the system of financial transactions (too large-scale).
But it would be possible for two counterparties to create a DLT and use it for their transactions
The cryptography used in Blockchain could certainly be considered to make current databases more secure
Small-scale examples of DLT applications are evolving
Not just finance: The Blockchain can be used as a register in which to enter any type of information and consequently also a contract, an act or a certificate, avoiding the intermediation of third parties, but maintaining the guarantee of advertising
Scalability of Blockchain
Analyzing blocks and transactions per second on different platforms.
Ethereum Statistics
Market cap of $76.856 Billion.
Transaction Throughput
Bitcoin – 3 to 4 transactions per second – 1 block every 10 minutes
Ethereum – 20 transactions per second – 1 block every 15 seconds
PayPal – 193 transactions per second average
Visa – 1,667 transaction per second
Scalability and Trust Issues
PoW is expensive: it is the main cause of scalability problems (as well as memory problems: all nodes should store all transactions).
Solutions under study: off chain operations, proof of stake, proof-of-work only on some random blocks, permissioned ledgers
Permissioned ledgers (or private blockchains) can be controlled, and therefore can have ownership. When a new data or record is added to the blockchain, the approval system is not bound to the majority of participants but to a limited number of actors who can be defined as trusted.
DLT and Financial Services: Myths
Less expensive system
Safer
Faster
And Currency on the ledger VS Currency not on the ledger à Are stable coins the solution?
Cost Analysis
Bitcoin transactions on the Blockchain cost (nearly) nothing.
But this is possible because new Bitcoins are created for the remuneration of the network nodes that work for the proper functioning of the system
What if the generation of new money is not allowed / possible?
The mirage of low operational costs derives from the false impression of free blockchain transactions: if one takes into account the seigniorage revenues invested, each transaction on the bitcoin blockchain has a cost of about 5-10USD [ESMA Response]
Safety Considerations
Potentially yes: safer in terms of immutability (less than 51% attacks), but not privacy.
The system of remuneration of the nodes pushes to use their own computing power to make the system work, not to try to force it
The database is distributed all-over-the-world
What would happen if 2 and 3 were to fail, for example because some large intermediaries manage it on their own for the clearing of their transactions?
Speed and Consensus
The current financial transaction system is "slow" not for a technological issue, but for a consensus issue
“Consensus by reconciliation”: a process that the financial markets have chosen as their “checks and balances” system.
It is therefore a question of moving to a new form of “decentralized consensus”: an automatic mechanism that allows transactions to be quickly validated. Like in Bitcoin!
Mechanisms to correct erroneous transactions? In Bitcoin & Blockchain they are not present! They cannot be present in the current DLT designed!
Currency Availability
Currency on the ledger VS Currency not on the Ledger Double Spending and real availability of the transaction object: Currency on the ledger (bitcoin) VS Currency not on the ledger (fiat money). In the first case (Bitcoin) it is possible to be sure of real availability. In the second?
How do we avoid double spending?
How can we be sure of the real availability of the transacted object?
Currency on the ledger (bitcoin), the transaction object is uniquely identified by the DLT Centralized system (central bank type authority, clearing house)