3. Overview of level 2 Blockchain Basics
1. Distributed Ledger Technology (DLT) (= “different games different blockchains”)
2. Introducing the field: a multi-disciplinary crypto flower (= “describing the playing field”)
3. Introducing different overviews / point of views (= “the different positions in the field”)
4. Different entities in the ecosystem (= “the players in the game”)
5. Hard- and software tools (= “the gear the players use”)
6. Introduction of transaction registration (= “the ball that moves in the field”)
7. The protocol rules (= “the referee that controls the game”)
8. Putting it all together – how does a blockchain work (version 5)
9. Goal of the game
10. How to start the game yourself
4. 2.1.1 Introduction Distributed Ledger Technology (DLT) - overview
Bitcoin is the first decentralised distributed ledger that tackled the double spending problem and “solved” the
BGP with a practical approach. But the distributed ledger technology field has existed long before Bitcoin and
consits of many other distributed forms.
The official definition of what a blockchain is, is still vague. Would, for example a blockchain where a TTP or
consort of TTP’s are in control, still qualify as a blockchain (it currently does according to consultants and media,
but it doesn’t according to some proponents of public blockchains).
@Ri: plaatje eigen maken
5. 2.1.1 Introduction DLT – three main blockchain categories
1. Public blockchains = open for public, you don’t need permission to join = also known as permissionless
blockchains. A public blockchain has entirely an open read access and anyone can join and write in the
network. The power of open source.
2. Private blockchains = closed off for public, you need permission to join = also known as permissioned
blockchains. A private blockchain often is the opposite of a public blockchain and only authorized
participants have read access and can write and join the network. This form of ledger already existed >30
years. The power of marketing.
3. Hybrid blockchains = combination of public and private blockchains. A hybrid blockchain, also known as a
consortium blockchain, uses attributes of both private and public chains. It refers to a closed environment
in which various parties work together in sharing data and transactions. Members can also determine
which transactions can remain public and which have to be restricted to a smaller group of members.
6. 2.1.1 DLT - Introduction of private and hybrid blockchains
Remember the examples we used as motivation for creating these courses?
1. Example 1: Data ownership & freedom
2. Example 2: Censorship resistance & freedom
3. Example 3: The fiat experiment (+ digital cash & freedom)
4. Example 4: Software is eating the world
5. Example 5: Interconnecting possibilities (less asymmetry)
6. Example 6: Get a personal head start
Since we often focus on global problems, we will often focus on public blockchains because their more
centralised counterparts score less on the properties that benefit the “commons”: immutabilty, transparency,
leveled playing field, censorship resistance, neutrality, security and data privacy. We also focus on open public
blockchains because we are wildly enthusiastic about this huge step in ledger technology (transacting without
intermediairies!). The private and hybrid ledgers will be discussed when we describe more localised
usecases where the costs and trust in the TTP’s outweighs the need for above properties
9. 2.1.2 DLT – a game of trade-offs!
Remember that more decentralised blockchains are more secure and therefore less efficient. It is a game
of trade-offs, where different blockchains can have different goals. If you cannot trust current (or future!) TTP’s
or if the interests are just too great to be in hands of one party, like with money and the web for example,
decentralisation is the way to go. But if you want to improve a supply chain and aim to create and divide synergy
with competitors you don’t fully trust, perhaps a lighter hybrid version is suited. If you want to close off your
ledger for everybody, but you want an cryptographically more secure ledger to store records, the private
blockchain might be the way to go. Do keep in mind that for example a private ledger is more private, faster and
cheaper, but also less secure and prone for the 3 risk categories. Picking a blockchain is therefore a game of
balancing out the trade-offs! Different blockchains different goals different usecases (“games”)
10. Concluding remarks from “A systematic literature review of blockchain-based
applications: Current status, classification and open issues”
While blockchain applications are being widely deployed, many issues have yet to
be addressed. By doing so, blockchains will become not only more scalable and
efficient but more durable as well. The features they offer are not unique if judged
individually, and the bulk of the mechanisms they are based on are well-known for
years. However, the combination of all these features makes them ideal for many
applications justifying the intense interest by several industries.
As blockchains become more mature, their applications are expected to penetrate
more industries/domains than the ones covered in our survey. However, while
many try to propose blockchains as a panacea and an alternative to databases, this
is far from true. As already discussed, there are many scenarios where traditional
databases should be used instead. Moreover, we identified the individual
characteristics that are mostly required per each application domain. This
facilitates the choice of the proper blockchain and the corresponding mechanisms
to tailor the blockchain to the actual needs of the application”
Source
11. 2.1.2 DLT – making trade offs: the scalability trilemma
Each blockchain has its own mix of all kind of different properties (often categorizable in these three categories as
shown in the picture). It is important to realize that it is a trade-off between these properties, you can’t have all
three. This is also known as the scalability trilemma.
For example heavy encryption need for security (privacy) results in bigger and more complicated multi-layered blocks,
resulting in bigger blocks, resulting in harder scaling (more data to send between nodes). Like mentioned: it is a story
of trade-offs (depends on the game you wish to play!)
New forms of distributed ledgers and / or different set of properties are currently being tested out there and our
knowledge is growing faster each day (facilitated and elevated by the internet and open source principles!). Examples:
public, private, hybrids, DAG’s etc. etc.
But a trade off between what properties…..? See you next session !
@Ri: Plaatje eigen maken
12. 2.2 Introducing the field: a multi-disciplinary crypto flower
Where the usecase / need for blockchain can be described as the type of “game” we are playing, the blockchain
spectrum (a.k.a. the crypto flower) presents an overview of the playing field where we are playing this game.
Four “leafes”:
1. Distributed systems (Consensus)
2. Cryptography
3. Politics (Governance)
4. Economics (Game Theory)
Each leaf (pillar) has it’s own components. Each blockchain tweeks these components differently in the
search for the perfect fit with their usecase.
Find your preference!! But….don’t neglect the others!!
Source
13. 2.2.1 First leaf: cryptography in short
Cryptography is one of the foundational pillars of blockchain technology and is encountered in multiple places.
We will do a deeper dive in level 3, but the main forms of cryptography we encounter in a blockchain:
1. The hash
2. Proof of Work (uses the hash)
3. The public and private key pair (elliptic curve)
4. Digital signatures
“Blockchain does rely on cryptography, but remember: miners need to validate transactions so it does not
usually involve encryption at all”
https://www.imdb.com/title/tt2084970/ (opnemen in fun watch / further viewing)
17. 2.2.1 Public / Private key pairs (3) & signing Tx’s with digital signatures (4)
Simplified: like you used to make a mailadres to communicate on the internet, we make public keys, based on
a random number called “the private key”, to communicate (send and receive transactions) on a blockchain.
How that’s done? Just watch following short clips (as many times as needed!!)
BOTH MANDATORY (!)
18. 2.2.2 Second leaf: distributed systems and consensus in short
1. Byzantine Fault Tolerism (BFT) = How well can a blockchain resist the failures caused by the BGP
(node failure, false generals).
2. Rules of consensus: make the system BFT-approved. How? By making behaviour predictable by
promoting good behaviour with rewards and make cheating expensive (the handicap
principle)
3. Many forms of consensus, two most known consensus algorithms (= software protocol / coded set of
rules) are PoW and PoS. Both know many variants and tweeked flavours.
4. In addition there are multiple other consensus forms available as well. Each consensus algorithm has
its trade-offs (scaling trilemma), different usecases = different blockchains.
19. 2.2.2 Second leaf: distributed systems and consensus in short
What is PoS
What is PoW
Pow versus pos
Filmpjes te vervangen: wat is PoS and what is PoW. Pow & POS compared.
20. 2.2.2 Second leaf: distributed systems and consensus in short
We often see ecosystem discussions like:
- PoW is better than PoS
- We will use multiple connected blockchains (interoperability) or we will have “blockchain xxx to rule them
all”.
Let us know your opinion!
Recap BGP, explanation BFT
21. 2.2.2 Second leaf: distributed systems and consensus in short - forking
INFO PAGE ON FORKING!
22. 2.2.3 Third leaf: governance
Two forms of internal blockchain governance* :
1. Governance regarding the recording of transactions and blocks: “which transactions and which blocks are
valid” (= what are the consensus / protocol rules!)
2. Governance regarding changes of the protocol: “software updates” (= who are allowed to make changes,
how does the ecosystem upgrades the protocol)
* Once again: different blockchains, different flavors!
We also have external blockchain governance:
What are the implications of a decentralized distributed ledger? As mentioned before: removing centralized
TTP (1) and automated changes in the state of the ledger (2) can lead to new forms for societal governance!
Think peer-to-peer transactions with more security, trustless without hierarchy and with a leveled playing field
without thresholds in an open source environment on a global level.
25. 2.2.4 Fourth leaf: economics & game theory
Two types of “cryptoeconomics”
1. Institutional cryptoeconomics is the study of how changes in ledger technology affect economic activity
via its effect on institutions, organization, governance and transactions costs. Institutional crypto
economics seeks to understand how an economy that is extensively based on distributed ledger
technology differs in fundamental and systematic ways from an economy based on centralized ledger
technology. Source
2. Cryptoeconomics: Institutional cryptoeconomics should be distinguished from cryptoeconomics (Buterin
2017; Dannen 2017), which is the more specific concern with the application of microeconomic theory
(particularly game theory and mechanism design) to the efficient design of incentives for blockchain
consensus protocols.
27. 2.2.4 Cryptoeconomics
Incentivizing ecosystems to stimulate behaviour (aligned with goals) and de-stimulate unwished behaviour
(prevent unwished behaviour). It’s aim is efficient design of incentives for blockchain consensus protocols and
incentivizing… the ecosystem (!)
Mechanism design & Game theory are important concepts. Not in the case of “scam coins”
29. 2.2.4 Fourth leaf: why is this important?
Economics has often been touted as the dismal science and has always been seen as a rather abstract matter or discipline.
However, economics is a social science that studies human interaction in a broad sense and can offer some unique
insights which, many times are often overlooked. Blockchain is a case in point. Primarily discussed from a technical and legal
standpoint, the economics of blockchain, and the economics that explains why the technology is so important and revolutionary are
many a times overlooked.
Although there is no one accepted or plain definition, one can safely say that economics is a science that studies human
behavior and interaction as a relationship between ends and scarce means which have alternative uses. In other words, it
explores the concepts of choice and decision-making, the coordination process and the allocation of resources. Possibly, a
simplistic view of economics is that it studies markets.
The image of market encapsulates many economic elements including the allocation of resources; the mechanisms of individual
choice, the actual transactions; the payment and settlement of a transaction; the exchange between the buyers and sellers and so
much more. The market embodies the spirit of transactions and includes the element of transfer, settlement and even more so
of trust. Trust is a cornerstone of economics and political economy. Economics studies mechanisms on how trust is built
through repeated interactions apart from the rules or institutions that should support this function.
Bottom line: don’t forget the human role in technology!
30. 2.3 Introducing different overviews / point of views
There are not only different type of fields but also different positions within that field. In other words:
1. You now understand that you are currently are watching a course about ledger technology and how that
relates to society. You know what the “goal is of the game” (for example create decentralised digital
money) and that there are multiple games.
2. You now know that if you do a first deep dive, you will encounter an overview of different disciplines
(the crypto flower, the overview of the multi-disciplinary field).
3. But also know this: if you look closer in that field, you will see that you can participate in different
positions within that field. Imagine a field, for example soccer field. Just like with soccer you can cross
multiple places in the field (conensus, game theory etc.), but each player has a different goal (I want to
prevent the opponent from scoring) and all together share the same goal (we all want to win, for example in
Bitcoin “decentralised money”).
Source
31. 2.3 Introducing different overviews / point of views
4. Where in soccer a “goal keeper” might want to “prevent scoring” / might therefore look like someone
contributing to security = might look like in the blockchain field like a node increasing the BFT. The position
of the keeper is in the back of the soccer field and the position of the node is in the infrastructure layer in
the back end layer. Someone in the “offense” that wants to score points might look like someone making
applications (application layer / front end of the soccer field).
5. Bottom line: same game, same goal, but different positions for different individuals & roles in the
game.
6. Instead of offens and defens we have the following layers in the plockchain field: Infrastructure Layer
(setting up the nodes etc), Network Layer (transferring the data), Protocol Layer (validating transactions
etc) , Services and optional components (different type of services for / and forms of transactions) and the
Application Layer (front end for customer).
7. This is not a fixed stack, division of the field can be done differently, this is just an example. For
example; could also add the browser layer on top of that with for example the Brave browser)
Source
32.
33. 2.3 Introducing different overviews / point of views
Different games lead to different fields. Try to oversee the field as it truly is & don’t forget the goal!
Source Source Source Source
34. 2.4 Introducing the main group of players
1. Users
2. Miners & minters
3. Validators
4. Developers
5. Ecosystem entities
6. Open sourced ecosystem
7. Who’s in control?
35. 2.4.1 The users
“On the blockchain nobody knows that you’re a fridge”
Source
36. 2.4.2 The miners & minters
Source
Continuous loop of following steps:
1. Building transactions that were broadcasted on the peer-to-peer network into a block. Arbitrarily chosen
transactions (most likely based on the amount of fee per tx)
2. Verifying that all the transactions in the block are valid.
3. Selecting the most recent consensus block (longest chain e.g. in Bitcoin) and connect with previous hash
(“chain” the block).
4. Proof of Work puzzle + keep an eye out for new blocks. If solution is found, broadcast it to the p2p network
38. 2.4.2 The miners: who are they and where are they?
In case of Bitcoin: https://bitnodes.earn.com/
In case of Ethereum: https://www.etherchain.org/charts/miner
39. 2.4.2 The miners: ASIC miners
What PoW mining does under the hood, is use dedicated machines (ASICs) to convert electricity into Bitcoins
(via block reward). The machine repeatedly performs hash operations (guesses/votes) until it solves a
cryptographic puzzle and receives Bitcoins (block reward). The solution to the puzzle proves that the miner
spent energy in the form of ASICs and electricity, a proof that a miner put in work. Bitcoin has
a capitalistic voting mechanism, “money risked, votes gained” through the energy/ASICs used to generate
hashes (votes). — Hugo Nguyen
The security of the network is dependent on the hash rate and the hash rate is for many blockchains,
like Bitcoin, dependent on the ASIC mining (ASIC is a brand / company!). So the question: should we
fight or embrace ASICs? Constant cat and mouse game between developers and manufacturers
Example of the Monero fork Source 1 and the 80% drop in hash rate Source 2.
Will the market correct itself?Source 3 , Source 4
Further viewing: Comparing hashrates
Source
Cost of mining Chinese mining farm
40. 2.4.2 The mining cycle & game theory
Who validates and why? The mining race
Once solved the mining puzzle, ergo find the nonce that results in a number below the current target set by the
protocol. It adjusts itself every 2016 blocks, based on the average time of 10 minutes, hence +/- every two
weeks. Target is actually just a number (computers always need numbers!), but made humanly readable as the
start of a hash in a number of zero’s. Currently 18 zeroes.
Miners gets to keep the block reward and the fees. End supply of 20999999.90550000.
Auto adjusting difficulty (2014 blocks, +/- two weeks)
@Ri: kun je dit plaatje van de oranje balletjes eigen maken?
(rest kan genegeerd worden)
41. 2.4.2 The energy discussion
1. “We have an economy based not on money, but on work and energy”.
2. Idea of the energy dollar (Ford & Edison). The concept was popular due to its sound money characteristics, including: (1) a well-
defined unit of account, (2) easy measurement/ (3) not easily counterfeited, (4) divisibility into smaller units, and (5) fungibility.
Remember the properties of money?
3. However, energy money was flawed — it could not be transmitted or stored easily. “That in order to make a man/woman covet a thing, it
is only necessary to make the thing difficult to attain.” — Mark Twain. (opnemen op website bij deze sessie)
4. When Satoshi designed PoW, he was fundamentally changing how consensus between humans is formed from political votes to
apolitical votes (hashes) via the conversion of energy. PoW is proof of burn, or the validation that energy was burnt. Why is that
important? It’s the most simplistic and fair way for the physical world to validate something in the digital world. PoW is about
physics, not code. Bitcoin is a super commodity, minted from energy, the fundamental commodity of the universe. PoW transmutes
electricity into digital gold. Source: POW is efficient
Further viewing: Bitcoin’s Energy consumption
42. 2.4.2 The energy discussion
5. The Bitcoin ledger can only be immutable if and only if it is costly to produce. The fact that Proof of Work (PoW) is “costly” is a
feature, not a bug. (from building thick physical wall around what we deemed valuable to the new world of cryptocurrency that is
unintuitive and weird with no physical walls or vaults to protect our new form of value.
6. Bitcoin’s public ledger is secured by its collective hashing power: the sum of all energy expended to build the wall. And through its
transparent costly design, it would take an equivalent amount of energy to tear it down (unforgeable costliness).
7. Electricity consumption per transaction is a poor KPI, first off all because the energy spent is per block, not per transaction. Also the
economic density of a transaction is increasing (Segwit, Lightning). Should be defined by security of economic history (further read!)
8. Energy production & Bitcoin: miners search for the cheapest source of energy. Is that the problem is the real problem that dirty
(polluting) forms of energies are still not taxed enough and are cheap?
+/- 39:00 – 41:51https://www.youtube.com/watch?v=H_kyYrbBY1I
44. 2.4.2 Recap mining & miners
What mining enables:
Confirms transactions & allows value to be transferred
Secures and ensures that no malicious parties attack the network
Creates Blockchain “Repository of Truth” & underpins trustless consensus
Allows Bitcoin and other currencies to work (incentivization!)
46. 2.4.4 Developers
Different layers (remember the “positions” in the field) ask for different kind of
developers. There are for example the front end developers, working on the user side of the
application, and the back end developers, working on the infrastructure as for example the
Bitcoin core developers working on the bitcoin protocol (software rules).
47. 2.4.4 Developers
The open source principles allows developers from all over the world to not only contribute to the network, but
also to “fork” the network and create a different approach (for example tweek one of the properties, like
increasing the block size). We saw this happening in Linux, creating different operating systems with different
properties for different usecases and is also already happening in the blockchain realm.
Source
48. 2.4.5 Eco-system entities - influencers
Individuals the-top-100-crypto & top-50-influencers-in-crypto etc. etc.
Organizations http://blockchainage.com/top-100-blockchain-organisations/
Informational sites like coin ranking sites www.coinmarketcap.com & https://coinsutra.com/coinmarketcap-alternatives/
Informational sites like news sites: https://www.labsterx.com/blog/best-blockchain-and-crypto-news-sites/
Exchanges https://coinsutra.com/best-cryptocurrency-trading-site/
And a deeper dive: https://bitcoinexchangeguide.com/exchanges/
49. 2.4.6 Open Source Principles
Enables you to build upon shoulders of giants. Because nobody knows as much as
everybody
&
“Competition makes strong”
Source
50. 2.4.6 Open Source Strategy
What is Open Source explained in Lego:
https://www.youtube.com/watch?v=a8fHgx9mE5U
The rise of Open Source Software:
https://www.youtube.com/watch?v=SpeDK1TPbew
51. 2.4.6 Open Source Strategy
What can be replicated ad-hoc and what cannot?
• network effects (can they be re-used by allowing seamless protocol integration)
• investment perspectives
• potential mining investment
• developers investing their time
• active users community
• new use cases that couldn‘t be covered on the original platform
• specific market niches, etc.
52. 2.4.7 Who is in control?
So you know now that there are different fields, different positions in that field, who the determines the rules and
who the referee is, what different groups of players are active in the game….But who is boss? Welcome to the
“Blockchain Power Bootstrap”
53. 2.5 Introducing the tools (short overview)
1. Keys
2. Wallets
3. Clients
4. Nodes
5. Mining tools
6. Github
7. Internet protocol & communication
Side note: in level 3 will we do a deeper dive per tool!
54. 2.5.1 Tool #1 public-private key pair
The private key is nothing more than a very, very, very (!!!!!!!!!!!!!!!!!!!!) big number (approx. between 1^77 =
2^256 in case of Bitcoin). For comparison: current science states that there are between 1078 to 1082 atoms in
the known, observable universe.
The public key is nothing more than a hash of a hash of a hash, often using different hashing formulas,
rendering is virtually impossible to calculate back to the original number. (“chances of succeeding are as big as
being hit by a comet within 2 seconds”)
But….what do we do with this key pair? Send (private) and receive (public) data transactions (often this data
presents some form of value, like a bitcoin)
So tool #1 is like the bat you need in baseball to move the ball. No keys = no bat = no game.
55. 2.5.2 Tool #2 – Wallets
In short: the game of blockchain is played with as many keys as you like. Wallets offer the service of keeping your keys together
and often ordened. A wallet is software that holds all your addresses. Use it to send bitcoins and manage your keys.
Ownership is established through digital keys and digital signatures. These keys are generated locally on Bitcoin end-users’
computers using special software called a Bitcoin client. They can be stored in a file, in a database, or just printed on a piece of
paper, but most commonly they are stored in a Bitcoin wallet. The keys within each user’s wallet allow the user to sign transactions,
thereby providing cryptographic proof of the ownership of the bitcoins sourced by the transaction. Keep in mind that if you don’t
know who generates your private keys, where they are stored, or if someone else has them (as when using a cryptocurrency
exchange), they are not actually yours, as seen in the case of MtGox, which discontinued operations in February 2014
“Like email addresses, Bitcoin addresses can be shared with other Bitcoin users who can use them to send bitcoins directly to your
wallet. Unlike email addresses, you can create new addresses as often as you like, all of which will direct funds to your wallet. A
wallet is simply a collection of addresses and the keys that unlock the funds within. There is practically no limit to the number of
addresses a user can create.” (from Antonopoulos, Mastering Bitcoin)
Different wallets for different scenario’s, but most importantly: pick your wallet very carefully!
56. 2.5.3 Tool #3 – clients
In short: the client, also known as client software, is software that lets the wallet communicate with the network.
In other words: it connects the wallet, that holds your keys, with the miners that records your transactions. Side
note: this also enables to participate without becoming a full node (we rely on the client software of the wallet to
connect to the SSOT).
Source
57. 2.5.4 Tool #4 – the node
Catching up with the digital time (ledger) itself…downloading the bitcoin ledger (blockchain).
Bitcoin “client” software - downloads the blockchain (transaction history). You know become a recordkeeper,
just another copy of the distributed ledger among “client nodes” But…which blocks does the software pick?
How does it (do I) reach consensus with other clients = BGP = longest chain principle
Integrity check: do we have the same hash as others nodes?)
A node is hardware (or an entity, just like a “miner”). It is quite easy to become a node, but it does require a
lot of bandwidth and memory storage on your hardware device.
Source
Source
60. 2.5.7 Internet protocols & communication software
Bitcoin uses a simple broadcast network to propagate transactions and blocks. All communications are done
over TCP. Bitcoin is fully able to use ports other than 8333 via the -port parameter. IPv6 is supported with
Bitcoind/Bitcoin-Qt v0.7. Using bitcoin over tor is also supported. https://en.bitcoin.it/wiki/Network
The Transmission Control Protocol is one of the main protocols of the Internet protocol suite. It originated in the
initial network implementation in which it complemented the Internet Protocol. Therefore, the entire suite is
commonly referred to as TCP/IP. How does the internet work? https://www.youtube.com/watch?v=x3c1ih2NJEg
Also relevant: How does your mobile phone work? https://www.youtube.com/watch?v=1JZG9x_VOwA
61. 2.5.8 The protocol rules: The referee and the rules of the game
The rules of the game are called the consensus rules and they determine what is valid and what isn’t
(transactions and blocks). The entity checking whether everybody obliges is called the protocol. The protocol is
not really an entity (no TTP), but the consensus rules encoded in software. Note that the referee is therefore
an automated consensusprotocol, a set of rules where multiple parties agree upon, and not a human
being or an organization (so this .
So the (core) developers of a blockchain encode the rules in the protocol. But who determines the rules they
encode? Can they steer the referee then…? They can and they cannot ! As can you, and I, and everybody.
With your own choosing you determine what rules to follow, what properties to set and therefore what goals to
reach. If you want to change the rules of the game…build your own game (thanks to the open source
principles!). Bottom line: more freedom of choice.
Up for discussion: will truly only the best survive over time or the best financed / best connected / best
marketed? And will the time-scope have an influence on that concept?
62. 2.6 Introducing the ball: recording (“accounting”) transactions
1. Once more: what are transactions?
2. Single entry accounting
3. Double entry accounting
4. “Triple” entry accounting
5. Example: how does a blockchain transaction works on Bitcoin
6. Example: how does a blockchain transaction works on Ethereum
7. Component approach
63. 2.6.1 What are transactions
Source
In short: a blockchain either fully transfers the data (processed in totality), representing value, or not (rejected) =
valid / unvalid tx. Where the internet enabled us to transfer information, a blockchain additionally enables us
to transfer value. By solving the BGP, we can create a global SSOT without TTP = creating a digital ledger we
can use to send unique pieces of data representing value. It is unique, because we all agree about who owns
that data.
64. 1. Bitcoin: an Accounting Revolution
https://medium.com/@permabullnino/bitcoin-an-accounting-revolution-
65. 2.6.2 Single entry accounting
Single-entry accounting is a form of bookkeeping and accounting in which each financial transaction is a
single entry in a journal or transaction log (system is called single-entry system, the approach single-entry
bookkeeping). Easy approach, does not require training in accounting. A few (small!) businesses choose
single-entry accounting instead of the more common double-entry system. With the single-entry approach, each
financial event calls for just one accounting system transaction. This approach is similar to the way that
individuals use a check register (see picture).
Firms using single-entry approach are effectively limited to reporting on a cash based ledger system: you
either have the asset or you don’t. Simple, but limited: It does NOT allow for recording debits (assets people
own you) or credits (assets that you owe people). You also can’t periodically depreciate assets, you can’t
record time aspects of assets. Benefit: you don’t need complicated accounting rules etc!
Bitcoin combines computing with a cash based accounting system = you either own the data / bitcoin
(“utxo”) or you don’t.
Source
66. 2.6.3 Double entry accounting
The single-entry approach contrasts with double-entry accounting, in which every financial event brings at
least two equal and offsetting entries (equal in amount!). One is a debit (DR) and the other a credit (CR),
resulting in an accrual reporting system. Focus on Revenues, Expenses, Assets, Liabilities, and Equities.
A double-entry system keeps the firm's entire "Chart of accounts" in view. This chart for a double-entry
system has, in fact, five kinds of accounts in two categories:
Firstly, Income statement accounts: (1) Revenue accounts, and (2) expense accounts.
Secondly, Balance sheet accounts: (3) Asset accounts, (4) Liability accounts, and (5) Equity accounts.
These “balance sheet accounts” are new in double entry accounting and is like a frozen moment in
time (for example the 31st of December 2019) where the income statement is a flow of time (for example
“2019”). In other words: the balance sheet is a snapshot of the income statement, enabling us the
record additional assets (debits) and liabilities (credits).
67. 2.6.3 Double entry accounting
All transactions in a double-entry system result in entries in at least two different accounts. When the company
receives cash through a bank loan, the double-entry system records:
Firstly, a debit (DR) for an asset account, e.g., Cash on hand. For an asset account, a DR is an increase.
Secondly, a credit (CR) to a liability account, e.g., bank loans. A CR to a liability account increases its
balance.
With double entry accounting you can introduce time aspects in recording and for example record debt (money
that somebody will pay you in the future). Like mentioned: A double-entry system keeps the firm's
entire "Chart of accounts" in view, in other words: it presents “the state” of the income statement (just
like Ethereum presents the world state of transactions per block).
68. 2.6.4 Triple entry accounting
We will see in a few minutes that Bitcoin uses transaction based accounting (entering transactions like single
entry accounting) and that Ethereum looks more like double entry accounting (entering account based
transactions). So what’s new here?
1. The recording of transactions are cryptographically secured. History can’t be altered when recorded!!
2. Near instant verification by multiple external parties, proving that the transaction actually happened
3. The transactions contain data that can automatically execute itself / change its own state (= no TTP or
accountant needed, the so-called “smart contracts”)
Resulting in a global ledger, sometimes automatically updating it’s own state, without using a TTP. You
already know the benefits: it reduces the three risks of TTP and removes thresholds. Blockchain & Accounting:
record data, where data can take multiple forms like for example a regular bitcoin transaction, the representation
of a real world asset, but also enabling a smart contract. How that data is used differs per blockchain. Further
reading
69. 2.6.4 Triple entry accounting
Question remains here whether it actually qualifies as triple entry accounting, but more about that in the “all
about accounting” course.
Big downside of the Single-Entry System: Error Checking is not built in! If the single-entry bookkeeper
mistakenly enters, say, a revenue inflow as $10,000 when the correct value is $1,000, the error may go
unnoticed until the firm receives a bank statement with an unexpected low account balance. In a double-entry
system, however, the $1,000 cash deposit entry (a debit to an asset account, cash on hand) will be
accompanied by another entry recognizing the source, for example, a credit to a liability account (e.g., bank
loan) or a credit to another asset account (accounts receivable). And, if the firm omits the second entry, the
sums of credits and debits in the system would differ, immediately revealing the error.
As we will show next is how Bitcoin solves this problem: by continually referring to the entire past of a
transaction and more importantly: fully send that transactions (and its past) and not just a part of the transaction.
Like the definition of computing transaction already stated: “a (1) single unit, (2) processed in totality or failed”!
70. 2.6.5 How does a blockchain transaction works on Bitcoin
72. 2.6.5 Miners “verify”…But what? And how? What’s happening here?
At “verifying” the miners check whether the send transaction (“tx”) is valid. The tx is valid when (among other
things):
1. The sender of the public key proves he/she/it owns the private key (remember private – public key pairs?)
2. When history has shown that the public key actually (1) received the tx in the past and (2) hasn’t spend it
When you receive a transaction, you receive a so-called unspent (u) transaction (tx) output (o) = UTXO. It is
unspent, because you haven’t spent it. A utxo is therefore the equivalent of (a part of) bitcoin.
73. 2.6.5 Miners “verify”…But what? And how? What’s happening here?
So every block new bitcoins are created (“born”): in the coinbase the miner is allowed to send a number of
bitcoins to their account (based on the protocol, currently in August 2019 12,5 BTC per block). The protocol /
rules also state that the miner needs to wait 100 blocks before they can spent the bitcoins.
The first block, the genesis block, has therefore created the very first bitcoins. A “small” problem:
approximately 1.000.000 bitcoins are mined the first 20.000 blocks and are most likely owned by Satoshi.
They still haven’t moved since then, and are therefore still recorded as unspent transactions (utxo’s a.k.a.
bitcoins).
74. 2.6.5 Step-by-step approach of bitcoin transaction (simplified)
Step 1: a single unit transaction of 12,5 bitcoins are born in the Coinbase of a freshly new block (so not
“12,5 units of 1” bitcoin, but “1 unit of 12,5 bitcoins”. Because the miner can’t spend this transaction for 100
blocks and therefore still hasn’t spend it, the transaction is recorded as an unspent transaction output of 12,5
(“utxo”, “bitcoin”). Note: spending = sending the transaction to another address
Step 2: after 100 blocks the miner can send the transactions to another public key = “spending” the bitcoins.
For example to the public key of the energy supplier to pay for used energy in the real world.
Step 3 - Scenario 1: costs of energy are 12,5 bitcoin. The wallet takes the 1 single unit (12,5 utxo’s) and
sends it to one address: 12,5 to the public key of the supplier. The utxo is recorded as “spent” for the public
key of the miner and as “unspent” for the key of the enerhy supplier.
The fee is ignored in this example. Fee is currently 20 satoshi per byte, median tx is 226 bytes, so 4,520 satoshi
(1 bitcoin = 100.000.000 satoshi’s). Normally the sender needs to pay for this fee, so the miner needed to send
the 12,5 btc + a bit of fee.
75. 2.6.5 So how does this work?
Step 3 - Scenario 2: cost of energy are 10 bitcoins. Here comes the trick: The miner still sends the full
transaction of 12,5 BTC (remember the single unit in the computing definition?!). The wallet software sends
it times to two addresses, (a return address is added!). Which means that the single transaction of 12,5
BTC goes:
(1) for 10 BTC to the PK of the supplier,
(2) 2,5 BTC back to (often a new) PK of the miner (= “change” received back). So now the
miner has 12,5 spent, but also a new unspent transaction of 2,5 recorded at it´s public key. The supplier has
now a new unspent transactions unit of 10.
Step 4 the energy supplier: can spend the 10 UTXO. So let’s say they spend 8 utxo to pay the manager, the
wallet sends 10 utxo to 8 PK of manager and 2 PK back to own wallet. What remains is a new utxo of 2,
waiting to be spend.
Step 4 the miner: can spend the 2,5 UTXO, let’s say 1 UTXO to the PK of the grocery store. The wallet
sends 2,5 utxo to 1 utxo in the PK of the grocery store and 1,5 utxo to a return address.
@ri: plaatje eigen maken. Veranderen getallen: blokje 1 25 wordt 12.5. Alice wordt miner, blokje 2 bob wordt
energy supplier. 17.0 wordt 10.0 en 8.0 wordt 2.5. Blokje 3: 8.0 blijft 8.0 en 7.0 wordt 2.0 (oorspronkelijke plaatje
klopt hier niet trouwens, 7 moest 9 zijn). Carol wordt daar “manager”. Blokje 4 : 6.0 wordt 1 en 2.0 wordt 1.5.
76. 2.6.5 So how does this work?
Because you need to wait for your change, you can only send one transaction output per block. After
the block you received your change back and can spend the change.
Your wallet can also combine multiple unspent transactions into one new transaction, creating a new
unspent transaction for the receiving party. So let’s say the miner has paid the energy supplier 12 times, and
every time receives 2,5 utxo unit back. The wallet can combine these 2,5 utxo and send them to one public
key as 25 btc (if you need to pay somebody 25 btc for example). If you needed to pas somebody 4 BTC, the
wallet would take 2 x 2,5 utxo and send 4 to one public key and the remaining 1 back as 1 utxo to the own
account.
A miner checks the history of the transaction, by using “hash pointers” as we will learn later. Every block the
miners update the state of the ledger: which public keys hold which utxo’s. The ledger only records these
transactions and their entire history. The miners therefore follow the transaction outputs, and not the
accounts (public keys)!! This is why bitcoin is called a transaction based ledger system.
77. 2.6.5 What’s happening here? - recap
Nodes keep track of the UTXO’s - a reference to a transaction received and not yet send forward
yourself. In that case you have a transaction that has not yet been spent, an unspent transaction.
Everyone on the network agrees that you (your public key) have received the transaction and that you have
not yet spent it and they are all in agreement about that (the SSOT).
As soon as you spend this, = send the utxo = the single unit of data, to another public key, the transaction
is recorded as 'spent’ for your public key and “unspent” for the next public key.
So, after creating a bitcoin in a block, you get a whole series of referrals, a sort of decentralized consensus
of different nodes that agree on the history of the current unspent transactions.
So the Bitcoin blockchain is currently nothing more than a decentralised distributed ledger with 10.000
nodes all in consensus on what public keys hold what unspent transactions outputs. “And that’s all”
78. 2.6.5 What’s happening here? - why do these utxo’s have value?
The only thing the book currently does is watching: where are all of the utxo’s now. Why does this has value?!
1. An UTXO is a intangible asset, just like the other examples of intangible assets we encounter (derivates, money in the bank ledger accounts).
2. This time the underlying value is not the promise of a bank paying you back (credit based fiat money, 98% of current fiat), a government paying
you back (government fiat, 2% of fiat) or a stock or a derivative of that stock of a company promising you returned cash flows. Or a derivative
of derivative of a derivate (housing bubble in 2008, still haven’t watched the big short ?!)
3. So this time the value it is not based on “trusting a TTP”, but still isn’t neither based on a physical commodity like gold, jewels etc. (which are
only worth something because we deem that worthy, because they are hard to acquire for example). Value = subjective over time and
changes.
79. 2.6.5 What’s happening here? - why do these utxo’s have value?
4. So bitcoins, utxo’s, are intangible commodities. We already did a comparison with gold, but the same goes for other
commodities with limited real life use-cases. But this time this intangible commodity harbours some neat properties
because:
- no TTP’s and no intervention is possible. You own the utxo and you alone
- a decentralised ledger is not significantly more secure, but also censorship resistant, open network, borderless, etc.
etc.
- It is scarce, supply is limited, it is a collectible, a rarity.
- An utxo harbours enormous amounts of energy, has a lot of similarities with the “energy dollar”. Data representing
energy = data representing one of universe most valuable resource! As we seen economies often align with energy
consumption in the past. This time though represented / registered in worlds most secure ledger and secured by
enormous power (digital walls).
- Currently important for example as international value transfer (remittances), protect purchasing power (Venezuela)
or as a store of value and hedge instrument (non-correlation with other markets).
- It removes TTP’s thresholds, increasing transaction cost efficiency and create a more levelled playing field for the
commons.
- I think we have done this already in part 1 !
82. 2.6.5 What’s happening here? - why do these utxo’s have value?
5. Just remember: it seems like Bitcoin is only checking the state of UTXO, but the UTXO and the state of the
entire ledger itself represent much, much more (a new form of digital money with no TTP and with different
/ better properties and lot of possibilities). Possibilities? Jep, because here comes the beauty: it is digital
programmable (!) money. An UTXO is nothing more than data and that data can be programmed! Bitcoin
has it’s limitations in flexibility, currently mainly acts as money (“layer 1”), but if you want more flexibility
(and trade-off with security) you can tweak some properties of the leafs of the crypto flower (remember =
change the playing field and often change the game and goal!). A very, very interesting other blockchain is
up: let’s check Ethereum !
83. 2.6.6 How does a blockchain transaction works on Ethereum
(plaatje eigen maken)
Ethereum is, as opposed to a transaction based ledger, an account based ledger. Ethereum checks the state of the
public keys and not the transactions, also known as the “world state”. Comparable with a balance sheet of
accounts, only now an overview in time off the state of all public keys instead of account numbers. In the end still
value has been transferred, only the record mechanism has changed.
As previous seen with the accounting systems, this enables more flexibility within the ledger system. Ethereum is
originally developed for more flexibility regarding programming the data and checks the “world state” every block (+/-
every 15 seconds). As seen in part 1 the flexibilty offered us programmable data and enabled smart contracting (turing
complete programming), the automated and transparant process of transaction recording, resulting in automated
changing the state of data = automatically change the ledger, where you can predict the possible routes /
outcomes in advance! (remember 494 AD?)
So in short: Ethereum still records the entire transaction history, only focusses on accounts instead of transactions.
When sending transactions, it is still either valid or not valid. Not only do we use transactions to send value, but in
Ethereum you can also use transactions to communicate with each other.
84. 2.6.7 Component approach
So instead of just a random number hashed (public key Bitcoin), Ethereum adds (in addition!) also the
possibility to hash written software code. The outcome of the hashed data, is still the same. As shown in
section 1: it doesn’t matter what data you hash, the length of the hash is still the same. This is because, where
we read text, a computer still reads a number (so it still hashes a huge random number).
So now we can add more data in a public key and program that data (= write code in it / create a digital decision
tree). Important is that you realise that you can’t alter the code later on, because then the data is altered which
leads to a different hash / public key. So when you aim to automate the recording of transactions you need to
take into account all the components in advance. Not only the different variables and entities, but also the
different scenario’s / possible outcomes need to be accounted for.
85. 2.7 Ecosystems & Commons
1. What are the commons?
A Who or what are the commons?
B The tragedy of the commons
C The rules for successful commons
D Common pool resources and nested markets
E Transferring the tragedy of the commons into the wealth of the commons
F Investment in commons
G Fat protocols and the commons
2. Ecosystem
- Natural ecosystem
- Manmade ecosystem
- Digital ecosystem
3. Introducing game theory
4. Building the ecosystem
86. 2.7.1A What are the commons?
The commons is the cultural and natural resources accessible to all members of a society, including natural
materials such as air, water, and a habitable earth. These resources are held in common, not owned
privately.
Commons can also be understood as natural resources that groups of people (communities, user groups)
manage for individual and collective benefit. Characteristically, this involves a variety of informal norms
and values (social practice) employed for a governance mechanism.[1]
Commons can be also defined as a social practice of governing a resource not by state or market but by a
community of users that self-governs the resource through institutions that it creates .[2]
Each stakeholder has an equal interest.
87. 2.7.1A What are the commons?
Examples of commons
Environmental resource (air example)
Cultural and intellectual commons
Digital commons (Wikipedia & FOSS)
Urban commons
Knowledge commons
88. 2.7.1A What are the commons
The DAO as a common: self-sovereign entities generating “value”. Could be generating clean air, but also actual
“money”. Example: a DAO Forest “Terra0”
89. 2.7.1B Tragedy of the commons
The tragedy of the commons is a situation in a shared-resource system where individual users, acting
independently according to their own self-interest, behave contrary to the common good of all users, by
depleting or spoiling that resource through their collective action.
Easiest examples are Earth Ecology (deforesting, earth fishing, pollution) or shared public goods (like
vandalism). Biologically: parasites killing their host, killing their source of food and therefore killing them selves.
90. 2.7.1C Commedy of the commons – successful commons
While the original work on the tragedy of the commons concept suggested that all commons were doomed to
failure, they remain important in the modern world. Work by later economists has found many examples of
successful commons, and Elinor Ostrom won the Nobel prize for analysing situations where they operate
successfully.
For example, Ostrom found that grazing commons in the Swiss Alps have been run successfully for many
hundreds of years by the farmers there.Allied to this is the "comedy of the commons" concept, where
users of the commons are able to develop mechanisms to police their use to maintain, and possibly
improve, the state of the commons.
Other related concepts are the inverse commons,. It is argued that some types of commons, such as open-
source software, work better in the cornucopia of the commons; proponents say that, in those cases, "the grass
grows taller when it is grazed on".
91. 2.7.1C Rules for the commons
1. Rules are clear
2. rules are shared by community
3. decision-making is democratic
4. conflict resolution is local and public
5. sanctions are graduated
6. cheap & accessible conflict resolution
7. users themselves check compliance to rules
8. rules don't conflict with higher laws
Wikipedia:
1) Clearly defined (clear definition of the contents of the common pool resource and effective exclusion of external un-entitled
parties);
2) The appropriation and provision of common resources that are adapted to local conditions;
3) Collective-choice arrangements that allow most resource appropriators to participate in the decision-making process;
4) Effective monitoring by monitors who are part of or accountable to the appropriators;
5) A scale of graduated sanctions for resource appropriators who violate community rules;
6) Mechanisms of conflict resolution that are cheap and of easy access;
7) Self-determination of the community recognized by higher-level authorities; and
8) In the case of larger common-pool resources, organization in the form of multiple layers of nested enterprises, with small local
CPRs at the base level.
92. 3. What is a natural ecosystem
https://en.wikipedia.org/wiki/Ecosystem
Plaatje : https://trello-
attachments.s3.amazonaws.com/5c7416cf5b3256160225f27e/5c7e6ce68a40097e76b1c4ed/8ecf7b5108e7a9c
cd0292f189585f49a/image.jpeg
93. 3. From ego to ecosystem
https://medium.com/presencing-institute-blog/ecosystem-leadership-4227fd214f2
94. 3B What is a manmade ecosystem
https://www.dailymail.co.uk/sciencetech/article-2267504/The-sealed-bottle-garden-thriving-40-years-fresh-air-
water.html
96. 3D Hard to copy: blockchain ecosystem
https://vanrijmenam.nl/five-blockchain-trends-consider-this-year/
97. Hard to copy: Network effects
Source 1
@rico: kun je een leuk plaatje vinden of deze pimpen? Zie ook bron
Source 2
98. The Future Of Network Effects – the end of economic rent extraction by centralized parties?
Current centralized platforms = economic rent extraction (fees and data)
Decentralizes peer-to-peer platforms = No more distinction between network participants and network owners.
Tokenized ecosystems capture value for participants
This creates new incentives, reduce costs and results in better outcomes for everyone (except the centralized
parties)
Well-designed decentralized ecosystems set the fundamentals to surpass the powerful companies / disrupters
of today.
https://medium.com/public-market/the-future-of-network-effects-tokenization-and-the-end-of-extraction-
a0f895639ffb
www.get.uber.com www.airbnb.com
99. What is driving growth
Will decentralized networks replace centralized firms as the dominant mode of human organization in the years
to come? The answer will have a lot to do with network effects, so below is a big list of the best thinking about
network effects and crypto https://twitter.com/nlw/status/1020099428777160704
Thesis https://www.blockchain.com/research/index.html
100. 4. Introducing game theory
Common-payoff games
Zero-sum games
Prisoner’s dilemma
Evolutionary game
https://www.quantamagazine.org/in-game-theory-no-clear-path-to-equilibrium-20170718/
101. 4. Introducing game theory
The evolution of trust – play the long game
play the long game
http://ncase.me/trust/
The investment game: http://www.econport.org/content/handbook/commonpool/Experiments/invest.html
102. 5. Building the ecosystem
1. https://outlierventures.io/wp-content/uploads/2018/03/Token-Ecosystem-Creation-Outlier-Ventures-1.pdf
2. https://www.cadalyst.com/management/become-cad-ecosystem-expert-18033
3. Slides Gerard
4. http://www.teebweb.org/
5. https://ecosystempie.com/
6. https://en.wikipedia.org/wiki/Elinor_Ostrom
7. https://inform.tmforum.org/insights/2018/05/blockchain-and-business-ecosystem-design/
103. 2.8 Putting it all together: How do blockchains work?
1. Step 0: So what do we already know (version 4)
2. Step 1: The entity is represented by a public key, this can be a human, department, organisation, but for the first time in
human history value can now also be send by a piece of code called a contract enabling for example machines owning public
keys (you can create an automated organisation without human interfering). The entity constructs a transaction (for example
collecting UTXO’s and bundle them in one transaction) and adds the public key of the recipient as well as their own private
key, called the digital signature.
3. Step 2: the constructed transaction is now cryptographically secured (remember the colour blending?), and is offered to the
network by the clientsoftware that talks to wallet containing the keys as well as to the network where the miners are waiting for
transactions.
4. All the transactions world wide are gathered (in the “mempool” = als “unconfirmed”), and each individual miner picks the
transactions and collects them until the block is “full” (full is determined by the consensus rules). The miner checks the
transactions, are these transactions valid.
5. Miner solves PoW puzzel or is for example randomly selected by an algortihm (PoS) and presents the valid block to the entire
network (all the nodes). Each node validate the presented block and if valid (= check if the miner abides by the protocol
rules?) adds the block to their blockchain and compare the hash with other nodes. If everybody has the exact same data,
every node should have the exact same hash and therefore everyone has the exact same “single source of truth”
6. We now not only have (1) a decentralised ledger, but it also enables (2) automated transactions. A new form of ledger
respectively a new form of data recording, most likely resulting in new forms of society.
104. 2.8 How do blockchains work – overview general foundations
A decentralized peer-to-peer network (enabled by the Bitcoin protocol)
A public transaction ledger (the blockchain)
A decentralized transaction verification system (transaction script)
The Internet protocol
Asymmetric Cryptography, The Hash Function & The Proof of Work concept
Open source development
“Bitcoin is a collection of concepts and technologies that form the basis of a digital money ecosystem,
including:
A decentralized peer-to-peer network (enabled by the Bitcoin protocol)
A public transaction ledger (the blockchain)
A decentralized mathematical and deterministic currency issuance mechanism (distributed
mining and the “Proof-of-Work” concept)
A decentralized transaction verification system (transaction script)” - Mastering Bitcoin
105. 2.8 Connecting the dots, Eureka!
A shared global truth with no trusted third party, entering a new era of ledger technology. Leading technologists
believe that the implications of this technical breakthrough will be far-reaching, extending far beyond digital
currency. Imagine a public and immutable ledger that is spread across the globe, open to all and let’s you record
digital data. Blockchain harbors a possible promise to distribute power from central entities to the commons and
cut out the middleman. Think trustless, think privacy, think self – sovereignty and owning your own data in a
data-driven world.
Multi-leveled explanation
https://www.wired.com/video/watch/expert-explains-one-concept-in-5-levels-of-difficulty-blockchain
Why is it hard to get Bitcoin?
https://www.unchained-capital.com/blog/blockchain-spectrum/
