2. 2
Impulsvortrag 1
Blockchain - Agenda:
1. What is blockchain technology
2. How does blockchain technology work?
3. What are thinkable applications of blockchain technology?
4. What are pros & cons?
5. Why should we care about blockchain?
6. Excurse: Initial Coin Offerings
3. 3
What is blockchain technology and how does it work?
The concept of blockchain was originally described by someone
using the pseudonym “Satoshi Nakamoto” in 2008
The database consists of a chain of data structure blocks and
grows linear chronologically by adding new blocks
Each block holds timestamped batches of valid transactions and
a specific link (hash) to one previous block
A 1:1 duplicate of the complete blockchain resides on each
computer of a blockchain network
New transactions have to be repeatedly authenticated across
this distributed network, before they are included as a new block
on the chain
Distributed database that maintains a continuously growing list of
data records secured from tampering and revision
4. 4
The cryptocurrency bitcoin (BTC) was initiated based on
blockchain technology in 2009
The BTC blockchain is a digital, decentralized, and public ledger
that records every bitcoin transaction that has ever occurred
no intermediary needed
Everyone can view the source code and can participate in the
further development of the bitcoin software open source
Every user is allowed to connect to the network, send new
transactions to it, verify transactions, and create new blocks
open access
The generation of blocks is called “mining”, which is rewarded
with a certain amount of BTCs (defined by the system) for the
miner bitcoin mining
Nowadays, mining is a computational-intensive process
The case of Bitcoin
5. 5
Volatile development of the market price (in USD) http://www.finanzen.net/devisen/bitcoin-dollar/chart
Volatile development of the BTC market price
Statistics Jannuary
2018
Size of the BTC
blockchain
154 GB
Total number of BTC 16,7 million
Market price of 1 BTC 10,947 USD
Market capitalization 188 bn USD
6. 6
Block 1 Block 2 Block 3 Block 4
…
Block 3
Header Checksum of block 2
Hash tree of transactions
Appendix Transactions
Genesis-block
Structure of a Blockchain (simplified)
7. 7
Example: Tom wants to buy Dana’s car with bitcoins
Tom & Dana both
have a digital
bitcoin wallet and
open their Bitcoin
clients (e.g. a
smartphone app).
Tom needs Dana’s
public key (payment
address) and his
private key (personal,
digital signature to
access the bitcoins in
the wallet).
Tom scans Dana’s public key
via QR code (or she e-mails
her payment address). And
Tom initiates the transaction
(Internet access necessary).
1F1tAaz5x1
HUXrCNLbt
MDqcw6o5
GNn4xqX
1F1tAaz5x1HUXrCN
LbtMDqcw6o5GNn4x
1F1tAaz5x1HUXrCN
LbtMDqcw6o5GNn4x
1F1tAaz5x1HUXrCN
LbtMDqcw6o5GNn4x
1F1tAaz5x1HUXrCN
LbtMDqcw6o5GNn4x
The bitcoin app forwards
the impending transaction
to the ‘miners’ of the bitcoin
network. All miners own an
1:1 copy of the complete
bitcoin ledger and verify the
transaction autonomous.
In order to process and verify
the transaction, impending
transactions must be packed
into blocks and added to the
blockchain. The creation of
blocks is a competitive
process and accomplished by
completing cryptographic
processing power intense
computations (proof-of-work).
Solving the cryptographic
problem comprises
calculation of hash values
that meet a strict criterion.
The hash values are based
on a combination of the
previous hash value, the
new block and a nonce.
When a miner solves the problem,
a new block is generated and
propagated to the network for
verification. The block is added to
the blockchain and the winning
miner receives new bitcoins as a
compensation for his work.
The transaction is processed
and the blockchain and Tom’s
and Dana’s wallets have been
updated throughout the entire
network.
How does blockchain technology work?
8. 8
Smart Contracts:
facilitate, verify, or enforce the negotiation or performance of a
contract
make a contractual clause unnecessary
aim to provide security superior to traditional contract law
reduce other transaction costs associated with contracting
Smart Contracts represent the actual disruptive potential of
blockchain technology
Smart Contracts are short computer programs, based on blockchain technology
that execute their pre-defined instructions once certain criteria have been met
Blockchain technology enables the creation of Smart
Contracts
9. 9
Revokes the contract
contract mortal {
/* Define variable owner of the type address */
address owner;
/* This function is executed at initialization and sets the owner of the contract */
function mortal() { owner = msg.sender; }
/* Function to recover the funds on the contract */
function kill() { if (msg.sender == owner) selfdestruct(owner); }
}
contract greeter is mortal {
/* Define variable greeting of the type string */
string greeting;
/* This runs when the contract is executed */
function greeter(string _greeting) public {
greeting = _greeting;
}
/* Main function */
function greet() constant returns (string) {
return greeting;
}
}
Smart Contract example for Ethereum
10. 10
Banking
Concepts to facilitate the exchange of money, e.g. digital currencies
Shared databases for KYC and AML compliance
Insurance
Streamline payments of premiums and claims via smart contracts
Public Sector
Replacing traditional approaches for registering properties and assets
Media Industry
New form of (direct) digital music distribution via smart contracts
(management of copyright, payment of royalties)
Internet of Things
Managing the support of smart home devices across the entire life-
cycle
Supply Chain
Traceability of the whole lifecycle of products—from production to
consumption
Applications for blockchain technology
12. 12
Security
No need for trusted third parties (banks, financial intermediaries)
as transactions are transparent to anyone within the network
Security for data against tampering and revision via
cryptography and collective intelligence
Transparency
Decentralization paves the way for aggregate and analysis of
large pools of data across institutions
Easy, traceable, and reliable user & use verification
Efficiency
Radical reduction of transaction costs and costs for financial
reporting & administration and central IT infrastructure
Automation of the detection of weaknesses in transactions,
supply chains, and other business processes
Advantages of blockchain technology
13. 13
Technology
Limits of scalability, due to throughput capacity (network bandwidth, storage limits,
processing power)
Speed and performance of a distributed database is slower than a centralized one
(less appropriate for high-speed, high-volume applications)
High and increasing demand for energy (for executing the computations)
Governance
Unclear responsibilities (admitting new users, regulation of access permissions)
Bypassing regulation (digital identities, cross border standards, system integrity)
Rising questions regarding privacy and security (pseudonymity vs. real identity)
Commercialization
Challenges of integration with corporate legacy and record systems
Total shift in the culture of doing things
Standards needed to gain widespread adoption and to ensure interoperation
between multiple, specialized blockchains
Hurdles of blockchain technology
14. 14
In famous blockchains, like bitcoin or Ethereum, the single account
identifier is the key ID. No more information is provided.
→ Meets the criteria for anonymity and pseudonymity of the
EU Data Protection Regulation
But:
Blockchains are intended to be public, so everyone can retrace every
single transaction on the blockchain
→ This allows to track the owner of an account, e.g. by tracing back to
his/her IP address, even though he or she is anonymous.
→ Additional adoptions would be required to prevent back-tracking
Additional information that may be required to store title deeds, music
licenses or environmental certificates on a blockchain, e.g. name and
address of the owning person or company, are publicly accessible
Privacy
15. 15
Updates and changes of a blockchain system are hard to realize
Example for bitcoin:
Original, the bitcoin blockchain was limited to 7
transactions per second
To allow more transactions per second, a fork of bitcoin
was required
that was executed in August 2017
Blockchain updates and changes
16. 16
Transactions are persistent
→ Mistaken transactions can not be rolled back
If the private key gets lost, the account can't be accessed
anymore, thus the money, contracts or what ever was put on
the blockchain is lost forever
Damages caused by programming errors on Ethereum:
2016: The DAO exploit
A programming error in a contract caused damage of 150,000,000 USD
Ethereum was forked to make it unhappened → this was a big and
unique act of the Ethereum community
2017: Bugs in the Parity wallet contract
Bug #1 allowed to steal 30,000,000 USD
Bug #2 has frozen 160,000,000 USD that can't be accessed anymore
Risk of persistent transactions
17. 17
Blockchain technology has the potential to:
disintermediate the middleman
disrupt economies, markets, and existing participants
drive cost savings by reducing labor-intensive processes and eliminating
duplicate effort (disruption of the labor market)
create new markets by exposing previously untapped sources of supply
facilitate secure, de-centralized transactions among many parties in the Internet
of Things
increase transparency and efficiency in multi-party transactions
reduce fraud and increasing trust with increased security
Blockchain technology is in its infancy and has the potential to
change … everything!
Conclusion – Why should we care?
18. 18
“Beyond its technological capabilities a blockchain can be considered as an
economic system”
Hence a blockchain can be used to build and enact…
Digital currencies
Payment methods
Financing models (token sales, ICOs)
And a variety of other business logics e.g. smart contracts
Excurse – Initial Coin Offerings
19. 19
“Initial Coin Offerings also known as ‘token-sales’ or ‘crowd-sales’ denote
a method of start-up fundraising via the sale of digital tokens over a
blockchain”
Features of an ICO What an ICO is not
Token -
Issuer
Token -
Buyers
Start-up Investors
Generate Tokens Issue Tokens
Send CryptocurrencyGenerate Protocol
• Tokens are a promise to future rewards or
services of a company
• Tokens can be bought in exchange for
other cryptocurrencies and act as
transaction mechanism on the blockchain
• Tokens are freely tradable on
crytocurrency exchanges (i.e. they have
high liquidity)
• Tokens are not a legal claim on debt or
equity
• Funds are not raised through an
intermediary (but directly by the
entrepreneur)
• ICOs are not regulated
What is an ICO?
20. 20
ICOs constitute a very fast and easy way to collect funds. Also they can be conducted at a
fraction of the cost of more traditional fundraising methods (e.g. Venture Capital, IPOs)
Steps ICO
1. Initiate • Write a white paper (i.e. a business plan) and a yellow paper (i.e. a technical
paper)
• Announce your endeavour to the crypto-community to gauge interest
2. Marketing • Create a website
• Establish various channels to communicate with your community (e.g. slack,
reddit and/or telegram)
3. Token
Creation
• Create your tokens
- build your token on top of existing standard (e.g. ERC20 on Ethereum)
- or build your own standard (i.e. creating your own blockchain).
4. Sales • Determine the conditions of your token sale:
- Quantity/ Price
• Consider a pre-sale at favourable conditions (e.g. discount) to draw in early
users/investors
5. Diffusion • Get your token listed on various cryptocurrency exchanges (e.g. Kraken,
Bitfinex)
• Consider mechanisms to stabilize the price of your currency (e.g. gas)
6. Development • Shift all your resources to the development of your technology
How to conduct an ICO?
21. 21
Since ICOs seem to be particularly confined to a particular type of start-up
(i.e. blockchain-type start-ups) it is difficult to compare them to other
fundraising methods
However if we want to make a comparison, the following general characteristics are
observable:
Characteristics ICOs Crowdfunding Venture Capital
Equity - +/- +
Ease of Access ++ + --
Transaction
Volume
++ - +
Liquidity ++ -- -
Community
Help/Interaction
++ + -
Risk -- - -
*
* Depending on the type of crowdfunding (equity vs. reward-based cf)
How ICOs compare to other Fundraising Methods
22. 22
To prevent to come under scrutiny of financial authorities and regularties…
• Consider KYC (Know Your Customer) and AML (Anti Money Laundering) regulations
• Refrain from advertising your token as a financial security (i.e., focus on the utility of
your token and not the financial gain obtained from it)
• Make sure that you token is sufficiently decentralized if you do not want it to be
classified as a security.
• However, if you want your token listed as a financial security follow common security
law as well as the recently established guidelines of Coinbase:
• https://www.gdax.com/static/digital-asset-framework-2017-11.pdf
“Although ICOs are not regulated yet financial authorities are closely
monitoring this new phenomenon”.
Beware of the following mistakes!
23. 23
Bitcoin, company website
https://bitcoin.org/
Deloitte, «Blockchain, Enigma. Paradox. Opportunity», 2016
http://www2.deloitte.com/content/dam/Deloitte/ch/Documents/innovation/ch-en-deloitte-innovation-blockchain-full-
report.pdf
Ethereum, « A Next-Generation Smart Contract and Decentralized Application Platform», 2018
https://github.com/ethereum/wiki/wiki/White-Paper
Goldman Sachs Group, «Profiles in Innovation: Blockchain – Putting Theory into Practice», 2016
http://www.the-blockchain.com/docs/Goldman-Sachs-report-Blockchain-Putting-Theory-into-Practice.pdf
Harvard Business Review, «The Impact of the Blockchain Goes Beyond Financial Services», 2016
https://hbr.org/2016/05/the-impact-of-the-blockchain-goes-beyond-financial-services
Morgan Stanley Research, «Global Insight: Blockchain in Banking: Disruptive Threat or Tool?», 2016
http://www.the-blockchain.com/docs/Morgan-Stanley-blockchain-report.pdf
Medium, «Understanding the SEC’s Guidance on Digital Tokens: The Hinman Token Standard», 2019
https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-
standard-dd51c6105e2a
Nakamoto Satoshi, «Bitcoin: A Peer-to-Peer Electronic Cash System», 2008
https://bitcoin.org/bitcoin.pdf
Medium, «How to Determine if a Cryptocurrency is a Security or Not Using the Howey Test», 2018
https://medium.com/altcoin-magazine/how-to-tell-if-cryptocurrencies-are-securities-using-the-howey-test-da18cffc0791
Recommended readings
Sources for Numbers '18 (Access Date: 29.01.2018): https://blockchain.info/ and https://blockchain.info/de/charts/market-cap
A blockchain consists of a theoretical infinite number of blocks.
The initial block (Block 1) is generated on the creation of the blockchain
Regarding Bitcoin or Ethereum, the further blocks are generated by miners by solving a mathematical problem
Each block refers to the previous block. Therefore, the block header contains the checksum of the previous block.
Additionally, the block header contains a hash tree with the checksums of the transaction. With these checksums, all transactions in a block can be verified.
The transactions itself are appended to the block (block body)
Source for the code example: https://www.ethereum.org/greeter
The code is written in the programming language Solidity, a high level contract language, that was developed for Ethereum
Supports inheritance to simplify coding. That means, a contract can inherit the characteristics of another contract ([mortal]←[greeter])
*KLICK*
Important: On Ethereum, every contract is immortable by default. That means, a contract that is deployed, cannot be revoked, because the author has no privileges anymore.
If the option to revoke a contract should be kept, it has to be implemented manually!
Banking: R3, a consortium with over 40 world leading banks, aims at designing and delivering advanced distributed ledger technologies to the financial market
Insurance: Smart Contracts überprüfen, dass Claims nicht mehrmals getätigt werden, bzw zahlen bei dem Eintreten/Nicht-Eintreten eines definierten Ereignisses automatisch die Prämien aus -> keine Sachbearbeitung nötig… keine Sachbearbeiter nötig!
Public Sector: Register als blockchain werden zentral organisiert, aber dezentral geführt. Informationen stehen jederzeit und öffentlich zur Verfügung. Handel mit Assets kann ohne «Amt» durchgeführt werden, da Besitzverhältnisse fälschungssicher in der Blockchain festgehalten sind. -> keine Sachbearbeitung nötig… keine Sachbearbeiter nötig!
Media Industry: Raubkopien können über Smart Contracts ausgeschlossen werden. Künstler können Nutzung selbst definieren. Royalties fliessen bei Nutzung automatisch an den Künstler, ohne, dass ein Intermediär nötig ist
IoT: IBM arbeitet mit Adept an einer Plattform, die mit Blockchain-Technologie Geräte im Smart Home managbar machen. Das Problem, das hier gelöst werden muss, ist die Frage, wie heute verkaufte Geräte wirtschaftlich tragfähig zehn Jahre oder länger auf Service-Seite von Servern des Anbieters unterstützt werden können. Die Herausforderung: Entweder die dadurch enstehenden und einzupreisenden Kosten lassen die Preise pro Produkt explodieren oder die Unternehmen unterstützen die von ihnen verkauften Geräte nicht für die gesamte Lebensdauer. Am Ende des Tages ist das dann weder vernetzt noch smart.
Documentation of the complete supply chain
Every information is documented on the blockchain. This allows to trace back a product to its origin.
Smart Contracts are triggered automatically for payment transfers, e.g. when a shipment reaches the customer.
Source: https://aqurus.ca/blockchain-crucial-link-supply-chain/
Traceability is an advantage for the verification of a block chain (consistency check) …
However, it is also a disadvantage regarding the privacy.
Source: https://www2.deloitte.com/dl/en/pages/legal/articles/blockchain-datenschutzrecht.html
Not all updates or changes can be made via update of the blockchain software
For bigger updates, a fork is required!
DAO exploit: Ethereum was forked, but the old blockchain exists parallel
The new blockchain got the name "Ethereum"
The old (original) blockchain was renamed to "Ethereum Classic"
Parity bugs: This also could only be solved by an additional fork of Ethereum to make it unhappened. But this is improbable. You can't fork it every time if a programming error occurs or a transaction was performed erroneously. This would not be in the sense of a blockchain.
https://www.heise.de/newsticker/meldung/Nach-dem-DAO-Hack-Verbliebenes-Kryptogeld-mit-freundlichem-Hack-gesichert-3246539.html
https://en.wikipedia.org/wiki/Ethereum#The_DAO_event
https://www.heise.de/newsticker/meldung/Kryptogeld-Wallet-Parity-Bug-friert-Ether-Einheiten-im-Wert-von-Millionen-ein-3882902.html
https://www.finanzen.net/nachricht/devisen/bug-beim-parity-wallet-erneute-panne-bei-kryptowaehrungen-nutzer-koennen-nicht-auf-ihr-ethereum-zugreifen-5802148
Ad Punkt 3 – „Token creation“: Be aware that creating an own standard is more time consuming and requires higher technological capabilities
Ad Punkt 3 – „Token creation“: Be aware that creating an own standard is more time consuming and requires higher technological capabilities