Block

Chain

Blockchain is this hot new buzzword. We have to start with the big one, Bitcoin.
Bitcoin was started in late 2008. Open-sourced January 2009. Creator pseudonym Satoshi Nakamoto. First decentralized virtual currency. Before we talk about Bitcoin we need to talk about what money even is.

What is money?

    • Durable
      Portable
      Fungible
      Divisible
      Scarce
      (Acceptable)
    • Medium of exchange: ➫portable, ➫durable, ➫fungible Unit of account: ➫divisible, fungible Store of value: durable, ➫scarce, fungible One more property: ➫acceptable (people like using it) Next: things we've used as money
    Durable
    Portable
    Divisible
    Fungible
    Scarce
    Shells Used on most continents. Still a legal currency in Papua New Guinea alongside their paper money.
    Durable
    Portable
    Divisible
    Fungible
    Scarce
    Stone money Made in Micronesia and Guam Transported to the island of Yap as currency. Value from the story of how hard it was to transport. Ownership transferred by oral history, stones not moved.
    Durable
    Portable
    Divisible
    Fungible
    Scarce
    Precious metals, gold and silver. Used widely today as money but not currency. Less portable and divisible than its competitors.
    Durable
    Portable
    Divisible
    Fungible
    Scarce
    Cash Used to represent gold and silver. Starting with FDR's New Deal in 1933 and ending with Nixon Shock in 1971, the US (and practically everyone else) switched to unbacked "floating money" to take more direct control of national markets. As a result, cash is not scarce.

    How could we make
    digital currency?

    Digital items can be duplicated; how can I send you something the way I do in the physical world? The people on the island of Yap had the right idea: use a ledger.
    Sorry, wrong Ledger.
    Joshua 25
     - 15
    Tim 57
    Dave 9
    Jack 12
     + 15
    George 40
    A ledger keeps track each person's money. To send money, ➫reduce my account and ➫increase their account. Like Paypal. BUT - requires trust. One way to reduce the trust required is with...

    Cryptography

    We can use public and private keys to control balances in an anonymous ledger.
    1D4FA353C82B4 11.5
     - 11
    37563EA8932FB 6.0
    D163512ECD12E 9.0
    D15F73E98432A 13.5
     - 4
    333BCBA13A54C 9.7
    8DCFD9B98C72B 57.0
    8DBDA78D8BEF2 1.1
    C5F83ED13497A 6.0
     + 15
    92A1E683111A2 30.2
    Then instead of sending a payment from "Joshua" to "Jack", it's a payment from "private keys ➫A and ➫B" to "public key ➫C".
    There's a company that actually did this, called DigiCash. They used a centralized ledger with cryptographically controlled balances. Consumers weren't concerned enough about security or privacy and they ran out of money. Centralized providers can be fragile since there's a single point of failure.

    How to decentralize?

    You get a ledger! You get a ledger!

    YOU ALL GET A LEDGER!!

    Give everyone their own copy of the ledger. When you make a change to the ledger, send it out to everyone so all the ledgers stay up to date. Use cryptographic keys for privacy, and so that one person can't change another person's balance.

    Double Spending

    What if I send two transactions at once, spending the same money in two places? Real world, double spending is easy. Write two checks, first one cashed "wins", it's about timing. How can a decentralized network solve timing issues? Analogous problem:

    the

    Byzantine Generals’

    problem

    The Byzantine army is divided into groups, each group led by a general. But some of the generals are traitors. How can the loyal generals share one plan of attack, even in the presence of a small group of traitors? This kind of tamper-proof consensus they are looking for is called "Byzantine consensus".
    hashbrowns

    Hashes

    Hashing is a one-way transformation of some arbitrary data into some random-seeming but bounded output. We can get Byzantine consensus with creative use of hashes.

    Proof of Work

    In 1997 this guy Adam Back came up with HashCash. The idea is that an email client would brute-force a certain amount of zeros as the output to a cryptographic hashing algorithm. Also known as a "puzzle".

    Hash Pointers

    + Proof of Work

    = Blockchain

    A good structure for a ledger is a linked list: each block of transactions points to the previous block. Each participant will trust the longest log they hear about. But we need this log to be tamper-proof. ➫➫Hash pointers can make it so that changes earlier in the chain affect every item after that. ➫➫Add proof-of-work. Now to change history, you have to redo all the work after that point. But new blocks are still being added.

    Incentives

    Why would someone do all this work solving hashes to putting new transactions on the ledger? Well, Bitcoin kills two birds with one stone. The protocol specifies that whoever solves one of these hash puzzles is rewarded some newly created currency. (hence "mining") Also, transactions can include fees which miners collect.

    Implications

    So what can we use this technology for? It's a tamper-proof ledger, with timestamps and encryption and a giant network of computers keeping it secure. The key is that blockchains are a decentralized authority, rendering trusted third parties obsolete.

    Trusted Third Parties

    Central banks &
    payment services

    Blockchains' value as money is at the heart of their incentives. Private blockchains that don't try to be money face serious challenges. The ability to transfer value globally without using or trusting a third party can save money and time, especially for traditionally burdensome cases like international remittance. (Bitcoin, Dash, Monero, Litecoin, Ripple)

    Register of deeds,
    copyright office,
    notary

    Embedding a hash in the blockchain demonstrates an item's existence at point in the past. Easy to do, not a tremendous improvement for consumers yet. (Stampery [using Bitcoin and Ethereum Classic], Factoids, Emercoin)

    Cloud storage providers

    Cloud storage is just one step further than proof-of-existence. (Storj, Maidsafe, SIAcoin, NXT)

    DNS providers

    (Namecoin, Emercoin)

    Social networks

    (Steem, Synereo, Akasha [using Ethereum])

    Media rights &
    compensation

    (UJO Music using Ethereum, LBRY)

    Identity providers

    (Blockstack using Bitcoin, Namecoin, Dash [upcoming])

    SSL certificate authorities

    CAs are a great example of a TTP with perverse incentives. Ripe for disruption. (Namecoin, Emercoin, Ethereum)
    Applications for businesses: Look for places where we depend on a trusted third party, or where we operate as a trusted third party. These are areas that could be disrupted with blockchain technology, if conditions are right.

    Questions?

    Further reading:

    Credits