Crypto Midterm

Topics

1. Class Orientaiton/History & Mechanics 2. Non Technical Mechanics 3. Mining & Verifying 4. Smart Contracts 5. Business Use Cases: Money & Currency

4 Node Functions

6 common combinations § Mining/Staking - new block discovery/chaining § Wallet - creating new transactions and broadcasting to the network § Routing - maintaining/discovering connections with peers; facilitating consensus § Storage - storing/maintaining the blockchain

Cryptocurrency

A liquid, digital currency you can trade on exchanges where encryption is used to regulate generation of units and verify transer of funds. Math-based decentralized convertible virtual currency protected by cryptography. 4 components § Digital/virtual § Public Key Encryption & Mining § Independent Consensus § Decentrlized/ Distributed Permissionless

Public Permissionless

Anyone can Read/Write/Commit (Delete). Bitcoin, Ethereum

Public Permissioned

Anyone can read, Authorized Participants Write/Commit. Public Supply Chain ledger: Libra

Private Permissioned

Authorized Participants can Read. Network operator can Write/Commit.

Consortium

Authorized Participants can Read/Write/Commit. Multiple banks on a shared ledger

Hash Functions

Bitcoin uses SHA256 Fixed length output Collision resistant

QQ: Is Blockchain Bitcoin

Blockchain is DLT (Structure/form), Bitcoin is a subset

QQ: What is POW vs POS

Different census mechanisms, 66.7% percentage for an attack vector; tolerance of attack

DLT

Distributed or Decentralized Ledger § DLT is protected with cryptography, is immutable and auditable

Reasons to not need blockchain

Don't need shared write access, trust the users already, doesn't need to be accessed by multiple public entities or is immutable (can't update them)

Extended Answer of what is a DAO

Entities that operate through smart contracts, rules are code automation over human actors; reduced cost investors send money and receive the right to vote. Proposals are submitted and voted on

What does bad money drives out good mean

Greshams law; basically low value money from inflation forces out the good

Fork

Hard: break in consensus, In a sense the supply of coins doubles but in reality there are 2 distinct code/protocols and as soon as unique transactions occur within the 2 respective networks then the blockchains diverge Soft: Consensus is reached and new rule is adapted and 1 blockchain, backwards compatible

What is Money?

IOU which: § Functions as a medium of exchange § Unit of account § Store of value

Is Blockchain a DLT

It is one type of DLT

Death Spiral

Large number of miners leave the network due to mining not being profitable. Loss of hash power would mean more time to process transactions/blocks driving additional miners off the network. However difficulty mechanism exists Difficulty doesn't adjust fast enough so that a drop in price could start the death spiral We've seen extreme volatility of prices and hash power has continued to grow

Scarcity

Limited currency that can't just be copied/pasted. Previously a centralized authority did that to ensure digital currencies can't be double spended but there is no central authority in bitcoin

PoW: Why is the longest chain valid

Longest chain has the highest cumulative proof of work and requires the largest number of hashes more profitable for nodes to find valid blocks than attach the network

QQ: What is a key assumption of blockchain, why

Low trust, assume to be attacked

Advantages of a DAO

No employees, offices, overhead, jurisdiction, no beaucracy run by immutable code and greater longevity more oversight/engagement of operations from investors

What is staking

POS o Where voting is done based on ownership stake; staking pools have cropped up o Less separation of powers as the coin holders and miners are one in the same

Consensus Mechanism

POW: One CPU = One Node = One Vote electricity consuming because it requires energy to mine. If you want more representation you need to mine more and therefore consume more electricity POS: One Coin = One Stake = One Vote; PoS Consensus Mechanism § No need to consume large amounts of electricity § Discourages dentralized mining cartels § Economies of scale benefits mining because gear becomes cheaper at higher costs but PoS $10M yields same scale benefit as $1 § 51% attacks are more expensive

Ledger

Provides proof of ownership and a record of transactions and can be physical or digitally recorded

QQ: Is Bitcoin totally private

Pseudo anonymous, private/public key. Basically a paradigm shift to a low trust environment since the public key is visible. The key could in theory be traced

Public/Private Keys

Public keys is your wallet address while the private key allows coins to be spend

Nothing at Stake problem

Stakers aren't disentivized to stake in both currencies during a hard fork and that can cause double spending

Bitcoin

The first working cryptocurrency; specific subset of cryptocurrency § Trustless trust, decentralized, peer to peer w/out intermediary § Combines: Double Spend Problem, Mining and Supply Schedule (fixed supply) § Subset of blockchain technology

Trilemma

Trade-off between decentralize (# of active addresses), trust (security/# of confirmations major exchanges require) and scalability (transactions per second). Off-chain or side-chain may be a solution to the trilemma

Gas

Transaction Fee, measures computational effort in ethereum

What is Mining

Validation in PoW system, rewarded by new coins and transaction fees. Just transaction fees after 2140

What is a hash function

any function that be used to map data of arbitrary size to data of fixed size

Merkle Tree

collapse long histories to reduce processing power

Bad Node

double spender, faulty machines, malicious or malfunctioning nodes

Double Spend Problem

everyone sees the transactions and fraudulent transactions won't be added to the network; longer chains are taken as correct

New Digital Money Flower

more digital, private forms of money

• What Are Smart Contracts?

o Agreements written in code, managed by nodes and executed when conditions are met. Algorithmic justice; issues when there is subjective qualification Anatomy: § Identify Agreement § Set Conditions § Code the Business Logic § Encryption & Blockchain Technology § Execution & Processing § Network Updates

51% Attack

o Attack against the system where the attacker could double spend, censor others transactions or make stakeholders lose faith in the system and profit from shorting the network o In Bitcoin that means a majority of the Hashrate given Bitcoin is PoW; smaller networks are easier targets o Over time its theorized there'll be fewer miners because the compensation will go down and the hashpower will deceline and the cost for 51% will go down

What is Validation

o Audit Function that confirms a transactions follows the rule o If you are dishonest in your validation you will never be rewarded unless majority of the network is dishonest

Byzantine Fault Tolerance

o Byzantine General Problem with more than 2 actors relying on the others' to be in good faith. BFT is a solution so long as less than 1/3 of actors are bad actors o Honest nodes are incentivized to maintain valid transactions that end up overwhelming the minority of bad nodes o Nash Equilibrium node are already acting in the correct manner and won't spontaneously switch to malicious behavior via some random cooperation/collusion o Fault Tolerance

Trustless Trust

o Confidence in doing something or interacting with someone; scaled over time with help from major institutions until the internet and open software brought it to new levels by decentralizing trust o With the internet you have to assume bad actors; low trust environment. Without central authority you need governance protocols, math/cryptography and incentive structure

Why does the US Dollar have value

o Dollar initially backed by gold but over time backed up through taxation, the size of the economy, its reserve status, the military and trust

QQ: What features in bitcoins are built in to make it safer than others

o Hash function, asymmetric, o Nonce (random character tp screw up code crackers o Hash power; strengthening the amount of brute force necessary given increasing power of computers (mining rigs, aisic chips)

What is sovereign vs private money;

o IOU to the government vs a private entity o Money can be analyzed in terms of: issuer (central bank), form (digital), accessibility (permissioned, etc.) and payment transfer mechanism (P2P or between banks, etc)

What is Inflation?

o Increase in prices and fall of purchasing value of money o Demand inflation exists

What is a Stablecoin?

o Price stable coins introduced to counter bitcoins volatility o Value is pegged to a currency; stable coins are backed by off-chain assets. Rely on banks given the fiat collateral they have

Ledger Access

o Public Permissionless o Public Permissioned: o Consortium: o Private Permissioned:

What Does Fixed Money Supply Mean?

o Set number of units of a currency; means its inelastic so it is the one constant o Bitcoin will eventually reach a fixed supply by 2140

2 Layer Solutions

o Side-Chain and Off-chain solutions to conduct transactions off chain to help with scalability without a cost of the other 2. Transactions occur off chain so possibly eliminates the trilemma o When the network is backed up with transactions, fees soar o Lightning and Sharding

QQ: Is there inflation in bitcoin

o Yes and no; after 2140 when the last supply of bitcoin is mined then there won't be any additional predicted supply inflation pending any hardforks or adjustments to the code o Demand inflation may occur

QQ: Is Bitcoin Centralized

o Yes: parts like chips and mining rigs have made it centralized o No: all other components which aren't centralized

Changes in processing time

when there are large fluctuations in hash power of the network, Bitcoin takes time to reset difficulty to hit the target 10 minutes of block creation

Where does cryptography come in

§ 2 of the 3 cryptography techniques: asymmetric cryptography and hashing

DAO

§ A = operating rules are programmed, cuts down on a lot of human functions § D = runs on public infrastructure like the crypto network § O = organization or entities that coordinates activities among distributed community of stakeholders

Economics of Mining

§ Cost of Rig, cost of electricity and difficulty hash § Majority of mining in china; it controls validation bu doesn't own Bitcoin because it needs 2/3rds to change the code § Again, good behavior is rewarded and good behavior is determined if you are correct. Bad behavior is not rewarded but you are still charged fixed and variable costs so economic incentive is to behave well

Components of Blockchain

§ Distributed Ledger Technology (ledger is basically a format + all the data) § Requires Peer to Peer networking with cryptography § Common data structures (blocks) which link (chain) which creates a trustless trust network. You can trust because transactions are validated § May or May not have a token

Components of a Block

§ Hash function § Digital Signatures § Public & Private Keys § Nonces - dummy values meant to make the decryption take longer § Difficulty § Hashpower

Mining Pools

§ Lower overhead, economies of scale, specialized equipment, power purchasing agreements § Smooth rewards/make them more predictable. Reduces risk for a fee from organizer/cloud capacity costs o don't just audit but can choose not to process a transaction and act like a cartel

What is the point of governance

§ Network functions § Code § Economic incentives § Permissions of transactions Who edits the code, who decides whats true and who settles disputes

SHA 256 vs SHA 1

§ SHA1 is vulnerable to collision § SHA256 has 2^256 more possible hash outputs

Keys

§ There's a virtually zero chance of a collision given SHA251

3 Properties that must be accounted for with consensus

· Liveness - data gets added and network doesn't get stuck · Agreement - all nodes eventually agree · Safety - agreed upon value does not violate protocol

ERC20 & ERC721

• token standards for smart contracts in ethereum