Blockchain and Cryptocurrency

Technologies
Dr.P.Balakrishnan
Associate Professor
VIT, Vellore
Tamilnadu, India
Agenda
• Traditional Money System
• Bitcoin as Solution
• Bitcoin use-cases
• Bitcoin Ecosystem
• Sample Cryptocurrencies
• Bitcoin’s Blockchain
• Blockchain Applications
Money System
 Money and Currency
• “The amount of goods my 10 US Dollar bill buys now
is way less than what it used to buy me 10 years ago”
• Simple terminologies that are used for examining
money or currency
– Medium Of Exchange-It is widely accepted as a medium of
exchange
– Portable –It can be carried along and exchanged.
– Durable – It can be used a number of times without
degrading.
– Fungible – Its one unit is equivalent to another.
– Divisible – It can be divided into smaller units of value.
– Store Of Value– It should maintain its purchasing power
 Money and Currency
Money Currency
• It should be a medium of • It should be a medium of
exchange exchange
• It should be a unit of account • It should be a unit of account
• It should be durable • It should be durable
• It should be portable • It should be portable
• It should be divisible • It should be divisible
• It should be fungible • It should be fungible
• It should hold its purchasing • DO NOT store value and do not
power for a long duration. maintain the purchasing power
– Gold and Silver is used for this
– Now Bitcoin also
 Money and Currency: Fiat Money

it is a gold certificate and 20 dollars worth of gold coin is payable to

bearer on demand. Here, the USD is backed by gold
 Money and Currency: Fiat Currency

• As per the US government’s decree, this paper is worth of 20 US

dollar goods and services. Here, the USD is backed by decree or fiat.
• supply of dollars or paper currency increases, its value depreciates
over the period of time which leads to inflation
 Money and Currency:
Inflation Vs Hyperinflation
 Money and Currency
• How will you prove that currency never stores a
value?
– Central banks can print as much paper currency as
they want thus diluting the currency supply
• an increased supply of currency and its value or purchasing
power decrease which leads to inflation
• How will you prove that money maintains
purchasing power and stores a value?
– Bitcoin, Gold and Silver cannot be printed by
governments. Since they are limited in quantity they
are bound to maintain their purchasing power by
readjusting their prices time & again
 Fiat currency, Digital currency, Virtual
currency and Cryptocurrency
• Fiat currency
– Fiat currency is government-issued currency that isn't
backed by a commodity such as gold.
– Fiat currency gives governments' central banks greater
control over the economy because they control how
much currency is printed.
– One danger of fiat currency is that governments will
print too much of it, resulting in hyperinflation.
• Digital Currency
– blanket term used to describe all electronic currencies,
that includes both virtual currency and cryptocurrency
 Fiat currency, Digital currency, Virtual
currency and Cryptocurrency
– Currency in digital form which exhibits all the
properties of physical currencies supports
instantaneous transactions and borderless transfer of
ownership.
• Ex: Virtual currency and Cryptocurrency
– Can be used to purchase goods and services within
specific communities
• Virtual Currency
– A type of unregulated, digital money, which is issued
and usually controlled by its developers, and used and
accepted among the members of a specific virtual
community
 Fiat currency, Digital currency, Virtual
currency and Cryptocurrency
• Cryptocurrency
– is a digital currency designed to work as a medium of
exchange that uses strong cryptography to
• secure financial transactions using decentralized peer-to-
peer system,
• control the creation of additional units using proof of work
and proof of stake, and
• verify the transfer of assets
 Fiat currency, Digital currency, Virtual
currency and Cryptocurrency
• Differences
– Fiat CURRENCY
• “legal tender” backed by a “central government
• Centralized and local
• Can be represented physically or electronically
• Governments controls the supply
– Cryptocurrency
• not “legal tender” and it is not backed by a central
government or bank
• Decentralized and global
• Can be represented electronically
• An algorithm controls the money supply
 Fiat currency, Digital currency, Virtual
currency and Cryptocurrency
• Similarities
– both are mediums of exchange that are used to store
and transfer value
– both can be used to purchases goods and services
– both have their value governed by supply, demand
work, scarcity, and other economic factors
– both have their value affected by the quality of the
system surrounding it
– both can be traded on exchanges
Transaction in a traditional banking
Problems Associated with the
Traditional Systems
• Segregation
– Banking services are too expensive for some people.
– To use banking services, you need documentation, such as
an ID card, that many people don’t have.
– Banking services can be denied to people with certain
political views or those conducting certain businesses.
People might also be denied service due to their ethnicity,
nationality, sexual preferences, or skin color.
• Privacy Issues
– When it comes to electronic payments such as credit cards
or bank transfers, traditional money poses several privacy
problems. States can easily
• Trace payments
• Censor payments
• Freeze funds
• Seize funds
– Ex: Cyprus seized 47.5% of all bank deposits exceeding
100,000 € as part of a financial rescue program in 2013
• Inflation
– Inflation means the purchasing power of a currency
decreases

– Most currencies are subject to inflation, some more

than others.
– Extreme cases of inflation is called hyperinflation, and
are usually driven by a rapid increase in the money
supply.
• Governments sometimes increase the money supply as a tool
to extract value from the population and pay for expenses
• If this tool is overused, the risk of hyperinflation is apparent
Hyperinflations
• Borders
– Moving value across national borders using national, or
fiat, currency is hard, expensive, and sometimes even
forbidden
– Scenario:
• Sending 1,000 Swedish crowns (SEK) was worth 5,374
Philippine pesos (PHP) or 109 US dollars
Bitcoin as a Solution
• Decentralized – Solves segregation and privacy
– Control of Bitcoin is distributed among thousands of
computers, or nodes.
– No single node or group of nodes has more privileges
or obligations than any other

– No matter where or who they are, or to whom they’re

sending money, the Bitcoin system will treat all users
equally.
– The Bitcoin system has no central point that can be
exploited to censor payments, deny users service, or
seize funds.
–Since bitcoin is permissionless, no need to
ask anyone for permission to participate
–Changing the rules of Bitcoin is nearly
impossible without broad consensus.
• one rule is that Bitcoin’s money supply is
limited to 21 million bitcoins
• It is nearly impossible to change because
of decentralization
• There’s no one you can threaten or bribe
to change these rules
• Limited Supply – Solves
Inflation
– Bitcoin’s money supply
won’t exceed 21 million
bitcoins.
– People can be sure that
if they own 1 bitcoin,
they will always own at
least one 21-millionth of
the total supply of
bitcoins.
– Bitcoin’s money supply
isn’t fixed today. It’s
increasing, at a
diminishing rate,
according to a
predetermined schedule
and will eventually stop
increasing around the
year 2040
• Borderless – solves border issues
– Because Bitcoin is a system run by ordinary computers
connected to the internet, it’s as global as the internet.
– This means anyone with an internet connection can
send money to other people across the world
Use cases of Bitcoins
• Financial Use Cases
– Savings
• Save your money and protect it by saving your private keys
– Shopping
• Don’t send any sensitive information to the merchant, or
anyone else. You transfer the amount of money you agreed
on and nothing more
– Speculation
• buy when it’s low and sell when it’s high
• Financial Use Case
– Cross border payments
• Less costlier than traditional systems
• Non-Financial Use Cases
– Proof of Ownership
• Bitcoin lets you embed small pieces of data with payments
• for example, a chassis number of a car.
– When the car leaves the factory, the manufacturer can make a small
Bitcoin payment to the new car owner, containing the chassis number.
– This payment will then represent the transfer of ownership for that car
– The new owner can sell the car to someone else and transfer
ownership by sending the same bitcoins she got from the
manufacturer to the new owner’s public key
• Non Financial Use case
– Proof of Existence
• A digital document has a fingerprint: a cryptographic hash
that anyone can calculate from that document.
• This fingerprint is recorded in the Bitcoin blockchain thereby
anchoring the document in the blockchain
• How is bitcoin valued?
– bitcoin’s price can fluctuate dramatically based on supply and
demand
• When not to use bitcoin?
– Tiny Payments
• A Bitcoin transaction should usually include a processing fee
which is not related to the amount sent but to how big the
transaction is in bytes
• High-value transactions aren’t bigger (in bytes) than low-
value transactions, so the fee is about the same for both
kinds of transactions
• When to not use bitcoin?
– Bitcoin payments take time to confirm.
• The recipient sees the payment immediately but shouldn’t trust the
payment until the Bitcoin network confirms it, which typically
happens within 20 minutes.
– Trusting an unconfirmed transaction can be risky
• The sender can double spend the bitcoins by sending the same
bitcoins in another transaction to another Bitcoin address
• Risks associated with bitcoin
– You lose your private keys: the secrets you must have to
spend your money.
– Your private keys are stolen by some bad guy.
– The government in your location tries to crack down on
Bitcoin users by imprisonment or other means of force.
– The price of Bitcoin swings down dramatically due to
rumors or speculation.
– Software bugs make Bitcoin insecure.
– Weaknesses arise in the cryptography Bitcoin uses.
Other Cryptocurrencies
Legal Status of Bitcoin
 Bitcoin Summary
• Bitcoin
– Is a decentralized electronic payment system based on
cryptographic proof instead of trust thereby enabling two
willing parties to transact directly with each other without
the need for a trusted third party like centralized bank.
– cannot be printed
– resilient to any manipulations
– backed by hard and complex energy intensive math
problems
– Inflation proof
– Take the power back from the governments
– Moves faster and quicker
– Fixed supply of bitcoin 21Million
 Bitcoin Summary
– Is a peer to peer network that maintains a public
decentralized ledger of digital math based assets
known as bitcoins
• The integrity of these ledgers is backed and secured by a sub-
network of computers (miners) who audit and archive its
transactions for a reward
– Transaction named sending a bitcoin sends an
instruction to the network to change the custody in the
public ledger.
• However, the ownership cannot be changed till more than
half of the nodes in the network has to authenticate it.
Basic Cryptographic Operations
• Cryptographic hash functions
– A cryptographic hash function takes any varying size of digital
input data, called a pre-image, and produces a fixed-length
output, called a hash.
• Hash is commonly referred to as digest
• If SHA256 is used, output size is always 256 bits
– Properties
• Property1: collision-free/collision-resistant
– It is very hard to find two inputs that are going to produce the same hash value
• Property2: Pre-image resistance (hiding)
– Given only the hash of an input, it is very hard to get the original input from hash
value
• Property3: Secondary Pre-image resistance (puzzle-friendly)
– Given one input and its hash value, it is hard to find another input which is going
to produce the same hash value
• Property4: Efficiently computable
– Time taken to produce the output hash should be as low as possible
• Property5: High Avalanche effect
– Small change in input introduces huge change in output(hash)
• Property6: Deterministic
– The same input produces same output(hash)
How does a cryptographic hash function
work?
512 Padding (10* | length)
bits
Message
Message Message (block n)
(block 1) (block 2)
256
bits 256 bits
c c c
IV Hash

Output size is 256 bits

256/8=32 bytes
256/4 = 64 hex digits
2 hex digits = 1 byte
Digital Signature with Hash
Bitcoin Ecosystem
Bitcoin Ecosystem
 Bitcoin network and its Ecosystem
• End users
– People using Bitcoin for their day-to-day needs, such as savings, shopping,
speculation, or salaries
• Corporate users
– Companies using Bitcoin to solve their business needs, such as paying wages
internationally, or use cases similar to those of end users
• Merchants
– For example, a restaurant or a bookstore accepting Bitcoin payments
• Bitcoin services
– Companies providing Bitcoin-related services to customers, such as topping up
mobile phones, anonymization services, remittance services, or tipping services
• Exchanges
– Commercial services people can use to exchange their local currency to and
from bitcoins
• Protocols on top
– Systems that operate “on top” of Bitcoin to perform certain tasks, such as
payment network protocols, specialized tokens, and decentralized exchanges
• Bitcoin developers
– People working, often for free, with the open source computer programs that
participants of the Bitcoin network use
 Bitcoin Payment
1. Alice creates and signs a transaction that moves 1
bitcoin from her to Bob. She then sends the
transaction to the Bitcoin network.
2. The computers in the network—the Bitcoin nodes—
check that Alice actually has the money to spend and
that the transaction is authentic. They then pass the
transaction to their neighbors, called peers.
3. Each computer updates its own copy of the Bitcoin
blockchain, or the ledger, with the new payment
information.
4. The network notifies Bob that he has received 1
bitcoin.
 1. Transaction
• A transaction is a payment.
• The Bitcoin transaction is a piece of data specifying
– The amount to move (1 bitcoin)
– The Bitcoin address to move the money to (Bob’s Bitcoin
address, 15vwoaN74MBeF5nr2BH4DKqndEFjHA6MzT)
– A digital signature (made with Alice’s private key)
• Digital signature is created from the transaction and a huge secret
number, called a private key, that only Alice has access to.
• The result is a digital signature that only the private key’s owner
could have created
• Alice’s mobile wallet app is connected to one or more
nodes in the Bitcoin network and sends the
transaction to those nodes
 2.Bitcoin Network
• The Bitcoin blockchain is a database that each
computer in the Bitcoin network has a copy of. Think
of the blockchain as a ledger of all transactions ever
made
• Each node in the network checks the following by
referring their own copies of blockchain:
– The bitcoin that Alice spends exists.
– Alice’s digital signature is valid.
– If both are satisfied
• Valid transaction and is relayed further
– If both are not satisfied
• Invalid transaction and dropped
– IMPORTANT TO NOTE:
• THE TRANSACTION IS VERIFIED NOT INLCUDED INTO THE
BLOCKCHAIN YET
 3.Bitcoin’s Blockchain
• The Bitcoin blockchain is a APPEND_ONLY database
that each computer in the Bitcoin network has a copy
of. Think of the blockchain as a ledger of all
transactions ever made
• Every node in the network, collects the verified
transactions into Blocks and relayed it to other nodes
to confirm the order of the transactions in the blocks
• As nodes see this block, they update their copy of the
blockchain according to the message and pass the
block on to their peers. Alice’s transaction was one of
the transactions in the block and is now part of the
blockchain.
 4. Wallets
• Wallets
– A computer program that allows its users to interact
through the network
– Responsibilities
• Manage keys
• Watch incoming/outgoing bitcoins
• Send bitcoins
Sample Cryptocurrencies
GoofyCoin
Goofy can create new coins

New coins belong to

me.

signed by pkGoofy

CreateCoin [uniqueCoinID]
A coin’s owner can spend it.

Alice owns it
now.

signed by pkGoofy

Pay to pkAlice : H( )

signed by pkGoofy

CreateCoin [uniqueCoinID]
The recipient can pass on the coin again.

Bob owns it
signed by pkAlice
now.
Pay to pkBob : H( )

signed by pkGoofy

Pay to pkAlice : H( )

signed by pkGoofy

CreateCoin [uniqueCoinID]
 double-spending attack

signed by pkAlice signed by pkAlice

Pay to pkBob : H( ) Pay to pkChuck : H( )

signed by pkGoofy

Pay to pkAlice : H( )

signed by pkGoofy

CreateCoin [uniqueCoinID]
 double-spending attack

the main design challenge in digital currency

ScroogeCoin
Scrooge publishes a history of all transactions
(a block chain, signed by Scrooge)

H( )

prev: H( ) prev: H( ) prev: H( )

transID: 71 transID: 72 transID: 73

trans trans trans

optimization: put multiple transactions in the

CreateCoins transaction creates new coins

Valid, because I said

so.

transID: 73 type:CreateCoins

coins created

num value recipien

t coinID
73(0)
0 3.2 0x... coinID
73(1)
coinID
1 1.4 0x...
73(2)
2 7.1 0x...
PayCoins transaction consumes (and destroys) some coins,
and creates new coins of the same total value

transID: 73 type:PayCoins

consumed coinIDs:
68(1), 42(0), 72(3)
Valid if:
-- consumed coins valid,
coins created
-- not already consumed,
-- total value out = total value
num value recipien in, and
t -- signed by owners of all
consumed coins
0 3.2 0x...

1 1.4 0x...
signatures
2 7.1 0x...
 How a Bitcoin Transaction works
• Basic components
– Wallets
• Key Pair
• Private Key
• Public Key
• Address  Hash (Hash(Public Key))  Identities  Anonymity
• Transaction Creation
– Mining Network
• Relaying Transactions
– Verifying and Validating Transactions
– Double spending attacks / DoS attacks
– Block creation
• Race conditions
• Relaying newly constructed blocks
• Proof of Work algorithm
• Consensus mechanism
• Merklee tree  Binary Tree with hash pointers
– Blockchain
• Hash-based Append-only Data Structure
Transactions
 Blockchain
linked list with hash pointers = “block chain”
H( )

prev: H( ) prev: H( ) prev: H( )

data data data

use case: tamper-evident log

 detecting tampering

H( )

prev: H( ) prev: H( ) prev: H( )

data data data

use case: tamper-evident log

binary tree with hash pointers = “Merkle tree”

H( ) H( )

H( ) H( ) H( ) H( )

H( ) H( ) H( ) H( ) H( ) H( ) H( ) H( )

(data) (data) (data) (data) (data) (data) (data) (data)

Blockchain + Merkle Tree
Transaction propagation (flooding)
Already
heard
5 that!
1

7
A→B
8
A→B A→B

A→B New
3
6 tx!
A→B
A→B A→B 2
A→B
A→B A→B
4
A→B
Blockchain - Simplified
Highlevel View of Blockchain
Proof of Work in Blockchain
Blockchain is Secure
Cannot Manipulate Transactions
Smart Contracts
Potential Research Areas in Blockchain

Distributed Consensus Protocols

Scalability & Optimization
Zero Knowledge Proofs
Blockchain & IoT
Blockchain & Smart Home/City
Blockchain & Energy Systems
Blockchain & Healthcare
Blockchain & Industry 4.0
Blockchain & Supply Chain Management
Blockchain & Crowdsourcing
Blockchain & Mobile Systems
Blockchain & Social Networking
Blockchain Applications
 Blockchain in Healthcare
Source:
http://www.ancapetre.com/5-infographics-explaining-how-blockchain-can-
change-healthcare
Managing Medical Records on the Blockchain
Managing Medical Records on the Blockchain
Managing Medical Records on the Blockchain
Blockchain based Interoperable Medical Community
 Videos on blockchain use cases
• Trade Finance
• Supply Chain
30 Non-Financial Use Cases of Blockchain Technology
1. Authorship and
ownership: Bitproof, Blockai, Stampery, Verisart, Monegraph, OriginalMy,
Crypto-Copyright, Proof of Existence, Ascribe, Po.et
2. Birth and death certificates: Khanections, LLC
3. Blockchain-as-a-Service (BaaS): Ethereum Blockchain as a Service by
Microsoft Azure, Rubix by Deloitte, IBM Blockchain on Bluemix
4. Compliance and security: Chainalysis, Third Key
Solutions, Tradle, Vogogo, Elliptic, Coinalytics, Sig3, BlockSee,CryptoCorp,
Blockverify
5. Content
management/distribution: Brave, Bittunes, PeerTracks, JAAK, Paperchain
6. Data management: Factom
7. Data integrity and security: PeerNova, Guardtime
8. Decentralized social network: Datt, DECENT, Diaspora*, AKASHA, Synereo
9. Diamonds: Everledger
10. Digital identity, identification, and authentication:
Keychain, 2WAY.IO, ShoCard, Guardtime, BlockVerify, HYPR,Onename, Civ
ic, UniquID Wallet, Identifi, Evernym, BanQu, AID:Tech, SolidX
11. Energy: Energy Blockchain Labs, Grid Singularity, TransActive
Grid by LO3 Energy
12. Enterprise-grade solutions and development platforms
(infrastructure): XNotes Alliance, Tymlez, Symbiont, Sofocle,Pragmatic
Coders, OTCXN, Openchain, Nuco, Monax, Libra
Enterprise, Interbit, Credits, Colu, Ciphrex, ChromaWay,ChainThat, Chai
n Reactor, Chain, Bloq, BlockCypher, Blockchain
Foundry, BigchainDB, Avalanchain, Applied Blockchain, AlphaPoint
Distributed Ledger Platform
13. Esports: FirstBlood
14. E-voting: Follow My Vote, Estonia’s e-Residency platform
15. Gaming and gambling: Etheria, First
Blood, Etheramid, FreeMyVunk, CoinPalace, Etheroll, Rollin, Ethereum
Jackpot
16. Government and organizational
governance: BITNATION, Advocate, Borderless, Otonomos, BoardRoom,
Colony
17. Internet of Things (IoT): Databroker
DAO, Chronicled, Filament, Chimera, Filament, Stock.it
18. Job market: Verbatm, Appii, Satoshi Talent, Coinality
19. Land registry: The Dubai Land Department (DLD)
20. Licensing: license.rocks
21. Media: Publiq
22. Mining: Waves
23. Network infrastructure: Ethereum, ChromaWay
24. Open organization/business-related
collaboration: Colony
25. Operating
system: BloqEnterprise by Bloq, BOLOS by Ledger, EOS b
y block.one, DeOS by Razormind, GemOS by Gem, Vault
OS by ThoughtMachine
26. Real estate recording: UBITQUITY, Silvertown
27. Reputation verification and ranking: The World
Table (Open Reputation), ThanksCoin
28. Ride-share: Arcade City, La ‘Zooz
29. Supply chain management: Skuchain, Factom
30. Traceability of food products and supply chain
audit: Provenance
Thank You