1. Blockchains and Distributed Ledgers Peter McBurney Department of Informatics King’s College London UK www.dcs.kcl.ac.uk/staff/mcburney/ 20 May 2016 Vloebergh Leerstoel Vrije Universiteit Brussel, Belgium

2. 2 Outline n Bitcoin and Blockchain n Distributed Ledger Technology n Smart Contracts n Current Landscape n Research & Implementation Challenges

3. Blockchains are the new black 3 “We may be witnessing one of those potential explosions of creative potential that catalyse exceptional levels of innovation.” UK Government Office for Science Report January 2016. “I wish I was 30 years younger because this is really interesting stuff!” Jeremy Wilson, Vice-President Corporate Banking, Barclays Bank. July 2015.

4. Bitcoin and Blockchain

5. Satoshi Nakomoto 5

6. The Bitcoin Blockchain Cryptographic currency: Bitcoin –White paper published in 2008 –First code released 2009 Design properties: –No central authority –Decentralized –No double-spending of currency –Open and public –Anonymous (actually Pseudonymous) Enabled by Blockchain technology

7. Bitcoin Blockchain n Transactions –Transactions are exchanges of Bitcoin –Transactions signed by digital signatures –Transactions uploaded –Aggregated into blocks –Blocks chained together n Aggregation and chaining done by Miners –Doing this takes processing power (some work) –Miners paid in bitcoin n Chaining done by hashing n Blockheaders have dynamic-membership multi-party signatures based on computation power (not on knowledge or permission). 7

8. Public-key/Private-key Cryptography n Alice uses a key generating programme to creates two keys –A public key (which she shares with others) –A private key (which she keeps secret) n Either one can be used to encrypt a message –The other can be used to decrypt the message n Can be used for digital signatures –Alice signs a statement with her private key –She sends it to Bob with the original statement –Bob can decrypt the encrypted statement using Alice’s public key –He can compare his decrypted statement with Alice’s original –If verified, Bob knows the statement came from Alice Strictly, he knows it came from a person with Alice’s private key n This process does not reveal Alice’s private key. 8

9. Public & private keys 9 Source: WikiBooks: Communications & Networking

10. Hashing n Convert a digital object (eg, a file) into a single number (a hash) –Very hard to reverse –Not continuous Two similar documents result in very different hashes. Bitcoin Blockchain 10 Source: Nakamoto 2008

11. A metaphor – coffee transactions 11 Credit: World Barista Championship

12. Blockchain for Bitcoin n Focus: Currency transactions n No central authority –No central bank –No need to trust anyone n Witnessing done by entire community on the blockchain n Chaining makes it hard to alter past records –Have to alter all the ones since then n Witnessing makes it hard to alter or create false past records –Have to get 50% + 1 participants to agree your new chain is the correct one –Forking n Coins tagged –So cannot double spend 12

13. Distributed Ledger Technology

14. DLTs – Evolving thinking over last 2 years Distributed Ledger Technologies appropriate for: n Cryptocurrency transactions n Currency transactions n Transactions involving exchanges of ownership of assets n Records of information n Promises and commitments 14

15. Blockchains and Distributed Ledgers Several computer technologies are combined: n Duplicated databases n Cryptography (digital signatures and hashing) n Consensus Protocols Features Redundancy & robustness No central authority Transactions observable Immutable records Non-repudiable records Encrypted records Content agnostic Programmable (potentially)

16. The Design Space for DLTs n Closed or open ? –Permissioned or Permission-less –Who is the witnessing community? n Payments for mining? –Proof of work or proof of stake –What currency? (Bitcoin, Ether, XRP, Citicoin, etc) n Consensus protocol n Records –Syntax –Semantics –Pragmatics n Frequency & size of blocks. 16

17. Trade-off: Confidentiality vs. Trustlessness Who is the community? n One organization n Multiple organizations n Public – Permission-less 17 Public Private Peers Fully Open Trusted Third Party Permission-less Distributed Ledger Central Server Permissioned Distributed Ledger

18. Types of Applications n Record keeping –Identity records n Records of transactions –Exchanges of ownership of assets –Global protocol n Promises and commitments –If you do X, I will do Y. n Smart contracts –Self-executing programs –A local protocol. 18

19. Smart Contracts

20. A smart contract...... is a program based on agreement between two or more people that autonomously executes at a trigger Agreement ----------- ----------- InputsOutputs Process

21. Example Inputs: Satellite images of wheat fields Weather forecasts (To forecast harvest dates and crop quality) Outputs: Execution of wheat futures contracts ----------- -----------

22. A smart-contract eco-system ---------- ---------- ---------- ---------- ----------

23. Aside: Organization of air travel Ticket (purchase) Baggage (check) Gates (load) Runway takeoff Airplane routing Ticket (complain) Baggage (claim) Gates (unload) Runway landing Airplane routing Flying

24. Air Travel: layered services Ticket (purchase) Baggage (check) Gates (load) Runway takeoff Airplane routing Ticket (complain) Baggage (claim) Gates (unload) Runway landing Airplane routing Each layer provides a service, and relies on the layers below.

25. Distributed ledgers – layered services

26. Application: holiday lettings ---------- Smart Contracts on a Distributed Ledger

27. Application: Trade Finance

28. Legal issues related to smart contracts n Governing laws and jurisdiction n Evidence – what is the meaning of the contract? (Code, text?) n Identity of parties –Know Your Customer/Know Your Counterparty(KYC) laws –Anti-money laundering regulations n Coding bugs n External information sources n Termination & sunset clauses n RegTech –Smart contracts undertaking compliance monitoring and even penalties. 28

29. The Current Landscape

30. The Gartner Technology Hype Cycle 30 Source: The Gartner Group

31. DLT: Stages of development 31 Exploration Proofs of concept Small-scale deployment Large-scale deployment Source: Kwori & NRF Report 2016 You are here!

32. Leading platforms 32

33. Use Cases n Permanent identity information –eg, proof of university degrees n High-value, low-frequency financial transactions n Provenance Tracking –eg, diamonds, works of art n Workflows across multiple organizations –eg, trade finance –Preventing double-spend n Multi-party data aggregation –eg, across the subsidiaries of a bank 33

34. Research and Implementation Challenges

35. Research Challenges n Conceptual framework –What is the space of possible designs? –What is the fit between designs and applications? For instance: what level of privacy is appropriate for each application (eg, Zerocash protocol) n Technical –Scale –Speed –Obfuscation of private keys –Verification –Robustness against attack –Privacy on public networks 35

36. Implementation Challenges n Organizational challenges –Managing stakeholders –Managing revocation and cancellation –Business Process Engineering/Re-engineering Especially for inter-organization workflows –Governance of the Distributed Ledger n Legal and Regulatory aspects n Technical –User friendliness –Managing multiple DLs –Integration with legacy systems –Production readiness eg, security, compliance & monitoring requirements, analytics capabilities William Mougayar: 18-24 months to resolve!

37. Key Technical Challenge: Scaling n Current DLT Blockchain not adequate for most financial applications –Number of Bitcoin transactions per day: under 300K –Credit card transactions: 300 million per day (100 billion pa) n How to scale? n One possible solution: Sharding –Does everyone have to witness every transaction? –Split the space of accounts into sub-spaces –Each sub-space gets its own set of witnesses (validators) n Side-chains –Private blockchains with occasional posting to a larger chain (eg, Bitcoin) –Everledger (diamond blockchain) 37

38. Complex adaptive systems n Public consensus protocols do not have central controllers or network administrators –Network membership is governed by rules inside the protocol itself n Sybil attacks are when an attacker floods the network with entities they control n Economic Consensus Protocols aim to make the cost of an attack greater than any potential benefit n Vlad Zamfir (2015) has argued that Economic Consensus Protocols are the only way to defend against Sybil attacks –His argument assumes that attackers are economically rational. –But are they? n This problem could benefit from Evolutionary Game Theory analysis of attacks and defences. 38

39. From smart objects to smart societies Smart contracts –eg, self-executing futures contracts Programmable combinations –of existence records, smart contracts, transaction records, etc –for multiple participants Autonomic and self-organizing systems –Self-* systems (self-monitoring, self-repairing, self- optimizing) –Example in mobile telecoms: “No G after 5G!”

40. Thank you!

41. References n “Satoshi Nakamoto” (2008): Bitcoin: A Peer-to-Peer Electronic Cash System. Available online from: bitcoin.org n Kwori and Norton Rose Fulbright [2016]: Blockchains and Distributed Ledgers in 2016. Available from: www.kwori.co.uk n UK Government Office for Science [2016]: Distributed Ledger Technology: Beyond Blockhain. (“Walport Report”). London, UK. n Vlad Zamfir (2015): Challenges in Public Consensus. Talk at Ethereum DevCon1, London UK, November 2015. 41