1. What we know … and what know we don’t know
Innovation and Cryptoventures
What we know … and what know we don’t know
Campbell R. Harvey
Duke University and NBER
Revised February 21, 2018

2. Campbell R. Harvey 2018

3. Blockchain No one type of blockchain. It is a general classification.
Public:
Distributed ledger
Blocks cryptographically linked with hashes
Anyone can add blocks
Generally transparent (Quorum partially)
Verification done with DSA and history of blockchain
Immutable
PoW, PoS, PoI, PoA, …
Campbell R. Harvey 2018

4. Blockchain No one type of blockchain. It is a general classification.
Private:
Distributed ledger
Blocks cryptographically linked with hashes
Only permissioned can add blocks
Generally transparent to permissioned parties
Verification done with DSA and history of blockchain
Mutable
PoS, PoI, PoA, …
Campbell R. Harvey 2018

5. Blockchain Many different uses: Common feature:
Secure, quick, and efficient transactions (transactions are generally defined and they could involve transfer of property or the transfer of information as in a digital twin). Transactions need not involve cryptocurrency.
Verification of ownership (again, generally defined, it could be you own your identity)
Common feature:
They disintermediate someone or some entity
Everyone benefits – except the disrupted intermediary!
Campbell R. Harvey 2018

6. Blockchain Many visions:
A single master chain. The bitcoin blockchain is currently the strongest and there are millions of “sidechains” that are connected to the master chain. There is programming flexibility on the side chains – though the master chain is inflexible. It is also possible the ethereum chain becomes the master chain.
Multiple master chains. Here there are a small number of very secure master chains, like bitcoin and ethereum. Each has millions of side chains. It may be possible in the future to link the chains.
Private and public chains. Depending on the need, there could be millions of private chains and a smaller number of public chains. The private chains are not necessarily connected to the public chains. Hybrid databases also exist using some blockchain features.
Campbell R. Harvey 2018

7. Blockchain Chain mechanics:
Transactions are group together. A hash of the transaction block links the block to the next one.
In the bitcoin blockchain, transactions are plaintext for anyone to see (i.e., not private). In other blockchains, the transactions may be encrypted or hashed.
In bitcoin, transactions are unspent outputs. All new coins originate from miners. Each unspent transaction output is associated with a private key. If Alice pays Bob, then Alice opens her lockbox with her private key and deposits the coin in Bob’s lockbox. The transaction output is now associated with Bob’s private key.
Transactions can have many inputs and many outputs
Campbell R. Harvey 2018

8. Blockchain Chain mechanics:
Transactions are digitally signed with the elliptic curve digital signature algorithm
The ECDSA is a new way to think about addition and multiplication (as with hashing, there are no decimals or floating points needed)
With the public key, the message and the digital signature, we can verify mathematically that the person signing is in possession of the private key
Campbell R. Harvey 2018

9. Blockchain Chain mechanics:
The main hashing algorithm used is the SHA-256
Each input produces a unique 256 bit (or 64 hexadecimal) output
Inputs can be arbitrarily large
This is not encryption – it is a one-way function
We did SHA-1 in class which involves 4 rounds each with 20 steps
Campbell R. Harvey 2018

10. Blockchain
Chain mechanics:
Campbell R. Harvey 2018

11. Blockchain
Chain mechanics:
Campbell R. Harvey 2018

12. Blockchain Chain mechanics:
SHA-1 has 4 rounds (each with different functions and round constants)
SHA-256 has 64 rounds (each with different functions and round constants)
Much harder to create a collision with SHA-256
Again, a collision would be a situation where you could replace a block or part of a block and the same hash is generated
Inevitable that we move to SHA-512 or SHA-3 in the future
Note. We are talking collision not “undoing” a hash which can only be done with brute force – and we don’t have the energy to do that.
Campbell R. Harvey 2018

13. Blockchain Symmetric and Asymmetric Keys
Symmetric keys mean a common key is used to encrypt and decrypt
Asymmetric keys involve a key pair. Something can be encrypted with a public key and decrypted with a private key. The private key is mathematically linked to a public key. We always start with the private key (a random number) and then generate the public key. It is hard to go the other way.
Campbell R. Harvey 2018

14. Blockchain Asymmetric Keys
Asymmetric keys important for all blockchains
The owner of the unspent transaction output holds a private key
Using the public key, the transaction, and a DS, anyone can determine that the sender owns the private key
However, if you lose your private key, you lose your ownership of the item in the blockchain associated with the private key
Campbell R. Harvey 2018

15. Blockchain Asymmetric Keys
Bitgo has a good idea where you mathematically transform the private key into three parts.
You need 2 of 3 parts to generate the private key
Hence, if any part is lost, you can recover the private key with 2/3 parts
Campbell R. Harvey 2018

16. Blockchain Symmetric Keys
Used in private blockchains where it is not desired for all parties to see all transactions in plaintext
The transaction between two parties is encrypted with a symmetric key
The symmetric key is encrypted with the public keys of the parties in the transaction
The parties in the transaction can use their private keys to decrypt the symmetric key – which in turn can be used to decrypt the transaction
Other parties just see ciphertext
Campbell R. Harvey 2018

17. Blockchain Aside – This stuff is also used in other applications!
Campbell R. Harvey 2018

18. Aside
This is an unlikely transaction for me on Wednesday. A Lenovo T500 circa 2008!
Campbell R. Harvey 2018

19. Aside EC
SHA-384
RSA
AES-256
Campbell R. Harvey 2018

20. Aside
Real sender:
bundugamelodge.co.za
Campbell R. Harvey 2018

21. Blockchain in the future
We have talked about many ideas that are in the works
For example, many types of identity, transactions of goods, services, and capital, supply chain, intellectual property
What about looking far into the future?
Campbell R. Harvey 2018

22. Blockchain in the future
We have talked about many ideas that are in the works
For example, many types of identity, transactions of goods, services, and capital, supply chain, intellectual property
What about looking far into the future?
Change can happen quickly
Camera sales (‘000)
Campbell R. Harvey 2018

23. Blockchain in the future
All things shared:
Whether a car, hotel room, rental property, computing time, disk storage, blockchain enables an efficient way of sharing tokens that serve as access keys
Campbell R. Harvey 2018

24. Blockchain in the future
Big data:
Blockchain allows users to take control of their own data and provides security. It also potentially allows for the large scale sharing of data for research
Campbell R. Harvey 2018

25. Blockchain in the future
Machine to machine:
Third application of the Internet
HTTP 402
Allows for microtransactions: You pay for only what you use in real time (video, music, books, cell tower, electricity, water, …)
Disrupts Amazon Turk and allows people to monetize some of their human capital
Your identity, preferences, location, and needs should be yours
You offer sensor data
Fractional ownership. You share ownership in an Uber vehicle and get paid a revenue share in real time
Campbell R. Harvey 2018

26. Blockchain in the future
Machine to machine:
Old models at risk, like Google Adwords
Google and Facebook control 80% of all digital ads
Campbell R. Harvey 2018

27. Blockchain in the future
Machine to machine:
In the future, you will offer your profile and people will pay to access you
21.co a leader in this way of thinking
Implications:
Different way of thinking about
Different approach to the Internet
Monetization of on-line content by non-professional contributors
Campbell R. Harvey 2018

28. Blockchain in the future
The return of barter
You pay for your groceries at Whole Foods with a fraction of a share of IBM
Millions of good specific chains with billions of bilateral exchange rates
Campbell R. Harvey 2018

29. Social implications
Positive: Strong cryptography works in favor of privacy (a lot easier to encrypt than to decrypt)
Positive: Blockchains allow for a more efficient regulatory environment
Positive: Blockchain technology makes it more costly to undertake fraudulent transactions (for example, eliminates counterfeiting and more subtlety the immutability makes prosecution more efficient)
Positive: Machine to machine enables many younger people to monetize based on their profile
Campbell R. Harvey 2018

30. Social implications However, there are social risks:
Negative: Machine to machine monetization will target those relatively well off thereby potentially increasing income inequality
Negative: Blockchain will displace many lower income workers – whether a person in a back office job or the person at the Hertz counter. This is a general issue with technological advance.
Campbell R. Harvey 2018

31. Social implications However, there are social risks:
Positive: Blockchain technology will enable 2 billion people that are unbanked to become banked and that is a big positive
Positive: Blockchain will allow much more efficient and cheaper services. This reduces costs for consumers and frees up time.
Negative: The well off become more well off in two ways:
They are the ones that will be the most rewarded for putting up their profiles
They are the ones that can afford to accept a low cash wage at a start up – this is a general issue
Campbell R. Harvey 2018

32. …what we don’t know A lot
At the beginning of the course, you were confused. I told you by the end of the course my goal was to reduce the confusion – not eliminate it!
It is important to know what you don’t know
You may be in the 0.1% now on blockchain – but there is a lot of distance still to go
Campbell R. Harvey 2018

33. Innovation
I will be available through Saturday-Monday for group meetings including camping at the Fox Center on the weekend afternoons. You can drop by or grab a time on calendar
Assignment 6a submitted by Tuesday morning at 8am using format C20_Short_Silk_Road2.pptx (so a one or two word title)
Assignment 6b submitted in Canvas by Thursday using format C20_Full_Silk_Road2.pptx
Place a SHA-256 of the full file into the Google sheet for your class
Tool for group evaluations will be sent
Campbell R. Harvey 2018