Blockchain Wallets, Public Keys and Tokens

• Lecture covers Wallets and Tokens within Blockchain and Cryptocurrency

Wallets

• Blockchain wallets are software programs enabling users to buy, sell, and monitor balances for digital currencies or cryptocurrencies
• Blockchain wallets store private and public keys
• They keep records of all cryptocurrency transactions on the blockchain
• Public Key represents the address to deposit and receive funds

Public and Private Keys

• Analogy of colors illustrates how public and private keys help secure transactions between parties

Types of Wallets

• Non-deterministic Wallets
  • These wallets contain randomly generated private keys
  • They are nicknamed "just a bunch of keys" wallets
  • Bitcoin core client generates keys when first started and as needed
  • Disadvantages of non-deterministic wallets:
    • Managing many keys can be difficult and error-prone
    • Can lead to theft and loss of coins
    • Require regular backups
    • Need encryption for theft or loss prevention
• Deterministic Wallets derive keys from a seed value using hash functions
  • A seed number is generated randomly and usually represented by human-readable mnemonic code words
  • Mnemonic code words were defined in Bitcoin Improvement Proposal BIP 39
    • The mnemonic phrase can recover all keys, simplifying private key management
    • Electrum is an example of a deterministic wallet
  • Disadvantage: Single point of failure exists because seed phrase simplifies backup, an entire wallet's contents are at risk if the phrase is compromised or lost.
• Hierarchical Deterministic (HD) Wallets store keys in a tree structure derived from a seed
  • The seed generates a parent key (master key) used to generate child then grandchild keys
  • This is defined in BIP32 and BIP44
  • HD wallets advance non-deterministic wallets by managing multiple addresses and keys more securely and efficiently
    • Trezor, Jaxx, and Electrum are commercially available HD wallets
  • If the seed phrase is not complex enough or stored improperly, there is potential vulnerability to brute force attacks
• Brain Wallets let users generate private keys and corresponding public addresses using a passphrase or sequence of chosen words
  • Unlike hierarchical wallets (which use algorithms to derive keys from a seed), brain wallets directly use the passphrase as the private key
  • Disadvantage: Prone to password guessing and brute force attacks; key stretching can slow down attackers.
• Paper Wallets are paper-based with printed key material requiring physical security for storage
  • These wallets can be generated online from service providers like bitcoinpaperwallet.com or bitaddress.org
• Hardware Wallets typically use a tamper resistant device to store keys
  • Another is to use a tamper-resistant device to store keys
  • A custom-built device or Secure Element (SE) in NFC phone can be used
  • Trezor and Ledger (various types) are common Bitcoin hardware wallets
• Online Wallets are stored online, provided as a service, and usually via the cloud
  • Users can manage their wallets and perform functions via a web interface
  • Users must trust the online wallet service provider, e.g., GreenAddress
• Mobile Wallets are installed on mobile devices
  • They enable payments via smartphone cameras which can scan QR codes quickly
  • They're available for Android and iOS; examples include Blockchain, breadwallet, Copay, and Jaxx
    • Web wallets and hosted wallets as well as "physical storage facilities" like Xapo and Vo1t can be considered mobile wallets

Metamask Wallet

• Ethereum wallet that can be installed as a Chrome extension
• Helps run dApps without being part of the Ethereum network
• Interfaces with Infura (where smart contracts can be run)

Tokenization

• Tokenization converts rights to an asset into a digital token on a blockchain
• Assets (not just money) can be linked digitally to a token
  • Gold, real estate, and stocks can be represented on a blockchain using tokens
• Two token types:
  • Non-fungible
  • Fungible

Non-Fungible Tokens (NFTs)

• NFTs are cryptographic tokens representing something unique
• NFTs are not interchangeable
• NFTs are not divisible into smaller units
• Applications:
  • Creating verifiable digital scarcity
  • Crypto gaming, such as Crypto Kitties on Ethereum
  • Representing digital art or music ownership
• The Non-Fungible Token protocol is defined in ERC-721 (a token standard).

Fungible Tokens

• These tokens can be exchanged with any other token of the same type of divisible into smaller units
• Not uniform in nature, all tokens are identical to each other in nature
  • Similar to fiat currencies
• Fungible token standard is defined in ERC-20

Cryptocurrencies Definition

• Digital currency using cryptographic techniques to regulate currency generation and verify fund transfers
• Operates independently of a central bank

Altcoins

• An altcoin is generated in the case of a hard fork via forking, all together new code or modification of old code
• Methods of providing the initial amount of new coins when a cryptocurrency is launched
• Could create a new blockchain: Proof of Burn (PoB), Proof of ownership, Pegged sidechains

First Altcoin

• Namecoin was the first alternative coin project, introduced in 2011
• Two categories for bitcoin alternatives, based on primary purpose:
  • Alternative chains aim to build a decentralized blockchain platform
  • Altcoins intend to introduce a new virtual currency

Other Altcoins

• Prevalent altcoins other than Namecoin include Zcash, Litecoin, and Primecoin
• Zcash was introduced in 2016

Zcash Data

• Zcash is the first currency to use Zero-Knowledge Proofs (ZK-SNARKs) for complete user privacy
• These proofs are concise and easy to verify, maintaining privacy
  • Setting up initial parameters is a complicated process and needs to set up the proving key and verifying key
• Attribute data for Zcash:
  • Launch Date: 28/10/16
  • Currency code: ZEC
  • Maximum coins: 21 million (like Bitcoin)
  • Block Time: 10 minutes
  • Consensus: Proof of Work (equihash)
  • Difficulty adjustment algorithm: DigiShield V3 (modified)
  • Mining hardware: CPU, GPU
  • Difficulty adjustment period: 1 block

Litecoin Data

• Litecoin is a fork of the Bitcoin source code (2011)
• Uses Scrypt as PoW for faster transactions, with a faster block generation time of 2.5 minutes
• Scrypt features:
  • Memory hard function for the SHA-256 based PoW algorithm
  • Originally proposed as Password-Based Key Derivation Function (PBKDF)
  • A large array of pseudorandom bits must be held in memory
  • Algorithm is based on the Time-Memory Trade-Off (TMTO)
• Difficulty readjustment is achieved every 3.5 days roughly due to faster block generation time
• Litecoin total coin supply is 84 million

Hard Fork in Ethereum

• A hard fork on Ethereum created a new currency : Ethereum Classic (ETC)
• Ethereum Classic is the old chain and Ether is the new chain
• Bad because: opposes decentralization, splits user community due to disagreement
• Raises the question of distinction between the Altcoin with either ETH or ETC because it is the result of a chain split

ERC Token Standards

• ERC (Ethereum Request for Comment) constitutes technical documentation outlining guidelines and rules for creating & deploying smart contracts on the Ethereum blockchain
• ERC-20, 721, 777, 1155 are examples of commonly used ERC standards

ERC-20 and ERC-777 Fungible Tokens

• Ether (ETH) serves as the native token in Ethereum for verifying transactions
• ERC-20 creates smart contract-enabled fungible tokens within the Ethereum ecosystem
• ERC-20 properties:
  • Interchangable and compatible with currencies and smart contracts
  • Guarantees operation with compatible dApps
  • Provides transaction receipts
  • Widely used and Supported
  • High gas costs, low scalability, slow transaction speed.
• ERC-777 has backward compatibility with ERC-20 and is more efficient for token transfers

Comparing standards ERC-223 and ERC-827

• ERC-20 is the most widely used with no protection
• ERC-223 has backward compatibility and provides token loss protection
• ERC-777 has backward compatibility, introduces hooks, improves interaction and safety
• ERC-827, backward compatibility, Single-step transfer of date, higher gas cost and requires security due to hooks