Blockchain and Bitcoin PDF

Blockchain Fabio Angeletti November 6th, 2024 Eng. Fabio Angeletti, Ph.D. [email protected] Blockchain and Bitcoin Evolution Blockchain technology was introduced in 2008 as the underlying framework for Bitcoin, the world's first cryptocurrency. It has evolved...

Blockchain Fabio Angeletti November 6th, 2024 Eng. Fabio Angeletti, Ph.D. [email protected] Blockchain and Bitcoin Evolution Blockchain technology was introduced in 2008 as the underlying framework for Bitcoin, the world's first cryptocurrency. It has evolved to support a wide array of applications beyond digital currencies, including smart contracts, supply chain management, and more. Ongoing developments in blockchain technology are paving the way for more scalable, secure, and interoperable blockchain systems, meeting diverse industry needs. Today Bitcoin (BTC) has generated a total transaction volume valued at over 15 trillion dollars, but the actual value could be even higher, given the continuous growth and global adoption. The most expensive Van Gogh ever sold is "Portrait of Dr. Gachet," auctioned by Christie's in 1990 for the record amount of 82.5 million dollars (149 million in today’s terms), while the most expensive NFT in history, "Everydays: The First 5000 Days," was auctioned by Christie's on March 11, 2021, for a record 69.3 million dollars. The Bitcoin Energy Consumption Index by Digiconomist has estimated that a single Bitcoin transaction requires 855.83 kWh to complete, equivalent to about 29 days of energy for an average U.S. household. El Salvador is the first country where Bitcoin is legal tender. President Bukele purchased 21 million dollars' worth. September 7, 2021, will go down in El Salvador’s history, as it is the day Bitcoin gained legal status alongside the national currency, the U.S. dollar. In 2021, an NBA team, the Sacramento Kings, announced they would accept Bitcoin as a payment method for tickets and merchandise. What is a blockchain? Distributed Ledger Technology (DLT) Data is added over time into structures called blocks. Each block is built on top of the previous one and includes a piece of information that links it to that block. By examining the most recent block, we can verify that it was created after its predecessor. Therefore, if we continue down the chain, we reach the very first block, known as the genesis block. Always online and available, secure, and (partially) transparent. Public and Private Blockchains Bitcoin is what we call a public blockchain. This means that anyone can view the transactions it contains, and joining requires only an internet connection and the necessary software. Since there are no other requirements for participation, we refer to this environment as permissionless. Private blockchains set rules on who can view and interact with the blockchain. Therefore, we refer to them as permissioned environments, which are useful in business contexts. Centralized vs Distributed vs Decentralized Decentralization As standalone data structures, blockchains are truly useful only in niche applications. When combined with other technologies and a solid amount of game theory, a blockchain can function as a distributed ledger that is not controlled by anyone specific. Nodes Nodes are simply the devices connected to the network; they store copies of the blockchain and share information with others. Users do not need to manage these processes, they are made to work autonomously. How is Decentralization Maintained? Low probability that the same node consistently validates blocks Great number of nodes Incentives for new nodes to compete in block validation Consensus algorithms Security Although many elements contribute to the security associated with blockchain, two of the most important are the concepts of consensus and immutability. While consensus algorithms ensure that the system's rules are followed and that all parties agree on the current state of the network, immutability ensures the integrity of data and transaction records after each new block of data is confirmed as valid. Security is proportional to decentralization and, therefore, to the number of participants in the network. How do Transactions Work? If Alice wants to pay Bob via bank transfer, she must inform the bank. The bank checks that Alice has enough funds to make the transaction before updating its database (e.g., -$50 for Alice, +$50 for Bob). If Alice wants to send 5 Bitcoin to Bob, she broadcasts a message to the network stating this. The nodes will see it, but additional actions must be completed before the transaction is confirmed. Once the transaction is added to the blockchain, all nodes can see that it has been made and update their copy of the blockchain to reflect the change. The Life of a Transaction 1. I generate the transaction by entering the inputs and outputs (how much I want to send and to whom). 2. I sign the transaction with my private key, proving that I have the right to spend those BTC. 3. I send the transaction to the blockchain, which will validate it. Transaction under the microscope Input Address and unspent transaction outputs (UTXO) Data on the authenticity of the input and transaction signature Output Recipient's address and BTC sent Change: excess input sent back Other Data Fee (how much priority to give to the transaction in the queue) Change UTXO Model UTXO (Unspent Transaction Output) represents an amount of Bitcoin located at an address that has not yet been spent by the owner. The UTXO model allows Bitcoin nodes to verify each transaction on the blockchain. When a node receives a transaction, whether in a mempool or as part of a block, it can check if the UTXOs consumed in that transaction are valid and unspent. This verifiability enables Bitcoin to solve the double-spending problem without the need for trusted intermediaries. Transparency It is possible to trace all transactions back to their origin (mining) of the moved BTC. Coinbase transaction: a transaction that creates BTC from scratch and gives it to the first recipient. Spent transaction: no longer spendable; unspent: spendable. https://www.blockchain.com/explorer Encryption of a Bitcoin transaction How Bitcoin works Once a transaction is sent from an address, it goes into a queue on the blockchain The transaction is included in a block If the block is validated, it is propagated and becomes immutable All nodes must synchronize Byzantine Fault Tolerance The dilemma assumes that each general has their own army and that each group is positioned in different locations around the city they intend to attack. The generals must decide whether to attack or retreat. It doesn’t matter if they choose to attack or retreat, as long as all generals reach a consensus - that is, they all agree on a common decision to execute it in a coordinated way. Thus, we can consider the following objectives: Each general must decide: to attack or retreat (yes or no) Once the decision is made, it cannot be changed All generals must agree on the same decision and execute it in a synchronized way Byzantine Fault Tolerance (BFT) is the property of a system that enables it to withstand the class of failures derived from the Byzantine Generals Problem. This means that a BFT system can continue to operate even if some nodes fail or act dishonestly. Distributed Consensus Reaching agreement among all nodes on a single version of the blockchain is complex but fundamental for operations. How to decide who is correct in case of disputes? How to define the correct version of the blockchain? How to enable everyone to participate (decentralization)? How to prevent malicious actors from influencing the process? Distributed Consensus Algorithms Proof of Work Proof of Stake Proof of Authority Proof of History Proof of Capacity and many more… Proof of Work We don’t add transactions one by one but group them into blocks. Transactions are announced to the network, after which users creating a block include them in a candidate block. Transactions will only be considered valid when their candidate block becomes a confirmed block, meaning it has been added to the blockchain. Proof of Work requires a miner (the user creating the block) to use some of their resources. This resource is computational power, which is used to generate the block's data hash until a solution to a puzzle is found. The longest chain is the one that gets accepted. Hashing Functions These are algorithms that, starting from a block of data, generate a fixed-length sequence of numbers (also called a fingerprint or digest), usually shorter than the original block, which can be considered relatively unique. This means it is extremely difficult to find another “meaningful” block of data that produces the same sequence. Hashing Functions The same input always produces the same Arbitrary long input output. Regardless of the input size, the output is Iterate on Compression always a certain number of bits long (256 bits in SHA-256). It is impossible (to be precise, extremely hard) Transformation to determine the input from the output (asymmetry), it is thus defined as a one-way Fixed length output function. Block Previous Block Hash Metadata (timestamp, block verions number, difficulty) Nonce (solution to puzzle) A block consists of: Merkel Root (summary of all transactions) Data and transactions Transaction 1 Timestamp Transaction 2 Hash of the previous block … Transaction N Mining (Proof of work) Mining is the process through which crypto transactions between users are verified and added to the (public) ledger of the blockchain. Mining operations are also responsible for issuing new coins relative to the existing circulating supply. Mining is one of the key elements that allows the Bitcoin blockchain to function as a distributed ledger. All transactions are recorded on a peer-to- peer network without the need for a central authority. How does Mining Work? When new transactions are made on the blockchain, they are sent to a pool called the memory pool (mempool). A miner's job is to verify the validity of these pending transactions and organize them into blocks thus a mining node is responsible for collecting unconfirmed transactions from the memory pool and assembling them to create a candidate block. The miner will attempt to turn this candidate block into a valid, confirmed block. But to do so, they must solve a complex mathematical problem. A Complex Mathematical Puzzle Bitcoin miners work to find a unique number called a nonce, which, when combined with transaction data, creates a valid hash for a new block. For a hash to be considered valid, it must be lower than a specific target value set by the Bitcoin network and this target is adjusted periodically to maintain a consistent block creation time, roughly every 10 minutes, regardless of the number of miners. Finding a valid hash is challenging because it requires miners to try billions of nonce values in a trial-and-error process using a vast amount of computing power and energy to quickly test different combinations, racing to be the first to discover a hash that meets the target and validate the block. Phase 1 – Transaction Hashing The first step in mining a block is to take the pending transactions from the memory pool and send them, one by one, to a hash function. In addition to hashing and adding each individual transaction, the miner also includes a custom transaction in which they send the block reward to themselves. This transaction is called the coinbase transaction and is the process through which new coins are created. Phase 2 - Merkle Tree Creation The hashes are organized into a structure called a Merkle Tree. Also known as a hash tree, the Merkle Tree is formed by pairing the transaction hashes and then hashing them. The new hash outputs are then paired and hashed again, and this process is repeated until a single hash is created. This final hash is also called the root hash (or Merkle root) and is essentially the hash that represents all the hashes used previously to generate it. Phase 2 - Merkle Tree Creation Phase 3 - Find a valid block header (block hash) A block header functions as an identifier for each individual block. When a new block is created, miners combine the previous block's hash with the root hash of the candidate block to generate a new block hash. But, in addition to these two elements, they must also add an arbitrary number called a nonce. When attempting to validate their candidate block, a miner must combine the root hash, the previous block's hash, and a nonce and pass them all through a hash function. Their goal is to create a hash that can be considered valid. Nonce The root hash and the previous block hash cannot be modified, so miners must change the nonce value multiple times until a valid hash is found. To be considered valid, the output (block hash) must be lower than a specific target value determined by the protocol. In Bitcoin mining, the block hash must start with a certain number of zeros. This is what we call mining difficulty. https://guggero.github.io/blockchain-demo/#!/hash Phase 4 - Broadcasting the Mined Block Miners must repeatedly hash the block header with different nonce values, until they find a valid block hash. The miner who finds it will broadcast the block to the network. All other nodes will check if the block and its hash are valid, and if so, they will add the new block to their copy of the blockchain. The candidate block becomes a confirmed block, and all miners move on to mining the next block. Mining Difficulty Adjustment The mining difficulty is regularly adjusted by the protocol to ensure that the rate at which new blocks are created remains constant. The difficulty adjusts in proportion to the amount of computational power (hash rate) dedicated to the network. You can have a look here. Two Blocks at the Same Time Sometimes, two miners simultaneously broadcast a valid block, resulting in the network having two competing valid blocks. As a result, the network temporarily splits, creating two different versions of the blockchain. When a new block is mined, its previous block will be considered the winner. The block that gets abandoned is called an orphan block or stale block, and all miners who chose this block must return to mining on the winning block's chain. Mining pool Since the block reward is granted to the first successful miner, the probability of finding the correct hash is extremely low. Mining pools are groups of miners who pool their computational resources (hash power) to increase the probability of winning block rewards. When a pool successfully finds a block, miners will split the reward fairly among all pool members based on each member’s contribution of work. There is a possibility of a 51% attack on the network. 51% Attack A 51% attack is a potential attack on Bitcoin (or other blockchain networks), where a single entity or organization gains control of the majority of the hash rate. Such an attack would allow the attacker to attempt to reverse transactions they made while in control, likely leading to double- spending. A successful majority attack enables the attacker to prevent some or all transactions from being confirmed or to block some or all other miners from mining, resulting in what is known as a mining monopoly. Proof of Work - Pros Proven and tested to date, it is the most mature consensus algorithm and has secured hundreds of billions of dollars in value. Permissionless. Anyone can participate in the mining competition or simply run a validation node. Decentralization. Miners compete with each other to produce blocks, which means that hash power is never controlled by a single participant. Proof of Work - Cons Energy Consumption: Mining consumes an enormous amount of electricity. Increasing Barriers to Entry: As more miners join the network, protocols increase the difficulty of the mining puzzle. To stay competitive, users must invest in better equipment, which could exclude some miners. 51% Attack: Although mining promotes decentralization, there is a possibility that a miner could acquire the majority of the hash power. If successful, they could theoretically reverse transactions and compromise the blockchain's security. Blockchain - Pros Distributed. Since blockchain data is often stored across thousands of devices in a distributed network of nodes, the system and data are highly resilient to technical failures and malicious attacks. Stability. It is very unlikely that confirmed blocks will be reversed or canceled, meaning that once data is recorded on the blockchain, it is extremely difficult to remove or modify. Trustless. With blockchain technology, trust is no longer necessary, as the distributed network of nodes verifies transactions through a process known as mining. For this reason, blockchain is often described as a ‘trustless’ system. Blockchain - Cons 51% Attack: The Bitcoin blockchain has never experienced a successful 51% attack. Data Modification: Once data is added to the blockchain, it is very difficult to alter. Private Keys: If a user loses their private key, the funds are effectively lost, and nothing can be done to recover them. Inefficiency: Blockchains, especially those that use Proof of Work, are highly inefficient. Storage: Blockchain records can grow significantly over time. The Bitcoin blockchain currently requires around 600 GB of storage space. What is the Blockchain Used for? Supply Chain. Blockchain can enhance transparency and traceability in supply chains, allowing all participants to track the movement of goods from origin to destination. Gaming Industry. Blockchain enables secure and verifiable ownership of in-game assets and supports decentralized gaming economies. Healthcare. Blockchain can securely store patient records, ensure data integrity, and enable controlled access to sensitive health information. Digital Identity. Blockchain offers a secure and verifiable way to manage digital identities, reducing fraud and enhancing privacy. Internet of Things (IoT). Blockchain can improve the security and reliability of IoT devices by enabling decentralized device communication and data sharing. What is the Blockchain Used for? Governance. Blockchain can be used for transparent and tamper-proof voting systems, enabling decentralized and fair governance in organizations and communities. Charity. Blockchain offers transparency in charitable donations, allowing donors to track how funds are used and ensuring accountability for charitable organizations. Speculation. Many people invest in cryptocurrencies and blockchain assets with the hope of profiting from price fluctuations, making speculation a common use of blockchain technology. Crowdfunding. Blockchain-based crowdfunding platforms can offer more transparent funding processes, enabling contributors to verify how funds are utilized. Distributed File Systems. Blockchain supports decentralized file storage solutions, which can improve security, reduce reliance on centralized servers, and enhance data availability. Blockchain Fabio Angeletti November 12th, 2024 Ethereum and Smart Contracts Second Generation Blockchain Bitcoin relies on blockchain technology and financial incentives to create a global digital money system. The second generation of blockchain can do more. In addition to financial transactions, these platforms allow for a greater degree of programmability. Ethereum provides developers with much more freedom to experiment with their own code and create what we call Decentralized Applications (DApps). Some DApps Finance and Banking: Streamlining payments, loans, and securities trading by automating transactions and ensuring compliance and transparency. Insurance: Automating claim processing and payouts based on verifiable events, significantly reducing processing time and potential for fraud. Real Estate: Simplifying property transactions by automating deeds transfer, payments, and verification processes, making transactions faster and more secure. Some DApps Supply Chain Management: Enhancing transparency and efficiency by automating tracking, verification, and payment processes across the supply chain. Healthcare: Securing patient data sharing and automating healthcare services, including claims processing and compliance with regulations. Voting Systems: Ensuring secure, transparent, and tamper-proof electoral processes by automating vote counting and result verification. Some DApps Intellectual Property & Royalties Management: Automating the distribution of royalties for music, literature, and digital media, ensuring creators are fairly compensated. Identity Verification: Streamlining the process of identity verification, reducing fraud, and enhancing user privacy through decentralized mechanisms. Government and Public Records: Improving efficiency and transparency in government operations by automating the storage and management of public records, including land registries, licenses, and certifications. Ethereum Ethereum is a decentralized computing platform. Like Bitcoin and other cryptocurrencies, Ethereum allows for the transfer of digital money. However, it is capable of much more: it can execute code and interact with applications created by other users. Thanks to its flexibility, all kinds of sophisticated programs can run on Ethereum. Ethereum vs Ether (ETH) The units used in Ethereum are not called Ethereum or Ethereums. Ethereum is the protocol itself, but the currency that powers it is simply known as Ether (or ETH). Ether (ETH) is the only form of payment accepted for transaction fees on the Ethereum network. Ether Ether is used as the primary collateral in DeFi lending markets. When users want to make a transaction on Ethereum, they must pay fees in Ether for their transaction to be validated and recorded on the blockchain. Ether is minted when a new block is created on the Ethereum blockchain through the validation process. A burn mechanism (destruction of a portion of Ether) occurs during each transaction, reducing the total supply of Ether in circulation. What makes Ethereum so special? 1/2 Ethereum can execute code through a distributed system. Programs cannot be altered by external parties. They are added to the Ethereum database (i.e., the blockchain) and can be programmed so that the code cannot be modified. The database is visible to everyone, allowing users to verify the code before interacting with it. What makes Ethereum so special? 2/2 We call smart contracts the programs that make up applications. In most cases, they can be configured to operate without human intervention. The idea of "programmable money" has attracted users, developers, and companies worldwide. Smart Contract - Introduction Smart contracts are the building blocks of Ethereum applications. They are computer programs stored on the blockchain, allowing us to convert traditional contracts into digital equivalents. Smart contracts are highly logical and follow an "if this, then that" structure. This means they precisely follow their programming and cannot be altered. They provide a place where transactions and business functions can occur reliably without intermediaries - Nick Szabo If Then Else logic If A gives to B less then 4 Eth [then] [ B gives to A 1200 NTK ] Else If A gives to B more then 4 Eth [then] [ B gives to A 40000 NTK ] What is a contract? Contracts are simply agreements. Therefore, any form of agreement can be included in the terms of a contract. Verbal agreements or "pen and paper" contracts are acceptable for many things, but they are not without flaws. Trust and Contracts One of the biggest problems with a traditional contract is the need for reliable people to fulfill the contract's terms. E.g. Alice and Bob are having a bike race. Let's say Alice bets €10 with Bob that she will win the race. Bob is confident he will win and accepts the bet. In the end, Alice finishes the race before Bob and is the undisputed winner. However, Bob refuses to pay the bet, claiming that Alice cheated. A Digital Vending Machine 1. You select a product. 2. The vending machine displays the amount required to purchase the product. 3. You insert the correct amount. 4. The vending machine verifies that you have inserted the correct amount. 5. The vending machine dispenses the selected product. The vending machine will only dispense the desired product if all requirements are met. If you don't select a product or don't insert enough money, the vending machine will not provide the product. Enhancing Transparency and Traceability Blockchain creates an unalterable record of every transaction, ensuring product histories are easily traceable and verifiable by all parties. All participants in the supply chain have access to the same information in real-time, increasing transparency and trust among stakeholders. Blockchain enables accurate tracking of the origin and journey of products, from raw materials to the end consumer, helping to verify authenticity and compliance. Supply Chain Management Blockchain enables real-time tracking of products and transactions across the entire supply chain, from production to delivery, enabling enhanced traceability. By automating processes and reducing the need for paper-based record- keeping, blockchain significantly cuts down on delays and human errors leading to increased efficiency. Improved Transparency and Security. Every transaction is recorded on a tamper-evident ledger, accessible to all parties, fostering trust and reducing instances of fraud and counterfeiting. Case of Study - Blockverify Blockverify is dedicated to improving anti- counterfeit measures within supply chains. Their mission is to enhance transparency and trust by ensuring the authenticity of products, goods, and merchandise. The company verifies the provenance of items, tracking their journey from origin to destination. By leveraging blockchain’s immutable ledger, they create a tamper-proof record of ownership history. Improving Efficiency in Supply Chains Blockchain technology automates the verification of transactions and product origins, streamlining operations and saving time. By digitizing the ledger, blockchain minimizes the need for manual paperwork and administrative processes, enhancing operational efficiency. The clear, immutable record of transactions provided by blockchain helps in quickly resolving disputes and issues, leading to smoother supply chain operations. Automatic Execution One of the most significant benefits of smart contracts over regular contracts is that the outcome is automatically executed when the contractual conditions are met. There is no longer a need to trust the other party. E.g. A contract that automatically transfers a digital title of a car to you the moment you pay the seller. Reducing Costs with Blockchain Blockchain eliminates the need for middlemen or intermediaries, significantly reducing fees associated with transactions and exchanges. By automating and streamlining supply chain processes, companies can achieve substantial cost savings in logistics, inventory management, and compliance reporting. Enhanced security and transparency minimize losses due to counterfeit goods, theft, and fraud, further cutting operational costs. Predictable Behaviour The human factor is one of the most frequent reasons for the failure of traditional contracts. For example, two individual judges might interpret a traditional contract in different ways. Their interpretations could lead to different decisions and inconsistent outcomes. Smart contracts eliminate the possibility of differing interpretations. Instead, they execute precisely according to the conditions written in the contract code. This precision means that, given the same circumstances, the smart contract will produce the same result. Public Ledger Smart contracts are also useful for tracking and monitoring. Since Ethereum smart contracts are on a public blockchain, anyone can instantly monitor asset transfers and other related information. Privacy Since Ethereum is a pseudonymous network (your transactions are publicly linked to a unique cryptographic address, not to your identity), you can protect your privacy from observers. Digital Identity Verification Blockchain provides a secure and immutable platform for storing personal identity information, reducing the risk of identity theft and fraud. Individuals gain control over their digital identities, deciding how, when, and with whom to share their personal information, enhancing privacy and autonomy. By using blockchain for digital identity verification, there is no need for intermediaries in the verification process, streamlining transactions and reducing costs. Identity Verification Users store their identity credentials in secure digital wallets, enabling them to manage and share their identity data easily and securely. Identity verification is conducted through blockchain, where validators confirm the authenticity of the user's credentials without accessing personal details. Blockchain enables the creation of interoperable identity systems, allowing users to use their digital identities across various platforms and services seamlessly. Benefits of Decentralized Identity Systems Decentralized identities reduce the risk of data breaches by eliminating centralized points of failure and giving users control over their personal data. Users can verify their identities without disclosing unnecessary personal information, offering greater control over privacy. Streamlining verification processes reduces administrative burdens and costs associated with identity management, benefiting both individuals and organizations. Case of Study – Veriff Veriff, an Estonian startup, specializes in online-based ID verification. Their mission is to enhance security and trust by verifying the identities of individuals across various platforms. Veriff’s most notable achievement is partnering with Blockchain itself. Blockchain, after quietly testing various ID-verification services, decided to use Veriff for online identity verification. Users provide a valid government-issued document, take a selfie, and submit the information. Veriff crosslinks data points to ensure authenticity and prevent fraudulent activity. Clear Terms Finally, just like with contracts, you can verify what is in a smart contract before signing it (or interacting with it in any other way). Even better, the public transparency of the contract terms allows anyone to examine it. - Are you able to read and understand them? The Problem Blockchains and smart contracts cannot access off-chain data (data outside the network). However, for many contractual agreements, it is vital to have relevant information from the outside world to execute the agreement. Oracle 1/2 An oracle is a component that acts as an intermediary to provide external information to the smart contract. Smart contracts on the Ethereum blockchain are self-executing and automated but often need external information to function correctly. E.g. A smart contract that requires a stock price might use an oracle to obtain this information from reliable sources outside the blockchain. Oracles are therefore a key element for the functioning of smart contracts on the blockchain. Oracle 2/2 A blockchain oracle is not the data source itself but rather the layer that requests, verifies, and authenticates external data sources before transmitting the information. The data transmitted by oracles takes many forms: price information, successful completion of a payment, or the temperature measured by a sensor. Example Let's suppose Alice and Bob make a bet on who will win the U.S. presidential election. Alice believes that Candidate A will win, while Bob believes that Candidate B will be the victor. They agree on the terms of the bet and lock their funds in a smart contract, which will release the funds to the winner based on the election results. Since the smart contract cannot interact with external data, it must rely on an oracle to provide the necessary information - in this case, the presidential election results. Once the election is over, the oracle communicates with a trusted API to determine which candidate won and transmits this information to the smart contract. The contract then sends the funds to Alice or Bob, depending on the outcome. Pros Challenges of Blockchain Technology Scalability Issues: High transaction costs and slower processing times challenge blockchain's scalability and its adoption for widespread use. Interoperability Concerns: The lack of standardized protocols makes it difficult for different blockchain networks to communicate and share information seamlessly. Regulatory and Legal Uncertainties: The evolving nature of blockchain technology outpaces current regulatory frameworks, creating legal ambiguities and compliance challenges. The Scalability Challenge Blockchain networks, particularly those using Proof of Work (PoW), face limitations on the number of transactions they can process within a given timeframe, leading to potential bottlenecks. As more transactions are added, the size of the blockchain grows, requiring more storage space and potentially slowing down network operations for participants. The energy required for mining and transaction verification in some blockchain models, like Bitcoin's, is substantial, raising sustainability concerns as the network scales. Interoperability Issues Fragmented Blockchain Ecosystems: The existence of numerous blockchain platforms without standardized communication protocols hinders seamless interaction between different networks. Cross-Chain Transactions Complexity: Facilitating transactions across different blockchains remains complex and inefficient, limiting the potential for broader blockchain integration and use. Lack of Universal Standards: The absence of universally accepted standards for blockchain technology complicates the development of interoperable systems, slowing down innovation and adoption. Regulatory and Legal Challenges The rapidly evolving nature of blockchain technology leads to a lack of clear regulatory guidelines, creating uncertainty for businesses and investors. Differences in blockchain regulations across jurisdictions complicate international transactions and operations, requiring complex compliance strategies. The decentralized and open-source nature of many blockchain projects raises questions about intellectual property rights and enforcement, challenging traditional legal frameworks. Blockchain Fabio Angeletti November 13th, 2024 Ethereum and Smart Contracts pt.2 Challenges with Smart Contracts Handling complexities. Handling the natural interference or influence of other legal categories when a contract is executed. Attributing/defining the legal system actually applicable. Correctly determining the territorially competent court. Italian legislation Article 8b(2), L. 12/2019: "A 'smart contract' is defined as a computer program that operates on distributed ledger-based technologies and whose execution automatically binds two or more parties on the basis of effects predefined by them. Smart contracts meet the requirement of written form upon computer identification of the parties concerned, through a process having the requirements set by the Agency for Digital Italy with guidelines to be adopted within ninety days from the date of entry into force of the law converting this decree." DApp A decentralised application (dApp) is an application built on a decentralised network that combines a smart contract with a frontend user interface. In Ethereum, Smart Contracts are accessible and transparent so a dApp can also include smart contracts written by others. Evolution of World Wide Web Web 1.0 – The “read-only” web. Characterized by static websites where users can view information but have limited interaction. Web 2.0 – The “social web”. A more interactive internet with user- generated content, social media, and dynamic websites, enabling collaboration and communication. Web 3.0 – The “decentralized web”. Focused on data ownership, privacy, and blockchain technology, allowing users to control their own data and assets across decentralized applications.  Nowadays - Web2 and Web3 Web2 Web3 Controlled by large, centralized companies Controlled and governed by communities Limited control over your data Ownership and control over your data Reliance on third parties for transactions and interactions Direct peer-to-peer interactions without intermediaries Lack of transparency in data handling and decision-making Transparent, open source, and democratic Innovation driven by a few major players Open ecosystem fostering widespread innovation Trust placed in large corporations Trust built into technology through cryptography and consensus mechanisms Ownership verification provided by large corporations Ownership self-custodied and verified by users Centralized payment systems and intermediaries Native digital currency payments with reduced intermediaries and fees Vulnerable to censorship and content control Resistant to censorship due to decentralization Limited privacy control and potential data exploitation Enhanced privacy control through cryptographic techniques Limited scalability with growing user base Scalability potential through blockchain technology Web3 limitations Scalability. Transactions are slower on Web3 because they are decentralised. State changes, such as payments, have to be processed by a miner (no more) and propagated to the whole network. UX. Interaction with web3 applications may require additional steps, software and training. This can be a barrier to adoption. Accessibility. The lack of integration in modern web browsers makes web3 less accessible to most users. Cost. Due to the high cost, the most successful ISPs put small portions of their code on the blockchain. Accounts Ethereum has two types of account: - Externally owned. Controlled by whoever holds the private keys. - Contract. A network-distributed, code-controlled smart contract. Both account types have the ability to: - Receive, store and send ETH - Interact with smart contracts Transactions Transactions are cryptographically signed instructions from accounts. An account initiates a transaction to update the status of the Ethereum network. The simplest transaction is the transfer of ETH from one account to another. Transactions require a fee and must be validated. How do Smart Contracts Work? 1/2 We can define Ethereum as a state machine. At any given time, you have a snapshot of all account balances and smart contracts as they currently appear. Certain actions will cause the state to update, so all nodes will update their snapshot to reflect the change. How do Smart Contracts Work? 2/2 Smart contracts executed on Ethereum are triggered by transactions (whether from users or other contracts). When a user sends a transaction to a contract, each node on the network executes the contract code and records the output. To do this, it uses the Ethereum Virtual Machine (EVM), which converts smart contracts into computer-readable instructions. Ethereum Virtual Machine (EVM) Ethereum is a decentralised network operated by thousands of interconnected computers, each running an Ethereum client. Unlike a simple distributed ledger, Ethereum functions as a distributed state machine. The Ethereum state is a complex data structure that not only tracks accounts and their balances, but also runs a state machine that evolves from block to block. This machine can execute arbitrary code (smart contracts) according to a predefined set of rules, allowing complex processes to be automated and managed through the blockchain. Ethereum Gas If someone sets their contract to keep repeating the same code, each node would have to execute it indefinitely. This would require too many resources and the system would probably end up collapsing. Ethereum introduces the concept of gas to mitigate this risk. Contracts define an amount of gas that users must pay to execute them successfully. If there is not enough gas, the contract will terminate. Ether and Gas 1/2 The average price of gas fluctuates. When you make a transaction, you pay for gas in ETH. Although the price of gas fluctuates, each transaction requires a fixed amount of gas. Gas is a measure of computational power and ensures that the system can present an appropriate fee to users based on their use of Ethereum resources. Ether and Gas 2/2 In general, gas costs a small fraction of ether, thus we use a smaller unit, gwei, to indicate this. One gwei corresponds to one billionth of an ether (10-9 ETH). Check the current gas price: etherscan.io/chart/gasprice Gas and Gas limits Suppose Alice is making a transaction to a contract, and she has calculated how much she wants to spend on gas. She will also set a gas limit to protect herself. The gas limit is set to ensure that once X amount of gas is used, the transaction is stopped. The contract will be blocked, but Alice will not end up paying more than she initially indicated. Tokens A large part of Ethereum's attractiveness is the possibility for users to create their own on-chain assets, which can be stored and transferred as ether. The rules governing them are defined in smart contracts, allowing developers to set specific parameters for their tokens. These can include the number to be issued, the mode of issue, divisibility, fungibility and many others. E.g. Currency, Shares, Loyalty Points, Gold Certificate... Our Own First Token Scalability Scalability is a measure of a system's ability to grow. In computing, for example, a network or server can be scaled to handle increased demand through various methods. In cryptocurrencies, scalability refers to how efficiently a blockchain can grow to accommodate more users. More users means more operations and transactions 'competing' to be included in the blockchain. Why Ethereum needs to Scale? Ethereum must significantly increase the number of transactions it can process without damaging the decentralisation of the network. E.g. The surge in popularity of CryptoKitties was a prime example of Ethereum's limitations on this front. In 2017, the Ethereum-based game prompted many users to make transactions to participate in the breeding of digital cats (represented as non-fungible tokens). The game became so popular that pending transactions skyrocketed, resulting in extreme network congestion for some time (thus, extremely high gas fees). Blockchain’s Trilemma 1/2 Blockchain’s Trilemma 2/2 Ethereum 2.0 To address Etherum's limitations, a major set of updates, collectively known as Ethereum 2.0 (or ETH 2.0), has been proposed. The 'Merge' took place on 15 September 2022 and included 4 breakthrough changes amongst others: PoS, Sharding, Beacon Chain, Block Times. New Characteristics in Ethereum 2.0 Ethereum 2.0 transitioned from Proof of Work to Proof of Stake, which significantly reduces energy consumption by relying on validators instead of miners. Validators stake ETH as collateral (at least 32 ETH) and are rewarded for helping secure the network. Sharding divides the Ethereum network into multiple "shards," each processing transactions and smart contracts independently, which improves scalability. This allows the network to process many transactions in parallel, reducing congestion and increasing throughput. Beacon Chain is the coordination layer introduced in Ethereum 2.0, managing validators and the consensus protocol across shards. It acts as the backbone of Ethereum 2.0, facilitating communication between shards and enhancing security. Ethereum 2.0 aims to reduce block times, meaning transactions are confirmed faster than on the original Ethereum network. This improvement results in a smoother user experience with quicker transaction finality. Proof of Stake Proof-of-stake is a type of consensus mechanism used by blockchains to achieve distributed consensus. Validators bring into play (staking) capital explicitly in the form of Ether in a smart contract on Ethereum. This staked ether then acts as collateral and can be destroyed if the validator behaves dishonestly or lazily. The validator is then responsible for verifying that new blocks propagated on the network are valid and, occasionally, for creating and propagating new blocks. Advantages of PoS Better energy efficiency, no need to consume a lot of energy on proof- of-work calculations. Lower access barriers, reduced hardware requirements: no need for high-end hardware to be able to create new blocks. Lower risk of centralisation: proof-of-stake should bring more nodes to the network. Economic penalties for misbehaviour make 51% attacks exponentially more expensive for a malicious user, compared to proof-of-work. Validator 1/2 To participate as a validator, a user must deposit 32 ETH in the deposit contract. Validators receive new blocks from peers on the Ethereum network. The transactions delivered in the block are executed again and the signature of the block is verified to ensure that the block is valid. If it is, the validator then sends a vote (called an attestation) into the network in favor of that block. Validator 2/2 The time is divided into slots (12 seconds) and epochs (32 slots). In each slot, a validator is randomly selected as the block proposer. This validator is responsible for creating a new block and sending it to other nodes on the network. In each slot, a committee of validators is randomly selected, whose votes are used to determine the validity of the proposed block. Security The validator is paid in ether (his staking balance increases). Validators lose their rewards in ether if they do not participate when required and their existing staking can be destroyed if they behave dishonestly. 51% Attack The threat of a 51% attack still exists on the proof-of-stake. But… a malicious entity would need 51% of ETH in staking (about $200,000,000,000 USD equivalent value). Governance 1/2 Governance is the system in place to make decisions. No one person owns or controls the Ethereum protocol, but decisions must still be made on the implementation of changes to best ensure the longevity and prosperity of the network. Governance 2/2 There are no fixed rules on who can or cannot create an application or send a transaction. There is a process for proposing changes to the main protocol on which these applications run. Because so many people depend on the stability of Ethereum, there is a very high threshold of coordination for fundamental changes, including social and technical processes, to ensure that any changes to Ethereum are safe and widely supported by the community. On-chain and off-chain Governance On-chain governance means that proposed changes to the protocol are decided by a vote of the stakeholders, who typically hold a governance token, and the vote takes place on the blockchain. Off-chain governance, on the other hand, refers to the opposite approach, i.e. when protocol change decisions go through an informal discussion process and, if approved, are implemented in the code. Ethereum governance is managed off-chain, with a wide variety of stakeholders involved in the process. Who is involved? Ether holders: people who hold an arbitrary amount of ETH. Application users: these people interact with applications on the Ethereum blockchain. Application/tool developers: These people write applications that run on the Ethereum blockchain. Node managers: these people execute nodes that propagate blocks and transactions, rejecting any invalid transactions or blocks they intercept. EIP Authors: these people propose changes to the Ethereum protocol, in the form of Ethereum Improvement Proposals (EIP). Miners/Validators: these people run nodes that can add new blocks to the Ethereum blockchain. Protocol Developers (or "Core Developers"): these people maintain the various implementations of Ethereum Formal Process Proposing a master EIP: the first step in formally proposing a change to Ethereum is to set out the details in a master EIP. This will serve as the official specification for an EIP the protocol developers will implement if it is accepted. Presenting the EIP to the protocol developers: once a main EIP for which community input has been gathered has been developed, it is presented to the protocol developers. The possible outcomes of this phase are: - The EIP will be considered for a future network upgrade - Technical changes will be requested - It may be rejected if it is not considered a priority or if the improvement does not justify the development effort Formal Process Iteration towards a final proposal: Once the EIP incorporates all the changes deemed necessary, it must be submitted again to the protocol developers. Inclusion of the EIP in the network upgrade: Assuming it is approved, tested and implemented, the EIP will be included in a network upgrade programme. Given the high coordination costs (everyone has to upgrade the network at the same time), EIPs are usually bundled into a multi- purpose upgrade. Activation of the network upgrade: once the upgrade is activated, the EIP will be active on the Ethereum network. Notes: upgrades are often activated on test networks before being activated on the main Ethereum network. Conflicts Disputes are usually handled through in-depth discussions in public forums, in order to understand the root of the problem and allow anyone to weigh it. Usually, a group will either give in or a satisfactory agreement is reached. However, it may happen that a group comes to force a particular change, with the risk of a chain split. Decentralized Autonomous Organization (DAO) A DAO is an organization managed collectively by its members, without central authority, using blockchain technology and smart contracts. Smart Contracts for Governance: DAOs use smart contracts to automate decision-making processes, where rules and operations are transparently encoded on the blockchain. Token-Based Voting: Members hold tokens that give them voting rights, allowing them to participate in decisions about the organization’s projects, funds, and policies. Trustless System: Since DAOs operate on a blockchain, members don’t need to trust any individual but rather rely on code and community consensus. Global and Transparent: DAOs are borderless and publicly auditable, enabling anyone with internet access to join, contribute, or review decisions made by the organization. DAO Branch The DAO branch came in response to the 2016 DAO attack, during which an insecure DAO contract was emptied of over 3.6 million ETH at once. It has been decided to move the funds from the flawed contract to a new one, allowing anyone who had lost the funds to hack to retrieve them. This course of action was voted on by the Ethereum community and every ETH holder could vote via a transaction on a voting platform. The decision to create the branch obtained over 85% of the votes. DAO Branch - Considerations It is important to note that even though the branching of the protocol served to reverse the attack, the weight given to the vote to decide on branching is questionable for some reasons: Participation in the vote was incredibly low Most people were unaware of the vote The vote only represented ETH holders, leaving out all other participants in the system A subset of the community rejected the branching, mainly because they felt that the DAO incident was not due to a protocol flaw. These users joined forces to form Ethereum Classic. DeFi Decentralised Finance (or simply, DeFi) is a movement that aims to decentralise financial applications. In the growing DeFi ecosystem, users interact with smart contracts and with each other through peer-to-peer (P2P) networks and Decentralised Applications (DApps). In a nutshell, Decentralised Finance (DeFi) aims to create a new financial system free from the restrictions of the current one. Advantages of DeFi No central coordinator or intermediary, No single point of failure. Billions of people around the world who do not have good access to any kind of financial service. No need for a central authority to coordinate the operation of the network. Programmable applications. Will DeFi ever be mainstream? Currently, most DeFi applications are difficult to use, inconvenient, break easily and are highly experimental. Software engineers, game theory experts, mechanical designers and many others still have a long way to go to solve all the challenges of building the DeFi ecosystem. DeFi Applications Stablecoin (more about it later). Peer-to-peer (P2P) services that allow you to lend your funds to others and collect the interest earned. Decentralised peer-to-peer marketplace where users can exchange unique crypto collectibles and other digital objects. Prediction markets, derivatives and more. Cryptocurrencies and Tokens The difference between is that the latter are not born with their own blockchain, but rely on one of the existing ones, in the most common case, that of Ethereum, Binance, Solana or Polygon. Ethereum is one of the most versatile blockchain for the creation of smart contracts, which in turn contain information such as the number of tokens in circulation, who is authorised to transfer them, who can dispose of the tokens and the rules of access to the tokens. Stablecoin Stablecoins are cryptocurrencies designed to maintain a stable value, minimizing the volatility typical of traditional cryptocurrencies. Their price is usually pegged to a reference asset, making them similar to fiat currencies in terms of stability. There are multiple types of stablecoins: Backed by fiat currencies (fiat-backed): Backed by reserves in traditional currencies such as the dollar or euro, maintaining a 1:1 ratio with the underlying asset. Examples: USDT (Tether), USDC. Backed by cryptocurrencies (crypto-backed): Collateralised with other cryptocurrencies, often over-collateralised to manage the volatility of the backing asset. Example: DAI. Commodities-backed stablecoins: Backed by physical assets such as gold or other commodities. Example: PAX Gold (PAXG). Algorithmic Stablecoins: Kept stable by algorithms that automatically adjust supply and demand, without the support of collateral assets. Example: UST (before its collapse). Case of Study – Luna 1/4 What was Terra-USD? TerraUSD (UST) was an algorithmic stablecoin designed to maintain a stable 1:1 peg with the US dollar, without being backed by fiat reserves or tangible assets. LUNA was the native token of the Terra project and functioned symbiotically with UST. The algorithmic stability mechanism was that UST and LUNA were linked via an arbitrage system: users could burn LUNA to create UST and vice versa, thus keeping the price of UST stable. Case of Study – Luna 2/4 What happened? In May 2022, the system suffered a depeg event, i.e. UST lost its peg to the dollar. A sharp drop in demand for UST triggered an algorithmic death spiral: Users began massively converting UST to LUNA in an attempt to bring the price of UST back to its $1 peg. This flooded the market with huge amounts of LUNA, leading to a dilution of the value of the LUNA token. The price of LUNA collapsed rapidly, along with UST, which failed to recover its peg. Case of Study – Luna 3/4 Consequences LUNA went from a value of about $85 to practically zero within a few days. UST lost its peg completely, falling to a few cents on the dollar. Investors suffered huge losses, which had a negative impact on the entire cryptocurrency market. The collapse raised global concerns about the stability of algorithmic stablecoins and led to increased calls for regulation. Case of Study – Luna 4/4 DeFi – Incomplete Blobs Map Decentralised Exchange (DEX) A Decentralized Exchange (DEX) is a peer-to- peer marketplace that allows users to trade cryptocurrencies directly, without relying on intermediaries. It operates on blockchain technology, using smart contracts to facilitate trades securely and transparently. The most famous is Uniswap CEX vs DEX CEX vs DEX DEXs tend to be the most widely used applications on the Ethereum blockchain. However, the trading volume is still small compared to centralised exchanges. Other differences include: Custody. DEXs allow users to retain custody of their assets, trading directly from their wallets, while CEXs require users to deposit assets, which are then held by the exchange. Regulation and Control. CEXs are typically centralized and regulated, often requiring user verification (KYC – Know Your Client), while DEXs are decentralized and generally offer anonymous trading without KYC. Liquidity and Speed. CEXs generally provide higher liquidity and faster transaction speeds through centralized servers, whereas DEXs may experience slower trades and lower liquidity due to relying solely on blockchain transactions and peer-to-peer matching. The Scandal Sam Bankman-Fried (SBF) What happened? In November 2022, FTX suddenly collapsed, causing a crisis in the cryptocurrency market. The investigation revealed that FTX had misused customer funds to cover losses and risky transactions of its subsidiary, Alameda Research, a trading company founded by Bankman-Fried. Principal Aspects of the Scandal Misuse of client funds FTX bankruptcy FTX was found to have transferred billions of dollars Within days, FTX declared bankruptcy, and Sam from client accounts to Alameda Research without Bankman-Fried resigned as CEO. The financial hole the users' consent. Client funds were being used to was estimated to be around USD 8 billion, with serious support Alameda's speculative operations and to consequences for investors, business partners and cover its losses. customers. Liquidity problems Arrest and charges The collapse began when news spread that FTX In December 2022, Sam Bankman-Fried was arrested was unable to cover its users' withdrawal requests, in the Bahamas, where he was residing, and extradited triggering a virtual teller run. Within days, the to the United States. The charges against him include exchange ran out of liquidity, leaving thousands of wire fraud, money laundering and conspiracy to commit users without access to their funds. investor fraud. Blockchain Fabio Angeletti November 19th, 2024 NFT The problem of digital assets As everything becomes more digital, it is necessary to replicate the properties of physical objects such as scarcity, uniqueness and proof of ownership, not to mention the fact that digital objects often only work in the context of their product. For example, you cannot resell an mp3 that you have purchased from iTunes. Smart contract - property tokenization If A gives to B more than 40 Eth [then] [ B gives to A a token representing a property ] Fungibility Fungibility means that the individual units of an asset are interchangeable and essentially indistinguishable from one another. Fungibility is a desirable property for currency because it allows free exchange and, in theory, there is no way of knowing the history of each individual unit. However, this is not an advantageous trait for collectibles. What is a non-fungible token? A non-fungible token (NFT) is used to unequivocally identify something or someone. This type of token is perfect on platforms offering collectables, access keys, lottery tickets, numbered seats for concerts or sporting events etc. Digital identity and the metaverse are other areas that can use NFTs. NFT NFTs are tokens that we can use to represent ownership of unique objects. They make it possible to tokenize art pieces, collectibles and even real estate. They can only have one official owner at a time and are protected by the blockchain. Non-fungible is a term used to describe things that are not interchangeable with other objects because they have unique properties. NFT is a smart contract Stores unique properties Keeps track of previous owners Keeps track of actual owners Royalties Scarcity NFT is a smart contract NFT internet vs Internet Today Some numbers (1/4) The NFT sector reached about USD 41 billion in 2021, surpassing traditional art sales. The narrowing of the gap can be understood from the increased enthusiasm around NFTs and the closure of auction houses during the coronavirus epidemic. The volume of NFT sales reached approximately USD 24.9 billion in 2021. In particular, the number of portfolios trading NFTs increased considerably in 2021, from about 545000 in 2020 to about 28.6 million in 2021. The most valuable objects were usually the most volatile. According to the Jefferies report, the NFT industry will reach a valuation of USD 80 billion by 2025. Some numbers (2/4) CryptoPunks, created by Larvalabs, run on the Ethereum blockchain network. Due to their rarity, they are extremely popular. For example, CryptoPunk #7523 was sold for approximately $11.8 million, while CryptoPunk #3100 was sold for $7.7 million, making it the fourth and fifth highest NFT sales, respectively. OpenSea is the largest peer-to-peer market for non-fungible tokens, with a total trading volume of approximately $14.68 billion. OpenSea holds 90 per cent of all NFT trading volume. OpenSea recorded a record trading volume of $3.7 billion in January 2022. The brand has also contributed to the creation of several other competitors, such as Axie Infinity, currently valued at $3.94 billion. Other well-known markets include CryptoPunks ($2.40 billion) and NBA Top Shot ($0.78 billion). Some numbers (3/4) Citizens of China and Singapore are the most interested in NFT in 2021, according to Google Trends, while in third place is Venezuela. Surprisingly, the United States is not even in the list of the top ten countries. Not all NFTs generate millions of dollars in revenue. More than 50 per cent of the recorded sales were less than USD 200. According to the NFT statistics, most primary sales were below USD 100. Millennials are three times more likely to buy NFTs than Generation Z. Nyan Cat's famous GIF, which was created in February 2021 and has been circulating for ten years, sold for almost USD 600,000. Jack Dorsey, founder and former CEO of Twitter, sold his first tweet in NFT form for $2.9 million. Eminem's first collection of NFTs sold at auction for $1.78 million. The 10 most expensive NFTs Some numbers (4/4) In February 2021, a short 10-second film was sold on Nifty Gateway for $6.6 million; the clip shows former US President Donald Trump lying on his stomach as passers-by continue their activities. According to Slate, the cost to generate an NFT can range from $1 to $1,000, depending on the techniques used. There are over 370,000 NFT owners who together own about $2.9 million worth of NFTs. However, about 9 per cent of the total owners are responsible for about 80 per cent of the share. The Merge – 91.8M $ The Rise and Fall The non-fungible token (NFT) market experienced a meteoric rise in 2021, reaching a peak trading volume of $17 billion in January 2022. However, by September 2022, the market had collapsed by 97%, with trading volumes plummeting to approximately $466 million. The Rise and Fall - Reasons Market Oversaturation Regulatory and Security Concerns Explosion of low-quality and scam projects diluted market value Increased scrutiny from governments created uncertainty Speculative buyers abandoned NFTs, leading to a sharp drop in High-profile security breaches (e.g., OpenSea phishing attacks) demand eroded trust Declining Interest and Utility Environmental Criticism Active NFT wallets fell from 1.4 million in late 2021 to 400,000 by Energy-intensive blockchain transactions drew backlash from late 2022 sustainability advocates Limited practical use cases outside art and collectibles reduced Environmental concerns discouraged participation from eco- long-term interest conscious users and investors Economic Pressures Shift in Digital Trends Global inflation and rising interest rates made speculative assets Attention shifted to emerging technologies like AI and like NFTs less attractive alternative blockchain solutions Investors shifted focus to safer, more stable financial assets Loss of momentum as companies reassessed metaverse and Web3 strategies. Metaverse Introduction to the Metaverse The metaverse is a collective virtual shared space, merging physical and digital realities, where users can interact in real time. It represents a blend of augmented reality (AR), virtual reality (VR), and the internet, creating immersive experiences that go beyond traditional online platforms. The metaverse offers a persistent and interconnected environment where users can socialize, work, shop, and play. This concept is seen as the next evolution of the internet—a shift from 2D interfaces to 3D interactive environments. Users can create and personalize their avatars, explore virtual spaces, and engage in activities that mimic real-world scenarios. The possibilities range from virtual meetings and events to digital economies powered by blockchain technology. The metaverse also crosses boundaries between the physical and digital worlds, enabling a seamless integration of virtual experiences into everyday life. With its potential to revolutionize communication, entertainment, and business, the metaverse is rapidly gaining attention from tech companies, developers, and visionaries. Historical Background The concept of the metaverse emerged from science fiction, notably Neal Stephenson's 1992 novel Snow Crash. Early virtual spaces like Second Life and video games such as World of Warcraft provided glimpses into shared digital environments. As technology advanced, VR and AR tools evolved, laying the groundwork for today's metaverse. The dream of persistent, shared digital spaces is now becoming a reality with modern advancements. Core Technologies The metaverse relies on several core technologies, including virtual reality (VR) for immersive environments and augmented reality (AR) for blending digital content with the physical world. Blockchain enables decentralized ownership of digital assets, while artificial intelligence (AI) supports dynamic environments and personalization. Cloud computing ensures scalability, and 5G networks provide the necessary speed for seamless experiences. Key Components The metaverse is built on three main pillars: virtual spaces, ranging from gaming worlds to digital meeting rooms user engagement focuses on avatars and interactions interoperability ensures that platforms and services are seamlessly connected, enabling a consistent experience across diverse environments Applications in Gaming Gaming is at the forefront of the metaverse revolution, with platforms like Fortnite and Roblox acting as early prototypes. Players engage in immersive, interactive environments that combine entertainment and social networking. In the metaverse, games can evolve into expansive virtual worlds where users not only play but also create content and build economies. Lamborghini: a New Player in the Game Lamborghini has partnered with Animoca Brands to develop a new gaming experience in the metaverse, aiming to offer unique digital experiences to fans and customers. This collaboration seeks to integrate automotive excellence with advanced technologies, shaping the future of brand engagement in the automotive industry. Key partners in this initiative include the creative design studio Gravitaslabs and the tech company Motorverse. Applications in Education The metaverse is transforming education by offering immersive learning experiences. Virtual classrooms, interactive simulations, and 3D environments allow students to explore subjects in ways traditional methods cannot. From history reenactments to virtual science labs, the metaverse makes learning engaging and accessible across the globe. Meta's Digital 'Metaversities' in EU and UK Schools Meta has introduced the first digital twin "metaversities" in Europe, enabling students to engage in virtual classes that mirror their physical campuses. University of Leeds, UK: Began offering metaverse-based theatre and performance classes in September 2024. University of the Basque Country, Spain: Plans to start physiotherapy and anatomy courses in the metaverse by February 2025. Schools in Hannover, Germany: Set to implement immersive classes at the beginning of the 2025 academic year. Applications in Business Businesses are leveraging the metaverse for virtual meetings, team collaboration, and immersive customer experiences. Virtual storefronts allow customers to browse products interactively, while digital twins help companies optimize operations. The metaverse is also creating new opportunities in training and remote work, redefining how businesses operate. Applications in Social Networking Users can connect with others through avatars in shared virtual spaces. Social platforms like Horizon Worlds enable virtual gatherings, concerts, and events, fostering a sense of presence and community beyond physical boundaries. Applications in Healthcare The metaverse is enhancing healthcare with virtual consultations, immersive therapy sessions, and medical training simulations. Patients can access care remotely through VR environments, and medical professionals can practice procedures in risk-free settings. Such integration is improving accessibility and outcomes in the healthcare industry. For Spherical Insights, Metaverse for healthcare market is expected to reach almost $500B by 2033. The Role of Blockchain Blockchain technology underpins the metaverse economy by enabling decentralized ownership and secure transactions, moreover it ensures transparency and trust, empowering a robust digital economy. Non-fungible tokens (NFTs) allow users to own virtual assets like art, avatars, and property, while cryptocurrencies facilitate in-world transactions. Digital Identity in the Metaverse Avatars represent users in the metaverse, serving as digital identities. These identities can be customized to reflect personal preferences and used across platforms. Digital identity management ensures privacy and security, while fostering authenticity in virtual interactions. Economy and Monetization The metaverse hosts a thriving digital economy where users can buy, sell, and trade virtual goods. Brands are entering the space with virtual storefronts, while creators monetize their work through NFTs and microtransactions. This economy is reshaping traditional commerce and opening new revenue streams. Challenges and Risks Despite its potential, the metaverse faces challenges such as privacy concerns, data security, and digital addiction. The lack of standardization across platforms hinders interoperability, while the digital divide may exclude underprivileged populations. Interoperability and Open Standards For the metaverse to thrive, platforms and services must be interoperable. Open standards and decentralized systems enable users to move seamlessly between virtual worlds, ensuring a unified experience. Collaboration among developers and organizations is essential to achieve this vision. Future of Work The metaverse is revolutionizing workspaces by creating virtual offices and immersive environments for collaboration. Employees can work from anywhere, participating in holographic meetings or using VR tools for training, with greater flexibility and increase in productivity. Metaverse and AI Artificial intelligence (AI) plays a key role in the metaverse, powering intelligent NPCs, personalized experiences, and content generation. AI-driven systems adapt environments to user preferences, creating dynamic and engaging interactions that mimic real-world spontaneity. Environmental Impacts The metaverse’s reliance on data centers and blockchain raises concerns about energy consumption. Sustainable practices, such as energy- efficient servers and renewable energy sources, are necessary to minimize its environmental footprint. Ethics in the Metaverse The metaverse raises ethical questions about user privacy, digital rights, and behavior regulation. Establishing guidelines for acceptable conduct and protecting user and user data are critical. Policymakers and developers must collaborate to ensure ethical use of this transformative technology. Conclusion and Outlook The metaverse is more than a buzzword - it’s a transformative force reshaping how we live, work, and play. While it offers immense potential, its success depends on addressing challenges like accessibility, security, and sustainability. Blockchain Fabio Angeletti November 20th, 2024 History Satoshi Nakamoto In 2008, Satoshi Nakamoto published the original Bitcoin whitepaper, introducing the concept of cryptocurrency and the blockchain as a distributed ledger for financial transactions. Over the years, many people have been associated with Satoshi Nakamoto, but none of these associations have ever been confirmed: Hal Finney was one of the first developers of Bitcoin and was the first person to receive a Bitcoin transaction from Satoshi Nakamoto. Gavin Andresen was one of the leading developers of Bitcoin and worked closely with Satoshi Nakamoto. Nick Szabo is a computer scientist and lawyer who developed the concept of 'bit gold', one of Bitcoin's influences. Szabo has often been cited as a possible identity of Satoshi Nakamoto, but there is no evidence to prove this. Satoshi Nakamoto Some consider that Nakamoto may be a team of people. Satoshi Nakamoto is believed to own more than 1 million bitcoins. The user known as Nakamoto continued to be active in the development and mining of bitcoins until December 2010, then his account was discontinued. The bitcoin wallets believed to be Nakamoto's have never been spent since the last mining in January 2009. At the last bitcoin peak of over $69,000 each in 2021, these wallets were worth over $80 billion making him the 33rd richest person in the world. Today they are worth over $100 billion. The Beginnings On 15 September 2008, Lehman Brothers filed for bankruptcy and the biggest bankruptcy in banking history materialised, leaving $613 billion in debt and 26,000 employees out of work. On 31 October 2008 14:10:00, Satoshi sends the first e-mail to cryptography@metzdowd saying that he has published a white-paper describing a new technology, Bitcoin. «I believe I’ve worked through all those little details over the last year and a half while coding it, and there were a lot of them. The functional details are not covered in the paper, but the sourcecode is coming soon. I sent you the main files. (available by request at the moment, full release soon). Satoshi.» The beginnings In 2009, the first blockchain Bitcoin was created, known as the 'Genesis Blockchain'. In 2010, programmer Laszlo Hanyecz exchanged 10,000 Bitcoins for two pizzas, becoming the first known transaction in which cryptocurrencies were used as a medium of exchange. In July 2010, Bitcoin began trading at USD 0.0008, rising to USD 0.08 by the end of the month. The cryptocurrency then slowly rose in the USD 10 range until it rose to USD 250 in April 2013. Ethereum and Vitalik Buterin Vitalik Buterin was born in Russia in 1994, but grew up in Canada, where he developed his passion for programming and technology. He co-founded a magazine dedicated to Bitcoin entitled Bitcoin Magazine in 2011. For this magazine, Vitalik was also responsible for writing articles focusing on the workings and trivia related to the famous cryptocurrency (5 bitcoins per article). In 2012, he won a bronze medal at the International Computer Olympics in Italy. He started working on the Ethereum project in 2013 and published the Ethereum White Paper in 2014 at the age of 19. The launch of the Ethereum Mainnet in July 2015. Ethereum and Vitalik Buterin The idea of smart contracts is not Vitalik's, it belongs to Nick Szabo, one of the most influential entrepreneurs in cryptocurrency. Vitalik's genius is to have embraced them in the core design of Ethereum, unlike the bitcoin blockchain which is designed solely as a P2P payment system. Ethereum had a stable value of around $10 until 2017, when it had a very strong increase in value, peaking at $1,261 on 12 January 2018, before falling again, with peaks in April 2018 (around $700), June 2019 (around $300), February 2020 (around $200) and December 2020 (around $600). It rose again in 2021 with a peak of over $4672. Vitalik Buterin Rise and Fall of Bitcoin “The Bitcoin is Dead” link Cryptocurrency Bubble - 2011 In February 2011, the price of Bitcoin rose to $1.06, then fell to $0.67 in April. This spike was encouraged by several posts on Slashdot. In June 2011, Gawker published an article on the dark web market Silk Road, in which it was reported that sellers on this market accepted Bitcoin as a form of payment. The article drew attention to the growing popularity of Silk Road and the growing interest in using bitcoin for illicit online transactions. This led to an increase in the price of bitcoin to $29.58 at the time. Gawker was one of the first mainstream news sites to talk about bitcoin and its implications for the economy and society at large. Cryptocurrency Bubble - 2017 In December 2017, the price of Bitcoin reached $20,000. Not really a Bitcoin bubble, the 2017 bull run was mainly fuelled by a number of new 'alternative' cryptocurrencies (altcoins). This explosion was fuelled by several factors, including: The rise in public interest in cryptocurrencies, thanks to increased media coverage and the spread of positive news regarding the sector. The increase in investor confidence in the potential of cryptocurrencies as an alternative to traditional currencies, at a time when many countries were experiencing economic and political crises. The increase in the number of cryptocurrency-related startups and projects, which generated a lot of attention and interest from investors. The adoption by some large technology companies, such as Microsoft and IBM, which have begun to explore the potential of cryptocurrencies and blockchain technology. The rise in the price of Bitcoin, which attracted the attention of many investors and led to the creation of many other cryptocurrencies, at a time of high speculation. Cryptocurrency Crush - 2018 After an unprecedented boom in 2017, the price of Bitcoin fell by about 65% from 6 January to 6 February 2018. Afterwards, almost all other cryptocurrencies followed Bitcoin's collapse. In September 2018, cryptocurrencies collapsed 80% from their January 2018 peak, making the 2018 collapse worse than the 78% collapse of the dot-com bubble. Cryptocurrency Crush - 2018 - Details (1/2) 17 December 2017: The price of Bitcoin briefly reaches a new all-time high of $19,783.06. 22 December 2017: Bitcoin falls below $11,000, a 45% drop from its peak. 12 January 2018: Amid rumours that South Korea may be preparing to ban cryptocurrency trading, Bitcoin's price depreciates by 12%. 26 January 2018: Coincheck, the largest OTC cryptocurrency market in Japan, is hacked. $530 million of NEM is stolen by a hacker, causing Coincheck to suspend trading indefinitely. The loss is the largest ever recorded to date for such a theft. Cryptocurrency Crush - 2018 - Details (2/2) 7 March 2018: Compromised Binance API keys are used to execute irregular trades. Late March 2018: Facebook, Google and Twitter ban ads for initial cryptocurrency offerings (ICOs) and token sales. 15 November 2018: Bitcoin's market capitalisation falls below $100 billion for the first time since October 2017 and the price of Bitcoin drops to $5,500. Cryptocurrency Bubble - 2020/2021 In November 2020, Bitcoin started a new growth from around $13,200 to $64,000 in April 2021. On 14 April, Coinbase, a well-known cryptocurrency exchange, went public on the NASDAQ. Their shares rose 31% on the first day to $328.28 bringing their market capitalisation to $85.8 billion. In May 2021, the value of Dogecoin, originally created as a joke, increased by 20,000% in one year. Bitcoin vs Dot-Com Bubble Elon Musk Musk started tweeting regularly about Bitcoin and other cryptocurrencies, pushing their prices up. For example, in February 2021, Tesla announced it had purchased $1.5 billion of Bitcoin, driving the price of the digital currency to new all-time highs. Musk used his Twitter account to promote Dogecoin during the popular TV show 'Saturday Night Live' in May 2021. During the show, Musk presented a skit parodying the cryptocurrency and referred to Dogecoin as 'a joke' in his opening monologue. Elon Musk Nevertheless, the price of Dogecoin rose during and after the show, thanks to the interest and media attention generated by Musk's speech. However, Musk also played a role in the fall of cryptocurrency prices when he announced that Tesla would no longer accept Bitcoin as payment for its vehicles due to environmental concerns related to Bitcoin mining, causing the price of Bitcoin and other cryptocurrencies to fall. ETF Bitcoin Bitcoin ETFs (Exchange-Traded Funds) are exchange- traded funds that allow investors to gain exposure to Bitcoin without having to own the cryptocurrency directly. Bitcoin ETFs replicate the price of Bitcoin, facilitating investment through regulated and traditional markets, offering greater security and accessibility for traditional investors. ETF Bitcoin The approval of spot ETFs by the US SEC in January 2024 is considered a historic turning point for the cryptocurrency market for several reasons: It will increase the legitimacy and adoption of Bitcoin as an asset class It will attract a significant inflow of liquidity from institutional and traditional investors It could lead to greater stability and growth of the Bitcoin market Paves the way for the approval of spot ETFs on other cryptocurrencies (such as Ethereum) Blockchain for Businesses Blockchain Permissioned (1/2) Blockchain permissions are subject to a central authority that determines who can access them. In addition to defining who is authorised to be part of the network, this authority defines which roles a user can play within it, and also defines rules on the visibility of recorded data Blockchain permissioned thus introduces the concept of governance and centralisation into a network that started out as absolutely decentralised and distributed. Commonly called the Consortium Blockchain, instead of allowing any person with an Internet connection to participate in the verification of the transaction process, it entrusts the task to selected nodes deemed trustworthy. Blockchain Permissioned (2/2) An illustrative example of this type of network can be a consortium of 10 companies, each connected to the Blockchain by a computer. If company '7' only has working relationships with '1', '3' and '6' it will only share invoices with these three without having to authorise the other companies to read the data shared between them. Private Blockchain (1/3) Private blockchains share many characteristics with permissioned ones. They are private, non-visible networks that sacrifice decentralisation, security and immutability in exchange for storage space, speed of execution and cost reduction. This type of Blockchain is controlled by an organisation, deemed highly trusted by users, which determines who can or cannot access the network and read/write the data recorded on it. Private Blockchains (2/3) In recent years, private Blockchains are becoming more popular than public ones among private companies and financial institutions due to five features: 1. The consortium or company operating a private Blockchain can easily, if desired, change the rules of it, reset transactions, change balances, etc. In some cases, e.g. with registries such as the Cadastre, this functionality is necessary. So, an attempt to create a register for real estate that is uncontrollable by the government would quickly turn into one that is not recognised by the government itself. 2. The validators are known, so there is no risk of a 51% attack from collusion by miners. Private Blockchains (3/3) 3. Transactions are cheaper, as they can only be verified by a few nodes, which are considered trustworthy and have very high processing power. Knowing the identity of the miners means that their work does not have to be checked and verified by other nodes, further reducing execution time and costs. 4. Nodes can be considered very well-connected and errors can be quickly resolved with manual intervention, allowing the use of consensus algorithms that offer finality after much shorter blocking times. 5. Read permissions are limited, thus ensuring a higher level of privacy. Opportunities at Company Level Transparency and traceability: Blockchain can improve transparency and traceability along the supply chain, allowing companies to track the origin and authenticity of products. This can increase consumer confidence and reduce the costs associated with dealing with fraud and counterfeiting. Efficiency and cost reduction: Blockchain can simplify and automate complex processes and reduce the need for intermediaries, leading to greater efficiency and reduced operational costs. Security and immutability: Transactions on the blockchain are encrypted and permanently recorded, making it difficult for malicious parties to manipulate or compromise data. This can improve information security and protect companies from cyber attacks and data theft. Innovation and new business models: Adoption of blockchain can lead to new market opportunities and business models, such as tokenization of assets, creation of decentralised platforms and creation of new blockchain-based services. Risks at Company Level Scalability and performance: Some blockchains may have scalability and performance issues, which may limit their ability to handle large numbers of transactions simultaneously and maintain fast confirmation times. Regulation and compliance: Blockchain regulation is still developing in many countries, and companies may face legal and regulatory uncertainties. It is important to monitor the evolution of laws and regulations to ensure compliance and reduce the risk of penalties or fines. Adoption and interoperability: Blockchain adoption may require significant changes in existing business processes and organisational culture. In addition, interoperability issues may arise between different blockchain platforms, which may make collaboration across companies and sectors difficult. Security risks and vulnerabilities: Despite the inherent security of blockchain, it is not risk-free. There could be unknown vulnerabilities in the technology itself or targeted cyber attacks that seek to exploit these vulnerabilities. Companies must implement appropriate security measures to protect their systems and sensitive information. Use Cases Supply chain management Digital identity and access management Data recording and sharing Financial sector Tokenisation of assets Energy and sustainability Supply Chain Management Blockchain can improve transparency and traceability in supply chain management, allowing companies to track the origin and route of products in real time. One example is IBM and Maersk's project, TradeLens, which uses blockchain to digitise and share supply chain information in the maritime logistics industry. VeChain VeChain is a blockchain platform focused on creating solutions for supply chain management and product traceability. Founded in 2015, VeChain aims to use blockchain technology to solve common problems in supply chains, such as lack of transparency, authenticity and product security. The VeChainThor Blockchain, VeChain's core protocol, is a public blockchain platform that enables companies to create customised supply chain and traceability solutions. VeChain - Services Product traceability: VeChain uses unique identifiers, such as NFC tags, QR codes and RFID chips, to associate detailed information on the provenance, production, logistics and other aspects of products to the blockchain. This allows companies and consumers to verify the authenticity and provenance of products through a transparent and immutable ledger. Supply chain management: VeChain offers solutions for real-time monitoring of supply chains, enabling companies to quickly identify and resolve problems, reducing costs and improving operational efficiency. Certification and compliance: VeChain works with certification bodies, such as DNV GL, to provide blockchain- based solutions that facilitate verification and compliance with regulatory and industry requirements. Smart contracts and decentralised applications (dApps): The VeChainThor platform enables developers to create smart contracts and customised dApps to simplify and automate specific business processes such as payments, authenticity verification and licence management. Digital Identity and Access Management Blockchain can be used to create secure and decentralised digital identity solutions, enabling companies to protect and validate the identity of their employees, customers and partners. Microsoft and ConsenSys, for example, have collaborated to develop a blockchain-based digital identity system called uPort. Recording and Sharing Data The blockchain can be used to create secure distributed ledgers for recording and sharing data, such as patents, property titles, certificates and legal documents. For example, the Swedish government has partnered with blockchain startup ChromaWay to develop a blockchain- based property registration solution. Financial Sector Blockchain can be used to improve the efficiency and security of financial transactions, reduce intermediation costs and increase the speed of payment processing. Ripple, for example, is a blockchain-based payment solution that enables fast and low-cost cross-border transactions between financial institutions. Tokenisation of Assets Tokenisation is the process of representing physical or digital assets as cryptographic tokens on the blockchain. This enables the creation of new business models and investment opportunities, such as the sale and trading of fractions of real estate, works of art or shares in unlisted companies. Energy and Sustainability Blockchain can be used to create decentralised platforms for the generation, distribution and trade of renewable energy, as well as to track and verify carbon emissions. One example is the Brooklyn Microgrid project in New York, which uses blockchain to allow residents to trade locally produced solar power. Blockchain and AI (1/2) Blockchain and Artificial Intelligence (AI) are two emerging technologies that are revolutionising several sectors. Although they are distinct technologies, there are connections and synergies between them that can be exploited to create innovative solutions. Blockchain and AI (2/2) Data security: Blockchain can ensure that data is authentic, traceable and not manipulated, improving the quality and reliability of AI models. Data sharing: Blockchain can facilitate the secure and decentralised sharing of data between different organisations and individuals Data marketplace: The blockchain can enable the creation of marketplaces for data, where individuals and organisations can sell and buy data in a secure and transparent manner. Management of AI resources: The blockchain can be used to manage and track the use of AI resources, such as computing power and machine learning models. AI transparency and accountability: The blockchain can improve the transparency and accountability of decisions made by AI models by recording and publicising decision-making processes and outcomes. Decentralisation of AI: The combination of blockchain and AI can lead to the creation of decentralised AI systems, where decision- making power and learning are distributed among network participants, rather than concentrated in a single entity. This can lead to more resilient, fair and democratic AI systems. What’s next? Regulation The European Union recently implemented a significant regulatory framework for cryptocurrencies through the regulation known as MiCA (Markets in Crypto-Assets). This regulation, adopted in 2023, aims to create a harmonised regulatory environment for crypto-assets, addressing challenges related to security, consumer protection and financial market stability. Some objectives of the MiCA Regulation are: Regulatory Harmonisation: MiCA aims to establish a uniform legal framework for crypto-assets within the EU, facilitating cross-border transactions and promoting fair competition. Investor Protection: Introduces specific measures to ensure transparency and prevent fraud, improving security for retail investors. Environmental Sustainability: Regulations require cryptocurrency service providers to publish information on their energy consumption, addressing the environmental impact of cryptocurrencies. Anti-Money Laundering Rules: Regulations have been introduced to track cryptocurrency transfers and prevent money laundering, with the implementation of public registries for non-compliant providers. Digital Euro The European community is currently working on a cryptocurrency project, known as the Digital Euro, which would be a digital currency issued by the European Central Bank (ECB). This project is in the exploration phase and aims to integrate digital technologies into the European monetary system, responding to the needs of an increasingly digitised economy.