Kick-off Blockchain & Crypto-economics‘23: Session 0.2 PDF

UZH Blockchain &DLT Research Group Blockchain Center Kick-off Blockchain & Crypto-economics‘23: Session 0.2 Claudio J. Tessone Blockchain & Distributed Ledger Technologies UZH Blockchain Center Blockchain & Crypto-economics‘23 19.09.23 UZH Blockchain Center Blockchain &DLT Research Group O...

UZH Blockchain &DLT Research Group Blockchain Center Kick-off Blockchain & Crypto-economics‘23: Session 0.2 Claudio J. Tessone Blockchain & Distributed Ledger Technologies UZH Blockchain Center Blockchain & Crypto-economics‘23 19.09.23 UZH Blockchain Center Blockchain &DLT Research Group Objectives for this session 1. 2. Why were blockchains created? Which are the requirements for them to work? 2 UZH Blockchain Center Blockchain &DLT Research Group = A fore-word on blockchains and the approach we will take in this class UZH Blockchain Center Blockchain &DLT Research Group In our daily life, we are surrounded by systems whose constituents are interrelated https://www.barabasilab.com/ 4 UZH Blockchain Center Blockchain &DLT Research Group In many cases, these systems are said to be “complex” 5 UZH Blockchain Center Blockchain &DLT Research Group A complex system is one composed by many interacting/interconnected constituents. Its global properties are not the simple aggregation of individual behaviour, but a richer, emergent one 6 UZH Blockchain Center Blockchain &DLT Research Group Paradigm of a complicated system Paradigm of a complicated system 7 UZH Blockchain Center Blockchain &DLT Research Group Paradigm of a complex system 8 UZH Blockchain &DLT Research Group Diseguaglianza è pervasiva in sistemi economici Blockchain Center Pervasiveness of economic inequality Prof. Vilfredo Pareto UZH Blockchain Center Blockchain &DLT Research Group Law of proportionate growth: In socioeconomic systems, the growth of an agent is proportional to its size UZH Blockchain Center Blockchain &DLT Research Group = Blockchains are a paradigm of a complex socio-techno-economic systems UZH Blockchain Center Blockchain &DLT Research Group Why where blockchains created? 12 UZH Blockchain Center Blockchain &DLT Research Group Accelerated by digitalisation, we live in an increasingly centralised World 13 UZH Blockchain Center Blockchain &DLT Research Group Trust on few: at the level of verification Few entities have unmatched power, introduce single-point of failure and have access to identities… 14 UZH Blockchain Center Blockchain &DLT Research Group Seigniorage: Centralisation in the creation of money Monetary policy is under the control of few, central authorities… 15 UZH Blockchain Center Blockchain &DLT Research Group Decentralisation, Anonymity, Open monetary system, No need for a priori trust 16 UZH Blockchain Center Blockchain &DLT Research Group What do you need to create such a system? 17 UZH Blockchain Center Blockchain &DLT Research Group Exchange of value of digital assets … without trusted central entities 18 UZH Blockchain Center Blockchain &DLT Research Group Open participation in the process of money supply …by the introduction of intrinsic economic incentives 19 UZH Blockchain Center Blockchain &DLT Research Group The participants do not need to disclose their identity … to participate in the system 20 UZH Blockchain Center Blockchain &DLT Research Group The ideal behind blockchains are decentralised, transparent yet anonymous, open monetary systems… 22 UZH Blockchain Center Blockchain &DLT Research Group … in which pre-existing trust among participants is not necessary. Instead, trust emerges because of the system operation 23 UZH Blockchain Center Blockchain &DLT Research Group How far is reality from this ideal? Can we just trust? 24 UZH Blockchain Center Blockchain &DLT Research Group Which is the relationship between design principles and outcome? 25 UZH Blockchain Center Blockchain &DLT Research Group These elements were received with opposing views from anarcho-capitalist communities in the aftermath of the 2008 crisis 26 UZH Blockchain Center Blockchain &DLT Research Group Exchange of value of digital assets … where verification is done in a distributed manner… 27 UZH Blockchain Center Blockchain &DLT Research Group Open participation in the process of money supply …by the introduction of intrinsic economic incentives 28 UZH Blockchain Center Blockchain &DLT Research Group The participants do not need to disclose their identity … to participate in the system 29 UZH Blockchain Center Blockchain &DLT Research Group The functioning of these systems is purely based on algorithmic protocols and a set of economic incentives 30 UZH Blockchain Center Blockchain &DLT Research Group Some key ideas behind blockchains (i) A distributed network 31 UZH Blockchain Center Blockchain &DLT Research Group A peer-to-peer network A P2P network is the backbone on which these systems build Peer network refers to the fact that network nodes are all alike 32 UZH Blockchain Center Blockchain &DLT Research Group Some key ideas behind blockchains (ii) Data storage 33 UZH Blockchain &DLT Research Group Blockchain Center If we want users to exchange assets, they need to independently verify that the attempted transactions are correct Theo @ 10 Diego @ 10 UZH Blockchain Center Blockchain &DLT Research Group From a data perspective, it is a distributed append-only database 35 UZH Blockchain Center Blockchain &DLT Research Group How to verify transactions in a decentralised manner? … TX ID FROM TX ... 12 Andrea @ 6 TX ... 17 Fred TX ... 22 Al TX ... 23 Theo TX ... 32 Dan TX ... 33 TO … … … Al @ 6 @ 1 Bob @ 1 @ 6 Charles @ 6 @ 10 Diego @ 4 Bob Charles @ 3 Dan Bob @ 10 @ 4 Eva Merlin @ 3 Bob Build a public registry with a well-defined notion of temporal order Such registry would be replicated in all nodes of the P2P network UZH … TX ID TX REC Blockchain FROM Center TX ... 12 TX ... 93 Andrea @ 6 … Blockchain &DLT Research Group TO Al @ 6 Bunches of transactions are packed and … verified concurrently by the same validator TX ... 17 TX ... 03 Fred @ 1 Bob TX ... 22 TX ... 12 Al @ 6 Charles @ 6 TX ... 23 TX ... 89 Theo @ 10 Diego TX ... 32 TX ... 34 TX ... 07 TX ... 33 TX ... 22 … @25 Dan @ 4 Bob Charles @ 3 Dan @ 1 @ 10 Alice @ 4 Bob Eva Merlin @ 3 Bob 37 UZH Blockchain Center Blockchain &DLT Research Group Why pack transactions into blocks before verification and not verify transaction per transaction instead? To allow for simpler agreement («consensus»), but this is key 38 UZH Blockchain &DLT Research Group Blockchain Center How to independently verify transactions TX ID TX REC … FROM TO … Al @ 6 @ 1 Bob @ 1 @ 6 Charles @ 6 @ 10 Diego TX ... 12 TX ... 93 Andrea @ 6 TX ... 17 TX ... 03 Fred TX ... 22 TX ... 12 Al TX ... 23 TX ... 89 Theo TX ... 32 TX ... 34 TX ... 07 TX ... 33 TX ... 22 … … @25 Dan @ 4 Bob Charles @ 3 Dan @ 10 Alice @ 4 Bob Eva Merlin @ 3 Bob A block is a set of transactions verified at the same time, by the same user acting as validator Blocks are chained one after the other introducing a natural order UZH Blockchain Center Blockchain &DLT Research Group A simpler representation … TX ID TX REC TX ... 12 TX ... 93 Andrea @ 6 TX ... 17 TX ... 03 Fred TX ... 22 TX ... 12 Al TX ... 23 TX ... 89 Theo TX ... 32 TX ... 34 TX ... 07 TX ... 33 TX ... 22 FROM TO … … … Al @ 6 @ 1 Bob @ 1 @ 6 Charles @ 6 @ 10 Diego @25 Dan @ 4 Bob Charles @ 3 Dan @ 10 Alice @ 4 Bob Eva Merlin @ 3 Bob 40 UZH Blockchain &DLT Research Group Blockchain Center A blockchain TX ID TX REC … FROM TO TX ... 11 TX ... 12 TX ... 93 … Andrea @ 6 … TX ... 03 Fred TX ... 22 TX ... 12 Al TX ... 23 TX ... 89 Theo Leo @ 50 @ 1 @ 1 Karl @ 50 @ 6 Charles @ 6 @ 10 Diego TX ... 21 … @ 50 @ 6 Bob TX ... 16 TX ... 17 Merlin Al @ 10 Each block is created by someone … TX TX ... ... 31 33 TX ... 32 TX ... 34 TX ... 07 TX ... 33 TX ... 22 @25 @ 4 Bob Charles @ 3 Dan Dan @ 1 Alice Alice @ 4 Eva Merlin @ 3 Bob 41 UZH Blockchain Center Blockchain &DLT Research Group How is it selected who will validate a set of transactions This is a core question throughout this course. Each blockchain has its own answer to it 42 UZH Blockchain Center Blockchain &DLT Research Group Some key ideas behind blockchains (iii) Consensus 43 UZH Blockchain Center Blockchain &DLT Research Group A chain of blocks … The blocks are logically linked one after the other, creating a temporal sequence of the data therein 44 UZH Blockchain Center Blockchain &DLT Research Group Local copy of the blockchain … This is a chain of blocks, so we can identify the logical status just by overlaying the last block in the local copy 45 UZH Blockchain &DLT Research Group Blockchain Center Consensus in the local state of a blockchain … Essere in Consenso significa che tutti i nodi hanno la stesa copia della blockchain (i.e. lo stesso insieme di blocchi) 46 UZH Blockchain Center Blockchain &DLT Research Group Some key ideas behind blockchains (iv) Economic incentives 47 UZH Blockchain Center Blockchain &DLT Research Group But, why should a user verify transactions? UZH Blockchain Center Blockchain &DLT Research Group … and moreover, how are the assets created? UZH Blockchain Center How to independently verify transactions … TX ID TX REC TX ... 12 TX ... 93 Andrea @ 6 TX ... 17 TX ... 03 Fred TX ... 22 TX ... 12 Al TX ... 23 TX ... 89 Theo TX ... 32 TX ... 34 TX ... 07 TX ... 33 TX ... 22 FROM TO … … … Al @ 6 @ 1 Bob @ 1 @ 6 Charles @ 6 @ 10 Diego @25 Dan @ 4 Bob Charles @ 3 Dan @ 10 Alice @ 4 Bob Eva Merlin @ 3 Bob Blockchain &DLT Research Group UZH Blockchain &DLT Research Group Blockchain Center How are cryptocurrencies created? TX ID TX REC … FROM TO TX ... 11 TX ... 12 TX ... 93 … Andrea @ 6 TX ... 16 TX ... 17 TX ... 03 Fred … @ 1 TX ... 21 TX ... 22 TX ... 12 Al TX ... 23 TX ... 89 Theo TX TX ... ... 31 33 TX ... 32 TX ... 34 TX ... 07 TX ... 33 TX ... 22 … Merlin @ 50 Al @ 6 Leo @ 50 Bob @ 1 Karl @ 50 @ 6 Charles @ 6 @ 10 Diego @25 Dan @ 4 Bob Charles @ 3 Dan @ 10 @ 1 Alice Alice @ 4 Bob Eva Merlin @ 3 The block creator can add a transaction without sender, but with herself as recipient UZH Blockchain Center Blockchain &DLT Research Group Cryptomonetary supply this is the mechanism by which cryptocurrencies enter into the system 52 UZH Blockchain Center Blockchain &DLT Research Group The supply policy is completely decoupled from the technical underpinnings, but it has a hugh impact on its functioning 53 UZH Blockchain Center Blockchain &DLT Research Group Rewards (creation of cryptocurrency) is a completely arbitrary decision UZH Blockchain Center Blockchain &DLT Research Group In most blockchains, this is a technocratic decision, in most cases immutable UZH Blockchain Center Blockchain &DLT Research Group How is it selected who creates the next block? UZH Blockchain Center Blockchain &DLT Research Group Who creates the next block? Consensus proof-of-work is based on investing computational resources … More resources are invested in preserving the consistency of the system, more likely to receive rewards 57 UZH Blockchain Center Blockchain &DLT Research Group Block creator, incentives create a wealth of design alternatives that give raise to a large variety of blockchains 58 UZH Blockchain Center Blockchain &DLT Research Group A final point: Reaching consensus 59 UZH Blockchain Center Blockchain &DLT Research Group How does this distributed system reach consensus? By Gossiping UZH Blockchain Center Blockchain &DLT Research Group Each block has a creator, who adds it to the blockchain UZH Blockchain Center Blockchain &DLT Research Group Each block has a creator, who adds it to the blockchain UZH Blockchain Center Blockchain &DLT Research Group Each block has a creator, who adds it to the blockchain UZH Blockchain Center Blockchain &DLT Research Group Each block has a creator, who adds it to the blockchain UZH Blockchain Center Blockchain &DLT Research Group Each block has a creator, who adds it to the blockchain UZH Blockchain Center Blockchain &DLT Research Group Diversity in block creation is fundamental Block #...00 TX ... 01 1 coinbase @25 0x01 @25 1 … Who creates a block should be admissible to all… … there should not be prerrogatives nor imbalances UZH Blockchain Center Blockchain &DLT Research Group These systems require to be functioning on a decentralised manner 67 UZH Blockchain Center Blockchain &DLT Research Group Are these systems working in a decentralised manner? 68 UZH Blockchain Center Blockchain &DLT Research Group In the next lecture we will understand how does bitcoin work 69 UZH Blockchain Center Blockchain &DLT Research Group Now, the first hands-on 70 UZH Blockchain Center Blockchain &DLT Research Group Questions / Comments 71 UZH Blockchain Center Prof. Dr Claudio J. Tessone Blockchain & Distributed Ledger Technologies Group UZH Blockchain Center [email protected] https://www.blockchain-group.io https://www.blockchain.uzh.ch in/claudiotessone @uzh_blockchain Blockchain &DLT Research Group