IS4302 Blockchain and Distributed Ledger Technologies Week 8 Fall 2024 PDF

IS4228: Information Technology and Financial Services IS4302 Blockchain and Distributed Ledger Technologies Week 8 © Copyright National University of Singapore. All Rights Reserved. Intended Learning Outcomes 1. NFTs: Define, use cases, creation, tradi...

IS4228: Information Technology and Financial Services IS4302 Blockchain and Distributed Ledger Technologies Week 8 © Copyright National University of Singapore. All Rights Reserved. Intended Learning Outcomes 1. NFTs: Define, use cases, creation, trading. 2. Smart Contract Security: Identify risks, implement security patterns. 3. Blockchain Protocols: Compare models, understand consensus. 4. Interoperability: Define, evaluate solutions, cross-chain challenges. 5. Challenges: Recognize issues, plan for future developments. 2 Overview 1. Non Fungible Tokens 2. Smart Contract Design Patterns (Security) 3. Blockchain Protocols Design Patterns 4. Interoperability 3 Overview 1. Non Fungible Tokens 2. Smart Contract Design Patterns (Security) 3. Blockchain Protocols Design Patterns 4. Interoperability 4 What Are NFTs? Definition: NFTs are unique, non-interchangeable digital assets stored on a blockchain. Each NFT is associated with a specific identifier, making it different from any other token (unlike cryptocurrencies, which are fungible). Represent ownership of digital or physical items (art, music, collectibles, virtual real estate). Key Blockchain: Most NFTs are created and traded on the Ethereum blockchain using the ERC-721 standard. 5 Trading NFTs Buying and Selling: NFTs are bought and sold on decentralized marketplaces (e.g., OpenSea, Rarible). Ownership transfer is secured by the blockchain, ensuring a tamper-proof transaction history. Smart Contracts in Trading: Smart contracts facilitate the transaction by executing predefined terms (e.g., transfer of ownership and payment). Royalties: Some NFTs are programmed to pay creators royalties every time the NFT is resold, providing ongoing revenue. 6 NFT Use Cases Art and Collectibles: Digital artists sell unique works directly to buyers (e.g., Beeple’s $69M NFT sale). Gaming: Players own in-game assets (characters, weapons, skins) and can trade or sell them on NFT marketplaces. Virtual Real Estate: Platforms like Decentraland and The Sandbox allow users to buy, sell, and build on virtual land. Music and Entertainment: Musicians can release limited- edition albums or concert tickets as NFTs. 7 NFTs CryptoPunks, one of the first NFT on Ethereum, has created more than 10000 collectible punks (6039 males and 3840 females) and further promoted the ERC-721 standard to become popular. CryptoKitties officially put NFTs on notice, and hit the market in 2017 with the gamification of the breeding mechanics. Participants fiercely competed at high prices to auction the rare cats, and the highest price reaches more than 999 ETH (equally 3M USD). NBA Top Shot: an NFT trading platform used to buy/sell digital short videos of NBA moments. … 8 An example workflow of NFT system NFT Digitize. An NFT owner checks that the file, title, description are completely accurate. Then, s/he digitizes the raw data into a proper format. NFT Store An NFT owner stores the raw data into an external database outside the blockchain. S/he is also allowed to store the raw data inside a blockchain, despite this operation is gas-consuming. NFT Sign The NFT owner signs a transaction, including the hash of NFT data, and then sends the transaction to a smart contract. 9 An example workflow of NFT system NFT Mint&Trade After the smart contract receives the transaction with the NFT data, the minting and trading process begins. NFT Confirm Once the transaction is confirmed, the minting process completes. By this approach, NFTs will forever link to a unique blockchain address as their persistence evidence. 10 An example workflow of NFT system 11 Value of NFT Liquidity Uniqueness Social value Speculation … 12 Challenges Usability Challenges Slow confirmation High gas prices Data inaccessibility A cryptographic hash as the identifier, instead of a copy of the file, will be tagged with the token and then recorded on the blockchain to save the gas. More generally, oracle problem Legal pitfalls Taxable property issues NFT Interoperability (cross-chain) … 13 NFTs Overview: Unique Ownership: NFTs represent a groundbreaking way to establish and verify ownership of digital assets. Technological Foundation: Built on blockchain and smart contracts, NFTs are evolving as a powerful tool for creators, gamers, and businesses. Challenges Ahead: High gas fees, environmental impact, and legal ambiguities need to be addressed to ensure sustainable growth. Future Outlook: As blockchain technology evolves (Layer 2, PoS), NFTs will likely expand into new industries, including finance, identity, and virtual worlds. 14 Overview 1. Non Fungible Tokens 2. Smart Contract Design Patterns (Security) 3. Blockchain Protocols Design Patterns 4. Interoperability 15 Overview Some commonly used patterns in smart contracts Authorization Action and control Lifecycle Maintenance Security 16 Mutex (Mutual exclusion) Problem: Re-entrancy attack When a contract calls another contract, it hands over control to that other contract. The called contract can then, in turn, re-enter the contract by which it was called and try to manipulate its state or hijack the control flow through malicious code. 17 Mutex Example of an insecure contract 18 Mutex Attacking the insecure contract 19 Mutex Solution: Utilize a mutex to hinder an external call from re- entering its caller function again. 20 Emergency Stop Problem: Since a deployed contract is executed autonomously on the Ethereum network, there is no option to halt its execution in case of a major bug or security issue. Solution: Incorporate an emergency stop functionality into the contract that can be triggered by an authenticated party to disable sensitive functions. 21 Emergency Stop 22 Speed Bump Problem: The simultaneous execution of sensitive tasks by a huge number of parties can bring about the downfall of a contract. Solution: Prolong the completion of sensitive tasks to take steps against fraudulent activities. Contract sensitive tasks are slowed down on purpose, so when malicious actions occur, the damage is restricted and more time to counteract is available. 23 Speed Bump 24 Speed Bump 25 Rate limit Problem: A request rush on a certain task is not desired and can hinder the correct operational performance of a contract. Solution: Regulate how often a task can be executed within a period of time. 26 Rate limit 27 Balance limit Problem: There is always a risk that a contract gets compromised due to bugs in the code or yet unknown security issues within the contract platform. Solution: Limit the maximum amount of funds at risk held within a contract. cannot prevent the admission of forcibly sent Ether, e.g. as beneficiary of a selfdestruct(address) call, or as recipient of a mining reward. 28 Balance limit 29 Overview 1. Non Fungible Tokens 2. Smart Contract Design Patterns (Security) 3. Blockchain Protocols Design Patterns 4. Interoperability 30 Design Taxonomy of Blockchain Systems Main Dimensions: Storage & Computation, Configuration, Decentralization Storage & Computation: Item Data: Stored off-chain or on-chain (Bitcoin, Ethereum). Off-chain Options: Use of IPFS and Storj for efficient storage. Architectural Configurations: Blockchain Scope: Public, Consortium, Private. Data Structures: GHOST, BlockDAG, Segregated Witness (SegWit). 31 Design Taxonomy of Blockchain Systems Main Dimensions: Storage & Computation, Configuration, Decentralization Storage & Computation: Item Data: Stored off-chain or on-chain (Bitcoin, Ethereum). Off-chain Options: Use of IPFS and Storj for efficient storage. Architectural Configurations: Blockchain Scope: Public, Consortium, Private. Data Structures: GHOST, BlockDAG, Segregated Witness (SegWit). 32 Storage and Computation Three main components Item Data Item Collection Computation 33 Item Data Where is the data is used for? Smart contracts variables Data Storage Images Log data 34 Item Data – On Chain Bitcoin Originally Bitcoin allowed the storing of small amounts of data (40-80 bytes) in “OP_Return script” for about $3- 8 each. This was later deprecated as the core devs felt that it created confusion and bloated the Bitcoin UTXO database 35 Item Data – On Chain Ethereum In smart contracts every transaction has a fixed cost of 21,000 gas, and every non-zero byte of data costs an additional 68 gas. Data can also be stored as log events. Logged data is stored in log topics which cost 21,375 gas, where every byte costs an additional 8 gas. 36 Item Data – Off Chain Commonly Raw data is stored off-chain Only metadata, hashes of raw data, and small critical data is stored on chain 37 Item Data – Off Chain Data can be stored in private clouds on client’s infrastructure or in public storae. P2P data storage options: IPFS and Storj Designed to be friendly to blockchain IPFS usage is free if you provide storage space for hosting data Storj costs US$0.015GB/month Data is replicated automatically or based on how often users access it 38 Item Data – Off Chain 39 IPFS – Video https://youtu.be/k1EQC7tdh70?si=LePqswFZYTw5bZA7&t= 22 40 Architectural Design Configurations Considerations Scope: Public, Consortium, Private Data Structure: Chains, DAGs, etc. Consensus Protocols: PoW, PoS, etc. 41 Blockchain Scope: Public, Consortium, or Private 42 Blockchain Scope: Public, Consortium, or Private Public: Free entry to use or validate/mine Consortium: Designated set of validators Used across multiple organizations or multiple divisions in an organization Private One designated validator node 43 Blockchain Scope: Public, Consortium, or Private 44 Blockchain Scope: Public, Consortium, or Private Public: Free entry to use or validate/mine Consortium: Designated set of validators Used across multiple organizations or multiple divisions in an organization Private One designated validator node 45 Public Blockchain Best for: Open and transparent applications where anyone can participate. Examples: Cryptocurrencies (like Bitcoin, Ethereum), decentralized finance (DeFi) platforms. Use Cases: Decentralized Applications (DApps): Where transparency and immutability are crucial. Public Data Sharing: When you want to enable broad access and visibility to information. Pros: High transparency, strong security through decentralized consensus. Cons: Lower transaction speed, high energy consumption. 46 Consortium Blockchain Best for: Collaborative efforts between multiple organizations that require shared control. Examples: Interbank payment systems, supply chain consortia, healthcare data sharing. Use Cases: Business Partnerships: Where multiple entities need a secure and private way to interact and share data. Governance: When controlled participation is needed but still benefits from decentralized principles. Pros: Faster transactions than public blockchains, reduced energy consumption, controlled access. Cons: Less decentralized than public blockchains, relies on the trust between participants. 47 Private Blockchain Best for: Internal use within a single organization with specific needs for control and privacy. Examples: Corporate data management, internal audit systems, logistics tracking. Use Cases: Enterprise Solutions: Where data privacy and speed are essential, and trust is not a major issue. Regulated Environments: Industries that must adhere to strict data security and compliance standards. Pros: High transaction speed, low energy consumption, full control over access and modifications. Cons: Less secure against external attacks, lacks the transparency of public blockchains. 48 Scope Summary Public Blockchain: Best for transparency and open participation. Consortium Blockchain: Ideal for collaboration between trusted partners. Private Blockchain: Most suitable for secure, internal use within a single organization. 49 Data Structures Blockchains GHOST BlockDAG Segregated Witness 50 Blockchain – Original Design Consensus Guaranteed by Longest Chain heuristic 51 Blockchain Trilemma 52 Greedy Heaviest-Observed Sub-Tree (GHOST) Allows concurrent work to be performed, allowing shorter inter-block times, thus increasing throughput Each block refers to 1-2 “uncle blocks” The “heaviest” branch is considered valid 53 Block Directed Acyclic Graph (DAG) Allows non-conflicting transactions from uncle blocks to be incorporated into the main chain. Selection rules can decide to use heaviest subtree or longest chain 54 Block Directed Acyclic Graph (DAG) Allows more concurrent processing and asynchronous processing, increasing the throughput as more miners/validators join. 55 Block Directed Acyclic Graph (DAG) Hedera hashgraph is one of the popular example of DAG which uses gossip protocol which ensure the highest standard of security to prevent any malicious attacks. 56 Block Directed Acyclic Graph (DAG) Hedera hashgraph is one of the popular example of DAG which uses gossip protocol which ensure the highest standard of security to prevent any malicious attacks. Gossip protocol: when an event occurs, the node transmits data to it to two other random nodes, which transmit them to two other nodes (in the total already four), and so on. This leads to an exponential spread of information throughout the network. “Gossip about Gossip” consensus algorithm: Each node on the network shares all of its information about which node, when and with whom it communicated Gets around the problem of asynchronous execution discussed in FT5003 discussion on Distributed Systems. 57 Segregated Witness (SegWit) Signatures (witnesses) were separated from the input fields of the blocks 58 Segregated Witness (SegWit) Signatures (witnesses) were separated from the input fields of the blocks The first part of a transaction contains the wallet addresses of the sender and receiver and the second part contains the “witness data” containing transaction signatures. SegWit removes the “witness data” from the main block, therefore notably reducing transaction size. This allows more transactions per block Implemented as an upgrade to Bitcoin First implemented in Litecoin, and later Bitcoin Disagreements about such upgrades also pushed the hard fork of Bitcoin Cash in 2018 59 Overview 1. Non Fungible Tokens 2. Smart Contract Design Patterns (Security) 3. Blockchain Protocols Design Patterns 4. Interoperability 60 Cross Chain Interoperability Importance Wide proliferation of various chains with different features Desire to move assets or information from one chain to another Desire to interface with traditional web2 and company databases Benefits Customizable Web3 Services Allows “mix and match” lego pieces Creates more decentralized overall ecosystem 61 Cross Chain Interoperability – Wide Ecosystem 62 Cross Chain Interoperability Layer 1s and Layer 2s Most Layer 1s lack features that support cross-chain interoperability. Sidechains are separate networks that each have their own consensus mechanisms, security parameters, and tokens Polkadot and Cosmos were designed from the ground up to be comprehensive cross-chain infrastructure solutions to establish a “network of networks” 63 Cosmos https://youtu.be/jj299iVoKwc?si=xuajOiTihgc6v0qd&t=45 64 Cross Chain Interoperability Oracles Chainlink and API3 feed off-chian data into blockchain enabled smart contracts to allow each chain to “see” what is going on in other chains and ensure a common source of truth 66 Cross Chain Interoperability Bridges and Swaps Bridges: enable ownership to be locked on one chain while an identical asset is minted on another chain and sent to an address owned by the original owner. Atomic swaps: use smart contracts to automatically exchange tokens from different chains 67 Decentralized Exchanges https://www.youtube.com/watch?v=2tTVJL4bpTU 68 Summary Non-Fungible Tokens (NFTs) Blockchain Protocols 1. Unique digital assets on 1. Enhancing performance blockchain. and transaction efficiency. 2. Use cases: art, gaming, 2. Models: GHOST, SegWit, virtual real estate. BlockDAG. Smart Contract Design Interoperability 1. Focus on security: Mutex, 1. Cross-chain solutions: Emergency Stop. Polkadot, Cosmos. 2. Implement design patterns 2. Linking different to prevent attacks. blockchains for a unified ecosystem. 69 Thank you! 70