Cryptocurrency - Can Micro Incentives Yield Macro Trust ?
In this module, we will consider Bitcoin and other Cryptocurrency. We will review this first wave application of crypto infrastructure and consider the question of whether Micro Incentives Yield Macro Trust ?
@ computational professor daniel martin katz danielmartinkatz.com BLOCKCHAIN, CRYPTOCURRENCY AND LAW professor nelson rosario CRYPTOCURRENCY - CAN MICRO INCENTIVES YIELD MACRO TRUST ? nelsonmrosario.com @ nelsonmrosario BLOCKCHAINLAWCLASS.COM
DANIEL MARTIN KATZ E D U | I L L I N O I S T E C H + S TA N F O R D C O D E X B LO G | C O M P U TAT I O N A L L E GA L S T U D I E S . C O M PAG E | DA N I E L M A R T I N K AT Z . C O M C O R P | L E X P R E D I C T. C O M NELSON ROSARIO B LO G | L AWO F C RY P TO C U R R E N C Y. C O M PAG E | N E L S O N M RO S A R I O . C O M F I R M | S M O L I N S K I RO S A R I O L AW P. C . BLOCKCHAINLAWCLASS.COM L A B | T H E L AW L A B . C O M E D U | I L L I N O I S T E C H - C H I C AG O K E N T L AW
“...LIMITED ENTRIES IN A DATABASE NO ONE CAN CHANGE WITHOUT FULFILLING SPECIFIC CONDITIONS.” CRYPTOCURRENCY (WORKING DEFINITION) BLOCKCHAINLAWCLASS.COM
CRYPTOCURRENCY IS THE FIRST VERIFIABLE UNIQUE DIGITAL PROPERTY (HERE ENTRIES IN A DISTRIBUTED LEDGER STORED ON A DECENTRALIZED NETWORK) BLOCKCHAINLAWCLASS.COM
BLOCKCHAINLAWCLASS.COM UNSPENT TRANSACTION OUTPUT MODEL ACCOUNT MODEL USES A BLOCKCHAIN EVERY TRANSACTION CONSISTS OF UNSPENT TRANSACTION OUTPUTS SMART CONTRACTS ARE LIMITED MOSTLY TO LOCKING UNLOCKING FUNDS USES A BLOCKCHAIN TWO TYPES OF ACCOUNTS EXTERNALLY FACING HOLDS CRYPTO CONTRACT ACCOUNTS SMART CONTRACTS SMART CONTRACTS ARE EXECUTED BY ALL NODES ON THE NETWORK
BLOCKCHAINLAWCLASS.COM SOME THINGS TO KNOW ABOUT BITCOIN WHY ARE TRANSACTIONS SECURE ONCE ADDED? HOW ARE TRANSACTIONS CONSTRUCTED? HOW ARE TRANSACTIONS COMMUNICATED? HOW ARE TRANSACTIONS VALIDATED? HOW ARE TRANSACTIONS ADDED?
LETS SEE HOW NELSON MIGHT TRANSFER FOUR BITCOINS TO DAN … BLOCKCHAINLAWCLASS.COM DAN NELSON TRANSACTION MESSAGE FROM: NELSON (3Nxwen… TO: DAN (18rnfoQgGo… AMOUNT: 4 BTC
BLOCKCHAINLAWCLASS.COM TRANSACTIONS ARE SENT TO THE HASH OF A PUBLIC KEY, OR TRANSACTIONS ARE SEND TO PUBLIC KEY OF THE RECIPIENT (DIFFERENCE BETWEEN THE TWO IS FOR SIZE PURPOSES)
BLOCKCHAINLAWCLASS.COM WHAT IS A TRANSACTION IN BITCOIN? “WE DEFINE AN ELECTRONIC COIN AS A CHAIN OF DIGITAL SIGNATURES. EACH OWNER TRANSFERS THE COIN TO THE NEXT BY DIGITALLY SIGNING A HASH OF THE PREVIOUS TRANSACTION AND THE PUBLIC KEY OF THE NEXT OWNER AND ADDING THESE TO THE END OF THE COIN. A PAYEE CAN VERIFY THE SIGNATURES TO VERIFY THE CHAIN OF OWNERSHIP.” SATOSHI NAKAMOTO BITCOIN.ORG/BITCOIN.PDF
BLOCKCHAINLAWCLASS.COM TRANSACTIONS ARE BROADCAST TO ANY NODE ON THE BITCOIN NETWORK A NODE ON THE BITCOIN NETWORK RECEIVES THE TRANSACTION THE NODE VALIDATES THE TRANSACTION AND PROPAGATES IT TO THE NODES IT IS CONNECTED EVERY NODE INDEPENDENTLY VALIDATES ALL TRANSACTIONS THEY RECEIVE
BITCOIN MINING PROOF OF WORK MAKES THE SYSTEM GO ROUND MINERS SOLVE A MATHEMATICAL PUZZLE MINERS ARE INCENTIVIZED WITH A COIN REWARD BLOCKCHAINLAWCLASS.COM
BITCOIN MINING MINERS GATHER VALID TRANSACTIONS AND FORM BLOCKS ONCE THEY HAVE HOWEVER MANY TRANSACTIONS THEY WANT THEY WILL START TO SOLVE THE CRYPTOGRAPHIC PUZZLE BLOCKCHAINLAWCLASS.COM
BITCOIN MINING MINERS SPEND COMPUTATIONAL CYCLES TO GUESS A NONCE NUMBER THE NETWORK IS CONFIGURED SO THAT SOMEONE SHOULD SUCCESSFULLY GUESS A NONCE ONCE EVERY 10 MINUTES BLOCKCHAINLAWCLASS.COM NOTE: A NONCE IS AN ARBITRARY NUMBER THAT CAN BE USED JUST ONCE IN A CRYPTOGRAPHIC COMMUNICATION ( HTTPS://EN.WIKIPEDIA.ORG/WIKI/ CRYPTOGRAPHIC_NONCE )
BITCOIN MINING THE DIFFICULTY OF THE PUZZLE CHANGES EVERY 2016 BLOCKS BASED UPON A BACKWARD LOOKING FORMULA DIFFICULTY = DIFFICULTY_1_TARGET / CURRENT_TARGET (TARGET IS A 256 BIT NUMBER) BLOCKCHAINLAWCLASS.COM https://en.bitcoin.it/wiki/Difficulty
BITCOIN MINING AVERAGE TIME TO FIND A BLOCK CAN BE APPROXIMATED BY CALCULATING: TIME = DIFFICULTY * 2**32 / HASHRATE ONCE A MINER GUESSES A CORRECT NONCE THEY TRANSMIT IT WITH THEIR NEW BLOCK TO THE NETWORK BLOCKCHAINLAWCLASS.COM https://en.bitcoin.it/wiki/Difficulty
BLOCKCHAINLAWCLASS.COM JUST LIKE TRANSACTIONS MINERS VALIDATE BLOCKS IN BITCOIN, THE LONGEST BLOCK WINS THE ASSUMPTION IS THAT THE LONGEST BLOCK REPRESENTS THE MOST PROOF OF WORK BITCOIN CONSENSUS
BLOCKCHAINLAWCLASS.COM ETHEREUM ETHEREUM HAS TRANSACTIONS THAT INVOLVE “ETHER” (THE NATIVE TOKEN TO THE ETHEREUM NETWORK) ETHEREUM USES ACCOUNTS AT PRESENT ETHEREUM USES PROOF OF WORK TO ACHIEVE CONSENSUS
https://www.coindesk.com/a-multi-million-dollar-bet- ethereums-proof-of-stake-isnt-coming-soon “I DON’T KNOW IF [ETHEREUM] WILL OR WILL NOT SWITCH TO PROOF-OF- STAKE … PROOF-OF-STAKE HAS A LOT OF PROBLEMS.” CHEN MIN CEO AND FOUNDER OF LINZHI BLOCKCHAINLAWCLASS.COM
BLOCKCHAINLAWCLASS.COM ETHEREUM ACCOUNTS AN EXTERNALLY OPERATED ACCOUNT IS CONTROLLED BY PRIVATE KEY HAS A BALANCE DENOTED IN ETHER A CONTRACT ACCOUNT STORES CODE HAS A BALANCE DENOTED IN ETHER
BLOCKCHAINLAWCLASS.COM ETHEREUM ACCOUNTS ALL THE ACCOUNTS ON ETHEREUM ARE REPLICATED ACROSS ALL NODES IN THE NETWORK AND TOGETHER FORM THE STATE OF THE NETWORK
BLOCKCHAINLAWCLASS.COM ETHEREUM ACCOUNTS SMART CONTRACT ACCOUNTS IN ETHEREUM EXECUTE ACCORDING TO TRIGGERING CONDITIONS TYPICALLY THE CODE EXECUTES WHEN ETHER IS SENT TO THE ACCOUNT WHERE THE CONTRACT CODE IS STORED CODE IS DISTRIBUTED ACROSS THE ETHEREUM NETWORK ABLE TO BE EXECUTED ETHER IS USED AS GAS TO FUEL THE EXECUTION OF SMART CONTRACTS
JUST SOME OF THE GOVERNANCE RULES LEVEL OF ANONYMITY PROOF OF WORK VS PROOF OF STAKE EXPLICIT MONETARY POLICY ENCRYPTION (SHA 256, LYRA2RE, ETC.) ‘SMART’ CONTRACT FUNCTIONALITY TRANSACTION PROCESSING SPEED CONSENSUS MECHANISM BLOCKCHAINLAWCLASS.COM
BLOCKCHAINLAWCLASS.COM CRYPTOCURRENCY WALLETS ‘WALLETS ARE PIECES OF SOFTWARE THAT HELP MANAGE THE CONTROL OF CRYPTOCURRENCY’ https://blockgeeks.com/guides/cryptocurrency-wallet-guide/
BLOCKCHAINLAWCLASS.COM CRYPTOCURRENCY WALLETS AS DISCUSSED - WHEN YOU OWN CRYPTOCURRENCY YOU OWN A PAIR OF KEYS THAT ALLOWS YOU TO SEND AND RECEIVE THAT CRYPTOCURRENCY WALLETS MANAGE THE KEYS FOR YOU https://blockgeeks.com/guides/cryptocurrency-wallet-guide/
BLOCKCHAINLAWCLASS.COM CRYPTOCURRENCY EXCHANGES EXCHANGES ARE BUSINESSES WHERE PEOPLE CAN TRADE FIAT CURRENCY FOR CRYPTOCURRENCY USUALLY REQUIRE EXTENSIVE ONBOARDING TO FIGHT MONEY LAUNDERING SIMILAR TO EXISTING FINANCIAL EXCHANGES
BLOCKCHAINLAWCLASS.COM CRYPTOCURRENCY EXCHANGES (VOLUMES ARE NOW LOWER THAN IN 3/2018) https://www.bloomberg.com/news/articles/ 2018-03-05/crypto-exchanges-raking-in- billions-emerge-as-kings-of-coins
BLOCKCHAINLAWCLASS.COM https://bitcoinmagazine.com/articles/report-crypto- exchanges-saw-trading-volumes-plummet-january/ JANUARY 2019 WAS A BAD MONTH FOR TRADE VOLUME
BLOCKCHAINLAWCLASS.COM CRYPTOCURRENCY ECOSYSTEM OTHER BUSINESSES PROVIDING SERVICES ACCOUNTING LAWYERS COMPLIANCE SUCH AS KNOW YOUR CUSTOMER/ ANTI-MONEY LAUNDERING
BLOCKCHAINLAWCLASS.COM PROOF OF WORK “PoW idea was originally published by Cynthia Dwork and Moni Naor back in 1993, but the term “proof of work” was coined by Markus Jakobsson and Ari Juels in a document published in 1999. Proof of work [combined with the other Blockchain building blocks] is maybe the biggest idea behind the Nakamoto’s Bitcoin white paper – published back in 2008 – because it allows trustless and distributed consensus.” https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/
BLOCKCHAINLAWCLASS.COM STEPS IN A TRANSACTION ‘Transactions are bundled together into what we call a block; Miners verify that transactions within each block are legitimate; To do so, miners should solve a mathematical puzzle known as proof- of-work problem; A reward is given to the first miner who solves each blocks problem; Verified transactions are stored in the public blockchain’ https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/
‘This “mathematical puzzle” has a key feature: asymmetry. The work, in fact, must be moderately hard on the requester side but easy to check for the network. “All the network miners compete to be the first to find a solution for the mathematical problem that concerns the candidate block, a problem that cannot be solved in other ways than through brute force so that essentially requires a huge number of attempts.’ BRUTE FORCE COMPUTING IS THE ‘WORK’ AND IT NECESSARY TO SOLVE THE GIVEN CRYPTO PROBLEM https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/ BLOCKCHAINLAWCLASS.COM
BLOCKCHAINLAWCLASS.COM PROOF OF STAKE https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/ BLOCKCHAINLAWCLASS.COM “Proof of stake first idea was suggested on the bitcointalk forum back in 2011, but the first digital currency to use this method was Peercoin in 2012, together with ShadowCash, Nxt, BlackCoin, NuShares/NuBits, Qora and Nav Coin. Unlike the proof-of-Work, where the algorithm rewards miners who solve mathematical problems with the goal of validating transactions and creating new blocks, with the proof of stake, the creator of a new block is chosen in a deterministic way, depending on its wealth, also defined as stake.”
BLOCKCHAINLAWCLASS.COM WHY IS PROOF OF STAKE CHALLENGING? https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/ BLOCKCHAINLAWCLASS.COM There is no mining award but rather just transaction fees … Sometimes PoS system participants are thus called forgers Instead, the underlying PoS algorithm must be as bulletproof as possible because, without especially penalties, a proof of stake- based network could be cheaper to attack. To solve this issue, Buterin created the Casper protocol, designing an algorithm that can use the set some circumstances under which a bad validator might lose their deposit.
BLOCKCHAINLAWCLASS.COM WHY IS PROOF OF STAKE CHALLENGING? https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/ BLOCKCHAINLAWCLASS.COM To solve this issue, Vitalik Buterin created the Casper protocol, designing an algorithm that can use the set some circumstances under which a bad validator might lose their deposit. He explained: “Economic finality is accomplished in Casper by requiring validators to submit deposits to participate, and taking away their deposits if the protocol determines that they acted in some way that violates some set of rules (‘slashing conditions’).” Notwithstanding significant issues remain with PoS
BLOCKCHAINLAWCLASS.COM GOVERNANCE FORKS ATTACKS ON BLOCKCHAINS KEY MANAGEMENT SCALING USER EXPERIENCE PUMP AND DUMP SCHEMES ADDITIONAL OUTSTANDING ISSUES IN CRYPTO
DANIEL MARTIN KATZ E D U | I L L I N O I S T E C H + S TA N F O R D C O D E X B LO G | C O M P U TAT I O N A L L E GA L S T U D I E S . C O M PAG E | DA N I E L M A R T I N K AT Z . C O M C O R P | L E X P R E D I C T. C O M NELSON ROSARIO B LO G | L AWO F C RY P TO C U R R E N C Y. C O M PAG E | N E L S O N M RO S A R I O . C O M F I R M | S M O L I N S K I RO S A R I O L AW P. C . BLOCKCHAINLAWCLASS.COM L A B | T H E L AW L A B . C O M E D U | I L L I N O I S T E C H - C H I C AG O K E N T L AW
@ computational professor daniel martin katz danielmartinkatz.com BLOCKCHAIN, CRYPTOCURRENCY AND LAW professor nelson rosario CRYPTOCURRENCY - BITCOIN AND BEYOND nelsonmrosario.com @ nelsonmrosario BLOCKCHAINLAWCLASS.COM
danielkatz
nayuts
hakubishin3
mottox2
takasehideki
mtx2s
coconala_engineer
wakamsha
lemiorhan
nagix
colopl
aoshun7
orgachem
dougneiner
smashingmag
garrettdimon
addyosmani
eileencodes
kneath
tammyeverts
jcasabona
rocio
bermonpainter
reverentgeek
zenorocha