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Blockchains and Distributed Ledger Technology

Kenji Saito
December 05, 2016

Blockchains and Distributed Ledger Technology

Slides I used for a guest lecture at "Introduction to the Internet" class at SFC (Shonan Fujisawa Campus), Keio University, on December 5, 2016

Kenji Saito

December 05, 2016
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  1. What if promises can be fixed in the air?
    Blockchains and Distributed Ledger Technology
    ∼ A True Story ∼
    Kenji Saito
    Senior Researcher, Keio Research Institute at SFC, Keio University
    [email protected]
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.1/29

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  2. Self Introduction
    Kenji Saito
    Senior Researcher, Keio Research Institute at SFC, Keio University (Murai Lab)
    CSO (Chief Science Officer), BlockchainHub Inc.
    Representative Director, Academy Camp
    Bio
    1988∼1997 : Hitachi Solutions (“Hitachi Software” then)
    1993 : Received M.Eng in Computer Science from Cornell University
    2006 : Received Ph.D. in Media and Governance from Keio University
    Conducting research in P2P and digital currencies for over 16 years at Graduate School of
    Media and Governance, Keio Research Institute at SFC, etc., in Keio University
    Representing Academy Camp for children in Fukushima since 2011
    ⇒ One and the same in my mind
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.2/29

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  3. First of All, A Question
    To which we will return in the end
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.3/29

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  4. Q. What would you do if digital promises can be
    fixed in any defined (cyber)space?
    The promises can be viewed and verified by anyone in such space
    If you can provide a proof that you have a right to do so, you can have the
    promises automatically executed
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.4/29

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  5. Overview of Blockchain
    A blockchain is a democratized newspaper
    It is a promise-fixation device in the air
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.5/29

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  6. What is a Blockchain?
    A chain of blocks (so it is a bad name for a concept)
    Block ← A collection of transactions
    Transaction (TX) ← Description of a state transfer (e.g. money transfer)
    Usually associated with rights ⇒ Promise
    A publishing platform (substituting newspaper)
    “A timestamp server works by taking a hash of a block of items to be timestamped and
    widely publishing the hash, such as in a newspaper or Usenet post”
    “To implement a distributed timestamp server on a peer-to-peer basis, we will need to
    use a proof-of-work system similar to Adam Back’s Hashcash, rather than newspaper
    or Usenet posts”
    – Satoshi Nakamoto (2008)
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.6/29

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  7. Why Newspaper?
    Bitcoin’s Question
    “How do I create a system where nobody can stop me spending my own
    money?” (according to R3 Corda)
    Bitcoin’s Answer
    Transfer digital coins in a P2P manner
    Use digital signatures (to ensure verifiability)
    Need to prevent “double spending”
    ⇒ Put proofs (digests) of transactions on a “newspaper” that crowd publish
    Blockchain is a “Medium for Public Notice” by crowd, for crowd
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.7/29

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  8. Overview of Blockchain (in case of Bitcoin)
    1. Each “miner” collects transaction data from past around 10 minutes, put them in a block, and participate in a lottery
    2. If they win, they broadcast the block
    3. Each miner, if they admit that the received block is the final block in the chain, goes back to 1 to continue
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.8/29

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  9. Understanding Blockchains or DLT
    Blockchain (or Distributed Ledger Technology) is a “promise-fixation device in the air”
    to (try to) manifest the End-to-End philosophy of the Internet in controlling digital assets
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.9/29

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  10. Possibilities of Blockchains
    Why they can be disruptive
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.10/29

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  11. Applications that are Talked About (by Hyperledger)
    Financial Assets
    Direct access (without intermediaries), settlement in agreed real-time, business rules, control confidentiality
    Corporate Actions
    Real-time execution with controlled confidentiality of stock split, capital reduction, merger, equity transfer, etc.
    Supply Chains
    Track sourcing of raw materials, record and search all aspects of production, storage and sale
    Master Data Management
    Authorized parties can submit changes, and the designated validators accept those changes
    Sharing Economy and IoT (Internet of Things)
    Smart cities/towns, transportation, healthcare/fitness, retailing, construction, education, etc., while their stake
    holders do not always trust one another (implicitly real-time problems)
    Those features Bitcoin Blockchain is not good at are written in red
    Among the problems we want to solve, we see problems unsolved by the technology
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.11/29

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  12. Actual Applications So Far
    Monetary Transfer
    E.g. Bitcoin,
    . . .
    Monetary transfer that bypasses banking networks
    Huge impact by itself
    Proof of Existence
    E.g. Proof of Existence (name of a service)
    Embed arbitrary digests in Bitcoin Blockchain
    Proof that they existed in their exact forms
    Within the intention of the original design (“newspaper” substitute)
    Name Service
    E.g. Namecoin
    Fix name-value pair in the air
    Only within the digital domain
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.12/29

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  13. By the way,
    What are companies remembered in
    human history?
    Examples?
    Will they still appear in history textbooks in year 3000?
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.13/29

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  14. Companies Remembered in Human History?
    Example :
    British East India Company (1600)
    One of the first join-stock companies
    Companies remembered in human history today are the ones that began
    corporations as we know today
    What are the next companies to be remembered in human history?
    Ones that end corporations as we know today
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.14/29

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  15. DAO (general noun)
    Distributed Autonomous Organization
    Which is automatically administered
    E.g. Bitcoin
    Suppose that users are shareholders, coins are stocks and miners are
    employees
    . . .
    Then Bitcoin’s program code describes how to administer the organization
    that transfer stocks
    If we generalize, how we form and enforce “laws” will change
    Computer software has such a power anyways
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.15/29

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  16. Earth-Scale Operating System (2007)
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.16/29

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  17. Earth-Scale OS as a Platform
    Makes the monetary financial system obsolete
    Includes settlement systems
    Includes programming languages and environments
    Accounting of resources on the earth, including human resources
    Can define new “laws”
    Platform on which people can start new activities
    For profit-making organizations, governments and NPO/NGOs
    Blockchains are not unrelated with building such a platform
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.17/29

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  18. Ethereum
    Vitalik Buterin, “Ethereum White Paper: A NEXT GENERATION SMART
    CONTRACT & DECENTRALIZED APPLICATION PLATFORM”
    An enhanced blockchain
    With a programming language (virtual machine language)
    Application platform for smart contracts
    Smart contract :
    A mechanism to automatically transfer digital assets according to
    predefined rules
    Designed to make the monetary financial system obsolete
    To be a platform for many different DAOs
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.18/29

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  19. Impossibilities and Problems of Blockchains
    A transient technology with trials and errors
    Lots of new technology are getting tried
    Unusable in society unless evolution can be governed
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.19/29

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  20. Protection by Proof Of Work?
    Transactions are immutable because of digital signatures, but they may be removed from blocks
    Can “Proof Of Work” deter falsification?
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.20/29

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  21. Hash-Rate for 2 Years before January 2016
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.21/29

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  22. Reality vs. Blockchains
    Thought experiment
    Suppose we create a service where a drone carries drinks, and drops
    them when paid by Bitcoin
    When does the drone drop a drink?
    Reality that goes in real-time and the blockchain are so different
    However, the business operator can decide to drop the drink as soon as
    they sense the payment, as part of business design
    Applications can be disruptive as long as businesses can make use of
    social infrastructure such as insurances
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.22/29

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  23. The DAO Incident (Exposed Problem of Governance)
    Distributed autonomous investment fund “The DAO” on Ethereum
    3.6 million ETH (5∼6 billion yen) were stolen by recursively calling Split (Jun. 17)
    Options
    Do nothing
    Soft Fork (freeze the account)
    Stolen fund is not returned
    Hard Fork (rewrite history; Who controls the present controls the past)
    Worst manifestation of “ONENESS Trap”
    Community chose “Hard Fork” (Jul. 20)
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.23/29

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  24. ONENESS Trap
    Bitcoin-like blockchain does not work unless “The world is one”
    Does not work under partitioned networks by natural disasters or political
    changes
    Governance is difficult for evolving technology
    Cannot try something different locally and later apply to the whole
    Impossibility of Governance :
    Consensus of the “whole” must be maintained, but the “whole” cannot be defined
    ⇒ Paradoxically invoking authoritarian power
    Weakness by structure that disallows decentralization
    Therefore, truly decentralized “promise-fixation device in the air” has big
    possibilities
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.24/29

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  25. Overview of Technological Problems
    Evaluation of 3 layers of blockchain technology
    1. UTXO data structure with digital signatures (Ledger Structure)
    Ends have control and anyone can verify ⇒ Useful (no confidentiality)
    2. Hash-chained blocks (Distributed Timestamp)
    Basis of proof by ordering events ⇒ Not as robust as thought
    3. Nakamoto Consensus (Consensus Mechanism)
    Trial for finalization of transactions ⇒ Cannot synchronize with reality
    Solutions to these problems, and pursuit of applications assuming that those
    problems will be solved, must go side by side
    Both require more people to join
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.25/29

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  26. Think About Questions
    Satoshi Nakamoto’s question
    “How do I create a system where nobody can stop me spending my own
    money?”
    ⇓ A lemma
    “How do we fix promises in the air?” ← Blockchain is an incomplete answer
    ⇑ Applicable to?
    “How do we provide proofs of existence?”← “OP_RETURN hack”
    Only within digital domain
    ⇒ We need new and right questions
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.26/29

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  27. Example : R3 Corda
    A new distributed ledger technology
    To manage financial agreements among institutions
    Using industry-standard tools
    Interoperability, incremental deployment, confidentiality
    Corda’ question :
    “How do I create a system where what I see is what you see and we both
    know that we see the same thing and we both know that this is what has been
    reported to the regulator?”
    Starting with a different question from Bitcoin
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.27/29

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  28. Now, Back to Our Question
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.28/29

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  29. Q. What would you do if digital promises can be
    fixed in any defined (cyber)space?
    The promises can be viewed and verified by anyone in such space
    If you can provide a proof that you have a right to do so, you can have the
    promises automatically executed
    Blockchains and Distributed Ledger Technology – A True Story – 2016-12-05 – p.29/29

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