Slides I used for FinTech - Financial Innovation and the Internet 2022 Fall at Graduate School of Business and Finance, Waseda University on December 16, 2022.
Sending money — generated by Stable Diffusion. FinTech — Financial Innovation and the Internet 2022 Fall Lecture 11 : Further Smart Contracts Kenji Saito, Graduate School of Business and Finance, Waseda University Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.1/25
This class is recorded 7 out of 15 lectures will be online only. When online, Camera ON is recommended, but not required You do need to speak often anyway (we are going to have a lot of dialogue) We will use breakout rooms a lot, but those won’t be recorded unless you do it yourselves (need to be allowed) Keep your Zoom client updated! We might use latest features The recordings could be used for research on (online) learning Transcribed for use and anonymized Will let you know when the necessity arises Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.2/25
The lecture slides can be found at : https://speakerdeck.com/ks91 Recording and chat text will be posted at Moodle and Discord Trial automatic transcriptions will be posted at Discord Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.3/25
Last Time, We Did . . . Assignment Review — Science Fiction Prototyping Smart Contracts and Ethereum — Brief Introduction Demonstration of Smart Contracts We switch a lot of content between the two weeks, and went with a lot of demonstrations last week This week, we will cover issues of blockchain in more depth Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.5/25
Today’s Topics Impossibility and Challenges of Blockchain Brief Introduction to Upgrading and Governance of Blockchain Technical Challenges of Blockchain Assignment Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.6/25
Impossibility and Challenges of Blockchain Transitional technology, in the process of trial and error In fact, a lot of new designs are being tested If we do not have governance for (or if we do not know how to accommodate) technological changes, we cannot use it in society Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.7/25
Hash Rate Transitions (Jan. 2009 - Nov. 2022) If malicious participants gain half of the hash rate, blockchain cannot be guaranteed to work correctly Risky in principle if the hashrate is doubled quickly → It has happened On the other hand, what if it doesn’t double rapidly? → Dilemma of providing room for malicious participants What if it suddenly halves? → Very risky in principle, and it also happened Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.8/25
The DAO Incident (uncovered governance challenges) The DAO, an autonomous decentralized investment fund built on Ethereum Split (fund split) was recursively called, and 3,600,000 ETH (5 to 6 billion yen) was stolen (2016/6/17) Choices Do nothing Soft fork (maintains compatibility → freezes the address of the thief) Funds are not returned Hard fork (No compatibility → rewrites history; who controls the present controls the past) Worst occurrence of “Oneness Trap” (described later) in a sense Community chose “hard fork” ! (executed on 2016/7/20) “Most interesting. Gravity’s silhouette remains, but the star and all its planets have disappeared. How can this be?” “Because someone erased it from the archive memory.” — from Star Wars: Episode II – Attack of the Clones So the incident never happened Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.9/25
Scaling Out Question There is one ATM that always has 10 people in line Sorry if you are in an advanced environment, and you don’t know what we are talking about (or even wonder what an ATM is) ;) What happens to the number of people in the queue if we add one ATM? Other conditions remain the same cf. Daisuke Yamazaki, “Rethinking Scaling Out” (in Japanese) http://www.slideshare.net/yamaz2/ss-58813038 Performance problems can be solved by adding a server ⇒ The system scales out Blockchain does not scale out in its bare form (because everyone makes and maintains a replica) Improvement is possible if you see it as a KVS (Key-Value Store) Because of the distributed KVS technology But you might lose autonomy Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.10/25
Scaling Out and Blockchain 7PMVNFPG%BUBUP1SPDFTT -PBEQFS/PEF #MPDLDIBJO 1SPQFSMZEFTJHOFEEJTUSJCVUFETZTUFN In blockchain, the cost of maintaining data structures rises linearly as transactions increase It does not scale out Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.11/25
Blockchain’s “Oneness Trap” It does not scale out Adding more nodes does not solve or mitigate performance challenges Must be “the world is one” to work System does not work correctly if the network is partitioned by a large-scale disasters or political change Difficulty of governance to advance technology You cannot “try something different partially, and if it works, apply it to the whole” Impossibility of governance : Agreement by the “whole” must be maintained, but the “whole” cannot be defined ⇒ Powered few changes the technology instead ⇒ Those are disadvantages of non-decentralized nature of blockchain Conversely, there are great expectations and potential for truly decentralized “record fixation device in the air” Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.12/25
Incentive Mismatch Ethereum cannot survive as an application platform if ETH as a currency crashes and declines Supported by validators’ motivation to get ETH When the value of ETH drops, validators withdraw Can people who want to run apps (smart contracts) buy ETH to maintain the price? If ETH’s market participants are primarily app users, may be . . . (but they aren’t) The design of the raw Bitcoin is goal-consistent, but . . . In other words, “Bitcoin cannot survive if BTC declines” would be fine But as proof applications such as Proof of Existence advance, similar problems arise Either way, the future of the system depends on the interests of the miners/validators ⇒ Need to separate application platforms from currency systems That is where the recent ledger technology is going, hopefully (because many still aren’t) Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.13/25
What is the True Worth of Blockchain? Roughly speaking, what’s the thing you can never do without blockchain? Ex1 : Digitizing the last will and testament (in a thought-experiment sense) After the death of the person, the private key used for the digital signature may no longer be a secret Can’t believe a notary saying, “it is as signed before the death” (possible collusion with malicious heir) Ex2 : Online banking passbook data as proof (for the liabilities of banks) If you download it as a CSV file, the data anyone can create is not considered as evidence Even with the digital signature of the bank, once the private key is leaked, the data can be created by anyone Prove “data digitally signed at cetain past date has not been tampered with” (instead of believing those who insist so) “The Last Will Test” is to ask them if they can do that with their blockchain A test to see if something that someone has been pitching as “it’s a blockchain” really makes sense An idea (hash-chain with proof of work) that may satisfy this true worth, combined with existing technologies around the idea is the Bitcoin blockchain Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.14/25
How Well Is It Realized Today? Is there a technology that can pass the “last will test”? Public blockchain may pass the test while the market value of the native currency is high Defense such that it would cost a lot to tamper with When the price of the native currency drops or crashes it becomes unreliable Private ledger systems in general only insist, so they do not pass the test Mostly, “blockchain made and operated by XXX Inc.” is meaningless ← please be careful We are building new technology to make it pass the test BBc-1 (Beyond Blockchain One; https://github.com/beyond-blockchain) (just an example) There is an inherent challenge of linkage between records and entities Includes areas that cannot be solved by engineering alone (does the public key really belong to the person?) Including the openness of the source code, it is roughly the problem of . . . “How can we trust automated mechanisms?” Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.15/25
Brief Introduction to Upgrading and Governance of Blockchain Weaknesses are not left untouched, but continue to be improved But governance issues remain Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.16/25
Enhancements to Bitcoin Blockchain Virtualization – Open Assets Protocol (no fork) Interpret transaction data in a specific way so that quantities independent from BTC can be defined and used Bug fix – Segregated Witness (SegWit) (soft fork) Signatures are separated from the transaction body Better privacy and conciseness – Taproot (and Schnorr signatures) (soft fork) Scripts can be partially disclosed by expressing them in Merklized Abstract Syntax Trees (kind of Merkle trees) Quickness – Payment channels (no fork) Only write to the blockchain when the channel is opened and closed, and in between you can make fast payments Conceptually, connected payment channels form a Lightning Network How do we upgrade? Soft fork : miners vote by setting a bit in a block header Wait, voting? Is it an Internet way? (remember “We reject kings, presidents and voting”?) Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.17/25
MPDLUJNF Alice pays fast by sending Bob transactions to pay, which are cut out of the deposit addressed to Alice and Bob Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.18/25
Technical Challenges of Blockchain Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.19/25
Technical Challenges of Blockchain Non real-time (probabilistic behavior) Difficulty of secrecy (guarantee of verifiability to all) Oneness (distribution vs. replication) Not scalable (do not scale if replicated to all participants) Harder governance of evolution (can’t change if everyone needs to be united) Incentive mismatch (discrepancy of motivations for participation in infrastructure and applications) Supported by the value of the native currency (crash would stop all applications) ⇒ Can be solved by redesigning it zero-base Actually in progress (ex. BBc -1) Problem with many ledgers is that they are not redesigned zero-base ex. Hash-chains without proof of work can be tampered with ex. Talking about “newspaper model”, you can’t prove anything by publishing articles in company newsletters Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.20/25
Ethereum’s Approach (solutions blockchain-way) Non real-time (probabilistic behavior) ⇒ Transactions are finalized after two epochs; 1 epoch = 32 slots Difficulty of secrecy (guarantee of verifiability to all) ⇒ ZoE (Zcash on Ethereum) Oneness (distribution vs. replication) Not scalable (do not scale if replicated to all participants) ⇒ Sharding, Rollups (layer 2) Harder governance of evolution (can’t change if everyone needs to be united) ⇒ Benevolent Dictator For Life (BDFL) (with bitter smile ;) ) Incentive mismatch (discrepancy of motivations for participation in infrastructure and applications) Supported by the value of the native currency (crash would stop all applications) ⇒ Will people who want to run the apps buy ETH and support? Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.21/25
BBc-1’s Approach (solutions non-blockchain-way) Non real-time (probabilistic behavior) ⇒ No probabilistic behavior before transaction commits Difficulty of secrecy (guarantee of verifiability to all) ⇒ Transaction content is kept secret outside the domain, and can be encrypted inside Oneness (distribution vs. replication) Not scalable (do not scale if replicated to all participants) ⇒ Scale-out on a domain-by-domain basis, intra-domain DHT in the future Harder governance of evolution (can’t change if everyone needs to be united) ⇒ Autonomy by domain (don’t care about intra-domain protocols) Incentive mismatch (discrepancy of motivations for participation in infrastructure and applications) Supported by the value of the native currency (crash would stop all applications) ⇒ No native currency, proof of context work by mutual aid Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.22/25
Assignment 5. “The DAO Attacked” In 2016, an autonomous decentralized investment fund “The DAO” leaked 3.5M ETH in an attack that exploited a bug in a smart contract, but this incident was made to look like it never happened, by the hard fork of Ethereum 1) Choose between A) public policy position (of a country with many victims), or B) management position at The DAO 2) Discuss briefly what would have been the best thing to do from your position Deadline and how to submit December 20, 2022 at 17:59 JST From Moodle (mandatory) (Q&A forum) So that your classmates can read your report, refer to it, and comment on it Optionally, you can also post to #assignments channel at Discord Just plain text, and be concise, please Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.24/25
See You Next Week in Classroom! Have a nice weekend! Take good care of yourselves Lecture 11 : Further Smart Contracts — FinTech — Financial Innovation and the Internet 2022 Fall — 2022-12-14 – p.25/25
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