An Introduction to Blockchain Technology

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@ computational professor daniel martin katz danielmartinkatz.com BLOCKCHAIN, CRYPTOCURRENCY AND LAW professor nelson rosario AN INTRODUCTION TO BLOCKCHAIN TECHNOLOGY nelsonmrosario.com @ nelsonmrosario BLOCKCHAINLAWCLASS.COM

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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

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WHILE WE WILL OFFER A MORE DETAILED TREATMENT IN FUTURE MODULES …. BLOCKCHAINLAWCLASS.COM

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FOR NOW - WE WILL OFFER A HIGH LEVEL OVERVIEW OF A BLOCKCHAIN ENABLED TRANSACTION … BLOCKCHAINLAWCLASS.COM

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DAN NELSON DAN WANTS TO SELL A CAR TO NELSON FOR A SET AMOUNT SAY $30,000 BLOCKCHAINLAWCLASS.COM

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DAN NELSON ANALOG TITLE TO VEHICLE ANALOG MONEY BLOCKCHAINLAWCLASS.COM

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MAYBE NELSON DOES NOT WANT TO GIVE CASH BUT INSTEAD WANTS TO WRITE A CHECK OR UNDERTAKE A WIRE TRANSFER BLOCKCHAINLAWCLASS.COM

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BOTH OF THESE HAVE AN UNDERLYING TRANSFER PROTOCOL BLOCKCHAINLAWCLASS.COM

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BUT LET’S FOCUS ON THE CHECK THE CHECK INSTRUCTS A TRUSTED AUTHORITY (SUCH AS A BANK) TO DO SOMETHING …. BLOCKCHAINLAWCLASS.COM

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THE CORRESPONDING LEDGER ENTRIES CREDIT TO DAN’S ACCOUNT DAN NELSON DEBIT TO NELSON’S ACCOUNT BLOCKCHAINLAWCLASS.COM

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THE CORRESPONDING LEDGER ENTRIES DAN NELSON +$30,000 -$30,000 BLOCKCHAINLAWCLASS.COM CREDIT TO DAN’S ACCOUNT DEBIT TO NELSON’S ACCOUNT

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BOTH NELSON AND DAN MIGHT BE CHARGED A FEE FOR THIS TRANSACTION BY THEIR RESPECTIVE BANKS BLOCKCHAINLAWCLASS.COM

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THE BANK(S) MIGHT IMPOSE A DELAY IN THE PROCESSING OF THE TRANSACTION BLOCKCHAINLAWCLASS.COM

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HISTORICALLY, WE NEEDED THIS CENTRALIZED TRUST INTERMEDIARY BECAUSE MAINTAINING LEDGERS OUTSIDE OF SUCH INSTITUTIONS REQUIRED TRUST AND EXTENSIVE COORDINATION BLOCKCHAINLAWCLASS.COM

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SUCH INSTITUTIONS HAVE PROVIDED VALUE AMONG OTHER THINGS THEY HELP ELIMINATE THE ‘DOUBLE SPEND’ PROBLEM BLOCKCHAINLAWCLASS.COM

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IN OTHER WORDS, A BANK CAN TRY YO VERIFY THAT THE COUNTERPARTY HAS THE MONEY (NOTE THIS DOES NOT ALWAYS WORK BUT THIS IS THE BASIC IDEA) BLOCKCHAINLAWCLASS.COM

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BUT IS THERE AN ALTERNATIVE TO CENTRALIZED ‘TRUST’ INSTITUTIONS ? BLOCKCHAINLAWCLASS.COM

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THIS IS THE QUESTION WHICH ANIMATED THE CREATION OF BITCOIN (AS WELL AS FOLLOW ON FRAMEWORKS SUCH AS ETHEREUM, ETC.) BLOCKCHAINLAWCLASS.COM

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WE WILL USE BITCOIN AS THE BASIS FOR OUR DISCUSSION BLOCKCHAINLAWCLASS.COM (WE WILL COVER OTHER APPROACHES SUCH ETHEREUM, ETC. IN LATER MODULES)

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IF WE ARE *NOT* GOING TO USE THE TRUSTED INTERMEDIARY … BLOCKCHAINLAWCLASS.COM

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WE WILL NEED ANOTHER WAY TO SOLVE FOR THE TRUST PROBLEM(S) ASSOCIATED WITH TRANSACTING … BLOCKCHAINLAWCLASS.COM

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WE COULD HAVE A PUBLIC VERSION OF THAT PRIVATE LEDGER … BLOCKCHAINLAWCLASS.COM

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THE KEY IS TO ALLOW THAT LEDGER TO BE UPDATED AS TIME TICKS FORWARD … BLOCKCHAINLAWCLASS.COM

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THE TRANSPARENCY OF PUBLIC LEDGER MUST BE COUPLED WITH SOME MECHANISM(S) TO PREVENT FRAUDULENT ENTRIES … BLOCKCHAINLAWCLASS.COM

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LETS SEE HOW NELSON MIGHT TRANSFER FOUR BITCOINS TO DAN … BLOCKCHAINLAWCLASS.COM DAN NELSON

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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

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OKAY BUT HOW DOES DAN ENSURE THAT NELSON HAS 4 BTC TO GIVE HIM ? BLOCKCHAINLAWCLASS.COM DAN NELSON TRANSACTION MESSAGE FROM: NELSON (3Nxwen… TO: DAN (18rnfoQgGo… AMOUNT: 4 BTC

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NOW REMEMBER THAT IN REAL LIFE BITCOIN JUST CONTAINS ADDRESSES   (NO NAMES) BLOCKCHAINLAWCLASS.COM DAN NELSON TRANSACTION MESSAGE FROM: NELSON (3Nxwen… TO: DAN (18rnfoQgGo… AMOUNT: 4 BTC

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USING ECONOMIC INCENTIVES, THE EXISTING NETWORKED INFRASTRUCTURE AND A BIT OF CRYPTOGRAPHY BLOCKCHAINLAWCLASS.COM DAN NELSON

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THE NETWORK VERIFIES NELSON HAS THE 4 BTC TO GIVE TO DAN AND THEN PROCESSES THE TRANSACTION BLOCKCHAINLAWCLASS.COM DAN NELSON

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WHEN NELSON ANNOUNCES THE TRANSACTION THIS IS ACTUALLY COUPLED WITH A DIGITAL SIGNATURE FROM HIM BLOCKCHAINLAWCLASS.COM DAN NELSON

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‘FULL NODES’ ARE SPECIAL NODES WHICH HAVE A COPY OF THE ENTIRE BLOCKCHAIN LEDGER BLOCKCHAINLAWCLASS.COM DAN NELSON

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BLOCKCHAINLAWCLASS.COM DAN NELSON FULL NODES WILL CHECK AGAINST OTHER PENDING TRANSACTIONS TO ENSURE THAT NELSON DID NOT DOUBLE SPEND

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IF NO DOUBLE SPENDING THEN FULL NODES WILL BROADCAST ACROSS THE BITCOIN NETWORK BLOCKCHAINLAWCLASS.COM DAN NELSON

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EACH BITCOIN ADDRESS COMES ALONG WITH A PRIVATE KEY LINKED TO THAT “ACCOUNT NUMBER” BLOCKCHAINLAWCLASS.COM

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WHEN NELSON SEEKS TO TRANSFER 4 BTC - HE PASSES HIS PRIVATE KEY AND THE TRANSACTION MESSAGE INTO A CRYPTOGRAPHIC SIGNATURE CREATOR FUNCTION BLOCKCHAINLAWCLASS.COM

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THERE IS ANOTHER FUNCTION WHICH ALLOWS THOSE ON THE NETWORK TO VERIFY THE SIGNATURE BLOCKCHAINLAWCLASS.COM (WHILE NOT ALLOWING FOR REVERSE ENGINEERING OF NELSON’S PRIVATE KEY)

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ANATOMY OF A BITCOIN TRANSACTION

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NELSON HOW DO WE DECIDE THAT DAN HAS BEEN OFFICIALLY CREDITED 4 BTC ? BLOCKCHAINLAWCLASS.COM DAN

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NELSON AND HOW DO MAKE SURE TO PLACE NELSON’S TRANSACTION IN THE PROPER ORDER ON THE LEDGER ? BLOCKCHAINLAWCLASS.COM DAN

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NOTE THAT ORDER OF TRANSACTIONS IS IMPORTANT IN BOTH THE PHYSICAL WORLD AND IN THE CRYPTOCURRENCY WORLD “I CANT WAIT TO TRY TO DOUBLE SPEND …” BLOCKCHAINLAWCLASS.COM

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IN THE PHYSICAL WORLD MERCHANTS AND BANKS MUST FIGHT AGAINST DOUBLE SPEND BLOCKCHAINLAWCLASS.COM

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IN THE PHYSICAL WORLD WE HAVE A RANGE OF GOOD (ALBEIT IMPERFECT) MECHANISMS TO PREVENT SUCH FRAUD BLOCKCHAINLAWCLASS.COM

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HOW CAN WE DEVELOP SIMILAR (OR EVEN BETTER) PROTECTIONS IN THE COMPUTATIONAL WORLD ? BLOCKCHAINLAWCLASS.COM

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HOW CAN WE DEVELOP SIMILAR (OR EVEN BETTER) PROTECTIONS IN THE COMPUTATIONAL WORLD ? BLOCKCHAINLAWCLASS.COM DEVELOP AN ‘IMMUTABLE’ TRANSACTION ORDER

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PUBLIC BLOCKCHAINS ARE DISTRIBUTED PEER TO PEER AND APPEND ONLY TRANSACTION RECORDS BLOCKCHAINLAWCLASS.COM

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BLOCKCHAIN PROPERTIES BLOCKCHAINLAWCLASS.COM A LEDGER OF TRANSACTIONS THAT ARE STORED IN BLOCKS THE BLOCKS ARE LINKED TOGETHER USING CRYPTOGRAPHIC HASHES THE CHAIN OF BLOCKS GROWS BIGGER AND BIGGER WITH EACH BLOCK TRANSACTIONS BURIED IN THE BLOCKCHAIN GET HARDER AND HARDER TO CHANGE

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EVENTUALLY THIS TRANSACTION WILL BE SORTED INTO TIME ORDER WITH ALL OTHER TRANSACTIONS … BLOCKCHAINLAWCLASS.COM NELSON PENDING

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THIS IS DONE IN BATCH (BLOCK) WITH A SET OF OTHER TRANSACTIONS https://medium.com/@micheledaliessi/how-does-the-blockchain-work-98c8cd01d2ae BLOCKCHAINLAWCLASS.COM

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IN ORDER TO ‘VOTE’ ON ORDERING IN A PROOF OF WORK SYSTEM … BLOCKCHAINLAWCLASS.COM (WE WILL CONTRAST THIS WITH PROOF OF STAKE IN LATER MODULES)

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YOU HAVE TO SOLVE A COMPUTATIONALLY EXPENSIVE CRYPTOGRAPHIC PUZZLE BLOCKCHAINLAWCLASS.COM

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THIS HELPS TO PREVENT (BUT DOES NOT GUARANTEE) HIJACKING OF THE OVERALL NETWORK … BLOCKCHAINLAWCLASS.COM

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MINERS MAINTAIN THE NETWORK BLOCKCHAINLAWCLASS.COM

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MINERS RECEIVE REWARDS BLOCKCHAINLAWCLASS.COM COINS IF THEY SOLVE CRYPTO PUZZLE AND IF THEIR BLOCKS ARE ACCEPTED BY THE NETWORK

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MINERS RECEIVE REWARDS BLOCKCHAINLAWCLASS.COM THEY ALSO CAN RECEIVE TRANSACTION FEES

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ALL THIS RESULTS IN BLOCKCHAINLAWCLASS.COM VERIFIABLE DIGITAL ASSET

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ALL THIS RESULTS IN BLOCKCHAINLAWCLASS.COM A NEW WAY TO DELIVER TRUST WITHOUT CENTRAL COUNTERPARTIES