Blockchain: The Information

Technology of the Future

Melanie Swan
October 1, 2014 melanie@[Link]
[Link]
Bitcoin Meetup
Slides: [Link]
 What is the Blockchain?

We should think about the blockchain as another class

of thing like the Internet – a comprehensive information
technology with tiered technical levels and multiple
classes of applications for any form of asset registry,
inventory, and exchange, including every area of
finance, economics, and money; hard assets (physical
property); and intangible assets (votes, ideas,
reputation, intention, health data, information, etc.)
– Melanie Swan, Founder, Institute for Blockchain Studies

October 1, 2014
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 New VC investment cycle: Blockchain Tech

“The blockchain is the core innovation,”

Marc Andreessen, CoinSummit (Mar 2014)

“We want a whole sequence of companies: digital

title, digital media assets, digital stocks and bonds,
digital crowdfunding, digital insurance. If you have
online trust like the blockchain provides, you can
reinvent field after field after field.”

October 1, 2014 [Link]

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 About Melanie Swan

Prediction Markets
Traditional Background
Quantitative Methods

New market startups:

Grouppurchase
Virtual World Valuation Blockchain Futures

October 1, 2014 [Link]

[Link] 3
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 Agenda for Blockchain Futures
 Blockchain Industry Status

 Bitcoin Overlay Protocols (Mastercoin, Counterparty)

 Next-gen Bitcoin 2.0 Platform: Ethereum

Based on information synthesized from Internet resources including

cryptocurrency expert Andreas M. Antonopoulos and Ethereum project
members (Vitalik Buterin, Gavin Wood, Stephan Tual)

October 1, 2014
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 Blockchain Industry Status
 Bitcoin
 Protocol is ossifying (to be stabilized w/in 2 years for 30 years)
 Harder to make any changes: 5 constituencies for consensus1
 Impossible for any new [Link] to get network effect traction
 BIP0032: hierarchical deterministic wallet trees, etc.
 Solution 1:
 Overlay Protocols (Mastercoin, Counterparty)
TREZOR
 Innovation moves up-stack: ‘http/smtp to Bitcoin’s TCP/IP’ hardware wallet

 Solution 2:
 New Foundational Protocol (Next-gen Bitcoin 2.0 Platforms):
Turing-complete platforms like Ethereum (can run any coin)
 ‘A new and improved TCP/IP transport protocol’

1Miners(independent & pools), merchant processing gateways, web wallet companies (Blockchain),
October 1, 2014
exchanges (Coinbase, Bitstamp), users, hardware manufacturer s (TREZOR) 5
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 Solution 1: Bitcoin Overlay Protocols
 Mastercoin: financial derivatives
 Colored Coins: issue your own currency on the bitcoin
network (by adding metadata to Bitcoin transaction)
 Counterparty: a decentralized exchange between
[Link]
 Ripple: payment, exchange, and remittance network
 Direct fund transfers and foreign exchange transactions between
institutions; consensus-based ledger
 BitShares: crypto-equity decentralized company stock
share exchange
 Namecoin: decentralized domain name registry
 Blockstream: credits (sidechain, treechain,privatechain)
October 1, 2014
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 But still, Bitcoin Protocol shortcomings…
 Applications
 Bitcoin is only for currency
 Functionality and security
 Anonymity, fungibility, scalability
 Irreversible transactions, one asset per token, no multisignature
 Complete Step 3 of Satoshi Nakamoto’s original plan
1. Decentralized database, put assets into a transparent ledger,
everyone has a copy
2. Transaction system to move value between parties without
third party interaction
3. Robust scripting system; instead of just sending currency, send
contracts, smart property, anything; requires Turing
completeness, solving blockchain bloat
October 1, 2014
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 Solution 2: Ethereum
 A decentralized publishing platform featuring stateful
user-created digital contracts and a Turing-complete
contract programming language
 Chain implementation & contracts with shared mining
 Ether, the underlying network unit, as payment to execute
contracts as a workaround to the Halting Problem
 A network for powering Ethereum-based contracts (not
exclusively for transacting monetary value)
 Open-ended contracts to securely execute services including:
voting systems, domain name registries, financial exchanges,
crowdfunding platforms, company governance, self-enforcing
contracts and agreements, intellectual property, smart property,
and distributed autonomous organizations (DAOs)
October 1, 2014 [Link] 8
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 What is Ethereum?
 Basic infrastructure, standard, foundation, platform
 Turing-complete scripting language
 One-click install dev tools (mining, open transactions, wallet)
like iOS and Android apps
 ‘General-purpose’ cryptocurrency network
 Blockchain + cryptographically-secure transactions platform
 Create any custom specialized applications on top
 A secure decentralized generalized transaction ledger
 Next-generation cryptocurrency network

October 1, 2014 Source: Wood, Gavin. Ethereum: A Secure Decentralized Generalized Transaction Ledger: Proof of
Concept VI. [Link] 9
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 $18.4m USD Ethereum Fundraising 7/2014
 Initial Sale
 (Sliding) 2,000 ether to 1 bitcoin or $620
 60m Ether (ETH) sold ($1 USD ~ 3.25 ETH)
Vitalik Buterin, Creator
 Dev offices in Berlin (expanding to ~20)
 Ongoing Macroeconomic Policy
 Ether has build-in increase of overall money
supply at fixed rate
 40% of the amount raised in the fundraiser will
Gavin Wood, Architect
be the annual increase in money supply
 Ether subunits
 Finney (10-3), szabo (10-6), shannon (10-9),
babbage (10-12)
Stephan Tual, CCO

October 1, 2014 [Link] 10

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 Smart Contracts: Programmable Money
 Multisignature (multiparty) escrows (~Bitrated 2.0)
 Financial exchanges
 Savings Accounts
 Domain name registries
 Voting systems
 Company governance
 Self-enforcing contracts and agreements
 Crowdfunding platforms, Prediction markets
 Smart property
 Intellectual property
 Nationstate constitution and bill of rights
October 1, 2014
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 Easy to Create Ethereum Contracts

October 1, 2014 [Link] 12

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 Example: Smart Property
 Instead of trading coin, shares, trade/buy-sell assets
 Encode asset to the blockchain via unique key
 Trade cars on the blockchain through a decentralized
exchange
 Entire used auto market trades via blockchain
 Blockchain becomes
an inventory,
tracking, and
exchange mechanism
for all hard assets

October 1, 2014
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 Ethererum Browser ‘Mist’ Mock-up

October 1, 2014 [Link] 14

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The key benefit of Ethereum for the automated-economy is that
it is a Turing-complete VM

Ethereum Virtual Machine (EVM)

 The Ethereum blockchain is…
 A blockchain with a built-in programming language
 The decentralized, massively replicated database in which the
current state of all accounts is stored
 A consensus-based globally executed virtual machine
 The Ethereum Virtual Machine (EVM) handles internal
state and computation
 Large decentralized computer with millions of account objects
 Each account object
 Has its own internal code
 Contains a 32-byte key/value database called storage
 Can call or send messages to other objects

October 1, 2014 [Link]

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 Tech Specs
Accounts stored in a Patricia tree (like a Merkle tree)
 A root hash refers to the entire tree;
tree contents cannot be modified
without changing the root hash
 A miner produces a new block each
minute with the latest transactions and
the root hash of the Patricia tree
representing the new state

 4-tuple stored per account

 [account_nonce, ether_balance, code_hash, storage_root]
 account_nonce: the number of transactions sent from the account
(kept to prevent replay attacks)
 ether_balance: the balance of the account
 code_hash: the hash of the code if the account is a contract
 storage_root: the root of another Patricia tree with the storage data

October 1, 2014 [Link]

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 Ethereum Contract Processing
 Two account object types
 Contract
 EOA (externally owned account)
 Contract receives a message and runs the code
 Ability to read/write to its own internal storage
 Read the storage of the received message
 Send messages to other contracts, and to itself
 The contract is the code that executes the contract
 Contract can interact with the world outside the EVM
 EOA (externally owned account) messages the contract
 Transaction is sent signed by the EOA’s private key
 Advanced: SchellingCoin Universal Data Feed for derivatives
(minimal trust, two-step commitment protocol per round)
October 1, 2014 [Link]
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 Ethereum Contract Example
 GavCoin weather bet between Bob and Alice
 Automated EVM communications
 Heterogeneous user security preferences
 A transaction is sent, triggering forwarding contract
and EAO messaging
 GavCoin is stored as
entries in the GavCoin
contract's database
 The bet contract sees the
temperature and messages
the GavCoin contract to
payout (object autonomy) EAO (externally owned account)

October 1, 2014 [Link]

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 EVM Operation / “Gas” Fees
 Ethereum consensus model
 Each operation executed in the EVM is simultaneously executed
by every full node
 Benefit: any contract on the EVM can call any other contract at
almost zero cost
 Cost: computational steps on the EVM are very expensive
 Transaction fee and block operation limit
 The Ethereum protocol charges a market-based fee in ether per
computational step (prevent deliberate attacks and abuse)
 Floating limit on the number of operations contained in a block
 Even miners who can afford to include transactions at close to
no cost are forced to charge a fee commensurate with the cost of
the transaction to the entire network

October 1, 2014 [Link]

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 Smart Contract-DOA/DAC Progression
 Smart Contract
 Transaction protocol that executes the terms of a contract
 Smart property: property whose ownership is controlled via the
blockchain using contracts (examples: cars, phones, houses)
 Đapp (Decentralized Application)
 Contract plus graphical interface for contract execution
 JavaScript API ‘eth object’ interacts with Ethereum blockchain
 DAO (Decentralized Autonomous Organization)
 Self-enforcing smart contract (group of contracts) on a
cryptographic blockchain, multiparty complexity
 (Like remittances) avoid local business jurisdictional costs
 Own Ethereum address (key) and balance, send and receive
transactions, EtherScript scripts can modify their own code
October 1, 2014 [Link]
Egalitarian DAO contract explained: [Link] 20
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 Decentralized Autonomous Corporations
 DACs, automated markets, and tradenets
 Fully-autonomous business entity
 Autonomous property, example: self-owned, self-driving car

Vehicles use the tradenet to find

customers and bid for road space

 Example:
 [Link] (decentralized cloud storage) - Gregory Maxwell
 MetaDisk: upload your data to the Storj network
 DriveShare: earn money by being a part of the Storj network
 Doesn’t work on bitcoin due to scripting language limitations

October 1, 2014 [Link] [Link]

[Link] 21
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 Tech Specs
State Machine, Languages, and Code
 Current Release
 Proof of concept build - PoC5, GitHub release on July 22, 2014
with the launch of the Ether pre-sale
 EVM computation via a stack-based bytecode language
 Bitcoin Script, traditional assembly and Lisp
 A program in EVM is a sequence of opcodes
 Contract programming with high-level languages
 LLL, serpent, Mutan compiles into EVM
 Create contracts by sending the transaction containing the EVM
bytecode
 One-click installation for everything (like mobile apps)
 Wallet, Open Transactions, Ripple

October 1, 2014
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 Classes of Ethereum Applications
 Finance and Economics
 BitCloud (decentralized escrow), OpenLibernet (open comms)
 Debt market, futures (derivatives), savings
 Voting (futarchy, Liquid Democracy)
 Resource exchange: eBay, Amazon, Uber, AirBnB
 Functions: authentication, validation, escrow, delivery
 P2P Package Courier Service (notified as you leave location)
 Real-time cost-based data center storage swapping
 Loyalty, everyone’s own currency: JefCoin
 Automated markets, tradenets
 Economics: transactions/contracts pay-on-board network Ether
 GBI (Guaranteed Basic Income) – Switzerland freicoin
October 1, 2014
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 One use for Ethereum
Blockchain Genomics
 Jurisdictional regulation prevents
individuals from having access to
their own genetic data

October 1, 2014 [Link]

[Link] 24
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 [Link]: Blockchain Health
 Using blockchain tech for health-related applications
1. Personal Health Record Storage
 Personal health records stored and administered via blockchain
 Users key-permission doctors and other parties into records
2. Health Research Commons
 Aggregated personal medical records, quantified self data
commons ([Link])
3. Health Document Notary Services
 Proof-of-insurance, test results, prescriptions, status, condition,
treatment, physician referrals
4. Doctor Vendor RFP Services
 (Like Uber drivers) doctors and health practices bid to supply
medical services; automated bidding via tradenets
October 1, 2014 [Link]
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Fitbit is a demurrage (action-inciting) health currency

Demurrage Blockchain Health

 Demurrage currency: built-in mechanism for
spend/action-taking
 Freicoin: Switzerland GBI (Guaranteed Basic Income)
 GBHA (Guaranteed Basic Health Initiative): paid out and payable
in HealthCoin; HSA (Health Savings Account) 2.0
 Fitbit and smartwatch are demurrage health currencies
 Health itself as a demurrage currency, a continually
auto-redistributing commodity among synapses, cells,
humans; body and brain as a DAO/DAC AI
 Concept: demurrage resource-allocation + Đapp
 Automatic redistribution of any commodity within a system (brain or mindfile
(potentiation, optogenetic stimulation)), body (‘health’ (oxygen, waste removal
nanobots, circulating lab-on-chips)), work team (ideas), society (liberty)

October 1, 2014
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 [Link]: Blockchain Futures
 Any venue for decentralized contracts (Đapp)
 ‘Bitcoin MOOCs’ (‘Kickstarter for literacy’)
 Like remittances, blockchain-improved aid, microcredit,
development economics 2.0
 Write Ethereum Literacy Contracts to emerging market peers
 Reading, Technical, Agricultural, Vocational Literacy
 New implementation of education in the blockchain

 Blockchains as a public good

 Wikileaks, ICANN, Wikipedia, Genomics
 Uplifted to cloud from jurisdiction

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 [Link]: Blockchain Futures
 Community supercomputing time
 Blockchain tech as resource allocation for science efforts
 Funding markets like crypto-equity and crowdfunding for any
resource
 Reputation systems (OpenBazaar), insurance
(SchellingQuake), Key recovery (wallet key protection)
 Blockchain GAAP: valuation, amortization, retirement
 Intangible asset encoding, tracking, and trade
 Attention, intention, reputation, health, ideas
 Cryptoledger, financial cryptography, consensus-based
ledger: revolutionizing concept for traditional institutions
and startups in finance and beyond
October 1, 2014
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 Ethereum: Vitalik 9/14 Silicon Valley update
 Key progress: proof of stake
 Custody mining, hybrid proof-of-stake proof-of-work,
Slasher, TenderMint, dbus
 Decentralized application architecture
 Ethereum: account registry
 Whisper: generalized P2P messaging (decentralized
Twitter)
 Swarm: off-chain P2P data storage (images)
 Dev priorities: fully decentralized Internet Đapps
 Proof of Concept 6 (?) – consensus algorithm
 Ethereum 1.0 core, optimization, security, virtual machine
 UI, mobile client, DevTools, SchellingCoin (decentralized
oracle)
October 1, 2014
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 Tech Specs
Ethereum JavaScript API: eth object
 Ethereum contract execution interface is implemented as
an HTML/CSS/JS webpage
 JavaScript API, eth object interacts with the Ethereum
blockchain, JavaScript API components:
 [Link](from, ethervalue, to, data, gaslimit, gasprice) - sends a transaction to the desired
address from the desired address (note: from must be a private key and to must be an
address in hex form) with the desired parameters
 (string).pad(n) - converts a number, encoded as a string, to binary form n bytes long
 [Link] - returns the current gas price
 [Link](key) - converts a private key into an address
 [Link](acct, index) - returns the desired account's storage entry at the desired index
 [Link] - the user's private key
 [Link](acct, index, f) - calls f when the given storage entry of the given account changes

 Required: Ethereum client (not regular web browser)

 JavaScript API example: see source of link below
October 1, 2014 [Link]
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 Tech Specs
Ethereum Code
 Currently stable clients are available
for PoC5 (Proof of Concept #5):
 AlethZero (C++)
 Ethereal (Go)
 pyeth (Python)
 Bleeding edge PoC6 code can be
cloned from their git repositories:
 [Link]
ethereum/
 [Link]
 [Link]

October 1, 2014 [Link] 31

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 Resources
 Ethereum
 [Link]
 [Link]
 [Link]
 [Link]
 [Link]
 [Link] (Yellow Paper)

 Bitcoin
 Satoshi Nakamoto’s design for the blockchain (2008)
[Link]

 News
 SATOSHI'S REVOLUTION: How The Creator Of Bitcoin May Have Stumbled
Onto Something Much, Much Bigger
[Link]
 The Future of Bitcoin and Math-Based Digital Currencies
[Link]
October 1, 2014
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 Image credit: M. Ghezel

Blockchain: The Information

Technology of the Future

Thank You! Questions?

Melanie Swan
October 1, 2014 melanie@[Link]
[Link]
Bitcoin Meetup
Slides: [Link]
 Appendix: Bitcoin/Blockchain Background
 The New Economy…

October 1, 2014 [Link]

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 Cryptocurrency Market Cap Tracking

October 1, 2014 [Link]

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 What is Bitcoin?
 Digital currency, payments system, decentralized ledger
 History: by combining BitTorrent technology (peer-to-
peer file sharing) and public key cryptography a new
form of currency was made possible
 Arose as a solution to the double-spend problem
 Prior to bitcoin and the blockchain concept, a centralized third
party had to issue and reconcile digital cash transactions to
prevent the digital cash from being spent multiple times (digital
cash, like an image attached to an email, can be copied infinite
times like any digital cash)
 Implication: any transaction on the Web can be
decentralized and stripped of a controlling authority

October 1, 2014 [Link] [Link]

[Link] 36
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 What is the blockchain?
 A ledger of all transactions owned and monitored by
everyone and controlled by none
 Like a giant interactive spreadsheet everyone has access to and
updates to confirm that each digital credit is unique
 Literally blocks (of transactions) in a chain, a sequential
ledger of bitcoin transactions
 What is a Digital Wallet? (it is not a wallet) Stores keys
 Bitcoin's public ledger (the blockchain) was started on
January 3rd, 2009 at 18:15 UTC by Satoshi Nakamoto
 First block is known as the genesis block
 First transaction recorded in the first block was a single
transaction paying the reward of 50 new bitcoins to its creator

October 1, 2014 Source: Wood, Gavin. Ethereum: A Secure Decentralized Generalized Transaction Ledger: Proof of
Concept VI. [Link] 37
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 What is the blockchain?
 A concept
 A transaction database
 A decentralized public ledger
 A technology layer protocol like TCP/IP
 An information technology
 An asset administration tool
 Application areas
 Finance and economics: payments, asset exchange
 Exchange of all assets (physical and intangible)
 A registry, inventory, listing of all the world’s stuff

October 1, 2014
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 Economic Arguments for Bitcoin
 Banking services market: 5 billion
individuals worldwide without
access to banking, financial, credit
services
 Remittances market: $4T global
market 5-30% transaction fee,
immediate funds transfer
 Payments market: 1-3% merchant
transaction fee
 Successful examples indicate
demand for digital payments:
Starbucks mobile payment app
October 1, 2014
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 What is Bitcoin Mining?
 The process of adding transaction records to Bitcoin’s public
ledger of past transactions (the blockchain)
 Confirms to the rest of the network that unique transactions
have taken place
 Bitcoin nodes use the block chain to distinguish legitimate
Bitcoin transactions from attempts to re-spend coins that
have already been spent elsewhere
 Intentionally designed to be resource-intensive so that the
number of blocks found each day by miners remains steady
 Individual blocks must contain a proof of work to be
considered valid. This proof of work is verified by other
Bitcoin nodes each time they receive a block. Bitcoin uses
the hashcash proof-of-work function
October 1, 2014 [Link]
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