Blockchain Tech Big Picture

Campbell R. Harvey
Duke University and NBER
Tech Big Picture
Key ingredients
• Hashing function: provide the chain (the entire last block as the header
of the next). Bitcoin SHA-256; Ethereum Keccak-256 (SHA-3). One way
cryptographic function (infeasible to go the other way)
• We will do demonstrations on the main hashing algorithms

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Tech Big Picture
Key ingredients
• Private keys/Public keys: Private key is just a
random number. The public key is mathematically
linked to the private key. It is easy to go from the
private key to the public key – but very difficult to go
from public to private. Current technology uses
Elliptic Curve Cryptography (ECC)
• We will spend a module on how these work with simple
examples

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Tech Big Picture
Key ingredients
• Public Address: This is either identical to the public key (e.g., Ethereum)
or a function of the public key (e.g., Bitcoin).
• We will detail how bitcoin public addresses are derived

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Tech Big Picture
Key ingredients
• Digital Signatures: When doing a
transaction, you “sign over” your
cryptocurrency to someone else using a
Digital Signature Algorithm (DSA). The
signature proves that you are the owner of
the private key. Anyone observing the
signature and the public key can verify that
you have the private key (without revealing
the private key).
• We will spend a session on DSA pointing out
future vulnerabilities

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Tech Big Picture
Key ingredients
• Transaction mechanics: For many cryptocurrencies like bitcoin, we deal
with unspent transaction outputs (UTXOs). If I have an UTXO of say 10
units and I want to send 7 to Jenna, Jenna generates a private key (and a
public key). I generate a (potentially) new private key (and public key). In
a single transaction, I sign over 7 to Jenna and 3 to myself (think of this
as “change”). I have a new UTXO of 3 units. The old one resides in a
blockchain but has no value. Ethereum uses a different system of account
balances.
• Cryptocurrency doesn’t move anywhere. Everything remains on the associated
blockchain.
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Tech Big Picture
Key ingredients
• Cryptography: This is widely used in all aspects of blockchain. It is
particularly important in deriving the public key and the DSA. We will
also see that other types of cryptography are used in certain blockchain
applications (for example, you might find it useful to have a contract
codified in a blockchain – but you only want it visible to the contracting
parties.
• Introduction to Cryptology session will introduce some simple ciphers

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Tech Big Picture
Key ingredients
• Consensus Mechanisms: Consensus is
the mechanism by which nodes agree
on both the historical blockchain as
well as the new additions to the
historical blockchain.
• We will initially talk about Proof of Work
(PoW) which is currently used in Bitcoin
and Ethereum. We will also talk about
Proof of Stake (PoS) and some other
mechanisms.

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Tech Big Picture
Key ingredients
• Incentives: In Proof-of-Work systems, miners are incentivized to verify
transactions and to do the work that allows new blocks. However, there
is no incentive to run a node.
• It is possible to introduce incentives for Level 2 systems (Lightning Network for
bitcoin)
• Some newer technologies incentivize nodes

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