FUQINTRD 697: Innovation and Cryptoventures

Blockchain Tech Big Picture

Campbell R. Harvey
Duke University and NBER

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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 session 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 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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Tech Big Picture
Key questions
• Latency: Blockchains have complete redundancy. How can blockchains
compete with Visa with 24,000 transactions per second – and go beyond
as blockchain applications grow?
• Transactions are but one level – what happens
when smart contracts become more mainstream

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Tech Big Picture
Key questions
• Data: Blockchains are stored on multiple nodes. If large amounts of data
are associated with transactions, it may be infeasible to store petabytes
of data on each node.
• Possible for blockchains to store summaries of data rather  1981 - $300,000
than original data  1987 - $50,000
• Cost of storage declining exponentially  1990 – $10,000
 1994 - $1,000
Cost per GB  1997 - $100
 2000 - $10
 2004 - $1
Campbell R. Harvey 2020  2010 - $0.1
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Tech Big Picture
Key questions
• Computing power: While Moore’s Law
might be near a limit, other
technologies, such as quantum
computing could create a structural  1981 - $300,000
break.  1987 - $50,000
• Threat to current digital signature  1990 – $10,000
algorithms Calculations per  1994
$1 (constant)*
- $1,000
 1997 - $100
*Note y-axis is double exponential
 200 - $10
 2004 - $1
Campbell R. Harvey 2020  2010 - $0.1
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Tech Big Picture
Key questions
• Connection: Are we headed to a world of millions if not billions of
blockchains – or will there be one Masterchain.
• Sidechains will be studied in the course

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Tech Big Picture
Key questions
• Privacy: Delicate balance needs to be achieved. No one has worked it out
yet.
• This is not just a blockchain issue!

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Key questions
• Real world verification: How do we verify events
in the real world trustlessly on a digital and siloed
blockchain?
• Much work needs to be done on oracles (software,
hardware, inbound, outbound, and consensus based).
How do we trust the oracle?
• RFID tags?

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https://blockchainhub.net/blockchain-oracles/
Tech Big Picture
Key questions
• Immutability: This is a crucial characteristic of a blockchain. What are the
guarantees on my transaction?
• Block confirmations
• The issue of forks
• Bitcoin Cash 1 Aug 2017
• Bitcoin Gold 24 Oct 2017
• Bitcoin SV 15 Nov 2018

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https://hackernoon.com/blockchain-forks-b0dca84db0b0 https://www.investopedia.com/tech/history-bitcoin-hard-forks/
Tech Big Picture
Key questions
• Governance: We are only now thinking about decentralized governance.
This is very much related to consensus mechanisms – but broader in that
the computer programs that generate current blockchains will surely
need improvement and enhancements in the future. Who will do this?
(BIP/EIP for example.)
• Much research on consensus mechanisms.
• What will the world look like with potentially millions
of DAOs?

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Tech Big Picture
Key questions
• Use Case: Blockchain is not the panacea for all business applications. In
addition, even if a business application is suited for blockchain
technology – there are a myriad of potential blockchain choices.
• Technology needs to match the needs of the application

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Tech Big Picture
Key questions
• Regulation: Regulators are at a disadvantage because blockchain is not
currently part of the law. In addition, there is a steep learning curve for
regulators
• How do we classify tokens?
• Regulatory risk may cause
innovation to move off shore
to jurisdictions that are less strict

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 Tech Big Picture
Key questions
• AI: Is there a nexus between AI and blockchain?
• Think of Federated Learning being
moderated by Smart Contracts.
• Singularity NET; DeepBrain Chain;
Namahe;

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https://blockonomi.com/ai-blockchain/