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Blockchain Decoded
Campbell R. HarveyDuke University and NBER
January 2020
FUQINTRD 697: Innovation and Cryptoventures
Campbell R. Harvey 2020
Blockchain is a technology
There is no “the” blockchain… blockchain is a technology. • Concept invented by Haber and
Stornetta (1991) in the context of time-stamping digital documents.
• Also, blockchain is not bitcoin. Bitcoin uses a blockchain technology.
Campbell R. Harvey 2020https://medium.com/@taodust/blockchain-history-part-1-idea-and-birth-5c8b560b9827
Blockchain is a ledger
A very special ledger…• Quickly and easily accessed and
shared by many -- distributed• Various levels of transparency
depending on application• Immutable (you can only add to it
– you cannot alter history)
Campbell R. Harvey 2020
Removes single point of failure
Blockchain is a ledger
A very special ledger…• Quickly and easily accessed and
shared by many -- distributed• Various levels of transparency
depending on application• Immutable (you can only add to it
– you cannot alter history)• Cryptographically secured
Campbell R. Harvey 2020
What can blockchain technology do?
Solves many problems• Verification of ownership (quickly check the immutable history recorded on
a blockchain to see if someone owns something)• Efficient exchange of ownership (direct transactions without middle person,
everybody treated the same whether customer, retailer or banker).
Campbell R. Harvey 2020
Imagine …
Buying and selling stock with t0 settlement• Today is t+2 not much
different than the 1920s• All stock transactions would
reside in a secure ledger devoted to a company’s equity
Campbell R. Harvey 2020
Imagine …
Closing on a property with• No title insurance• Minimal legal• No title search• Simply consult a secure ledger
that establishes the person you are buying the house from actually owns it
Campbell R. Harvey 2020
Imagine …
Instantly transferring funds between accounts• Transfers are not immediate
today – even within your own bank!
• Transfers are secure and inexpensive
• Financial institutions constantly being cyber-attacked:
https://carnegieendowment.org/specialprojects/protectingfinancialstability/timeline
Campbell R. Harvey 2020 https://www.ft.com/content/e3bfdd54-21b2-11e6-aa98-db1e01fabc0c
Imagine …
The end of counterfeiting• Massive number of counterfeit bills
in circulation
Campbell R. Harvey 2020
Imagine …
Starting your car with your thumb print or your face• A secure ledger is checked to verify that you own the car
Campbell R. Harvey 2020
Prime targets of disruption
Any situation with a thick layer of middle people• Blockchain is fundamentally a P2P technology.
Campbell R. Harvey 2020
Types of blockchains
Public blockchains• Trustless. Original example bitcoin blockchain. Open source code.• Ethereum blockchain allows for contracting and is the main choice for
most corporate applications. Contracts can be conditional, if then statements. Bitcoin blockchain cannot do this.
• Variety of mechanisms to ensure security (Proof of Work, Proof of Stake, Proof of Authority, Zero Knowledge Proof, etc.)
Campbell R. Harvey 2020
Types of blockchains
Private blockchains• Trust required. • Need to determine if the cost of trustlessness is worth it. Most
applications today involve trust. Combining blockchain technology with trust allows for much more efficient transactions (think of payments)
Campbell R. Harvey 2020
Original blockchain
Let’s start with the bitcoin blockchain:• A distributed, secure, transparent, public ledger that establishes
ownership and allows for the efficient exchange of ownership• Available to anyone for download on the Internet (decentralized)• Does not depend on trust (controlled by no one – monitored by
everyone)• Backed by strong cryptography secured by the world’s most powerful
network of computers• Miners provide security and are rewarded with new cryptocurrency
Campbell R. Harvey 2020
Original blockchain
How powerful?• #1 supercomputer is IBM Summit
(June 9, 2018) ≈3,300 PetaFLOPs• Currently 80,704,290 PetaFLOPs• The bitcoin blockchain uses specialized hardware.
Cost of 50% of the network power is about $3 billion
http://bitcoincharts.com/bitcoin/ http://www.top500.org/ https://www.top500.org/statistics/perfdevel/Campbell R. Harvey 2020
mFLOP=1 million operations per second
Hashing 101
A simple hashSuppose I send an email to Sasha. However, she needs to verify that what I sent her is exactly what he received. • My email contains a single word “hello”.• Encode the word (a=1, b=2, …, z=26), so 8 5 12 12 15.• Multiply the numbers to get 86,400.• I post the hash on my website. Importantly, the has does not reveal information
about my message. After Sasha gets my email, she does the same hash of the message and checks my website to verify.
• If the message was corrupted the hash will not match, for example, “hallo”= 8x1x12x12x15=17,280 which does not match the original.
• However, this hash is too simple (e.g. hello=ohell) and causes a “collision”Campbell R. Harvey 2020
Hashing 101
SHA-256 (Secure Hashing Algorithm)https://emn178.github.io/online-tools/sha256.html
Hashing is a one-way function. Hashing is not “encryption” because you can’t decrypt.For example, passwords are routinely stored on websites in hashed form.The output of a SHA-256 is 256 bits no matter how big the inputLet’s do some examples:
Campbell R. Harvey 2020
Hashing 101
SHA-256 (Secure Hashing Algorithm)https://emn178.github.io/online-tools/sha256.html
Let’s hash the phrase: “Hello, world!” with a special number appended. No spaces. Do it three times for three different strings.Hello, world!0 Hello, world!1 Hello, world!4250
Campbell R. Harvey 2020
Hashing 101
Campbell R. Harvey 2020
Output of program
Hashing 101
How many combinations in a SHA-256 hash?• Need 2255 = 1.15*1077 guesses• Which is roughly the number of atoms* in the known universe!
Campbell R. Harvey 2020*Number of atoms between 1078 to 1082 http://www.universetoday.com/36302/atoms-in-the-universe/
Hashing 101
SHA-256 hashes widely used for email and file transfer• Returning to the email example, I want to send a file to Sasha• I SHA-256 the file• I send Sasha the original file• Sasha does her own SHA-256 hash of the file• Sasha checks to see if her hash of the file matches the hash that I have on my
website• If there is any difference, the file has been corrupted• This all happens automatically and is called “checksum”
Campbell R. Harvey 2020
Hashing 101SHA-256 appears in Wall Street Journal
Campbell R. Harvey 2020
Hashing 101Three pre-releases
Campbell R. Harvey 2020
How does the bitcoin blockchain work?
Every transaction ever made on this blockchain is public• Ledger is append-only and immutable• Serves as a basis of trust• Can store (limited) metadata as well as transactions
Campbell R. Harvey 2020
How does the bitcoin blockchain work?
Ledger broken up into 10 minute “blocks”● Every block contains a hashed reference to the block before it so you can
trace every transaction all the way back to 2009
Campbell R. Harvey 2020
How does the bitcoin blockchain work?
Example. In block 1000, I buy a car (for 17 BTC) from John
Campbell R. Harvey 2020
How does the bitcoin blockchain work?
Suppose I edit the block on my computer – to give me 17 BTC!I then broadcast to the network
Campbell R. Harvey 2020Nefarious action
How does the bitcoin blockchain work?
Even making that small change results in a very different block hash. It no longer matches what is stored in block 1001.
Campbell R. Harvey 2020
How does the bitcoin blockchain work?
Blockchain clients automatically compute the hash themselves - if no match, they reject the block - Check other peers in the network for correct block
Campbell R. Harvey 2020
How does the bitcoin blockchain work?
But there is more to it! Here is where the miners come in.• Miners group the current transactions together and take a hash of the
transactions plus a “magic number” – called a “nonce”.
Campbell R. Harvey 2020
How does the bitcoin blockchain work?
But there is more to it! Here is where the miners come in.• Miners try different nonces to get a special hash that has a certain number
of leading zeros• More leading zeroes means fewer solutions – and more time to solve the
problem• Think of shuffling 5 decks of cards. You goal is to turn over 5 aces of spades
in the first five cards! That will be a lot of shuffling.
Campbell R. Harvey 2020
How does the bitcoin blockchain work?
But there is more to it! Here is where the miners come in.• Current difficulty is 19 leading zeros! Probability = (1/16)19
• Odds of winning two Powerball jackpots* in a row approx (1/16)15
• Someone finds the winning hash approximately every 10 minutes• System is immune to increases in computing speed – the difficulty
automatically adjusts if the hash is found in less than 10 minutes
*Probability of one Powerball win = 3.4223E-09; two Powerball wins in a row = 1.17122E-17; 19 zeroes in winning hash 1.3E-23
Campbell R. Harvey 2020** https://blockchain.info/charts/hash-rate Note 1 gigahash=1 billion hashes
How does the bitcoin blockchain work?
But there is more to it! Here is where the miners come in.• It is easy to verify the hash is correct• Anyone can take the hash of the transactions + nonce and get the hash with
the 19 leading zeros• However, any change in any transaction – no matter how trivial – will lead to
a completely different hash (and unlikely to have any leading zeros)• Miners are rewarded with cryptocurrency for finding the winning hash and
verifying transactions. There are also small transaction fees.
Campbell R. Harvey 2020
Distributed public ledger
Bitcoin blockchain:• Anyone can write to ledger and anyone can mine, i.e., no “censorship”• Network determines “settlement”• Having extreme “difficulty” is expensive (power consumption) but reduces
or eliminates the possibility of any single person (or miners) from doing anything nefarious.
Campbell R. Harvey 2020
Cryptocurrencies are deeper than bitcoin
1. First Gen/Gold 2.0: Bitcoin (BTC), Litecoin (LTC)
Campbell R. Harvey 2020
Cryptocurrencies are deeper than bitcoin
1. First Gen/Gold 2.0: Bitcoin (BTC), Litecoin (LTC)2. Distributed Computation Tokens: Ethereum (ETH), Tezos (XTZ), EOS, and DFinity
Campbell R. Harvey 2020
https://medium.com/@fluence.sh/blockchain-performance-comparison-eb47d94249b5
Cryptocurrencies are deeper than bitcoin
1. First Gen/Gold 2.0: Bitcoin (BTC), Litecoin (LTC)2. Distributed Computation Tokens: Ethereum (ETH), Tezos (XTZ), EOS, and DFinity3. Utility Tokens: Programmable blockchain assets: Storj, Golem (GNT), Sia (SC), FileCoin
Campbell R. Harvey 2020
Cryptocurrencies are deeper than bitcoin
4. Security Tokens: Represent stocks, bonds, other assets, ASX initiative• STO=Security Token Offering; ETO=Equity Token Offering
https://medium.com/@nisc/list-of-security-token-offerings-stos-32b75e079884
Campbell R. Harvey 2020
Cryptocurrencies are deeper than bitcoin
4. Security Tokens: Represent stocks, bonds, other assets, ASX initiative• STO=Security Token Offering; ETO=Equity Token Offering
5. Fungible Tokens: ERC-20, Decentraland (MANA), REP
Campbell R. Harvey 2020
Cryptocurrencies are deeper than bitcoin
4. Security Tokens: Represent stocks, bonds, other assets, ASX initiative• STO=Security Token Offering; ETO=Equity Token Offering
5. Fungible Tokens: ERC-20, Decentraland (MANA), REP6. Non-fungible Tokens: ERC-721, Dharma debt agreements, Decentraland (LAND), Cryptokitties
Campbell R. Harvey 2020
Cryptocurrencies are deeper than bitcoin
7. Stablecoins:• Fiat Colleralized: USDT, TUSD, USDC, PAX, JPMCoin, Libra, AmaCoin?• National Cryptofiat: Fedcoin, Petro, Eurocoin, CADCoin,… • Natural Asset Collateralized: Digix Gold (DGX), Tiberius Coin (TCX), Swiss Rea
Coin (SRC)• Non-Collateralized: Basecoin
Campbell R. Harvey 2020
Cryptocurrencies are deeper than bitcoin
Resources• https://coinmarketcap.com• https://coin360.com/• Fuqua miner 1: https://ethermine.org/miners/ff65F352156D2c69F9AbbF1AEF18E6d85314Ecce/dashboard
• Fuqua miner 2: [S17 to be set up]
Campbell R. Harvey 2020
Cryptocurrency vision
• Secure, efficient, immutable, and indisputable transactions• Removal of many middle people• A world of near zero transactions costs creates new assets• Trust in the network rather than the Central Bank - but Central
Banks will likely introduce their own cryptocurrencies• Tokenization of almost any asset• Financial inclusion for the unbanked
Campbell R. Harvey 2020
Cryptocurrency risks
• Technology is complicated and hard to understand• The wild west of ICOs and bandwagon investors• Extreme volatility• Regulatory risk• The privacy debate
Campbell R. Harvey 2020
Private blockchains
Example: 3 banks, 2 customers
Campbell R. Harvey 2020http://gendal.me/2015/04/27/how-to-explain-the-value-of-replicated-shared-ledgers-from-first-principles/
Private blockchains
Example: 3 banks, 2 customers + 1 blockchain
Campbell R. Harvey 2020http://gendal.me/2015/04/27/how-to-explain-the-value-of-replicated-shared-ledgers-from-first-principles/
Application to Back Office
JP Morgan’s Quorum• Ethereum based chain• Blockchain includes encrypted versions of all contracts• For a specific contract, only the parties to the contract have the ability to
decrypt the contract• So their blockchain includes all history, is immutable, but you can only see
the transactions you are a party to• Disrupts back office functions – large cost savings
Campbell R. Harvey 2020
Blockchain applications
Voting• Each citizen registered to vote is issued a voting token • The token cannot be sold and it can be used only once• It expires after the election• Voter needs to provide proof of identity (thumb print)
to vote• Blockchain is checked to see if that voter has the
token to “spend” • Your vote can be anonymous even though you provide
proof of identity with “zero knowledge proof”
Campbell R. Harvey 2020https://crypto.stanford.edu/pbc/notes/crypto/voting.html
Blockchain applications
Internet of Things• Only you can control your thermostat• Provide proof of identity (blockchain
is checked) and IoT device works for you
• Strong protection against hacking because the hacker would have to rewrite the entire blockchain and take over the majority of computing
Campbell R. Harvey 2020
Blockchain applications
Internet of Things• Only you can control your car• Provide proof of identity (blockchain
is checked) and IoT device works for you
• Driverless cars are a “no go” unless they are hack proof.
Campbell R. Harvey 2020
Blockchain applications
Prescriptions• Widespread fraud• Blank scripts are stolen from doctors’ offices
or forged• Some doctors abuse the system• Token issued to patient: it cannot be resold
and has an expiration• Patient presents token to pharamacist and
blockchain is checked to make sure patient owns the token (and has not already spent it)
Campbell R. Harvey 2020
Blockchain applications
Medical records• You enter a health facility (not your home facility)• You provide proof of identity verified with a blockchain• Your “private key” unlocks encrypted data related only your health records• Also provides a much stronger privacy protection
• Instead of a medical database being encrypted with one key (which might be lost or discovered), each patient’s record has its own key. Hence, to compromise the database you would need to guess potentially millions of keys
Campbell R. Harvey 2020
Blockchain applications
Real time financial statements• New role for Deloitte, E&Y, PwC, etc. in validating
company ledger transactions in real time• API would allow selected transparency (same categories as in the usual
financial statements) in real time• The end of quarterly reporting – and potentially some of the incentives that
are created to engage in short-termism
Campbell R. Harvey 2020
Blockchain applications
Digital Twins• Example: Jet engine• Every part, every replacement part,
every electronic sensor reading for the complete life of engine in a blockchain-based construct
• Easily monitored and easily transferred if the plane is sold
Campbell R. Harvey 2020
Blockchain applications
Fedcoin• 79% of the value of US currency is in
$100 bills• Large denomination bills method of
choice for criminal activity
Campbell R. Harvey 2020
Blockchain applications
Fedcoin• 80% of the value of US currency is in $100 bills• Large denomination bills method of choice for
criminal activity• Fedcoin is a digital USD currency where the
complete history of all transactions is visible to the Fed via a Fed blockchain
• Instant monetary policy, see Rogoff (2016)
Campbell R. Harvey 2020
El Chapo’s cash stash
https://www.federalreserve.gov/paymentsystems/coin_currcircvalue.htm
Blockchain applications
Central banks
Campbell R. Harvey 2020
Blockchain landscape
Campbell R. Harvey 2020
Key Takeaways• There is no one blockchain – it is a technology.• There are different methods of consensus – energy intensive mining is
not necessary.• Cryptocurrencies are but one application. Most blockchain applications
don’t include cryptocurrencies• Technology has two fundamental implications:
• Unprecedented security – information is set in stone and unable to be altered by a nefarious actor or a government
• Effective end to transactions costs meaning near instant, cheap, secure microtransactions and exchange of ownership. Dramatic implications for new types of assets and substantial cost savings.
Campbell R. Harvey 2020
Future work
Forthcoming...
#DeFi: The World of Decentralized FinanceCampbell R. Harvey
Campbell R. Harvey 2020
Coursera
Campbell R. Harvey 2020
https://www.coursera.org/learn/blockchain-business-models
Contact – Follow me on Linkedin!
[email protected]@camharveyhttp://linkedin.com/in/camharveySSRN: http://ssrn.com/author=16198PGP: E004 4F24 1FBC 6A4A CF31 D520 0F43 AE4D D2B8 4EF4
Campbell R. Harvey 2020
Campbell R. Harvey 2020
Blockchain business categories*
Transactions & Payment Services:• Startups whose primary use cases involve buying, selling, or storing
cryptocurrencies without a financial intermediary. The term cryptocurrency refers to a digital asset which functions as a medium of exchange on a distributed ledger. Smart contracts are programmable, transparent transaction contracts which self-execute upon the fulfillment of its terms of agreement. Wallets are software programs which interact with various blockchains to let users store, send, and receive crypto-assets and monitor their holdings. Some wallets extend services internationally and specialize in low-fee cross-border remittances. Merchant services enable vendors or organizations to participate in crypto-transactions. Finally, micropayment startups offer payments for metered content in small denominations. Campbell R. Harvey 2020
*Source: PitchBook
Blockchain business categories*
Cryptocurrency Exchanges & Trading:• Crypto-exchanges are platforms for exchanging cryptocurrencies into other
cryptocurrencies, fiat currencies, or vice versa. Peer-to-peer marketplaces enable two parties to directly exchange goods and services without an intermediary, while peer-to-peer lending platforms enable peers to extend and receive credit/loans through a blockchain. This segment includes crypto-investment companies who invest in cryptocurrencies with the intent to generate a return via value appreciation, as well as tools used to manage crypto-investments. Accordingly, startups providing clearing and settlement blockchain platforms for crypto-trading, forex and crypto-derivative markets are also included. Prediction markets involve speculation trading based on forecasts of economic and political events. Finally, fundraising platforms allow startups to complete blockchain-based fundraising and help prospective investors find such startups.
Campbell R. Harvey 2020*Source: PitchBook
Blockchain business categories*
Identity, Authentication, & Security:• An inherent characteristic of a blockchain is the immutability of transaction
records. Startups here use digital ledger software to verify the authenticity of data, as well as assets or documents, using blockchain identifiers to represent and/or authenticate tangible assets. Additionally, these startups leverage identity verification methods to track the cryptographic identity of an individual, entity, device, item, etc. Although blockchains themselves are secure by nature, blockchain-based applications are still vulnerable to cyber-attack. Startups in the security category create secure foundations for transactions, data storage, and network communication.
Campbell R. Harvey 2020*Source: PitchBook
Blockchain business categories*
Enterprise Blockchain Solutions:• Startups in this category provide enterprise-level blockchain
solutions to entities operating in sectors such as financial services, healthcare, insurance, and supply chain. This includes the development of industry-specific software as well as subscription leasing of proprietary blockchain platforms.
Campbell R. Harvey 2020*Source: PitchBook
Blockchain business categories*
Social, Games, & Gambling:• In this category, startups leverage decentralized networks to enable
social and networking platforms used for recruiting, classifieds, dating, and loyalty programs, among other use cases. One of the primary benefits such companies provide is the ability to share data and content without allowing a centralized third-party to assume any level of ownership of such content. Blockchain games include applications and tournament gaming platforms where users can compete for prize pools. Gambling startups allow users to place bets from anywhere around the world via blockchain peer-to-peer networks. Campbell R. Harvey 2020
*Source: PitchBook
Blockchain business categories*
Ecosystem:• This category includes startups furthering blockchain technology via
underlying infrastructure improvements and software development tools. The issues such companies address include those related to scalability, interoperability and governance, among others. While some of these companies could also be listed under “Enterprise Blockchain Solutions,” they are included here for the contribution of their open-source technology to the ecosystem. Mining companies provide products and services which assist in the computational process of solving cryptographic problems to earn cryptocurrency units. Data storage and hardware companies cater to the operational necessities of blockchain services.
Campbell R. Harvey 2020*Source: PitchBook
ConclusionsBlockchain will first disrupt financial services• Still early going but change will happen quickly• Low hanging fruit in financial applications• Next applications based on other types of property like real estate, digital media,…• Blockchain may be crucial to IoT applications that are at risk from hacking In the
short-term, I see the growth of a diverse set of blockchain types• Bitcoin blockchain is the strongest – but many applications do not require
censorship resistance; sidechains offer interesting opportunities• Alternative blockchains such as the one proposed by Ethereum allow for simple
contracts to be embedded in the blockchain and offer great promise• Blockchain not going away
Campbell R. Harvey 2020
More information
Campbell R. Harvey 2020
Fuqua Blockchain Club(Andrew Sears, Alicia Pumpian)
Fuqua Fintech Club(Alice Wang, Jordan Katz)
Duke Blockchain Lab
Blockchain on Courserahttps://www.youtube.com/watch?v=qtoHpmk3VHg&t=62s [Teaser]https://www.coursera.org/learn/blockchain-business-models?=