Blockchain & Money: Session 7: Technical Challenges by M.I.T. Sloan School of Management with Professor Gary Gensler

Session 7: Technical Challenges

• Session 7 Study Questions:
  • How critical are the technical and commercial challenges–scalability, efficiency, privacy, security, interoperability–of current blockchain technology?
  • What are the possible tradeoffs of decentralizaton, scalability and security? What are tradeoffs of consensus software updates, governance and so-called ‘hard forks’?
  • What might current work–Layer 2 applications, zero-knowledge proofs, alternative consensus algorithms–do to address current commercial challenges?

• Session 7 Readings:
  • Required:
    • ‘Geneva Report’ Chapter 2 (pages 9-16); Casey, Crane, Gensler, Johnson, & Narula
    • ‘On the Scalability of Blockchains’ The Control
    • ‘Transaction Speeds: How do Cryptocurrencies Speeds Stack up to Visa or PayPal?’, HowMuch.net
    • ‘Layer 2/ the Lightening Network’ Digital Currency Initiative
    • ‘Top 8 Privacy Coins’ Invest in Blockchain
  • Optional:
    • ‘On Sharding Blockchains’ Ethereum Wiki
    • ‘zkLedger: Privacy-Preserving Auditing for Distributed Ledgers’ Narula, Vasquez & Virza

Overview: Blockchain Technical Features; Framework for Comparing Costs and Trade-offs of Decentralization; Challenges with Blockchain Technology; Buterin Trilemma; Possible Solutions for Scalability, Efficiency, Privacy, & Interoperability; Governance Most Challenging; Conclusion.

Framework for Comparing Costs & Trade-offs (Coase):

• Challenges with Blockchain Technology:
  • Performance, Security & Efficiency
  • Privacy & Security
  • Interoperability
  • Governance & Collective Action
  • Commercial Use Cases
  • Public Policy & Legal Frameworks

• Vitalik Buterin’s Trilemma–Can you achieve all 3???
  • Some people debate that decentralization comes with a cost to scalability & security, or that if you want scalability & security, then you can’t have decentralization. That there’s a “give and take”.

• Performance, Scalability, & Efficiency:
  • Throughput:
    • Bitcoin: 7-10 transactions/sec.
    • Ethereum: 20 transactions/sec.
    • Visa: 24,000/sec.
    • DTCC (Depository Trust & Clearing Corporation): up to 100,000/sec

• Proof-of-Work Energy Consumption:
  • Bitcoin: estimates range
  • Digiconomist estimates 200 million kwh/day–Equivalent to Electricity consumption of:
    • 6.8 millions U.S. homes
    • 0.33% of the World, or
    • Austria

• Side Chains, Sharding, Layer 2 & Payment Channels:
  • activities that happen off the main chain & settles up with the main chain at a later point.

• Alternative Consensus Protocols:
  • Generally Randomized or Delegated Selection of Notes to Validate next block.
    • May have added mechanism to confirm Black Validators’ Work
  • Randomized Selection May be based upon:
    • Proof of Stake–Stake in Native Currency
    • Proof of Activity–Hybrid of POW of POS
    • Proof of Burn–Validation comes with Burning of Coins.
    • Proof of Capacity (Storage or Space)–Based upon Hardware Space.

Delecated Selection May be based upon Tiered System of Nodes

• Major Permissionless Blockchain Applications still use Proof of Work–though:
  • DASH is a hybrid of POW with a tiered system of ‘Master nodes’
  • NEO uses a Delegated protocol of ‘Professional Nodes’

• Privacy & Security:
  • Contradictory Tensions of Pseudonymous Addresses
    • Law Enforcement & Regulators want more transparency
    • Financial institutions, regulators, & some users want less public transparency
  • Concerns about coins & mechanisms fostering illicit activities.
    • Coins: Dash, Monero, Zcash
    • Mechanisms: Mixers or Tumblers

• Cybersecurity Challenges of private key Custody, Generation, & Storage
  • Significant Losses due to Hacks, Mismanagement & Thefts.
  • This brings also a whole set of financial, custody issues, & asymmetric risk issues, if a key gets lost or hacked.
• Possible Solutions involve a) Zero Knowledge Proofs, & b) Pedersen Commitments
  • Cryptographic Primitives that: a) lets someone prove a statement is true without revealing the details of exactly why that statement is true, & b) commit to data (like hash) but can also combine commitments.

• Interoperability:
  • Linking Blockchain Application to Legacy databases, infrastructures, and technologies.
  • Raises ‘Costs of Trust’ in Coordinating the Transfer of Assets & Information into the Blockchain or Across Chains.
  • A solution may be to enable Decentralized Mechanisms (including Side Chains or a ‘Layer 0’) for data transfers across chains.
  • Far more work is needed to achieve seamless movement between and amongst new Blockchain Technology and existing Technology.

• Consensus Required for Certain Software Updates:
  • Open Source software updates which are not backward compatible
    • Older versions won’t validate all new blocks
    • Similar to if Excel or Word updates and new files are not compatible.
  • Leads to ‘Hard Forks’
  • Blockchain–Consensus supports the longest chain

• Collective Action:
  • Blockchain applications derive their value from the participation of multiple parties in a network, adoption requires collective action.
  • Chicken & egg dilemma: need early adopters to start network effects, but path to incremental adoption is not often clear.

• Financial Sector Currently Favors Permissioned Blockchains:
  • Known set of participants
  • No proof-of-work or mining
  • No need for a native currency
  • Distribute database technology
• vs. Permissionless Blockchains:
  • Unknown participants
  • Security based on incentives
  • Native Currency
  • Crypto-economics

• Conclusions:
  • Blockchain provides P2P Networking, but with costs
  • Decentralization costs and Trade-offs of Permissioned Systems.
  • For Scalability, Efficiency, & Privacy Challenges–it’s early days but promising work exists on possible solutions–Side chains, Alternative Consensus Protocols, & Zero Knowledge Proofs.
  • Challenges of Interoperability might benefit from Decentralized Mechanisms across chains.
  • Governance & Collective Action Issues inherent to the design may end up being the most challenging to solve.

Biblio:

• Gary Gensler. 15.S12 Blockchain and Money. Fall 2018. Massachusetts Institute of Technology: MIT OpenCourseWare, https://ocw.mit.edu. License: Creative Commons BY-NC-SA.

Video Link: Session 7: Technical Challenges.