Blockchain & Money: Session 4: Blockchain Basics & Consensus by M.I.T. Sloan School of Management with Professor Gary Gensler

Session 4: Blockchain Basics and Consensus

• Session 4 Study Questions:
  • What is the Byzantine General’s problem? How does proof-of-work and mining in Bitcoin address it? More generally, how does blockchain technology address it?
  • What other consensus protocols are there? What are some of the tradeoffs of alternative consensus algorithms–proof-of-work, proof-of-stake, etc.?
  • How do economic incentives work within blockchain technology to maintain decentralized ledgers and avoid double spending?
  • What are the incentives of consensus protocols & mining?

• Session 4 Readings:
  • ‘Geneva Report’ Chapter 1 (pages 1-7); Casey, Crane, Gensler, Johnson & Narula.
  • ‘Blockchain Technology Review’ NIST (pages 23-32, section 3 & 4).
  • ‘The Byzantine Generals Problem’; Lamport, Shostak & Pease (382-387).
  • ‘A Short Guide to Consensus Protocols’; Coindesk.

Overview: Review of Blockchain Design; Consensus through Proof-of-Work; Bitcoin Mining; Native Currency; Network; Other consensus protocols; Conclusion.

Blockchain/Bitcoin Technical Features:

• Cryptography & Timestamped Logs
  • Cryptographic Hash Functions
  • Timestamped Append-only Logs (blocks)
  • Block Headers & Merkle Trees
  • Asymmetric Cryptography & Digital Signatures
  • Addresses
• Decentralized Network Consensus
  • Proof of work
  • Native Currency
  • Network
• Transaction Script & UTXO–Transaction Code & Ledgers
  • Transaction Inputs & Outputs
  • Unspent Transaction Output (UTXO) set or account-based
  • Scripting Language–Script, Solidity, or other programming languages.

• Hashcash–Proof of Work (Adam Back, 1997)
  • Proposed to address Email, Spam, & Denial of Service attacks
• Requires computational work to find a hash within predeterminded range.
• Difficultly defined by Hash output’s # of leading zeros.

• Blockchain–Proof of Work
  • Innovation–Chained Proof-of-Work for Distribute Network Consensus & Timestamping.

• Bitcoin–Proof of Work Difficulty
  • Targets 10 minute average block generation time.
  • Defined by the # of leading zeros Hash output requires to solve proof of work
  • Adjusts every 2016 blocks–about every 2 weeks
  • Currently, greater-than or equal to 18 leading zeros (out of 64 hexadecimal characters)
  • Block 541974 (09/18/18)–18 leading zeros.

• Genesis Block (01/03/09)–10 leading zeros, though only required 8
  • ex: 000000000019d6689c085ae165831e934ff763ae46c2a6c172b…

Bitcoin Mining Evolution

• Native Currency
  • Economic Incentive System
  • ‘Monetary Policies’ vary widely

• Bitcoin–BTC
  • Created through Coinbase Transaction in each block
  • ‘Monetary Policy’ preset in Bitcoin Core
  • Creation originally 50 Bitcoin per block
  • Reward halves (1/2s) every 210,000 blocks
  • Currently, 12.5 BTC’s created per block–thus ‘inflation’ 4.1%
  • Currently, 17.3 million BTC; capping at 21 million BTC in 2040.
  • Market based transaction fee mechanism also provided for in Bitcoin Core

• Ethereum
  • Currently, 3 ETH per block–thus ‘inflation’ 7.4%
  • Recent proposal to decline to 2 ETH per block in 11/18
  • Fees paid in ‘Gas’ (10⁹ Gas per ETH) for computation are credited to miners.
  • ‘Gas’ is a small unit of Ethereum, like how ‘satoshi’ is a small unit of Bitcoin.)

• Network
  • Full Nodes–Store full blockchain & able to validate all transactions
  • Pruning Nodes–Prune transactions after validation & aging.
  • Lightweight Nodes–Simplified Payment Verification (SPV) nodes–Store Blockchain Headers only
  • Miners–Performs Proof of Work & Create new Blocks–Do Not need to be a full node.
  • Mining Pool Operators
  • Wallets–Store, View, Send & Receive Transactions & Create Key Pairs.
  • Mempool–Pool of unconfirmed (yet validated) Transactions.

• Alternative Consensus Protocols
  • Generally Randomized or Delegated Selection of Nodes to Validate next Block
    • May have added mechanism to confirm Block Validators Work
  • Randomized Selection May be Based Upon:
    • Proof of Stake–Stake in Native Currency
    • Proof of Activity–Hybrid of POW & POS
    • Proof of Burn–Validation comes with Burning of Coins.
    • Proof of Capacity (storage or space)–Based upon Hardware Space
  • Delegated 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 ‘Masternodes’
    • NEO uses a Delegated protocol of ‘Professional Nodes’.

• Conclusions
  • Reviewed Bitcoin Design Features
    • Timestamped Append-only Logs (Blocks)
    • Secured through Cryptographic Hash Functions & Digital Signatures
  • Decentralized Network Consensus
    • Consensus through Proof of Work
    • Native Currency
    • Network
  • Transactions Ledgers
    • Transaction Inputs & Outputs
    • Unspent Transaction Output (UTXO) set
    • Scripting language

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 4:Blockchain Basics & Consensus.
• Slides Link: Session 4: Blockchain Basics & Consensus Slides.