Blockchain

Dr. Murat M. Tunc

November 11th, 2024

What is a Blockchain?
• A unique type of computerized ledger relies on
cryptographic techniques and new methods for
consensus to capture and secure the data
• Money transactions
• Medical records
• Buying and selling goods
• Insurance policies

• What is so special about blockchain?

• Distributed
• Consensus mechanism
• Encrypted
• Immutable
What is a Ledger?
What is so special about
blockchain?
Distributed
Consensus mechanism
Encrypted
Immutable
Where is this ledger?
• In a central location?
• Central banks, governments

• Why is it controversial to have the ledger in a central

location?
• Attack vulnerability
• Single point of contact
• Rely on middle-men
• Operational inefficiency
Centralized Ledger Risks

Attack Single Point of Middle-men Operational

Vulnerability Failure Dependencies Inefficiency
Equifax Data Breach TSB Bank IT Lehman Brothers SWIFT International
(2017) Migration (2018) Collapse (2008) Transfers
• 143 million • 1.9 million • $600 billion in assets • 3-5 business days
customers' sensitive customers locked out frozen due to delay and high fees
data exposed due to of accounts due to centralized due to multiple
centralized database central system failure intermediary failure intermediary banks
vulnerability Visa Network
JPMorgan Chase Outage (2018)
Hack (2014) • 5.2 million
• 76 million transactions failed
households affected due to single system
by cyber attack on failure in Europe
centralized banking
systems
Types of ledgers
Types of ledgers
• Control
• Centralized: One entity controls the entire system
• Decentralized: Multiple entities control the system

• Location
• Centralized: Ledgers exist at the same location
• Distributed: Ledgers exist at different locations

• Distributed yet centralized

• Distributed servers but controlled by a single authority
• Cloud service providers
Distributed Ledger Technology
• Distributed ledger technology
• Everyone in the peer-to-peer network have an
identical copy of the ledger
• No single entity is the authority of the system
• System is widely distributed among entities in the network
• Blockchain
• One type of DLT
• Based on a P2P network
What is so special about
blockchain?
Distributed
Consensus mechanism
Encrypted
Immutable
Self-regulating system
• In a centralized system
• Administrator has the authority to update and maintain the
database
• In blockchain, everyone in the network can
• Read the chain
• Make legitimate changes in the chain
• Write a new block into the chain
• Blockchain is a self-regulating system
• Contributions by the participants
• Authentication and verification of the transactions
Distributed consensus
• A well-known problem in computer science
• How multiple, independently run computers can reliably
agree on a set of common data in the presence of
faults?
• Where there is a risk that one or more computers are
programmed to introduce false information
• Satoshi Nakamoto (2008) proposed a solution to this
problem
• All computers in a blockchain network use a system of
distributed consensus to agree upon continually updated
history of transactions in a ledger
• There is only one version of the transaction ledger in
bitcoin over a decade (The trust machine)
Consensus mechanisms
• Proof of work
• Complex problem that needs computational power to solve
(miners) based on an algorithmically adjusted difficulty
• Bitcoin, Ethereum (past)
• Proof of stake
• A lottery-like system randomly rewarded to those based on
how much stake (currency) they commit (have) (validators)
• EOS, Cardano Ouroboros, Ethereum (present)
• Proof of authority
• Slightly adjusted proof of stake
• Validators are selected based on their reputation
• IBM Hyperledger
Proof of work
• Bitcoin’s breakthrough feature
• Participants (miners) competing to win rewards in bitcoin in
the presence of a computational cost
• Each miner collects a set of pending transactions (block: a list of
~2000 transactions)
• While simultaneously competing to find a randomly chosen string
(~10 minutes to find)
• Once a miner finds the required string, they broadcast the string and
the block (gets a reward of 6.25 BTC + fees)
• Fraud ?
• Computationally infeasible
• Controversies
• Energy intensive
• Costly barriers of entry for miners
Consensus protocol
• Create append-only log
• Transaction ledger
• To be used to form an auditable database
• Who owns what
How to update the ledger?
• John and Ashley are two peers in the bitcoin network
• John pays Ashley 0.05 BTC (~3800 €) for the rent
• John (-0.05) and Ashley (+0.05) add this transaction and update
the ledger
• How does the others see this update on their identical
copy of the ledger?
How to update the ledger?
How to update the ledger?
What is so special about
blockchain?
Distributed
Consensus mechanism
Encrypted
Immutable
How secure is blockchain?
• Users have control over their transactions (or
cryptocurrencies) via a digital signature system by
which they indicate consent to transfer goods (coins)
• These digital signatures are
• public
• cannot be forged
• can be verified by anyone
Digital signatures
• Every user has a
• private key (only the user can see it)
• public key (everyone in the network can see it)
Digital signatures
• 256-bit digital signature is produced based on
• the document (message)
• John pays Ashley 100 $
• private key
• John’s private key
• How does Ashley (or anyone) can verify that it is indeed
John that signed this document?
• Verification function (True / False) based on
• Digital signature (John’s Digital Signature)
• The message (John pays Ashley 100 $)
• Public key (John’s public key that anyone can see)
• When Ashley verify John’s signature
• Extremely confident that it is indeed John
What is so special about
blockchain?
Distributed
Consensus mechanism
Encrypted
Immutable
What does a block store?
• Timestamp
• the time when the block was mined
• Block number
• the length of the blockchain in blocks
• Difficulty
• the effort required to mine the block
• Hash
• a unique identifier for that block
• A parent hash
• the unique identifier for the block that came before (this is how blocks are
linked in a chain)
• Transactions list
• the transactions included in the block
• Nonce
• a hash that, when combined with the mixHash, proves that the
block has gone through proof of work
Block #656772
Changing Block #656772
• Let’s say that someone wants to change block #656772
and add the following
• John pays Murat 1000 BTC (~75 million €)
• 2916 transactions + John pays Murat 1000 BTC
• 2917 transactions
• Requires a new Hash #656772
• Difficulty: It has to start with 19 zeros (2^19)
• ~ 1 / 500,000 chance
• Also requires a new Hash for #656773
• Since #656773’s prev. hash (i.e. hash for #656772) has changed
• ~ 1 / 500,000 chance
• Also requires a new Hash for #656774 …
Changing Block #656772
• One needs to compete with all the other miners in the
network
• To find new Hash for the rest of the blocks
• Unless someone has more than 50% of the
computational power of all the miners combined
• You cannot change a block in the blockchain
• 51% attack
• Computationally infeasible to change a block
• Immutability
Real World Use Cases
Cross-border payments

Santander Challenge of Blockchain

Bank used traditional based
blockchain international platform’s key
technology in payments features:
their "One Pay
FX" app
3-5 days processing Same-day settlement
Unclear exchange Real-time exchange
rates rates
Hidden fees Full cost
No payment tracking transparency
Instant tracking
Supply Chain Traceability
Blockchain-powered platform
Real-time tracking
IBM Food Trust Digital documentation
Automated tracing

Time to trace: 7 days

The Mango Test - Manual process
Before: Multiple phone calls
Paper documentation

Time to trace: 2.2 seconds

The Mango Test - Automated tracking
After: Single platform
Digital records

Faster recall response

Improved food safety
Business Impact Better inventory management
Increased consumer trust
Adoption Challenges
Blockchain Scalability Challenges

Ethereum Network Congestion Events (2017-2023)

• CryptoKitties (2017): Network utilization reached 25%, transactions took
6+ hours
• DeFi Summer 2020: Gas fees reached 700 gwei ($50+ per transaction)
• Bored Ape NFT Launch (2021): Gas fees spiked to 8,000 gwei ($3,300)
• Stablecoin Crisis 2022: Network congestion led to failed liquidations
Bitcoin Network Congestion Events (2017-2023)
• December 2017: 116,000 unconfirmed transactions
• May 2021: Transaction fees hit $62.78 average
• 2023 Ordinals: Mempool exceeded 400,000 transactions
Performance Comparisons

Traditional Systems (TPS)

• Visa: 65,000
• PayPal: 193
• SWIFT: 200
• Mastercard: 45,000
Blockchain Networks (TPS)
• Bitcoin: 7
• Ethereum 1.0: 15-30
• Binance Smart Chain: 100
Scaling Solutions Being Implemented
Layer 2 Arbitrum: 40,000 TPS
Solutions
Optimism: 2,000 TPS
Polygon: 65,000 TPS
Sharding ETH 2.0: 100,000 TPS
Near Protocol: 100,000 TPS
Zilliqa: 2,828 TPS
New Solana: 65,000 TPS
Consensus
Avalanche: 4,500 TPS
Algorand: 1,000 TPS
 Blockchain Regulatory Challenges

SEC vs. Ripple (2020-

2023) Binance: $4.3B Coinbase: $100M
• $1.3B lawsuit over XRP's settlement for settlement with NY
security status regulatory violations regulators
• Legal costs exceeded
$200M

Bybit: Ceased UK Ripple: Relocated

operations due to majority operations to
FCA regulations Singapore
Blockchain Energy Consumption

Bitcoin Mining Plattsburgh, NY Tesla (2021)

Environmental (2018)
Impact
Annual consumption: ~110 10% city power consumed Suspended Bitcoin
TWh by miners payments
Netherlands (108.8 Electricity rates increased Cited 75 kWh energy cost
TWh/year) 50% per transaction
First US city to ban mining
Energy Efficiency Solutions
Proof of Stake
• Ethereum: 99.95% reduction
• Cardano: 0.01% of Bitcoin's usage
• Solana: 0.001% of Bitcoin's usage
Green Mining
• El Salvador: Volcanic energy
• Norway: 100% hydroelectric
Layer 2 Solutions
• Polygon: 0.0023 kWh/transaction
• Arbitrum: 0.0014 kWh/transaction
• Optimism: 0.0017 kWh/transaction
Blockchain Integration Challenges

Walmart
Supply Chain • 40% of suppliers struggled with
technical requirements
Food • $23M in additional integration costs
traceability

• National blockchain health record

Estonian system
Health Records • $7M integration cost overrun
• GDPR compliance complications
Common Integration Challenges

Technical Issues Organizational Issues

• Data format • Staff training

inconsistencies requirements
• API compatibility • Process redesign needs
problems • Stakeholder resistance
• Performance bottlenecks • Cost overruns
• Security protocol
conflicts
Current Integration Solutions
Enterprise Hyperledger Fabric
Platforms
R3 Corda
Quorum
Middleware ChainBridge
Solutions
Polkadot
Cosmos IBC
Integration ISO/TC 307
Standards
IEEE 2418.2
EEA Standards
Readings
• Nakamoto, S. (2008). A peer-to-peer electronic cash
system. Bitcoin.–URL: https://bitcoin.org/bitcoin.pdf.
• Ellervee, A., Matulevicius, R., & Mayer, N. (2017). A
Comprehensive Reference Model for Blockchain-based
Distributed Ledger Technology. In ER Forum/Demos
(pp. 306-319).
References
• Casey, M., Crane, J., Gensler, G., Johnson, S., & Narula, N. (2018). The
impact of blockchain technology on finance: A catalyst for change.
• Pease, M., Shostak, R., & Lamport, L. (1980). Reaching agreement in the
presence of faults. Journal of the ACM (JACM), 27(2), 228-234.
• Anderberg, A., Andonova, E., Bellia, M., Calès, L., Inamorato Dos
Santos, A., Kounelis, I., Nai Fovino, I., Petracco Giudici, M.,
Papanagiotou, E., Sobolewski, M., Rossetti, F. and Spirito, L. (2019).
Blockchain Now And Tomorrow. Editors: Figueiredo Do Nascimento, S.
and Roque Mendes Polvora, A.
• Anwar, H. (2018). Top 10 Blockchain Adoption Challenges.
https://101blockchains.com/blockchain-adoption-challenges/
• Essentia (2018). 50+ Examples of How Blockchains are Taking Over the
World. https://medium.com/@essentia1/50-examples-of-how-
blockchains-are-taking-over-the-world-4276bf488a4b
• Rosic, A. (2018) What is Blockchain Technology? A Step-by-Step Guide
For Beginners. https://blockgeeks.com/guides/what-is-blockchain-
technology/