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11. VII. Decentralized Ledger
VIII. Proof of Work
IX. Hash Inclusions
X. Cryptocurrency
XI. Chain Security
I. Cryptographic Hash Fxs
II. Ledger
III. Digital Signatures
IV. Unique Tx IDs
V. No Overspending
VI. Smart Contracts
What is a blockchain?
12. Cryptographic Hash Functions
y = 2x
x y
0 0
1 2
2 4
3 6
● (the hardest concept today)
● Functions: Take input(s) and return output.
○ Linear: y = mx + b
15. Properties of a 256-bit Hash
● 2256 possible outputs
(115,792,089,237,316,195,423,570,985,008,687,907,853,269,984,66
5,640,564,039,457,584,007,913,129,639,936).
● Looks random, but isn’t actually!
Cryptographic Hash Functions
16. Properties of a Cryptographic Hash Function
● Same input always results in the same output!
● Extremely hard to reverse engineer.
● Small change to the input results in large change to the
output.
Cryptographic Hash Functions
19. A owes B $5 🍕
A owes B $7 🍩
B owes A $4 🥨
+ A owes B $2 🍫
A owes B $10 🤓
Ledger
A ⬅️💸➡️ B
📔
20. Current Stage
We have a central ledger (notebook) capable of recording
transactions between 2 parties who trust each other, who will
settle at end of month.
Ledger
Problem
What if we introduce more parties?
21. A pays C $6 🍕
D pays B $2 🍩
B pays C $3 🥨
+ A pays D $2 🍫
(settlement) 🤓
Ledger
A ⬅️💸➡️ B
⬆️⬇️ ⬆️⬇️
C ⬅️💸➡️ D
🤓🤓
22. Current Stage
We have a central ledger (website) capable of recording
transactions between multiple parties who trust each other,
who will settle at end of month.
Ledger
Problem
What if we don’t trust each other?
23. A pays C $6 Anupam
D pays B $2 Damir
B pays C $3 Beaumont
+ A pays D $2 Anupam
(settlement) 🤓
Signatures
24. Current Stage
Our central ledger (website) records transactions between
multiple parties who trust each other, who will settle at end of
month. All transactions must be signed.
Signatures
Problem
What if someone forges the signatures?
25. Digital Signatures
New Inputs!
● Every user is assigned a secret key and a public key.
● Secret Key: Only user knows.
● Public Key: Everybody knows.
27. Digital Signatures
Properties of Digital Signatures
● Signature Function: Users have a cryptographic (secure) way
of attesting to transactions.
● Verification Function: Other users can check to see whether
signatures are legit.
28. Current Stage
Our central trustless ledger (website) records transactions
between multiple parties who will settle at end of month. All
transactions must be digitally signed.
Digital Signatures
Problem
What if the same signature is applied to an identical transaction?
29. Unique Transaction IDs
Old Model
A pays $50 to B bd7a8a
A pays $50 to B bd7a8a
A pays $50 to B bd7a8a
A pays $50 to B bd7a8a
30. Unique Transaction IDs
New Model (with Transaction IDs)
A pays $50 to B (6oexh2) cb9d9a
A pays $50 to B (9w7teg) 9aa232
A pays $50 to B (20t84w) 87ddbc
A pays $50 to B (825g37) c38bad
Remember: Change to input changes the output!
31. Current Stage
Our central trustless ledger (website) records transactions
between multiple parties who will settle at end of month. All
transactions are authenticated via digital signatures.
Unique Transaction IDs
Problem
How do we make sure people actually settle?
32. ● Users must put money in
the pot first.
● Users are only allowed to
spend as much as they put
in.
● Overspent transactions are
invalid.
No Overspending!
💰 A puts $150 into ledger.
☑️ A pays B $100
☑️ A pays D $50
✖️ A pays C $20
33. No Overspending!
Properties of No Overspending
● There’s always money to move.
● Never have to cash out - can fully transact within the system!
Problem: How do we make this happen without human
attention?
34. Smart Contracts
● Don’t overthink it.
● Smart Contract: Takes cause, and executes effect.
If (A pays B $50), then move $50 from A’s account to B’s.
35. Smart Contracts
Properties of Smart Contracts
● Fully in code.
● Operate automatically!
● Tezos allows you to use Michelson, SmartPy, LIGO or Morley
36. Current Stage
Our central trustless ledger (website) records transactions
between multiple parties who will automatically settle at end of
month. All transactions are authenticated via digital signatures.
No Overspending and Smart Contracts
Problem
Who controls and maintains the ledger?
37. Decentralized Ledger
● Everyone has their own copy of the ledger.
● Transactions are broadcast for everyone to record.
A 🔊 “A paid B $50”!
A 📒 B 🥨🥨 C 📔 D 📓
38. Current Stage
Our decentralized ledgers records transactions between
multiple parties who will automatically settle at end of month. All
transactions are authenticated via digital signatures.
No Overspending and Smart Contracts
Problem
How do we know which ledger to trust?
https://tzstats.com/
39. Proof of Work
● Nonce: Special number that satisfies the challenge.
● Challenge: Find a nonce input that returns a hash that starts
with a certain amount of zeros.
40. Proof of Work
PoW Example
Challenge: Find nonce so SHA256 (Message, Nonce) returns a
hash that starts with 30 zeros.
● Users on the network (“nodes”) guess and “check through”
2^256 possibilities.
41. Proof of Work
Proof of Work: Users compete to find a nonce that meets the
network’s requirement. The set of transactions (ledger) with the
most computational work (nonces found) is trusted.
Properties of PoW
● Difficult to achieve: have to guess through lots of combos.
● Easy to verify! Just plug the nonce in and check.
42. ● Side Note: We’ll start collecting transactions into blocks.
● Blocks are completed with their proof of work.
Proof of Work
Transaction 1
Transaction 2
Transaction 3
Proof of Work
✅
Transaction 1
Transaction 2
Transaction 3
❌
43. Our Consensus Mechanism:
● The chain (ledger) with the most proof of work is trusted.
● This doesn’t require any intermediaries (third parties). The
code can do everything.
Proof of Work
44. Example
A’s ledger has 4 sets of PoW. B’s ledger has 2 sets of PoW.
Whose ledger do we trust?
Proof of Work
45. Current Stage
Our decentralized ledger records transactions between multiple
parties who will automatically settle at end of month. All
transactions are authenticated via digital signatures. We have
decentralized consensus as to the correct record.
Proof of Work
Problem
How do we stop the reordering of blocks?
46. Block 2 must contain Block 1’s hash.
➡️
➡️
● Block order is maintained!
● A change to a hash changes the entire proof of work.
transaction 1
transaction 2
transaction 3
Proof of Work
Previous Hash
transaction 1
transaction 2
transaction 3
Proof of Work
Previous Hash
transaction 1
transaction 2
transaction 3
Proof of Work
47. Current Stage
Our decentralized ledger records transactions between multiple
parties who will automatically settle at end of month. All
transactions are authenticated via digital signatures. We have
decentralized consensus as to the correct record (and its order).
Block 2 must contain Block 1’s hash.
Problem
How do we incentivize people to do Proof of Work?
48. Meaning
Proof-of-stake means that participants in the consensus
algorithm are chosen in function of their stake (the amount of
tokens a participant has).
“Baking” 👩🥨🍳 🥨
Tezos uses Proof of Stake
49. Consensus in PoS
Proof-of-stake means that participants in the consensus
algorithm are chosen in function of their stake (the amount of
tokens a participant has).
What is Proof of Stake
50. Delegates
If one does not have enough stake to participate on its own or
does not want to set up the needed infrastructure, (s)he can use
delegation. Therefore, in Tezos, it is the delegates that may
participate in consensus.
Tezos uses Proof of Stake
51. In a PoS system, a participant's vote in a system is linked directly
to the number of coins they have, so that a person who only has
100 coins cannot pretend to be 1000 different people with 100
coins each.
It could pretend to be 100 different people with 1 coin each, but
since the voting power of a participant is proportional to the
number of coins they own, this spoof does not help.
Why is Proof of Stake better
52. In a Proof-of-Work system, block producers (aka miners or
validators) compete for this right by expending computing
power to solve random cryptographic puzzles. In this paradigm,
the more computing power a miner has, the more likely they are
to create the next block.
By contrast, PoS systems revolve around the idea that the more
coins a block producer has, the more likely they are to create the
next block.
PoS as more energy efficient
53. ● Baker: Listens for transactions, creates blocks, and
broadcasts those blocks.
● Those who achieve a PoS by ‘baking’ will be rewarded with
TEZ.
● Ledger users listen for blocks, not transactions
Cryptocurrency e.g. TEZ
54. Current Stage
Our decentralized ledger records transactions between multiple
parties who will automatically settle at end of month. All
transactions are authenticated via digital signatures. We have
decentralized consensus as to the correct record (and its order).
Continuous maintenance of the network is incentivized by
rewarding miners with crypto.
Cryptocurrency!
Problem
How secure is this really?
55. How do we break this?
Review of Security
● Cryptographic functions ensure that transactions and their
order are authenticated (signature function, hash inclusions).
● Their authenticity can be checked by anyone at any time
(using verification functions, plugging in the nonce).
● Only the chain with the most blocks is trusted. As the
network grows, cheating gets more and more difficult.
56. How do we break this?
Example
A hates B. A broadcasts “A pays $40 to B” to B, but not to
anybody else. A wants B to have his own (fraudulent chain), but
doesn’t actually want to pay B.
What would he have to do?
57. How do we break this?
Recall: Only the chain with the most blocks is trusted. A would
have to do his own proof of stake on the fraudulent chain in
order for B to believe it was the right one.
● This is possible, if A has 51% of the computational power on
the network.
● As the network grows, this becomes way more difficult.
● As soon as A’s fraudulent chain is outpaced, he’s blocked!
58. How do we break this?
Example II
C doesn’t like the set of transactions. She wants to go back a
couple blocks, and remove records of people paying her.
What would she have to do?
59. How do we break this?
Recall: Every block has the previous block’s hash. Block 6 has
Block 5’s hash, etc.
● To change Block 6, C will have to redo the baking for Blocks 1-
5, and outpace the real chain as she does.
● Possible, but extremely difficult.
● She also does not have people’s secret keys, so can’t create
new transactions that pertain to them.
60. Current Stage
Our decentralized ledger records transactions between multiple
parties who will automatically settle at end of month. All
transactions are authenticated via digital signatures. We have
decentralized consensus as to the correct record (and its order).
Continuous maintenance of the network is incentivized by
rewarding miners with crypto.
Our system is extremely secure and becomes more secure as
more users join.
How do we break this?
61. A trustless ledger of transactions that is:
● Immutable: Can’t be changed.
● Decentralized: Failure-tolerant, user-controlled, transparent.
● Secure: Via cryptography, hashing, etc.
● Distributed: Quicker without intermediaries.
● Consensus: No need for trust.
What is a blockchain?
62. ● Self-Amendment: Self-amendment allows Tezos to upgrade itself without having to split
(“fork”) the network into two different blockchains.
● On-chain Governance: In Tezos, all stakeholders can participate in governing the protocol. The
election cycle provides a formal and systematic procedure for stakeholders to reach
agreement on proposed protocol amendments.
● Proof of stake + delegation
● Smart Contracts + Formal Verification: Tezos offers a platform to create smart contracts and
facilitates formal verification, a technique used to improve security by mathematically proving
properties about programs such as smart contracts.
What is unique about Tezos
64. Web3 is a totally new way to engage with the
internet with financial primitives, identity and
individual autonomy built in.
65. Current: Our financial system relies on opaque systems of
intermediaries (banks, brokers, etc) that drive costs and are potentially
untrustworthy.
Possibility: Decentralized Finance
Possibility: What if we had a trustless mechanism by which
transactions can be permanently and transparently recorded, without
the need for costly intermediaries?
66. Current: ownership is either indirect (someone else looks after it or
verifies our ownership) or it is difficult to prove we own something
Possibility: Non-Fungible Tokens
Possibility: what if we had digital ownership of assets with a compelling
link between the asset and the owner
67. Current: The governance (decision-making) of powerful institutions is
concentrated between a few actors, shielded from stakeholders, and
compromised by the personal interests of those few actors.
Possibility: Decentralized Autonomous Orgs
Possibility: What if we had a transparent and decentralized way by
which decisions can be made, and governance tokens incentivize
participation by stakeholders?
