Fintech Workshop

Department of Computer Science
KICT
IIUM
Introduction to bitcoin, blockchain and smart contracts
by Rizal Mohd Nor (PhD)
Introduction to Blockchain
By
Rizal Mohd Nor, Ph.D.
Kulliyyah of ICT, IIUM
Workshop on Islamic Finance and Fintech

KICT
IIUM
Outline
● Evolution of Money
● What is Cryptocurrency
● What is Bitcoin
● How does BitCoin Work
● What is Blockchain
● Why is Blockchain Significant

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IIUM
Shells
Copper Cash
Ingot
Bandar’s Note
Gold / Silver
Modern Currency
Evolution of Money
Credit / Debit Card
Digital Money
Crypto Currency

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IIUM
Outline
● What is Money
● What is Cryptocurrency
● What is Bitcoin
● How does BitCoin Work
● What is Blockchain
● Why is Blockchain Significant

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IIUM
E-money: Cryptographically secure
● Early forms of e-money goes back to the early 1980’s
(see Chaum [1988, 1985, 1992])
– electronic cash
● useable in the real world economy
● emulating physical currency
● a digital cash as an extension to the RSA encryption protocol
● had a lot of promise, but fail to be main stream
– political
– business related issues

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The rise of e-money
● Later, emerged:
– PayPal, Liberty Reserve and E-gold
● PayPal
– successful (worked with banks)
– acceptable by central banks and regulators
● The other two was not successful due to
– activities related to criminal activities
● operated as centralized systems

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What is Cryptocurrency?
 Cryptocurrency?
 Digital medium exchange to ensure integrity
and general balance of all ledgers
 Monetary units of cryptocurrency requires:
•certain amounts of work, called Proof-Of-
Work/Stake/Interest (PoW, PoS, PoI)
•produced and cannot be reproduced to a materialized
representation by contemporary fashion
 Absence of a central Authority

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Definition
 Comparing Fiat money and Cryptocurrency
 Holder’s ownership is completely anonymous*
 Derives trust from mathematical
properties and cryptographic primitives
Hash function, a cryptographic
primitive extensively used in Bitcoin
 Logically immune against counterfeit
and other problems like Double
Spending
* Not Really, some wallets are starting to
implement KYC and AML

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Cryptocurrencies
● Today’s cryptocurrencies typically not centralized.
● Most widely known is Bitcoin, Nakamoto [2008].
– It is a ‘decentralized’ currency
● No need for financial intermediaries to perform electronic
transactions
● No central bank or authority in control of monetary policy
● Bitcoin is not the only cryptocurrency, there are
many more.

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Other Cryptocurrencies
● 831: tracked by coinmarketcap.com
Date 23rd
,
May, 2017

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Market Price (USD)

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Market Price (USD) – last 2 years

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Market Price (USD) – volatile?

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Number of Transactions per Day
Will it scale? This is still a fraction of VISA
transactions.

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Are people really using it? How much
is being Traded?

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●
It is simply a means of sending and receiving
numbers to and from "addresses"
●
An Open-Source Peer-To-Peer Payment Network
– Using Digital Signatures & Encryption
– decentralization is the basis for Bitcoin's security and
freedom
●
Public –Private Key Encryption
– Digital Certificate Blocking Chain
BitCoin
Source: http://www.weusecoins.com/

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Bitcoin
●
Governance - an open source community of developers
backed by the Bitcoin Foundation
●
Democratic - if you don't like one of the changes, you
are more than welcome to fork the chain and implement
your own rules
●
Money Creation - is given to the people, not to the
central bankers
●
Deflationary by design - money supply cannot be
manipulated and is fixed at 21 million coins, each
divisible up to 8 decimal*
18

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How to Store Your Bitcoin?
● E-Wallets
– Desktop Wallets
– Mobile Wallets
– Online Wallets
– Hardware Wallets
– Paper Wallets

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How It works
●
The blockchain is the fundamental data structure of
the Bitcoin protocol.
●
It's a single data file participants pass around to each
other. Usually using an algorithm called BFT.
●
It allows them to know who owns what.
●
Anyone can change it to send money to someone
else.
●
Other users mathematically verify the transaction to
ensure it's validity. (PoW/PoS/PoI)
21

How Does it
Work:
Technical run
through of a
transactionOutput contains
1) The actual amount being sent to the recipient.
2) The change amount being sent back to the
original sender (if any)
3) The voluntary transaction fee attached to the
output (if any).
Reference:
http://trueeconomics.blog
spot.my/2013/05/1252013
-how-bitcoin-works.html

New coins Mined
10 minute outcome
Reference:
http://trueeconomics.blogspot.
my/2013/05/1252013-how-
bitcoin-works.html

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BitCoin Mining
1. Collects transactions from the network
2. Validates them, and doesn't allow conflicting ones
3. Puts them into large bundles called blocks
4. Computes cryptographic hashes over and over until if finds one "good
enough to count"
5. Then submits the block to the network, adding it to the block chain
and earning a reward in return
6. These blocks are strung together into one continuous, authoritative
record called the block chain,
– which doesn't permit any conflicting transactions.
– lets you know for sure exactly which transactions count and can be trusted (no
double spending!).
24

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Verifying and Signing Transactions
 Fundamental Bitcoin transaction overview
 Requires basic knowledge of asymmetric cryptography,
and cryptographic hashing

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Blockchain
●
Bitcoin makes sure there is only one blockchain by
making blocks really hard to produce.
●
miners have to compute a cryptographic hash of the
block that meets certain criteria
– difficulty of the criteria for the hash is adjusted based on how
frequently blocks are appearing
– also carefully validate all the transactions that go into
their blocks
●
Successful miners are rewarded some bitcoins
according to a preset schedule
26

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The blockchain network (BFT origin)

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PBFT network in Ethereum

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Mining Platforms
Professional Mining Services
Old School Mining College kids are doing it

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Fraud prevention
●
Users can trust the block chain that was most
difficult to produce
– longest chain wins
●
If there was a "fake" blockchain competing with
the real ones the fraudster would have to do as
much work as the rest of the network to make
their block chain look as trustworthy
– intense work that goes into finding blocks through
hashing secures the network against fraud
30

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Bitcoin Security
• Bitcoin addresses are RACE Integrity Primitives
Evaluation Message Digest RIPEMD-160 of SHA-256 of
an Elliptic Curve Digital Signature Algorithm public key
• any vulnerabilities in the algorithms would constitute a
vulnerability in bitcoin itself
●
An attacker with > 50% of hash power can
– Double spend: Reverse transactions that he sends while he's in
control
– Prevent some or all transactions from gaining any confirmations
– Prevent some or all other generators from getting any generations
31

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Bitcoin Concerns
●
Wallet Vulnerable To Theft
●
Tracing a coin's history
●
Packet sniffing
●
Sybil attack (cancer nodes)
●
No authentication for IP transfers
– This attack is downright likely if you're using Tor
●
Denial of Service (DoS) attacks
●
Illegal content in the block chain
●
Energy Consumption
32

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Discussion
Assuming the implementation of the blockchain
system and the adoption of Bitcoin?
How can Shari’a principles be applied?
What challenges could Shari’a scholars face?
What are the features of Bitcoin that are compatible
with Shari’a ends?
What contradict with them?

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Introduction
● Blockchain is the technology behind bitcoin.
● However, Blockchain technology is much broader than
just bitcoin.
● It can be a distributed ledger beyond money/currency
(documents, transactions, data, ...)
● Blockchain can provide
– Efficiencies (eliminating legal intermediaries)
– intangible technological benefits (well define processes)
– do complex operations more than just tracking digital wallets

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What is a Smart Contract?
● Definition:
– program code that is capable of facilitating,
executing, and enforcing the negotiation or
performance of an agreement (i.e. contract) using
blockchain technology
– The entire process is automated can act as a
complement, or substitute, for legal contracts,
where the terms of the smart contract are recorded
in a computer language as a set of instructions
Ref: http://www.blockchaintechnologies.com/blockchain-smart-contracts

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What is a Smart Contract?
● For example shopping online, hiring people over the internet, and
generally conducting business with strangers over the internet is the
issue of trust.
● Most business requires some element of trust.
● Consider the trust needed between two parties in buying and selling
items online
– trusting that they will send it to me
– trusting not to reverse credit card payment
– How is it done today? Who do we trust to make this happen?
● By solving the problem of trust without the need for middlemen smart
contracts can reduce business costs, reduce consumer prices, and
increase our freedom to conduct our own business
Whats the point of it?
The main purpose of designing smart contracts is to enable people to trade and do
business with strangers, usually over the internet, without the need for a large centralized
authority site to act as a middleman.

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Smart Contract Explained
● Also called
– self-executing contracts,
– blockchain contracts,
– or digital contracts
● Computer programs
– act as agreements where the terms of the agreement can be
preprogrammed with the ability to self-execute and self-enforce itself
● Main goal of a smart contract is to enable two anonymous
parties to trade and do business with each other, usually
over the Internet, without the need for a middleman.

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Traditional Contracts
● Traditional Contracts
– contain legal language on a vast amounts of printed
documents
– heavily rely on third parties for enforcement
– enforcement takes time
● very ambiguous
● rely on the public judicial system

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Smart Contracts
● Future contracts will likely be a hybrid
– paper-plus-code model
– contracts are verified for authenticity via blockchain
– paper as backups are filed (traditional recourse)
● Created by computer programmers
– code defines the rules and consequences
● state the obligations
● benefits and
● penalties
– can then be automatically executed by a distributed ledger system

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Traditional vs. Smart Contracts
Traditional physical contracts
• created by legal professionals
• contain legal language
• vast amounts of printed documents
• heavily rely on third parties for enforcement
If things go bad, rely on the public judicial system
vs
Smart contracts
● created by computer programmers
● entirely digital and written using programming
code
● defines the rules and consequences
● stating the obligations, benefits and penalties
Code can be automatically executed by a distributed
ledger system

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Initially, not good for financial
institution, why?
●
Bitcoin was initially scorned and avoided by financial institutions
because:
– too slow (every 10 minutes?)
– too risky for traditional finance
– Imposes no prohibition on sales of particular items (MacCarthy 2010)
– payments are irreversible
●
This led to the development of permissioned ledgers.
● In contrast to the permissionless ledger of Bitcoin
– the nodes doing block validation are known and trusted
– nodes who can only initiate and receive transactions, are also required to
identify themselves when they join the network (like bank account)
Ref:https://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf

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Permissioned vs Permissionless
zzzz
References:
https://www.slideshare.net/koenvingerhoets/basic-introduction-
in-blockchain-smart-contracts-permissioned-ledgers

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Two modes of Blockchain Apps: Enterprise
(Improvement) and Individual (Revolution)
44
http://www.slideshare.net/lablogga/blockchain-consensus-protocols
Charts per: http://www.ofnumbers.com/wp-content/uploads/2015/04/Permissioned-distributed-ledgers.pdf
Individual (revolution)
• Permissionless ledgers; public
• Censorship-resistant (pseudonymous)
• ‘Brave new world’ apps
• Anonymous validators (network
vulnerable to anonymous attack)
Enterprise (improvement)
•
Permissioned ledgers; private
•
Identity known/confirmed, legally-compliant
•
‘Reinvent the existing world’ efficiency
improvement, eliminate intermediaries
•
Decentralized SaaS
Stellar

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Enterprise Blockchain Apps by Sector (selected)
http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
Crucial Blockchain Properties
• Cryptoledger
• Decentralized network
• Trustless
counterparties
• Independent
consensus-confirmed
transactions
• Permanent record
• Public records
repository
• Notarization time-
stamping hashes
• Universal format
• Accessibility
Government
& Legal
• Transnational orgs
• Personalized
governance services
• Voting, propositions
• P2P bonds
• Tele-attorney services
• IP registration and
exchange
• Tax receipts
• Notary service and
document registry
Economics
and Markets
• Currency
• Payments &
Remittance
• Banking & Finance
• Clearing &
Settlement
• Insurance
• FinTech
• Trading & Derivatives
• QA & Internal Audit
• Crowdfunding
IOT
• Agricultural & drone
sensor networks
• Smarthome networks
• Integrated smartcity,
connected car,
smarthome sensors
• Self-driving car
• Personalized robots,
robotic companions
• Personalized drones
• Digital assistants
• Communication
(messaging)
• Large-scale
coordination
• Entity ingress/egress
• Transaction security
• Universal format
• Large-scale multi-
data-stream
integration
• Privacy and security
Real-time
accessibility
Health
• Universal EMR
• Health databanks
• QS Data Commons
• Big health data
stream analytics
• Digital health wallet
• Smart property
• HealthToken
• Personal
development
contracts
• Large-scale
infrastructural
element for
coordination
• Checks-and-
balances system
for ‘good-player’
access
• Community
supercomputing
• Crowd analysis
• P2P resourcenets
• Film, dataviz
• AI: blockchain
advocates, friendly
AI, blockchain
learners, digital
mindfile services
Science,
Art, AI

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Let’s Blockchainize Islamic Finance
What aspects of Islamic Finance can you apply blockchain technology?
KICT & IiiBF Assemble….
● Zakat?
● Waqaf?
● Sukuk?
– Ijarah Sukuk
– Istisna Sukuk
– Musharakah Sukuk
– Gharzulhasan Sukuk
– Murabaha Sukuk
● Islamic Insurance (Takaful?)

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References
Blockchain Revolution, Don and Alex Tapscott
http://www.coindesk.com/making-sense-smart-contracts/
http://www.blockchaintechnologies.com/blockchain-smart-contracts
http://about.smartcontract.com/
http://www.coindesk.com/making-sense-smart-contracts/
http://cryptorials.io/a-beginners-guide-to-smart-contracts/
http://solidity.readthedocs.io/en/develop/introduction-to-smart-contracts.html

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