Blockchain technology has the potential to dramatically change the financial landscape. Kristen Stone, the product manager on the coinbase cryptocurrency payments team, and Jake Craige, the team’s technical lead, join us to discuss the evolution of the blockchain industry and its impact on our day-to-day lives. They dive deep into some of the inner workings of the technology, and they discuss the different types of blockchain models, smart contracts, consensus protocols, and what’s on the horizon. Recording: https://www.youtube.com/watch?v=xo6Zp0jL--s

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Cryptocurrency 101 & 201
Kristen Stone
Product Manager
Coinbase
S e s s i o n I D
Jake Craige
Senior Engineer
Coinbase

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Agenda
Cryptocurrency 101:
• Why do blockchains matter?
• A short history of Blockchain Technology
Cryptocurrency 201:
• Crash course in blockchain technology
• Consensus Algorithms
• Data models
• Programmability

4. Decentralizing currency
provides new opportunities

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< / >

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110M
Records
143M
Records
76M
Records

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< / > < / >

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A short history of Crypto

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2008:
Bitcoin white paper

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2008:
Bitcoin white paper
2012:
Coinbase founded

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2008:
Bitcoin white paper
2012:
Coinbase founded
2014:
Merchant Payments

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2008:
Bitcoin white paper
2012:
Coinbase founded
2014:
Merchant Payments
2015:
Private Blockchain initiatives

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2008:
Bitcoin white paper
2012:
Coinbase founded
2014:
Merchant Payments
2015:
Private Blockchain initiatives
2016:
Emerging asset class

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2008:
Bitcoin white paper
2012:
Coinbase founded
2014:
Merchant Payments
2015:
Private Blockchain initiatives
2016:
Emerging asset class
2017:
Smart Contracts

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Cryptocurrency 201

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What makes up a blockchain?

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What makes up a blockchain?
Economic
Incentives
Distributed
Consensus
Algorithms
Cryptography

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Cryptography: Hashing
Hello world SHA256
64ec88ca00b268e5
ba1a35678a1b5316
d212f4f366b24772
32534a8aeca37f3c

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Cryptography: Hashing
300 bits HashFn 256 bits

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Cryptography: Hashing
300 bits HashFn 256 bits
3M bits HashFn 256 bits

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Cryptography: Hashing
00000000 SHA256
5feceb66ffc86f38d952786c
6d696c79c2dbc239dd4e91b
46729d73a27fb57e9
00000100 SHA256
2c624232cdd221771294dfb
b310aca000a0df6ac8b66b6
96d90ef06fdefb64a3

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Cryptography: Hashing
Cryptographically Secure

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Cryptography: Public-key Cryptography
• Asymmetric cryptography
• Private & public key pair
• Public key uses
• Hiding data with encryption
• Verifying signatures

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Cryptography: Signatures
Sign(data, private key) Signature
Verify(data, signature, public key) Is valid?

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So what’s a blockchain?

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Blocks and Transactions
Block 1
Transaction
Transaction
Transaction
Previous Block Hash
Hash

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Blocks and Transactions
Block 1
Transaction
Transaction
Transaction
Previous Block Hash
Hash
Block 2
Transaction
Transaction
Transaction
Previous Block Hash
Hash

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Blocks and Transactions
Block 1
Transaction
Transaction
Transaction
Previous Block Hash
Hash
Block 2
Transaction
Transaction
Transaction
Previous Block Hash
Hash
Block 3
Transaction
Transaction
Transaction
Previous Block Hash
Hash

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Blocks and Transactions
Block 1
Transaction
Transaction
Transaction
Previous Block Hash
Hash
Block 2
Transaction
Transaction
Transaction
Previous Block Hash
Hash
Block 3
Transaction
Transaction
Transaction
Previous Block Hash
Hash

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Sending a Transaction
Signed
Transaction

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Sending a Transaction
Signed
Transaction
Node
Tx

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Sending a Transaction
Signed
Transaction
Node
Miner
Node
Node
Tx
Tx
Tx
Tx

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Sending a Transaction
Signed
Transaction
Node
Miner
Node
Node
Tx Tx
Tx
Block
Tx

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Sending a Transaction
Signed
Transaction
Node
Miner
Node
Node
Block
Tx
Block
Tx
Block
Tx
Block
Tx

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Consensus Protocols

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Consensus Protocols
• Proof of Work
• Proof of Stake
• And more…

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Consensus Protocols: Proof of Work
• Computationally expensive to create a block
• Verifying the computation is efficient
• Chain with “most work” is the canonical chain
• Probabilistic finality

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Consensus Protocols: Proof of Work
Difficulty:
A value determined by the network selected to make creating a block take
T time on average
Nonce:
An arbitrary value used to change the block hash

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Consensus Protocols: Proof of Work
Block 1
Transactions
Previous Block Hash
Nonce
Difficulty = 3

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Consensus Protocols: Proof of Work
Block 1
Transactions
Previous Block Hash
Nonce
Difficulty = 3
Set Nonce = 0 Hash(block) a8h36v37

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Consensus Protocols: Proof of Work
Block 1
Transactions
Previous Block Hash
Nonce
Difficulty = 3
Set Nonce = 0 Hash(block) a8h36v37
Set Nonce = 1 Hash(block) 7y91h81g

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Consensus Protocols: Proof of Work
Block 1
Transactions
Previous Block Hash
Nonce
Difficulty = 3
Set Nonce = 0 Hash(block) a8h36v37
Set Nonce = 1 Hash(block) 7y91h81g
Set Nonce = 3 Hash(block) 000cja01

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Consensus Protocols: Proof of Work
oa912Height 0
Height 1
Height 2
Height 3

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Consensus Protocols: Proof of Work
oa912
k19bc
Height 0
Height 1
Height 2
Height 3

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Consensus Protocols: Proof of Work
oa912
k19bc 9sl18
Height 0
Height 1
Height 2
Height 3

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Consensus Protocols: Proof of Work
oa912
k19bc 9sl18
o19bf
Height 0
Height 1
Height 2
Height 3

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Consensus Protocols: Proof of Work
oa912
k19bc 9sl18
o19bf
8djb1
Height 0
Height 1
Height 2
Height 3

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Consensus Protocols: Proof of Work
• Benefits
• Simple
• Battle-tested
• Problems
• Uses a lot of energy
• Probabilistic Finalization
• Security dependent on decentralized hash rate
• Slower blocks

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Consensus Protocols: Proof of Stake
• Participants deposit and lock up funds in the system. This is called
“staking”
• A participant is randomly selected from this pool to produce a block
and publish it
• Other nodes receive it and validate it
• The block producer is punished for attempting to cheat and rewarded
for good blocks

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Consensus Protocols: Proof of Stake
• Multiple versions of Proof of Stake
• Popular
• Delegated PoS (EOS, Tezos, Steem)
• Casper FFG/CBC PoS (Ethereum)

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Consensus Protocols: Proof of Stake
• Benefits
• Faster blocks
• More energy efficient
• Punishments explicitly defined
• Problems
• Less-battle tested

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Data Models

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Data Models: UTXOs
• Transaction Inputs & Outputs
• UTXO is an “Unspent Transaction Output”
• No in-protocol concept of a “balance” for an address
• Used by:
• Bitcoin
• Monero
• Zcash
• Cardano

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Data Models: UTXOs
Transaction

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Data Models: UTXOs
Transaction
5 BTC
Inputs

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Data Models: UTXOs
Transaction
5 BTC 3 BTC
1 BTC
Destination
Change
Inputs Outputs

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Data Models: UTXOs
Transaction
5 BTC 3 BTC
1 BTC
Destination
Change
Inputs Outputs
1 BTC fee

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Data Models: Accounts
• Like a bank account
• Account balance is changed over time from transactions
• Used by:
• Ethereum
• EOS
• Tezos
• Stellar

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Data Models: Accounts
Transaction

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Data Models: Accounts
Transaction
Account Balance
Miner 0 ETH
Alice 5 ETH
Bob 0 ETH

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Data Models: Accounts
Transaction
From Alice
To Bob
Value 3 ETH
Fee 1 ETH
Account Balance
Miner 0 ETH
Alice 5 ETH
Bob 0 ETH

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Data Models: Accounts
Transaction
From Alice
To Bob
Value 3 ETH
Fee 1 ETH
Account Balance
Miner 0 ETH
Alice 5 ETH
Bob 0 ETH
Account Balance
Miner 1 ETH
Alice 1 ETH
Bob 3 ETH

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Programmability

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Programmability: Bitcoin Script
• Script is simple, stack-based, and processed from left to right. It is
intentionally not Turing-complete, with no loops.
• Outputs include a partially complete script
• Inputs include the other half to complete it
• Script must evaluate to true for the output to be spent
• Protocol defines standard supported scripts

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Programmability: Bitcoin Script (P2PKH)
Type: pay-to-pubkey-hash (p2pkh)
scriptPubKey: OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG
scriptSig: <sig> <pubKey>

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Programmability: Bitcoin Script (P2PKH)
Stack Script
<sig> <pubKey> OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIGEmpty

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Programmability: Bitcoin Script (P2PKH)
Stack Script
<sig> <pubKey> OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIGEmpty
OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey>

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Programmability: Bitcoin Script (P2PKH)
Stack Script
<sig> <pubKey> OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIGEmpty
OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey>
OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubKey>

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Programmability: Bitcoin Script (P2PKH)
Stack Script
<sig> <pubKey> OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIGEmpty
OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey>
OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubKey>
<pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubHashA>

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Programmability: Bitcoin Script (P2PKH)
Stack Script
<sig> <pubKey> OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIGEmpty
OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey>
OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubKey>
<pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubHashA>
OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubHashA> <pubKeyHash>

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Programmability: Bitcoin Script (P2PKH)
Stack Script
<sig> <pubKey> OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIGEmpty
OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey>
OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubKey>
<pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubHashA>
OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubHashA> <pubKeyHash>
OP_CHECKSIG<sig> <pubKey>

73. © 2018, Amazon Web Services, Inc. or its affiliates. All rights reserved.
Programmability: Bitcoin Script (P2PKH)
Stack Script
<sig> <pubKey> OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIGEmpty
OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey>
OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubKey>
<pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubHashA>
OP_EQUALVERIFY OP_CHECKSIG<sig> <pubKey> <pubHashA> <pubKeyHash>
OP_CHECKSIG<sig> <pubKey>
true

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Programmability: Ethereum VM
• Turing complete virtual machine
• Stateful “smart contracts” are deployed to the network
• Operations are metered and cost “gas” to prevent DoS attacks
• Complex computations cost more
• Higher level languages (Solidity, Vyper)

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Programmability: Ethereum VM (ERC-20)
interface IPartialERC20 {
function balanceOf(address who) external view returns (uint256);
function transfer(address to, uint256 value) external returns (bool);
// other details omitted
}

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Programmability: Ethereum VM (ERC-20)
contract PartialERC20 {
mapping (address => uint256) private _balances;
function transfer(address to, uint256 value) public returns (bool) {
_balances[msg.sender] = _balances[msg.sender].sub(value);
_balances[to] = _balances[to].add(value);
return true;
}
}

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Programmability: Ethereum VM (ERC-20)
contract PartialERC20 {
mapping (address => uint256) private _balances;
function transfer(address to, uint256 value) public returns (bool) {
_balances[msg.sender] = _balances[msg.sender].sub(value);
_balances[to] = _balances[to].add(value);
return true;
}
}

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Programmability: Ethereum VM (ERC-20)
contract PartialERC20 {
mapping (address => uint256) private _balances;
function transfer(address to, uint256 value) public returns (bool) {
_balances[msg.sender] = _balances[msg.sender].sub(value);
_balances[to] = _balances[to].add(value);
return true;
}
}

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And more…

80. Thank you!
© 2018, Amazon Web Services, Inc. or its affiliates. All rights reserved.
Kristen Stone Jake Craige Please join our Coinbase Crypto
Happy Hour starting right after this!
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