Introduction to Distributed Ledger Technology
Roles of Money
1. Medium of exchange: A value carrier between two independent transactions.
2. Means of payment: Exchanging money for goods or services.
3. Store of value: The value of wealth remains relatively stable over time.
4. Unit of account: A measure for economic quantities, such as GDP.
5. Natural co-option on goods and services: No expiration date or restriction on when
money can be spent.
Centralized, Decentralized, and Distributed Databases
Centralized: A single, central database where all nodes are connected to the
database.
Decentralized: Databases are distributed across different storage devices and
interconnected.
Distributed: All nodes store data and access the database, requiring a consensus
algorithm to synchronize data across the network.
Distributed Ledger Technology (DLT)
DLT is a set of technologies that enable a consistent representation of data across
multiple nodes without a central authority.
It allows for a distributed record or ledger in which transactions are stored in a
permanent, immutable way using cryptographic techniques.
DLT is essentially a database with different ways of recording and adding new
information, resulting in various types of DLT.
Types of DLT
1. Blockchain: Transactions are recorded with an unchangeable cryptographic signature
called a hash, and data is stored in blocks chained together.
2. Directed Acyclic Graph (DAG): Transactions are entered sequentially, and each
transaction needs to endorse two previous transactions to be considered valid.
3. Hashgraph: A gossip protocol is used to relay transaction information, and virtual
voting is used for validation.
4. Holochain: Each node maintains its own ledger, and a set of rules called DNA is used
to verify individual ledgers.
5. Radix or Tempo: The system relies on the sequence of transactions to reach
consensus, and each node keeps a shard with a unique ID.
Key Characteristics of DLT
1. Decentralized
2. Immutable
3. Append-only
4. Distributed
5. Shared
Blockchain Ecosystem
Nodes and Miners
Nodes are computers or servers that maintain copies of the ledger, communicate
with each other, and help with data entry and verification.
Miners create new blocks through the mining process and are designated nodes that
add new blocks to the blockchain.
Wallets, Public Keys, and Private Keys
A blockchain wallet is a software program that allows users to buy, sell, and monitor
balances for their digital assets.
Public keys are derived from private keys using known algorithms and are made
available through public directories.
Private keys allow users to access their cryptocurrency and are kept secret. If lost, the
user can no longer access their wallet.
Hash Functions
Hash functions are mathematical algorithms that transform information bits into a
string of alphanumeric values.
They have a high avalanche effect, meaning a small change in the input results in a
significantly different output.
Common hashing functions include SHA-256 and SHA-512.
Merkle trees are hash-based data structures used to verify the contents of blocks and
links between blocks.
Nonce and Difficulty
A nonce is a number that is generated and used only once, providing replay
protection, authentication, and encryption in cryptographic operations.
Miners must find the correct nonce capable of generating a valid block hash that
meets specific requirements.
Difficulty is a mechanism for regulating the time it takes to mine a block, ensuring
that blocks are added at regular intervals even as more miners join the network.
The difficulty level is adjusted by the system every two weeks to maintain a
consistent block creation rate (e.g., every 10 minutes for Bitcoin).
Byzantine Generals Problem and Consensus
Byzantine Generals Problem
A group of generals needs to reach a consensus on whether to attack or retreat, but
some of them may be traitors sending conflicting messages to others.
In the blockchain network, all nodes are connected, so they can verify and check
transactions, solving the Byzantine Generals Problem.
Double-Spending and the Longest Chain Rule
Double-spending occurs when someone tries to spend the same funds in multiple
transactions.
The blockchain solves this problem by using a decentralized ledger that all users can
access and examine the full history of transactions.
Three scenarios for double-spending:
1. If transaction A is validated first, transaction B will be rejected.
2. If A and B reach the new block at the same time, the transaction in the block
that gets the next block validated will be confirmed.
3. If no new block is built on A or B, the network waits until six blocks are
confirmed after A or B to validate the transaction.
The Longest Chain Rule: The chain with the most accumulated work (measured by
the number of hashes and difficulty level) is considered the valid chain.
Limitations of Blockchain
1. Scalability: Blockchain networks are not as scalable as current financial networks.
2. Adoption: Blockchain is seen as a nascent technology, and challenges like scalability
must be solved to increase adoption.
3. Regulation: Due to its decentralized nature, regulation is almost impossible on
blockchain.
4. Relatively immature technology: Blockchain is still a new technology compared to
traditional IT systems.
5. Privacy and confidentiality: Public blockchains like Bitcoin lack privacy, which is a
concern for many industries.
6. High energy consumption: Blockchain, especially proof-of-work, consumes a lot of
energy.
Consensus Protocols
Definition and Key Properties
Consensus protocols are a way to reach an agreement between different parties in a
blockchain network.
Key properties: Safety and consistency, liveness, and fault tolerance.
Types of Consensus Protocols
66 known consensus algorithms, with Bitcoin using proof-of-work.
Proof-of-Work (PoW): Miners compete to find a nonce that satisfies a difficulty level,
requiring significant computational power.
Proof-of-Stake (PoS): Validators stake their coins to propose blocks and secure the
network, consuming less power than PoW.
Proof-of-Importance (PoI): A variation of PoS where each account is given an
importance score similar to a credit score.
Comparison of Consensus Protocols
The choice of consensus protocol depends on the type of blockchain network (public,
private, or consortium).
The comparison table in the reading material helps determine which consensus
protocol is suitable for a given network type.
Use Cases and Discussion
Facebook/Meta and the Libra Cryptocurrency
In 2019, Facebook announced its own cryptocurrency called Libra (now renamed
Diem).
Students are asked to research and discuss why Libra was not successful.
Other use cases mentioned include:
AiGang, Tokio Marine Insurance, Generali Group
Winding Tree, TUI Bedshare
JPM Quorum
Alibaba E-commerce, Walmart
