BLOCKCHAIN

TECHNOLOGY

Dr. Mohsin Khawaja, SBS Finance

Institute of Business Administration
AGENDA

INTRODUCTION

B E N E F I TS O F B LO C KC HA I N

SMART CONTRACTS

B LOC KCHA I N & B I TCOI N

B LOC KCHA I N G OVERN A N C E

CASE STUDIES
WHAT IS BLOCKCHAIN
TECHNOLOGY
 INTRODUCTION

• A decentralized ledger

• Each party (user) on a blockchain has access to the database and its history. No
single party controls the data.

• Communication occurs between peers instead of through a central node. Each

node stores and forwards information to all other nodes.

• Each node has an alphanumeric address that identifies it.

• Once a transaction is entered, the records cannot be altered.

 INTRODUCTION

• The transactions can be more or less private,

depending on the rules of the ecosystem.

• The ledger doesn’t exist in a single place.

• A block can represent transactions and data of many

types, e.g. currency, digital rights, intellectual
property, identity, property ownership etc.
ECONOMIC BENEFITS: (1) VERIFICATION

• Businesses often need some form of ‘audit’

• For example, verifying a vendor certification, hospital receipt,

university transcript

• Blockchain has zero cost of verification

• The distributed ledger allows access to previous nodes as long

as the address is given
ECONOMIC BENEFITS: (2) NETWORKING

• Cost of bootstrapping, operating, and scaling an economic network

• Trust in platform operator is replaced by trust in code, rules, and

incentives

• Permissionless system benefits from reduced networking cost

• Initial Coin Offering (ICO) is an example of ease in bootstrapping

• Use of tokens offers an example of ease in operations

 SMART CONTRACTS

• The digital nature of blockchain ledger allows transactions to be

tied to computational logic.

• Users can set up algorithms and rules that automatically trigger

transactions between nodes

• A good example of smart contract is the vending machine

VIDEO
BLOCKCHAIN & BITCOIN
 ORIGINS OF MONEY

• The Ancient Transaction: One person has wheat, the

other has sheep—and they trade 

• This isn’t always possible

• Money resolves this problem

TRADITIONAL DIGITAL PAYMENTS

A B
 PROS & CONS

• Digital payments make life easy

BUT:

• This isn’t a peer-to-peer transaction.

• The bank must be present and active all the time.
• We know that banks can fail
• Banks can also delay or censor transactions
• Privacy—the bank knows a lot about us
E-CASH

A B
 E-CASH DIDN’T WORK

• Bank was still required to generate tokens

• Privacy was still a problem

• Choumian e-cash was another alternate with more

privacy. But it didn’t work because of lack of banks’
interest.
 BITCOIN

• Satoshi Nakamoto introduced the idea of Bitcoin in

2008

• The idea was peer-to-peer electronic cash

• Bitcoin (as a system) doesn’t require a financial

institution to make digital payments
This is the first time it had ever happened
 ISSUES WITH CRYPTOCURRENCIES

• Cash makes things inconvenient, but this can prevent illegal transactions

• Currencies also have a good collateral: central banks

• Cryptocurrencies do not have a tangible asset

• Their management is pre-determined by protocols—leading to volatility

• Cryptos also lead to tax evasion

 SOME BENEFITS

• Alternative to the traditional currencies, particularly

during hyperinflation

• Reduced transaction cost

• Mostly relevant for poor countries

 CRYPTO VALUATION

• An alternate to the P/E ratio

• Network value to transaction (NVT) ratio

• The base unit of utility in blockchain is not ‘earnings’ but ‘on-chain

transaction volume’

• NV = Current price x supply

• T = Number of transactions

• Bitcoin has traded mostly at 80 times transaction volume

 CRYPTO VALUATION

• An alternate to the P/E ratio

• Network value to transaction (NVT) ratio

• The base unit of utility in blockchain is not ‘earnings’ but ‘on-chain

transaction volume’

• NV = Current price x supply

• T = Number of transactions

• Bitcoin has traded mostly at 80 times transaction volume

 CRYPTO VALUATION

A digital asset has a market value of $1 billion and a daily

transaction volume of $50 million. What is the Network Value to
Transactions (NVT) ratio for this asset, and what might this indicate
(overvalued, undervalued, or fairly valued)?
 CRYPTO VALUATION

Velocity: Velocity is a measure of how quickly units are

circulating in the network.

Calculated by dividing the on-chain transaction volume

by the market cap (i.e. the inverse of the NVT Ratio).

Essentially, a measure of how actively a cryptocurrency is circulating

within the economy, rather than being held in wallets.
 CRYPTO VALUATION

Suppose a cryptocurrency has:

• A total transaction volume of $100 million over a month

• An average circulating supply of $20 million during that month

On average, how many times was each unit of the cryptocurrency

transacted during the month?
BLOCKCHAIN
GOVERNANCE
 GOVERNANCE

Distributed Consensus

• What should be the mechanism to choose the next block in a chain?

• Crucial in an environment where no central authority exists to make decisions.

• It is a process used in distributed systems to ensure that multiple independent

entities agree on a single state, even if some nodes may act maliciously.

• In a blockchain network, it ensures the validity and order of transactions

 GOVERNANCE: PROOF- OF-WORK (POW)

• Often blockchain networks (like bitcoin) allow participants to be

anonymous–we don’t know who is going to participate.

• Hence, the log of transactions is not based on identity (like in banks).

• The system essentially relies on voting/validation by participants within

the system

• However, this poses the challenge of attacks: someone can generate

numerous identities and subvert the voting of the system. This is called a
“Sybil” attack.
 GOVERNANCE: POW (CONT’D)
• Bitcoin adopted PoW consensus algorithm.
• It works similar to the “HashCash” system designed to prevent spam emails.

• The algorithm works on hash functions. An identifier (hash) is a fixed sized reduced form
of any piece of data, regardless of its size.

• The identifiers have certain properties:

1. They are random

2. The same identifier is generated when a hash function is applied on a certain piece of data
3. They are very complicated, making it extremely difficult to go back from hash to original
data

• Example: A simple text like “Hello, World!” would be converted into hash like:
a591a6d40bf420404a011733cfb7b190d62c65bf0bcda32b57b277d9ad9f146e
 GOVERNANCE: POW (CONT’D)
• Every block contains a hash function as its identifier,
along with the hash of previous block and the
transaction data.
 GOVERNANCE: POW (CONT’D)
• In bitcoin, we don’t compute hash only once. It has to be done
over and over to get a hash with a certain number of leading
zeroes.
• The number of leading zeroes is adjusted to maintain a block time of ~10
minutes

• This makes hashing difficult. Hence, adding a block to a chain

requires computational effort (mining).

• Since each block also holds the hash of previous block, it makes
the chain tamper proof.
• To change the data in a certain block, it will require us to recompute the
PoW for all of the following blocks.
 GOVERNANCE: PROOF- OF-WORK (POW)

• Problems of PoW

1. Waste of energy
2. Miners have to be paid
3. Some miners are too powerful.
This violates the foundation of distributed
networks.
4. 10 min/transaction is too slow
 GOVERNANCE: PROOF- OF-STAKE (POS)

• Alternate mechanism where validators of new block are

chosen based on the amount of cryptocurrency they
‘stake’ as collateral

• PoS follows the principles of Byzantine Agreement, that

assumes majority of participants are honest.
 GOVERNANCE: POW (CONT’D)
Example:
Imagine a network with 25 participants. The network has a total of 10,000
tokens. Below is how each participant has staked:

Ahmed: 2,000 tokens (20% stake)

Bilal: 1,500 tokens (15% stake)
20 other members: 325 tokens each (65% stake)
2 remaining members: No stake

A weighted voting process then decides whether the next block is added.

Ahmed and Bilal combined make up 35% of this decision. Usually, a majority is
needed. Some networks can require a supermajority (like 66% or more).
 GOVERNANCE: PROOF- OF-STAKE (POS)
• Advantages:
Trivial
Little computation
Scalable
Speed

• Problems:
51% attack: If the majority has malicious intent
Concentration: Only a handful of participants may decide
BLOCKCHAIN CASES
 CASE STUDIES

• Filecoin
• Earn.com
• Basic Attention Token
• Numerai
THANK YOU

Mohsin Khawaja
[email protected]