Topic 1 Highlights - Introduction DLT

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

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Introduction to Distributed Ledger Technology

Byzantine Generals Problem and Consensus

Use Cases and Discussion

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