Bitcoin: A Peer-to-Peer Electronic Cash System Satoshi Nakamoto satoshin@gmx.com www.bitcoin.org Abstract. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

1. © 2016 IBM Corporation
Esra UFACIK
esra@sg.ibm.com
Blockchain IOT Lead for
AP Systems
Making Blockchain Real for Business
Explained

2. Contents
is Blockchain?
is it relevant
for our business?
2Page© 2016 IBM Corporation

3. Blockchain is a technology for a new generation of transactional applications that establishes trust,
accountability and transparency while streamlining business processes. Think of it as an operating
system for interactions. It has the potential to vastly reduce the cost and complexity of getting
things done.
Blockchain is a design
pattern made famous by its
use in Bitcoin. But it’s uses
go far beyond.
Blockchain can reimagine
the world's most fundamental
business interactions and
open the door to invent new
styles of digital interactions.
IBM is adopting Blockchain
to a very broad range of
business applications
Blockchain defined`

4. Blockchain in an emerging platform for transaction
services
Party A’s
records
Bank’s
records
Auditor’s
records
Party B’s
records
Digitally
signed/encrypted
transactions and
ledger
All parties have
same replica of the
ledger
Party A
Bank
Auditor
Party B
Types of Use Cases
• Trusted registry of
ownership of assets
• Asset transfer
• Smart contracts
Attributes
• Shared replicated immutable ledger
• Digitally signed/encrypted transactions
• Business logic linking transactions into
business processes
• Automation
Blockchain technology has the potential to radically transform multi-party business networks, enabling
significantly faster, less expensive, lower risk transactions and innovative new business models
Inefficient, expensive, vulnerable
Consensus, provenance, immutability, finality
• Difficult to maintain a single source of truth
• Difficulty to maintain transparency
• Not timely in delivery or access
• Business logic implementation linking
transactions can be different between parties
• Can be overly complex due to the evolution
and use of older technology.

5. 1. It all starts with one node
4. Users submit transactions
2. Each node has the shared ledger
5. Consensus and leader election
3. Nodes form a peer network
6. Execution & Recovery
Each block has a digital fingerprint
of the previous block
Has an Owner Issues Transaction
ID = Digital Cert
Copy of Ledger
Sign Transactions
Answer Validated
Update
A = 100
Then
A=10
Now
A=100
5
Blocks
How it works

6. Shared Distributed Ledger
 Distributed
ledger is
implemented
as a chain of
blocks
 Transactions
are recorded
in each block
block 1020
Hash of previous
block
transaction(TX)
Create vehicle
registration
TX's hash value
block time stamp
● ● ●
● ● ●
block 1021
Hash of previous
block
transaction(TX)
Transfer vehicle
registration
TX's hash value
block time stamp
block 1022
Hash of previous
block
transaction(TX)
TX's hash value
block time stamp
block 1023
Hash of previous
block
transaction(TX)
TX's hash value
block time stamp
Update vehicle
registration
Transfer vehicle
registration
block 1024
Hash of previous
block
transaction(TX)
Transfer vehicle
registration
TX's hash value
block time stamp
block 1025
Hash of previous
block
transaction(TX)
Transfer vehicle
registration
TX's hash value
block time stamp
block 1026
Hash of previous
block
transaction(TX)
TX's hash value
block time stamp
block 1027
Hash of previous
block
transaction(TX)
TX's hash value
block time stamp
Transfer vehicle
registration
Dispose vehicle
registration
Distributed
Ledger

7. Source: On Distributed Communications Networks, Paul Baran, 1962

8. – Unregulated, censorship-
resistant shadow currency
– First Blockchain application
• Pioneer of Blockchain
technology
… Digital currencies different from cryptocurrency
8Page© 2016 IBM Corporation
BUT
is not bitcoin
Blockchain underpins Bitcoin …

10. Just Google “bitcoin.pdf”

11. Proof of Work
 Proof of Work asks for nodes to demonstrate they have burned CPU in order
to win the right to create the next block
 Mining is usually the process by which this proof occurs
 Nodes attempt to solve mathematics problems
 Called ‘miners’ because they receive payment for being the first to solve a
problem.
 Hash functions make it easy for other nodes to validate solutions
– Difficult to find (Brute Force)
– Easy to Check

12. Mining & Miners
 Transactions are broadcast to Miners for “Consensus”
 Example:
– Miner1 & Miner2 “process” the broadcast transactions
– Miner1 & Miner2 collect transactions into a block
– Miner1 & Miner2 work to solve a difficult maths problem based on the block
– Consider “Miner1” reaches the “solution” first
– Miner1 broadcasts the “solution” to Miner2
– Miner2 verifies the “solution”
– Miner2 also broadcasts consensus
– Block is added to the chain – by Miner1

13. Consensus
Node
Node
NodeNode
Node
Distributed to all nodes by Peer2Peer
Smart ContractShared Ledger
Block
Hash
Regulator
1.
Manufacturer
2. Dealer
3. Lease
Company
4. Lessee
5. Scrap
Merchant
Node
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Create V5C
(Send transaction)
Proof of WorkDiscover nonce!
OK
OK
OKOK
V5C
Data
Owner: Regulator
VIN:
Make:
Model:
Method Create
Transaction
Create V5C
Create BlockConsensusCreate V5C
(Execute transaction)
635840321837
000000012345
OK
Block
Hash
Transfer V5C
(Send transaction)
Hash of TX
nonce
OK
Proof of Work
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Timestamp
759710275638
000000067890
Discover nonce!Create BlockConsensus
OK
OK
OKOK
OK
OK
Transfer V5C
(Execute transaction)
Block
Hash
Manufacturer
Transfer
Update V5C
(Send transaction)
Transaction
Update V5C
Proof of Work
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Discover nonce!Create Block
Hash of TX
nonce
Timestamp
387291845274
000000037648
OK
OK
OKOK
OK
OK
Consensus
Update
123
Alfa Romeo
MiTO
Update V5C
(Execute transaction)
Shared
Ledger
Smart
Contract
Transaction
Transfer V5C
Timestamp

14. Very CPU intensive process!
Mining & Miners

15. Industrial Blockchain Characteristics
Confidential
permission
control
Private
un-linkable identity
Shared
single source of truth (ledger)
Secure
tamper proof
Auditable
prove identity &
ownership
Scalable
architecture

16. Append-only
distributed system of
record shared across
business network
Business terms
embedded in
transaction database
& executed with
transactions
All parties agree
to network verified
transaction
Ensuring appropriate
visibility; transactions are
secure, authenticated
& verifiable Privacy
Shared
ledger
… Broader participation, lower cost, increased efficiency
Smart
contract
Consensus
Blockchain for business …

17. • Shared between participants
• Participants have own copy through replication
• Permissioned, so participants see only appropriate transactions
• THE shared system of record
Records all transactions across business network
Shared ledger

18. Smart contract
• Verifiable, signed
• Encoded in programming language
• Example:
– Defines contractual conditions under which corporate Bond transfer occurs
Business rules implied by the contract … embedded in the Blockchain
and executed with the transaction

19. Privacy
• Participants need:
– Transactions to be private
– Identity not linked to a transaction
• Transactions need to be authenticated
• Cryptography central to these processes
Ledger is shared, but participants require privacy

20. Consensus
• When participants are anonymous
– Commitment is expensive
– Bitcoin cryptographic mining provides
verification for anonymous participants but
at significant compute cost (proof of work)
• When participants are known & trusted
– Commitment possible at low cost
… the process by which transactions are verified
• Multiple alternatives
– proof of stake where fraudulent transactions cost
validators (e.g. transaction bond)
– multi-signature (e.g. 3 out of 5 participants agree)
– PBFT (cross checked secure message exchange)
• Industrial Blockchain needs “pluggable”
consensus

21. Management Entity None Multiple Organizations Single Organization
Network Type Public Consortium Private
Participants
Free Permissioned
Anonymous, could be
malicious
Identified and trusted
Consensus Mechanisms
Mining
(Proof-of-Work)
Voting / multi-party consensus algorithm
• Large energy
consumption
• No finality
• 51% attack
• Lighter, faster
• Low energy consumption
• Enable finality
Transaction Approval
Frequency
Long (e.g., 10 min) Short (100x msec)
Use Cases Crypto Currency
Transactions in business networks, e.g., cross-
border payment, securities transactions, etc.
Comparison of consensus approaches
In business use, it is important the the platform supports different
consensus mechanisms depending on the use case

22. Contents
is Blockchain?
is it relevant
for our business?
22Page© 2016 IBM Corporation

23. Saves
time
Removes
cost
Reduces
risk
Increases
trust
Transaction time
from days to near
instantaneous
Overheads and
cost intermediaries
Tampering, fraud
& cyber crime
Through shared
processes and
recordkeeping
Blockchain benefits

26. Our analysis suggests blockchains can drive down
inefficiencies across networks
Blockchains have a leveling effect
by making business networks
more homogeneous in how they
can operate
This illustrative example of
shrinking inefficiencies suggests
that enterprises, ecosystems and
economies can function at
substantial higher levels of
efficiency and trust
Source: IBM Institute for Business Value analysis

27. We expect blockchains to fundamentally change
how we do business in three radical ways
A new science
of organizations
Codifications of contracts,
compliance and certifications
will redefine how trust is
embodied in business
transactions
Efficient and accessible
market-places built on
blockchains will accelerate
the exchange of value and
flow of wealth
The tightening
of trust
A new nexus for
value exchange
Highly efficient
distributed business
networks will challenge
our notions of traditional
enterprise management
Source: IBM Institute for Business Value analysis

28. Summary
Blockchain …
– is a shared, replicated, permissioned
ledger technology
– can open up business networks by
taking out cost, improving efficiencies
and increase accessibility
– addresses an exciting and topical set
of business challenges, which cross
every industry
IBM …
– supports the Linux Foundation
Hyperledger open standard, open
source, open governance Blockchain
– has an easy to access, proven and
incremental engagement model giving
customers the confidence to get
started NOW

29. © 2016 IBM Corporation
Thank you!