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2022 | Book

Handbook on Blockchain

Editors: Duc A. Tran, My T. Thai, Bhaskar Krishnamachari

Publisher: Springer International Publishing

Book Series : Springer Optimization and Its Applications

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

Table of Contents

About this book

This handbook aims to serve as a one-stop, reliable source of reference, with curations of survey and expository contributions on the state-of-the-art in Blockchain technology. It covers a comprehensive range of topics, providing the technical and non-technical reader with fundamentals, applications, and deep details on a variety of topics. The readership is expected to span broadly from technologically-minded business professionals and entrepreneurs, to students, instructors, novices and seasoned researchers, in computer science, engineering, software engineering, finance, and data science. Though Blockchain technology is relatively young, its evolution as a field and a practice is booming in growth and its importance to society had never been more important than it is today. Blockchain solutions enable a decentralization of a digital society where people can contribute, collaborate, and transact without having to second-guess the trust and transparency factors with many geographical, financial, and political barriers removed. It is the distributed ledger technology behind the success of Bitcoin, Ethereum, and many emerging applications.

The resource is divided into 5 parts. Part 1 (Foundation) walks the reader through a comprehensive set of essential concepts, protocols, and algorithms that lay the foundation for Blockchain. Part 2 (Scalability) focuses on the most pressing challenges of today’s blockchain networks in how to keep pace with real-world expectations. Part 3 (Trust and Security) provides detailed coverage on the issues of trust, reputation, and security in Blockchain. Part 4 (Decentralized Finance) is devoted to a high-impact application of Blockchain to finance, the sector that has most benefitted from this technology. Part 5 (Application and Policy) includes several cases where Blockchain applies to the real world.

Frontmatter

Foundation

Frontmatter

Blockchain in a Nutshell

Abstract

Blockchain enables a digital society where people can contribute, collaborate, and transact without having to second-guess trust and transparency. It is the technology behind the success of Bitcoin, Ethereum, and many disruptive applications and platforms that have positive impact in numerous sectors, including finance, education, health care, environment, transportation, and philanthropy, to name a few. This chapter provides a friendly description of essential concepts, mathematics, and algorithms that lay the foundation for blockchain technology.

Duc A. Tran, Bhaskar Krishnamachari

Blockchain Peer-to-Peer Network: Performance and Security

Abstract

Mistrusting nodes in a blockchain can reach consensus without the need of a trusted central entity. Instead, the nodes reach consensus through exchanging information on a peer-to-peer (P2P) network, without pre-established identities. Serving as the foundation of the blockchain, the P2P network plays critical roles in all performance and security aspects of the blockchain system. While P2P networks had been previously examined for many applications domains, including the file sharing systems, there is relatively less understanding on blockchain P2P networks that differs substantially from traditional P2P systems. In this chapter, we will cover different aspects of blockchain P2P networks from topology, peer discovery, known attacks, and defenses to improvement proposals to increase the throughput and reduce the latency in blockchain. Finally, we investigate theoretical limit on the throughput of blockchain systems in which nodes have heterogeneous capacities. We provide insights and discussion on how to construct a network to achieve the maximum theoretical limit in throughput.

Phuc D. Thai, Minh Doan, Wei Liu, Tianming Liu, Sheng Li, Hong-sheng Zhou, Thang N. Dinh

Consensus Algorithms for Blockchain

Abstract

A consensus algorithm is an essential component of a blockchain, responsible for reaching an agreement among decentralized nodes. It also determines the performance and characteristics of an application. With more than 2,000 different cryptocurrencies currently in use, we face an ever-growing list of consensus algorithms. Furthermore, the inherent complexity of consensus algorithms and their rapid evolutions make it hard to assess their suitability for blockchain applications. Understanding the pros and cons of a consensus algorithm is crucial in designing new blockchain services and developing more advanced algorithms. We propose a framework with comprehensive criteria to evaluate consensus algorithms in terms of performance, security, and decentralization. In addition, we present the operational mechanisms and analyze the characteristics of mainstream consensus algorithms, namely, proof-based algorithms such as Proof of Work (PoW) and Proof of Stake (PoS), and vote-based algorithms with Byzantine Fault Tolerance (BFT). The algorithms are evaluated based on our proposed framework to provide a better understanding. We hope this article leads us to identify research challenges and opportunities of consensus algorithms.

Hyunsoo Kim, Taekyoung Ted Kwon

Blockchain Incentive Design and Analysis

Abstract

The Bitcoin white paper introduced the blockchain technology to realize a decentralized electronic cash system that does not rely on a central authority. A major novelty behind the technology is the incentive design, in which participating nodes obtain rewards by creating blocks in a longest chain. The incentive design is paramount for a secure blockchain system as shown in many recent works. In this chapter, we take a close look at the incentive design of three influential blockchain protocols including Bitcoin, Ethereum, and Bitcoin-NG. For each protocol, we present the potential incentive-based attacks and go through several theoretical results to characterize the impact of these attacks. We hope that at the end of our journey, our readers can have a deeper understanding of blockchain incentive designs and analysis.

Jianyu Niu, Chen Feng

Cross-Blockchain Transactions: Systems, Protocols, and Topological Theory

Abstract

In this chapter, we turn our focus to those applications touching multiple blockchains. Since a blockchain deals with its data in the form of transactions, the real technical question we want to answer is how to handle cross-blockchain transactions (CBTs)? We will first present the state-of-the-art systems, i.e., exchanging cryptocurrencies between Ethereum and Bitcoin, and discuss the challenges of extending existing approaches to a more general context, such as application-specific blockchains (instead of cryptocurrencies) and an arbitrary number of blockchains (instead of two). We then review two recent schools of thought about CBT protocols and discuss their properties in detail. Finally, we sketch an ongoing research effort on building a theoretical foundation for CBTs using topological machinery.

Dongfang Zhao

Scalability

Frontmatter

Scaling Blockchains and the Case for Ethereum

Abstract

This chapter provides a high-level introduction to scaling solutions for blockchains, with a special focus on Ethereum 2.0. Current blockchain capacity is a hurdle for the widespread adoption of Web3 and cryptocurrencies. First, we discuss the considerations and pitfalls of blockchain scaling strategies. We then explore the design landscape—layer-1 and layer-2 solutions—and discuss concepts in each category, namely sharding, rollups, and sidechains.

Aditya Asgaonkar

Building Protocols for Scalable Decentralized Applications

Abstract

Blockchain protocols are a promising technology in the abstract, but, in reality, fall short of the promise of supporting arbitrary decentralized applications. For example, Bitcoin supports <10 transactions per second and Ethereum’s gas limit prevents computationally expensive applications to execute on its chain. This chapter provides an overview of mechanisms that have been proposed to overcome these limitations. In particular, we describe novel consensus protocols, sharding mechanisms, state and payment channels, subchains, and federated protocols. Additionally, we give insight into the tradeoffs and benefits of the different approaches.

Kai Mast

Information-Theoretic Approaches to Blockchain Scalability

Abstract

Blockchain systems fundamentally provide an environment of distributed trust in networks by creating individual copies of cryptographically secure ledgers of all transactions on the network at each node in the network. This redundant storage when combined with democratized transaction validation and the security from recording the ledgers as hash chains enable a self-sustainable system of distributed trust. However, the principal source of security and fairness of blockchain systems is from every participating node maintaining a local record of all transactions in the network. This in turn implies a significant amount of storage cost that scales prohibitively with larger block sizes, higher transaction volume, greater size of the network, and time in use. In this chapter, we will take a few blockchain applications as examples and highlight the storage and communication demands for maintaining a full node in the network. We then study some approaches with roots in coding theory that aim to reduce this cost and enable network scaling. Finally, we study some practical use cases in establishing distributed trust in computational systems using coding-theoretic methods.

Ravi Kiran Raman, Lav R. Varshney

Trust and Security

Frontmatter

On Trust, Blockchain, and Reputation Systems

Abstract

Trust management in distributed systems has always been a topic of active interest in the research community to understand how to foster and manage aspects. In this sense, Distributed Ledger Technologies (DLT) and, among them, Blockchains (BC), emerge as an alternative for shifting trust assumptions between users to the protocol that regulates the interaction, fostering trust in distributed systems. Especially reputation management systems have enabled several applications to be revisited as an application running based on an underlying distributed system. Thus, a clear understanding of major properties, threats and vulnerabilities, and challenges of reputation systems based on different types of DLT and BC (i.e., permissioned and permissionless) are key to determine their usefulness and optimization potentials. In this sense, a use case of a BC-based reputation system within the context of cooperative network defenses illustrates such benefits and drawbacks of exploiting DLTs for reputation systems.

Bruno Rodrigues, Muriel Franco, Christian Killer, Eder J. Scheid, Burkhard Stiller

Blockchain for Trust and Reputation Management in Cyber-Physical Systems

Abstract

The salient features of blockchain, such as decentralization and transparency, have allowed the development of Decentralised Trust and Reputation Management Systems (DTRMS), which mainly aim to quantitatively evaluate the trustworthiness of network participants and help to protect the network from adversaries. In the literature, proposals of DTRMS have been applied to various Cyber-physical Systems (CPS) applications, including supply chains, smart cities, and distributed energy trading. In this chapter, we outline the building blocks of a generic DTRMS and discuss how it can benefit from blockchain. To highlight the significance of DTRMS, we present the state-of-the-art DTRMS in various fields of CPS applications. In addition, we also outline challenges and future directions in developing DTRMS for CPS.

Guntur Dharma Putra, Volkan Dedeoglu, Salil S Kanhere, Raja Jurdak

Advances in Blockchain Security

Abstract

Blockchain, the technology that underpins the great success of Bitcoin and various other cryptocurrencies, has incredibly emerged as a trending research topic in both academic institutes and industry associations in recent years. With great potential and benefits, the blockchain technology can stimulate a new decentralized platform for various applications such that the possibility of censorship, monopoly, and single point of failures can be eliminated. However, the blockchain is still in its early stages and not yet ready to realize that vision, since there are many security vulnerabilities that can be exploited to obstruct blockchain systems. In this chapter, we present fundamental challenges and recent advancements in the blockchain technology, especially in terms of security. In particular, we investigate the security threats of blockchain, effectively capturing the recent attacks, and review some security enhancement solutions for blockchain.

Truc Nguyen, Tre’ R. Jeter, My T. Thai

Formal Verification of Blockchain Byzantine Fault Tolerance

Abstract

To implement a blockchain, the trend is now to integrate a non-trivial Byzantine fault-tolerant consensus algorithm instead of the seminal idea of waiting to receive blocks to decide upon the longest branch. After a dozen years of existence, blockchains trade now large amounts of valuable assets and a simple disagreement could lead to disastrous losses. Unfortunately, Byzantine consensus solutions used in blockchains are at best proved correct “by hand” as we are not aware of any of them having been automatically verified. We propose two contributions: (i) we illustrate the severity of the problem by listing six vulnerabilities of blockchain consensus including two new counter-examples; (ii) we then formally verify two Byzantine fault-tolerant components of Red Belly Blockchain (Crain et al. in Red belly: a secure, fair and scalable open blockchain, 2021, [32]) using the ByMC model checker. First, we specify its simple broadcast primitive in 116 lines of code that is verified in 40 s on a 2-core Intel machine. Then, we specify its blockchain consensus algorithm in 276 lines of code and assume a round-rigid adversary to verify in 17 minutes on a 64-core AMD machine using MPI. To conclude, we argue that it has now become both possible and crucial to formally verify the correctness of blockchain consensus protocols.

Pierre Tholoniat, Vincent Gramoli

Decentralized Finance

Frontmatter

Constant Function Market Makers: Multi-asset Trades via Convex Optimization

Abstract

The rise of Ethereum and other blockchains that support smart contracts has led to the creation of decentralized exchanges (DEXs), such as Uniswap, Balancer, Curve, mStable, and SushiSwap, which enable agents to trade cryptocurrencies without trusting a centralized authority. While traditional exchanges use order books to match and execute trades, DEXs are typically organized as constant function market makers (CFMMs). CFMMs accept and reject proposed trades based on the evaluation of a function that depends on the proposed trade and the current reserves of the DEX. For trades that involve only two assets, CFMMs are easy to understand, via two functions that give the quantity of one asset that must be tendered to receive a given quantity of the other, and vice versa. When more than two assets are being exchanged, it is harder to understand the landscape of possible trades. We observe that various problems of choosing a multi-asset trade can be formulated as convex optimization problems and can therefore be reliably and efficiently solved.

Guillermo Angeris, Akshay Agrawal, Alex Evans, Tarun Chitra, Stephen Boyd

Stablecoins: Reducing the Volatility of Cryptocurrencies

Abstract

In the wake of financial crises, stablecoins are gaining adoption among digital currencies. We discuss how stablecoins help reduce the volatility of cryptocurrencies by surveying different types of stablecoins and their stability mechanisms. We classify different approaches to stablecoins in three main categories (i) fiat or asset backed, (ii) crypto-collateralized, and (iii) algorithmic stablecoins, giving examples of concrete projects in each class. We assess the relative tradeoffs between the different approaches. We also discuss challenges associated with the future of stablecoins and their adoption, their adoption and point out future research directions.

Ayten Kahya, Bhaskar Krishnamachari, Seokgu Yun

Central Bank Digital Currencies

Abstract

Today’s societal digitization continues to advance at exponential speeds driven by technology trends. Billions of Internet of Things devices have made their way into our daily lives but also into healthcare, manufacturing, and supply chains. In contrast, the financial sector still largely operates on legacy infrastructures, where merchants receive their payments long after they released the digital/physical good to the consumer. In addition, the emergence of Decentralized Finance through blockchain technology, and the accumulation of data in private silos, has demonstrated a capacity to impact national sovereignty and monetary transmission channels. Against this backdrop, many central banks have recently started to research and test the issuance of digitally native fiat money—or Central Bank Digital Currencies (CBDCs)—in an effort to redesign the essence and use of physical cash. CBDCs present a broad variety of designs, which translate into manifold techno-legal and standardization policy questions. In this context, this chapter surveys the state-of-the art with specific focus on “retail” CBDCs. In doing so, it provides an overview of candidate architectures, heeds legal impacts and regulatory compliance issues, presents a set of case studies and touches upon cross-border CBDC challenges.

Nadia Pocher, Andreas Veneris

Application and Policy

Frontmatter

Ocean Protocol: Tools for the Web3 Data Economy

Abstract

This chapter describes a toolset to enable Web3 data economy. Ocean Protocol is an on-ramp for data services into crypto ecosystems, using datatokens. Each datatoken is a fungible ERC20 token to access a given data service. Ocean smart contracts and libraries make it easy to publish data services (deploy and mint datatokens) and consume data services (spend datatokens). Ocean contracts run on Ethereum mainnet to start, with other deployments to follow. Ethereum composability enables crypto wallets as data wallets, crypto exchanges as data marketplaces, data DAOs as data co-ops, and more. Ocean Market is an open-source community marketplace for data. It supports automatic determination of price using an “automated market maker” (AMM). Each datatoken has its own AMM pool. Anyone can add liquidity, aka stake (equivalent in AMMs). This is curation, as stake is a proxy to dataset quality. We envision thousands of data marketplaces, where Ocean Market is just one. In addition to Ocean Market being open-source (and therefore forkable), Ocean includes tools to help developers build their own marketplaces and other apps. Ocean’s “Compute-to-Data” feature gives compute access on privately held data, which never leaves the data owner’s premises. Ocean-based marketplaces enable monetization of private data while preserving privacy. These tools are part of a system designed for long-term growth of a permissionless Web3 Data Economy. The Ocean Data Farming program incentivizes a supply of data. The community-driven OceanDAO funds software development, outreach, and more.

Trent McConaghy

Blockchain in Supply Chain: Opportunities and Design Considerations

Abstract

Supply chain applications operate in a multi-stakeholder setting, demanding trust, provenance, and transparency. Blockchain technology provides mechanisms to establish a decentralized infrastructure involving multiple stakeholders. Such mechanisms make the blockchain technology ideal for multi-stakeholder supply chain applications. This chapter introduces the characteristics and requirements of the supply chain and explains how blockchain technology can meet the demands of supply chain applications. In particular, this chapter discusses how data and trust management can be established using blockchain technology. The importance of scalability and interoperability in a blockchain-based supply chain is highlighted to help the stakeholders make an informed decision. The chapter concludes by underscoring the design challenges and open opportunities in the blockchain-based supply chain domain.

Gowri Sankar Ramachandran, Sidra Malik, Shantanu Pal, Ali Dorri, Volkan Dedeoglu, Salil Kanhere, Raja Jurdak

Tokenization of Assets

Abstract

An asset is classified as any resource owned that can be used to produce positive economic value, and that economic value is usually recorded on a ledger. Typically, these ledgers have been the balance sheet of enterprises. With the advent of distributed ledgers, in several use cases, it has been found that in certain asset classes it is better to register these assets on a decentralized ledger.

Raghu Bala

The New Economy of Movement

Abstract

The convergence of a number of emerging technologies—including AI, IoT, and Blockchain—permits any entity, whether a vehicle, smartphone, sensor, road, or another piece of transportation infrastructure, to have a trusted identity, be intelligent, communicate, and autonomously participate as an independent economic agent in transactions. These transactions will become a large part of the new, pay-as-you-go, mobility services economy at the “edge”. The potentially large number of independent agents, combined with the frequency and near real-time latency requirements of these transactions, will require edge connectivity, processing, execution, settlement, and new types of digital identifiers. For a roaming, connected entity—such as a person, vehicle, smartphone, electric vehicle (EV) battery, or package—one of the most important and valuable attributes is its location in time and space. Combining secure identity with trusted time-stamped locations creates a “Trusted Trip” and, for the first time, enables marginal cost pricing for many new classes of mobility transactions such as urban road tolling, meter-free parking, congestion management, carbon and pollution taxing, usage-based insurance, and many other usage-based Mobility as a Service (MaaS) applications. Together, these new transactions will comprise a multi-trillion-dollar ecosystem that we call the New Economy of Movement.

Tram Vo, Chris Ballinger

Blockchain-Based Data Management for Smart Transportation

Abstract

Smart services for Intelligent Transportation Systems (ITS) are currently deployed over centralized system solutions. Conversely, the use of decentralized systems to support these applications enables the distribution of data, only to those entities that have the authorization to access them, while at the same time guaranteeing data sovereignty to the data creators. This approach not only allows sharing information without the intervention of a “trusted” data silo, but promotes data verifiability and accountability. We discuss a possible framework based on decentralized systems, with a focus on four requirements, namely, data integrity, confidentiality, access control, and persistence. We also describe a prototype implementation and related performance results, showing the viability of the chosen approach.

Mirko Zichichi, Stefano Ferretti, Gabriele D’Angelo

Crypto Regulation and the Case for Europe

Abstract

The blockchain phenomenon has seen an extraordinary rise to prominence. The technology has grown at a revolutionary speed across many sectors and within little over a decade. It is no longer a niche technology for geeks, but a formidable innovation capable of triggering a paradigm shift, not only in finance, but within the society as a whole. While the blockchain industry has experienced an unprecedented growth, regulators struggled to keep pace with this innovation, both in terms of understanding this phenomenon and adapting or providing adequate legal and regulatory frameworks. As a result, legal and regulatory uncertainties are some of the main obstacles for blockchain innovation. This paper seeks to analyze regulators’ and policymakers’ efforts to understand and develop an adequate regulatory approach to crypto assets, tokens, and the distributed ledger technology (DLT) in Europe and illustrates the evolution of regulatory perception and recognition of this innovation. As the EU regulator remained passive for some time toward blockchain innovation except for a few inconsequential statements or reports, the EU countries tried to address this innovation individually and mostly attempted to apply existing legal framework to blockchain, with limited success. This paper gives an example of Liechtenstein as a jurisdiction that developed a comprehensive, bespoke and unique law that creates an entirely new legal architecture and principles to enable the token economy. It also outlines the EU latest initiative to create unique and bespoke regulation to govern markets in crypto assets and highlights the challenge of regulating the dynamically developing blockchain technology for the entire European region.

Philipp G. Sandner, Agata Ferreira, Thomas Dunser

Economic Perspectives on the Governance of Blockchains

Abstract

The structure and operation of blockchains are dynamic, which means that mechanisms must exist for implementing changes. The New Institutional Economics (NIE), with its emphasis on how rules govern the performance of any complex organization or network, provides an especially useful framework to consider governance of blockchains. We consider how NIE has been applied to blockchain and future applications. Our analysis is divided into consideration of blockchain networks as institutional technologies, blockchain networks as knowledge commons and polycentric enterprises, and the ways to empirically research blockchain networks. The Institutional Analysis and Design (IAD) framework developed by Elinor Ostrom is particularly useful to develop an empirical research agenda for comparing the institutional features of blockchains and, ultimately, to comparing their performance.

Ilia Murtazashvili, Martin Weiss

Title: Handbook on Blockchain
Editors: Duc A. Tran
My T. Thai
Bhaskar Krishnamachari
Publisher: Springer International Publishing
Electronic ISBN: 978-3-031-07535-3
Print ISBN: 978-3-031-07534-6
DOI: https://doi.org/10.1007/978-3-031-07535-3