05 BLockchain 03 Flashcards
FtHow doe Initial coin offerings work?
Investors buy into the offering and in return get new tokens, for example
- Utility tokens that have some use in using the product of the company
- the internal cryptocurrency of the venture
Different to IPOs; ICOs are mostly unregulated
What is Initial Coin Offerings?
ICOs are a new type of crowdfunding, combining aspects of fundraisng with platform building and network growing
What can change the global state ? (Blanace, data,…)
Ethereum
only transsactions can change the global state
* transfer ether between EOAs
* Change contract data by triggering contract accounts
* Initialize contract accounts
What are decentralized applications?
dApps are computer programs that run on a distributed, decentralized network like the Ethereum blockchains
Characteristics of dApps?
Most dApps run on Ethereum
* Smart contracts are the building blocks of dApps
* user interfaces are often similar to other cloud apps
–>Code and data are stored on the blockchain
–>dApps are generally not owned by anyone (though the correspsonding utility tokens are) –>Trust?
Advantages and Disadvantages of dApps?
- dApps cannot be shut down,
- have no downtime and
- are censorship resistant
Contra:
* can be extremely slow
* user experience may (yet) be poor
Proof-of-stake Mechanism
- No mining, randomly chosen validators update the blockchain
- validators are user that deposit some coins at stake
- The stake is typically locked up for some time and cannot be used for transactions
- The probability of being drawn increases in the amount deposited as stake
–>Chosen validators then verify the transactions in the block and update the chain
How are Validators incentivized?
PoS
–>Validators are incentivzed positively and negatively
* As a reward, they typically get newly minded coins and transaction fees
* They can loose their stake if they are dishonest
What is the “Nothing at stake” Problem in PoS?
PoS
suppose there is a fork (two versions of the chain)
* in theory validators have an incentive to keep signing blocks on both versions of the blockchian because they collect fees and newly minted coins on whichever fork eventually ends up winning
–>In PoW this is not possible because you have to spend computing power
What does the “long range attacks mean in the context of PoS?
–>to perform a 51% attack in PoW, you need to manipulate a block of the recent past
–>In PoS theoretically you could stat such an attack much earlier, even at the Genesis block.
–>One solution: always reject forks that differ before some “checkpont”
Was is the Double spend —> Nothing at stake problem?
PoS
The double spender could for example only validate blocks on the fraudulent version, which then would be the longest chain
How transparent are Blockchains?
- Most cryptocurrencies are pseudonymous
- Data on blockchain is usually totally transparent
- Users prefer less transparency
–>Two approaches:- Privacy coins
- Mixers
How does the Lightning Network work=
THe Transaction between the two parties change the balance of the payment channel.
–>THe updated balance is signed by btoh parties using their private keys.
–>No transaction is recorded on the main blockchain
- Eventually the payment channel is closed and the net is broadcasted to the main network
- –>Which results in another single transaction of the main blockchain
What is a Lightning Network?
Is a off-chain solution for smaller payments
* First there is a payment channel opened between two parties by recording a transaction on the main blockchain
Payment channel: is a multi-signature address using both parties keys keeping track of each parties respective balance
Example of zero knowledge proof? (red and blue pills)
One firend A is blind and cannot differentiate between red and blue
–>How can you prove to him that the two are different without telling him which one has what colour?
- you let him change the pills hand behind his back and then tell him wheteher he changed it or not.
- Since you can see the color you can prove to him that they are different withoiut telling him
What is zero knowledge proofs in the context of privacy coins?
How can we make sure that only Alice can get to spend her coins?
–>Use zero knowledge proofs
- proof a secret to another party without letting anyone know what the secret is
What are privacy coins?
Alternative to cryptocurrencies that allow for completely anonymous transactions
Advantages and Disadvantages of PoS
Advantages:
* verly low energy demand
* scalability isoftentimes better (and more faster transactions)
* no expensive, specialized, soon-to-be redundant equipment needed
Disadvantages:
* Not robust 51% attacks, instead need 51% of stake, However when other find out the Stake would be worthless probably
* There are and have to be still costs for validatos –>Oppotunity cost of locking away the stake
* Liduidity may be reduced due to locked-stake
* not withstood the test of time for as long as PoW
Some issue with stablecoins?
- Some are very intransparent regarding their services
- Stablecoins pegged to other currencies are fully influenced by their monetary policy
- Regulation (collaterialized stablecoins, may suddenly have to buy or sell alrge amount of collateral, potentially impacting traditional financial markets
- Depending on the mechanism, stablecoins can be centralized
(in sace of fiat and commodity-backed: someone has to hold the reserve somewhere - they might not be as stable as they claim
Two basic types of backing mechanisms? Stablecoins
- Collateralized stablecoins
- Algorithmic stablecoins
Short description of Collateralized stablecoins?
they hold some other asset in reserve
->This asset can be the same asset as the stablecoin is pegged to
Collateralized stablecoins
Describtion between pegged and reserve asset
Peg = reservce –> a mechanism allows investors to direclty exchange the stablecoin for the reserve asset in 1:1 ratio
Peg =/ reserve –> the reserve asset hat to be bought and sold to meet the demans of investors wanting to exchange
- these stablecoins then need to be overcollaterialized, especially for volatile reserve assets
- reserve assets have to be sufficiently liquid
Algorithmic Stablecoins short descrioption
Versions of stablecoins
are not backed by any other asset
* rely on automated algorithms via smart contracts to adjust the value of the coin by increasing or decreasing supply
–>These share of each user stays constant during the adjustments, but the total suplly changes
Short Description of decenteralized exchanges
decentralized exchanges (DEX) is a type of on-blockchain exchange that does not require an intermediary but instead relies on smart contracts
Collateralized stablecoins — what three main types of reserve assets exists?
- Fiat–backed stablecoins
- Commodity–backed stablecoins
- Crypto–backed stablecoins (typically substantially overcollaterialized)
Variations of PoS?
Delegated PoS: not every stakeholder verifies blocks. Instead, they vote validates from a limited number of delegates where voting power is proportional to depositated stake
Leased PoS: users lease out coins and thus rights to validate blocks and get some reward in return. Similar to DPoS, but usually less centralized as there is no limited number of regulators
Known issues of bitcoin?
— high Energy demand of proof of work consensus mechanism
— slow and low transaction capacity
— anonymous/pseudonymous, but still transparent
— extreme exchange rate volatility
What is a payment channel? Lightning network
Payment channel: is a multi-signature address using both parties keys keeping track of each parties respective balance
