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3.4: Blockchain and Encryption (Part 1)
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En provenance du cours de The Hong Kong University of Science and Technology
FinTech Foundations and Overview
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The Tech of FinTech
The Technology enabling and supporting FinTech is important to understand, and this module provides a brief introduction to each of the areas of technology that enable FinTech business changes, including identity and privacy technologies, blockchain and encryption, big data analytics, AI and automation, and consumer tech innovations. This introduction is designed to be at a level appropriate for business managers or students of business, and is not intended to excite or engage tech geeks.
Rencontrer les enseignants
Theodore Henry King CLARKAssociate Professor
Information Systems, Business Statistics and Operations Management Department
Welcome back to our course on FinTech foundations and overview.
In this session we're talking about one of the technologies of FinTech
the technology of Blockchain and encryption and
the associated technology of distributed ledger.
With me today is a guest speaker on this session.
Yanzhen, who has joined us recently from Texas, University of Texas Austin.
And is a professor with her PhD specializing in FinTech and
Blockchain issues.
Okay, so
we're going to talk about Blockchain as a type of distributed ledger.
You may know Blockchain as an enabler for BitCoin or some other applications,
but Blockchain isn't the only way to do some cool things with technology.
It is a type of distributed ledger.
I recently listen to someone arguing
animatedly that Blockchain was needs of the only way or even the best way
to do many new applications which could be done with this distributed ledger.
What's interesting about is just like pointing out, it really doesn't matter
whether Blockchain is the only way or the best way.
It is a popular and successful way.
It has been proven, it works.
It might not be the only way to do distributed ledger, but
it's a powerful tool that is commonly accepted.
>> You're right.
>> Now if we think about it in terms of distributed ledger, we can look at this
figure here, which looks at distributed ledger in different ways and
we could say the first line here is not distributed.
That's a traditional database, you have one user.
You have one record.
That's not distributed, that's not a DLT.
The second line says we're distributing things to a closed-user group.
Other than a ledger, if we were to look at,
say, other kinds of documents like a spreadsheet, what's an example of
distributing something that is a small closed-user group?
>> We can think of that example using sharing Google doc.
Once I create a Google doc or Google spreadsheet,
I can to my collaborators to work on that same document.
But, it is only shared with the people I invited.
So this copy is accessed by a closed group of users.
>> But I could publish it to many and let a few update it, right?
>> Right, that's true.
>> Okay, so I could distribute it very broadly.
>> Mm-hm.
>> And I can have many people updating it, many people could see it, maybe.
Or many people could see it.
So it's distributed, but it's- >> At the [CROSSTALK]
>> Closed group, closed group.
Now I could also have anyone see it, and distribute it to the entire world.
I could publish it for everybody.
And can I have it be secure, if anybody can see it but I'm not using Blockchain?
>> Probably you would have concern in that aspect, because you can have
random people, as long as they get access, they can mess with your records.
>> So then you're worried and you say, if I'm going to do that maybe I'd like to
have one group or person or a closed group that has permission to update it.
>> Exactly.
>> So I could publish it to the world.
Everybody could see it, but only one or a few people can update it.
That's like some banking systems or applications.
Kind of like a crypto currency, called ripple.
Where there is one group that can authenticate it or
can approve it with a closed user group, not everybody can authenticate it.
Not everybody can update these blocks.
But a very small group or central clearing point.
That's more traditional banking, but distributed banking.
>> Right.
>> Okay. >> Take care of the trust part.
>> Now what happens with Blockchain?
Because Blockchain is a distribute ledger on streoids.
>> Right, but with Blockchain, all the miners can verify the same transaction.
And once the record on one block got changed,
the hash value will be changed as well.
So the whole Blockchain needs to be remined,
that's how Blockchain prevents change of values from happening.
>> Okay so Blockchain is kind of new.
It's a type of DLT and any DLT or
any distributed ledger has to address a couple of things basic to
the distributed ledger, one of which is trust.
How does Blockchain do that?
I don't have any administrator, I don't have any central clearing,
everybody's doing this.
How do I know I can trust them?
>> One mechanism here is, each block is linked by a hash pointer,
which means that the hash value of the premise block is used to
calculate the hash value of the second block.
That's how we link the blocks together, so once we change one record
on one block, the ranks of the blocks should be modified accordingly.
>> And that creates a chain?
>> That creates a chain.
>> A chain of blocks with hash values.
That can't be modified easily, at least.
>> Right.
>> So that's kind of cool and that creates a sense of trust.
Whether you like Bitcoin or not, you've got to acknowledge it's really made
Blockchain pretty clearly a viable technology.
Okay, what about security?
Is it secure.
>> It is.
That is because to change the record is very costly.
Probably it's going to take a long time and
it's going to consume a lot of computing resources.
>> And I can't change an old block without redoing all of the following blocks.
So if it's distributed out there, it's almost impossible to change history.
>> Exactly.
>> Okay, so that makes it very careful, very good.
How about privacy?
Do I get privacy?
Because I'd worry about my bank records and
information with a centralized database.
Things could be private, or they could be public.
How about with BitCoin?
>> With BitCoin when I want, for example,
I want to transport two BitCoin to Tad, to you.
>> Mm-hm, thank you.
>> And then I don't need to know your full name.
The only thing I need to know is the public address, which is a random number.
>> So I have to identify myself.
But maybe not by name.
>> Right. >> I need a unique identity,
I need a way for you to say this is definitiely the person
I want to send it to, but you don't need to know who I really am.
>> Right.
>> Okay, so I could have privacy and accuracy, and
yet some degree of anonymity- >> Mm-hm.
>> Along with identity.
>> Right.
>> That's unusual with Blockchain.
It's not traditional of typical banking, although it may make a Swiss banker proud,
because they like that amenity loan before we had a Blockchain.
Okay, then we have transparency.
We want to be able to verify things,
is the distributor ledger or Blockchain transparent?
>> And that is one of the major breakthroughs that happens
with Blockchain.
Because the content on one blockchain
consists of the history of the transactions.
We can trace back, one BitCoin was transferred from A to B,
from B to C, From C to me from me to Tad.
>> So we could follow the history of every bitcoin
ever created from the beginning to now.
>> Exactly, ever single transaction we can trace all the way back
to the creation of that exact BitCoin.
>> How important is cryptography or encryption to this Blockchain world?
>> I think most importantly it help us to address the trust problem, and
help us to eliminate the role of a central clearing house, or a government to.
>> So is that why Blockchain is a disruptive technology,
is because it eliminates, the third party.
>> That's the innovation that Blockchain brings us.
>> Okay, so we could do banking before, we could do a lot of these things before.
Blockchain eliminates the need for a central bank, or
a government, or a large institution.
>> Mm-hm.
>> We can have trust with people we've never met.
>> Right >> That's cool.
And so that's a new innovation.
One of the criticisms is efficiency,
is that it's kind of slow sometimes to update.
Is that an inherent problem to Blockchain or is that a problem of BitCoin?
>> It is by design for Blockchain, because we want the mining
of each block to be computational mounting.
So that the transaction cannot be easily modified.
>> What if I had information that only a central clearing group would know?
So that I could make the mining easy but only if you knew a secret code.
>> Right.
>> That you could do fast, right?
>> Yes.
>> But you'd have to have a secret code that only a few people knew.
That won't work with BitCoin.
For a government issue of a registry of deeds for land.
>> Exactly.
>> Okay, so Blockchain is more than BitCoin,
it could be different than BitCoin, we can use it in many different ways.
BitCoin is simply one way of using Blockchain for cryptocurrency.
>> Right, it's just one special case of it.
>> Okay, one special case.
But all of these cases have hash functions.
>> Yes.
>> And that's essentially encryption and action.
>> Mm-hm.
>> How does that work what's this hash?
>> So hash function in short terms it means that we take the input
off any lens but gives the output alpha fixed lens.
It is a one way function, which means that it is easy to go one way to the other but
hard to go the other directions.
We can take the modular function as an example.
So, for example what 2010 mod 36 will give us 30,
which we can calculate easily but given the result of 30 There
will be unlimited possibilities that congrute to 30 more 36.
That's what we meant by.
>> And if I make a small change to even a tiny bit of data?
>> It's going to look entirely different.
>> It's a totally new hash?
>> Totally new.
>> So it's clearly wrong.
You changed it.
Even a tiny bit, even a penny change, it's all wrong.
>> Yes, and the entire notes on this network will detect this change.
>> And if I change something in history, every block thereafter is invalid?
>> Right.
>> That's a problem, so it breaks the whole chain.
So I can't do that.
>> Right. >> But it's easy to compute.
>> Mm-hm. >> We could just do that on our PC.
We can compute the hash.
>> With a blink of time.
>> But it's hard to find the right one.
>> Right.
>> Okay, all right, so it's a complicated function.
So you've got an example here of a hash function.
How does that work?
>> So if you hash the input of a letter, a,
this long string is what we are going to get as the hash function output.
>> I would like to enter that into my phone.
>> Right.
>> So how do I deal with the long harsh like that?
>> With long harsh like this one,
we dont need to remeber the whole thing- >> Good.
>> As customers, we can only remember our original password or original code.
>> Okay. >> Letter A.
>> Or we can also use a QR code to be able to be recognized by the computer and
interface with a lot of data really easily with your phone.
Okay, so what do we do with a hash function?
How does it help us?
>> One important application can be committment.
Commitment allows one to commit to a value without reviewing the value to the others.
>> Like what?
>> Say that Alice and Bob both participate in a mathematic contest, and
Alice got her answer first but she doesn't want to review.
>> Well obviously, she's smarter.
>> [LAUGH] >> [LAUGH]
>> Alice would be happy to hear that.
>> Yes, okay.
But Bob is a little slow.
>> Bob is a little slow, but Alice doesn't want to give the answer to Bob,
because Bob can claim that he got the same answer, right?
>> Of course, that's what guys do.
>> [LAUGH] >> Okay.
>> Bob said not really.
>> Not really, okay.
But Alice is concerned that he would copy her and say that he was first, but even,
he's lying.
>> Yeah.
>> So now she can save Bob, here's my hash.
>> Yes, exactly.
>> And he can say.
>> Uh-oh.
>> I don't have that same hash, I better work on it some more.
>> Mm-hm.
>> Okay. >> Also he can check Alice's answer to see
if it really gives the same hash, to see if Alice is lying.
>> But he can also check and
see if he has the same answer as Alice to see if he's right.
>> Mm-hm, yep.
>> Without being given the answer.
You're given the key to grade your own problem without knowing the answer.
>> Right.
>> Okay. >> Mm-hm.
>> All right, so document integrity.
How does this help?
>> So when we download a file from a website,
the website can provide a hash value.
But once we have this file, we can compute the hash, and
then we can compare those two hash values.
If they are consistent with each other,
we can be confident to say that the file has not been compromised yet.
>> Okay, so my video is what I think it is, my program is what I think it is.
This is not just data, this could be a whole program, right?
>> Right, yes.
>> So it could be any length of thing could have a hash.
>> Mm-hm, videos, photos, whatever.
>> Yeah, okay.
And you said password storage also works.
>> Mm-hm, so many websites now store passwords of clients
in the hashed forms so when customers import their password,
the hash of it got to be compared with the stored hash.
>> Okay, so you can indeed validate, like if I call up and say,
I can't remember my password, and they say, well I can't tell you what it is,
because it's saved in hash form.
But I could say, well, could I try a couple of versions?
And you'll say no, that's not it, that's not it, yep, that's the one.
>> Hm hm.
>> So I could check, but I'm not sure I want to give customer service my password,
but I'm not even be able to type it in and the bank could say that's the one.
>> Right, and- >> Without seeing it.
>> Yep, bank won't have any idea what your possible combinations are.
>> Right, so they can't re-create my password, but
they could tell me you got the hash right.
>> Okay, so that's cool.
All right, well, thank you very much.
Now to bottom line on this.
DLT is more than Blockchain, Blockchain is more than BitCoin.
BitCoin is an application.
DLT and encryption are critical to many aspects of fintech.
Not just Blockchain, many other areas using encryption use distributed ledger.
But Blockchain clearly demonstrated the DLT works.
>> Right.
>> So it's a powerful technology that opens up the door to many,
many new ways of doing business in FinTech.
Okay, thank you very much for your time.
>> Thank you, Tad.
>> Okay.
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