Blockchain Essentials

Blockchain Essentials
Harnessing the Technology for Banking Industry

v2.2.0
Developed and Facilitated by Goutama Bachtiar

IT Advisor, Consultant, and Auditor
Workshop Agenda Goutam
Digitally signed by
Goutama Bachtiar
Date: 2018.12.06
a 16:19:46 +07'00'
Adobe Acrobat
Exploring Blockchain and their Bachtiar

2
Reader version:
 Session 1: 2019.008.20081
Components
 Session 2: Leveraging Blockchain Benefits
 Session 3: Valuing The Implementation in Banking
Industry
 Session 4: Understanding Key Challenges
Blockchain Essentials October 2018

Image: Baltana
Session 1
Exploring Blockchain and
Their Components
October 2018 Image: Excelland Blockchain Essentials 3

Module 1.1
Introducing Blockchain
October 2018Image: housemarque Blockchain Essentials 4

What is Blockchain?
• A technology that permits transactions to be gathered
into blocks and recorded.
• Allows the resulting ledger to be accessed by different
servers.
• Cryptographically chains blocks in chronological
order.
• First introduced in whitepaper “Bitcoin: A Peer-to-Peer
Electronic Cash System,” by Satoshi Nakamoto in
2008.
October 2018 Blockchain Essentials 5
What is Blockchain? (cont’d)
• A Distributed Transaction Ledger
• Every block contains multiple transactions
• Massively duplicated across network nodes
• Shared with a P2P file transfer protocol
• All network nodes perform transaction validation and
clearing.
• Updated by peculiar nodes, known as miners, appending
new blocks of transactions
• Miners perform the additional work required for settlement.
Whilst Bitcoin themselves:
• No reliance on trust
• Digital signatures
• Peer-to-peer network
• Proof-of-work
• Public history of transactions
• Honest, independent nodes control majority of CPU computing
power
• Nodes vote with CPU computing power
• Rules and incentives enforced through consensus mechanism
To imagine:
“Giant interactive
Google doc
spreadsheet that
anyone can view
and administrators
(miners)
continually verify
and update to
confirm that each
transaction is
valid”

Distributed Consensus
• Satoshi Nakamoto reaches consensus using game theory
in this case economic incentive for mining nodes to be
honest and do as they are expected.
• Miners are compensated for their proof-of-work

(validating, settling and clearing transaction) using
seigniorage revenues, i.e. with issuance of new bitcoins.

How Blockchain Works
• A participant is a member of a network
– Customer, Supplier, Government, Regulator
– Have specific identities and roles
• A transaction is an asset transfer between two or more participants:
– John gives a car to Anthony (simple)
– John gives a car to Anthony, Anthony gives money to John (more
complex)
• A contract is set of conditions under which transactions occur:
– If Anthony pays John money, then car passes from John to Anthony
(simple)
– If car won't start, funds do not pass to John (as decided by independent
third party arbitrator)
How Blockchain Works (cont’d)

How Blockchain Works (cont’d)

Image: Deloitte UK Report 2016
Image:
Image: Deloitte UK Report
Blockchain.info 2016 2018
October
October 2018
Image: IBM
Blockchain Essentials 15
Three Major Usage
1. Storing digital records
2. Exchanging digital assets (digital, crypto
currency as known as token)
3. Executing Smart Contracts
i. Ground rules: Terms & conditions recorded in code.
ii. Distributed network executes contract and monitors compliance.
iii. Outcomes are automatically validated without third-party
individual or organization.

Global Fintech Landscape

Module 1.2
Their Components

Blockchain in a Nutshell
Broader participation, increased efficiency and lowered cost

Blockchain Networks
• Public (Permissionless Blockchains)
Example: Bitcoin, Ethereum, Litecoin
• Private (Permissioned Blockchains)
Example: Multichain, Monax
• Consortium Blockchains
Example: R3, EWF, Corda

Blockchain Networks (cont’d)
Image: CoinDesk Consensus Q1 2017 Report

Distributed Ledger

Ledger
• A Ledger of Transactions stored as Immutable Blocks.
• Blocks are connected to one another hence forming a Chain.
• The validity of which has been agreed upon by Peers on a Decentralised
network secured by Cryptography.
• Whilst Shared Ledger is:

The Components
• Node: refers to client who owns the block.
• Transaction: Transfer of something from A to B.
• Block: Bundle of transactions.
• Miners: Burns effort, time and energy to create blocks, therefore get
rewarded by Block Reward + Transaction Fees.
• Block Reward: New coins created with each block, goes to miner.
• Transaction Fees: Small percentage of transaction value, which
goes to the miner.
• Mining: process by which blocks are created, transactions are
verified and added to blockchain.
The Node
• A client, which owns the block.
• A copy of the ledger operated by a participant of the
blockchain network.
• Contains one or more than one account.
• Miner (Account) mines on the specific node to whom they
belongs.

The Block
• Bundle of Transactions.
• Contains previous block hash.
• All blocks are linked using their hash.
• Data can’t be changed in one block without breaking the
chain.

Therefore, the Blockchain

Cryptography
Initiation and ▪ Digital Signature
Broadcasting of ▪ Private and Public
Transaction Keys
Validation of Proof of Work and

Transaction Certain Alternatives
Chaining Blocks Hash Functions

Public Key
• A large numerical value used to encrypt data/file/message.
• Encrypted file is intended for a particular recipient, and it could be
decrypted only by using the second key known only to the
recipient (the private key).
Therefore the sender must know the recipient public key, encrypted the file with
that key and sent it to his/her. He/she receives and decrypt it with his/her own
private key.
• Can be generated by a software, website, or provided by several
organization, Certificate of Authority (CA) for instance.
• Made available to everyone by telling others or through a publicly
accessible repository/directory service or server.

Example of Public Key

Private Key
• A large numerical value that is mathematically linked to the public
key.
• Whatever is encrypted with a Public Key may only be decrypted
by its corresponding Private Key and vice versa.
• Can be generated by a software, website, or provided by several
organization, Certificate of Authority (CA) for instance.
• Shall be kept securely and privately by the owner/holder.
• Symmetric/Private Key encryption uses the same private/secret
key for both encryption and decryption whilst asymmetric/public
key encryption uses two linked keys and required higher
computing resources.
Example of Private Key

Digital Signature

Digital Certificate
• Owner (subscriber/sender) name
• A Serial Number (unique; generated by CA)
• Expiration date
• A copy of certificate holder’s Public Key (utilized for
encrypting messages and digital signatures)
• Digital Signature of CAs so a recipient/second party can
verify the certificate is real.
• Standards: X.509, PKI X.509 and Public Key Cryptography
Standards (PKCS).

Example of Browser Certificate
When accessing
Google search engine
through Google
Chrome:
www.google.co.id
35
Example of Browser Certificate (cont’d)
When accessing
Google search
engine through
Google Chrome:
www.google.co.id
36
BlockchainTechnology
Example of Browser Certificate (cont’d)
When accessing
Google
search engine
through Google
Chrome:
www.google.co.id
37
Example of SSL Certificate (*.pem)
38
Example of Certificate Service Request
39
Proof of Work
• A system that ties mining capability to computational
power.
• When a block is successfully hashed, the hashing must
have taken some time and computational effort
• Hashed block is considered proof of work.
• In other words, transaction is confirmed in the
blockchain.
• Done by the node/miners.
Hash Function
• A hexadecimal code used SHA-256
• Blockchain uses Cryptographic Hash Function.
It takes any string as input
Fixed-size of output (256 bits)
Efficiently Computable
Security Properties (Collision free, Hiding and Puzzle friendly)

Module 1.3
Relationship with Crypto Currency

The First Crypto Currency
•It was Bitcoin (BTC)
•A maximum of 21 million Bitcoins can be generated
•The Satoshi is the smallest unit of bitcoin recorded on
blockchain (it's a one hundred millionth of a single
bitcoin (0.00000001 BTC)
•https://www.cryptocoincharts.info/coins/info claims to
be indexing 4,220 cryptocurrencies
•Bitcoin is one of the Blockchain digital assets.
•Most circulated: Bitcoin, Ethereum, Litecoin
Technology Behind Bitcoin
•Think of Bitcoin as an electronic asset other than
digital, crypto currency
•A network of computers keeps track of Bitcoin
payments and adds them to an ever-growing list of
them which have been made, called “The Bitcoin
Blockchain”.
•The file that contains data about all Bitcoin
transactions is often called a “ledger”.
Technology Behind Bitcoin (cont’d)
•Bitcoin value is created through transaction
processing, referred to as “mining”.
•Mining is performed by distributed processors
called “nodes” of the peer-to-peer network.
•Blockchain without digital asset in this case crypto
currency? NO.

Mining Revolution
•In 2009, one could mine 200 Bitcoins with a PC.
•In 2015, it takes about 98 years to mine just 1 BTC.
•Today there is almost no money to be made through
traditional home mining.
•ASIC (Application Specific Integrated Circuit) has
been designed strictly for mining BTC.
•Groups of miners have formed mining pools, with
each being paid their relative share for their
contribution to the work performed.
Mining Revolution
•In 2009, one could mine 200 Bitcoins with a PC.
•In 2015, it takes about 98 years to mine just 1 BTC.
•Today there is almost no money to be made through
traditional home mining.
•ASIC (Application Specific Integrated Circuit) has
been designed strictly for mining BTC.
•Groups of miners have formed mining pools, with
each being paid their relative share for their
contribution to the work performed.
Token In Details
• Can be defined as “scarce digital asset based on
underlying technology inspired by Bitcoin.”
• Ethereum was Bitcoin-inspired but has its own
blockchain and more programmable.
• Tokens can be issued on top of Ethereum blockchain.
• Token buyers are buying private keys and can be
transferred to other parties without consent.

Token In Details (cont’d)
• Have a value and therefore a price.
• Do not dilute capital. They introduce a huge increase
to buyer base and time-to-liquidity.
• Can be issued as a way to share profits.
• Can be sold internationally over internet and are
always open for business.
• Decentralize process of funding technology.
• Accommodate immediate custody without
intermediary.
Ethereum
A decentralized platform that runs smart contracts:
applications that run exactly as programmed without
any possibility of downtime, censorship, fraud, or third-
party interference.
The Ethereum project was bootstrapped via an ether
pre-sale during August 2014.
The project is developed by Ethereum Foundation, a
Swiss nonprofit, with contributions from individuals and
organizations across the globe.
Ethereum Components
• Ethereum Wallet
A gateway to decentralized applications on
Ethereum blockchain, allowing users to
hold and secure ether and other crypto-
assets built on Ethereum, as well as write,
deploy and use smart contracts.
• Design and issue your own
cryptocurrency/traceable token
• Kickstart a project with CrowdSale

Enterprise Ethereum Alliance
Permissioned Blockchain

Ether
• The crypto-fuel for Ethereum network.
• A form of payment made by clients of platform to machines
executing requested operations, functioning as incentive to
ensure that developers will write quality applications, and
network remains healthy.
• Developers who intend to build apps that will use the
Ethereum blockchain need ether.
• Users who want to access and interact with smart contracts
on Ethereum blockchain also need ether.
How was Ether Created?
• Total supply and its rate of issuance was decided by
donations on 2014 presale.
• 60 million ether created to contributors of the presale.
• 12 Million (20% of the above) were created to the
development fund.
• 3 ethers are created every block (roughly 15 seconds) to the
miner of the block.
• 0.625-2.625 ethers are sometimes sent to another miner if
they were also able to find a solution.
Ethstats.net
Statistics of Ethereum nodes on public Ethereum Blockchain

Bitcoin’s
Blockchain
Stats
Summary of bitcoin statistics for the
previous 24 hour period from
Blockchain.info

Bitcoin’s Blockchain Stats
Summary of bitcoin statistics for the previous 24 hour period from Blockchain.info

How to Store Crypto Currency
Ledger Blue
Ledger Nano S

How to Store Crypto Currency (cont’d)

Module 1.4
Transaction

Elements of Transaction

Example of Transaction
Receiving BTC in Blockchain.info Wallet
Local time when BTC

The sender’s ‘Send’ Wallet ID
received by the wallet
The receiver’s ‘Receive’ Wallet

ID (hashed)

Example of Transaction (cont’d)
The sender’s Status of

URL of the ‘Send’ Wallet ID
Transaction
Transaction
Confirmation time
between minutes until
hours

Example of Transaction (cont’d)

Module 1.5
Block

Inclusive of
Block creation
Visualization
time

Example of Block
Current Block

Example of Block (cont’d)
Previous Block

Example of Block (cont’d)
Next Block

Example of Transactions Inside the Block

Example of The Largest Transaction

Example of Unconfirmed Transaction

Example of Strange Transaction
Transactions containing outputs from which were unable to decode a bitcoin address

Detached/Orphaned Block
• Valid blocks which are not
part of the main chain.
• They can occur naturally
when:
▪ Two miners produce
blocks at similar times
▪ Caused by an
attacker with enough
hashing power attempting
to reverse transactions.
Rejected Inventory
Transactions and blocks which have been rejected by the nodes

Example of The Node

Module 1.6
Ledger

Processes in Ledgers
October 2018
Image: Baltana
Benefits of Distributed Ledgers
October 2018
Image: Nancy Liao Blockchain Essentials 79
Type of Distributed Ledgers
October 2018
Centralized vs Distributed
October 2018
Single Entity vs Multiple
October 2018
Example of Ledger

Hyperledger
• An open source collaborative effort created to advance
cross-industry blockchain technologies.
• A global collaboration, hosted by Linux Foundation,

including leaders in finance, banking, IoT, supply chain,
manufacturing, and technology.
• Business Blockchain Frameworks are hosted with

Hyperledger.
October 2018
Hyperledger (cont’d)
• Accommodate cross-industry open standard for distributed
ledgers.
• Some of well-known Hyperledger projects/frameworks:
• Hyperledger Burrow
Permissible smart contract machine with a modular blockchain
client, built in part to the specification of Ethereum Virtual Machine
(EVM)
• Hyperledger Fabric
Foundation for developing plug-n-play solutions within a modular
architecture
October 2018
• Hyperledger Iroha
Simple and easy blockchain
framework designed to be
incorporated into infrastructure
projects requiring distributed
ledger technology.
• Hyperledger Sawtooth
A modular platform for
building, deploying, and
running distributed ledgers.
October 2018
October 2018
Module 1.7
Smart Contract

Smart Contract
• Agreements between parties posted to the blockchain
for automated execution.
• Examples
Bet on high temperature tomorrow
Mortgage with automatic interest-rate resets
• Code: Ethereum and Eris
https://github.com/ethereum/
https://erisindustries.com/
October 2018
Image: Baltana
Example of Smart Contract
Image: Deloitte UK Report 2016

Module 1.8
Time Stamp and Notarization

Fingerprint and Time Stamp
• A file mostly Digital Certificate and Digital
Signature could be hashed to producing a short
unique identifier namely (Digital) Fingerprint.
• Such a fingerprint can be associated to a bitcoin
transaction (regardless to the amount) and hence
registered on the blockchain.
• Blockchain provides non-repudiation time-stamp, no
need for us to implement Time Stamp Server or get
connected to Time Stamp Authority (TSA).
Digital Fingerprint
• Application is related to digital media files.
• Helps a user locate a specific file to verify whether a
file has been altered, while actually facilitating
copyright protection.
• This involves using a fingerprint identifier/ID to
conduct protected file searches for other online file
instances.

Notarization
• The time stamp from third party organization act as
Online Notaria proving the existence of data file in
that specific status at that moment in time.
• This generic process is even undergoing some

standardization to achieve third party auditable
verification: broker-dealers could use it to satisfy
regulatory compliance.

Session 2
Leveraging Blockchain Benefits

How Blockchain Benefit Business
• Transparency and cryptography add resilience of data
• Audit electronic actions to easily complete forensic
analysis if a hack occurs
• If something was changed, Blockchain would become
invalid at that point and broadcast the error to all
nodes
• Immutable logging and connection of data to create a
tamper-proof chain of data

How Blockchain Benefit Business (cont’d)
• Immutable data means accurate reporting and
analytics
• Immutability means that it allows any fraud or error to
be identified and corrected, eliminating any single
point of failure and making it easy to have a correct
record of all behaviour at any point in time.
• If a past data entry is tampered, it will make the block
invalid, which both cancels the upcoming transaction
and shows data that was tampered with.
How Blockchain Benefit Business (cont’d)
• Immutable data means accurate reporting and
analytics
• Immutability means that it allows any fraud or error to
be identified and corrected, eliminating any single
point of failure and making it easy to have a correct
record of all behaviour at any point in time.
• If a past data entry is tampered, it will make the block
invalid, which both cancels the upcoming transaction
and shows data that was tampered with.
Blockchain Market Overview
Note
DLT: Distributed Ledger Technology

Source: World Economic Forum (WEF) Report, 2017
Image: Melanie Swan
Image: Melanie Swan
Image: Melanie Swan
October 2018
Credit: Melanie Swan

Potential Applications
October 2018
Image: Baltana
Session 3
Valuing the Implementation in
Banking Industry

Why Finance is Fascinated
• Blockchain transactions are immediately validated and
approved, then settled shortly thereafter, automatically
without a central authority.
• In the these days financial world, cash transactions
only are cleared and settled automatically without a
central authority.
• Financial transactions only take milliseconds to execute,
clear and settle rather than in days.
How Bank Benefits from Blockchain
Source: Finextra, Accenture, CoinDesk

How Bank Leveraging Blockchain These Days

central authority.
Source: CoinDesk, McKinsey, Bitcoin

Adoption in Banking Pads

Use Case – Financial Services

central authority.
Source: World Economic Forum

Use Case – Financial Services (cont’d)

central authority.
Source: World
Source: Economic
World Forum
Economic Forum

Banking Industry
• L/C
As a bank handling letters of credit (LOC) for our clients, we need a
common ledger that allows us and all counter-parties to have the
same validated record of transaction and fulfilment of conditions.
It’s intended so we can increase trust and speed of execution from 4

days to <1 day. If we can drive out 99% of the time and cost, we can
offer innovative LOC solutions for a wider range of clients, including
start-ups that are “born global.
October 2018
Image: Baltana
Session 4
Understanding Key Challenges

Identity and Access Management
Protecting access to data and
systems in place to process,
store, and report on that data,
requires ongoing resource
dedication.
Require configuring and
managing multiple identifiers for
an individual’s various identities.
Certainly be impacted by
widespread use of private keys to
secure transactions.
Private Keys
•Within blockchain, trust relies on safekeeping of private
keys, in support of a truly distributed identity
management.
•Ultimately, that safekeeping resides with the actions
taken by individuals to secure their private key.
•Always recommend to write one’s private key down on
a piece of paper and put it up for safekeeping in, for
example, a safe deposit box or locked cabinet.
Digital ID
•On May 24th, 2017, a Digitial ID solution by Netki, a
California blockchain startup, was released.
•A highly-anticipated Digital ID smartphone app that uses
Hyperledger blockchain to provide decentralized, open-
source identity management.
•Approved by several governments, fully Anti-Money
Laundering (AML) and Know Your Customer (KYC)
inclusive.
Interoperability
•On May 24th, 2017, a Digitial ID solution by Netki, a
California blockchain startup, was released.
Image: CoinDesk Consensus Q1 2017 Report
•A highly-anticipated Digital ID smartphone app that uses

Hyperledger blockchain to provide decentralized, open-
source identity management.
•Approved by several governments, fully Anti-Money
Laundering (AML) and Know Your Customer (KYC)
inclusive.
Public vs Private Network
October 2018 Image: IBM Blockchain Essentials 129

Energy Consumption
• Amounts of energy necessary to process and store
transactions, especially as use of blockchain technology
increases.
• Bitcoin blockchain network’s miners are attempting 450
thousand trillion solutions per second in efforts to
validate transactions.
• Mining Bitcoin itself requires huge amounts of energy
(around US$15million/day).

Other Challenges
• Uncertain/unharmonized regulatory status.
• Absence of laws and regulations.
• Physical, Administrative, Technical Control.
• Security and privacy.
• Cultural/change management adoption.
• Cost.
• Audit, taxes, and compliance.
Final Q & A

Looking forward to catching up with you again soon
Thank You!

Blockchain Essentials - Harnessing The Technology For Banking Industry

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Harnessing the Technology for Banking Industry

Developed and Facilitated by Goutama Bachtiar

Exploring Blockchain and their Bachtiar

Blockchain Essentials October 2018

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• Miners are compensated for their proof-of-work

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Broader participation, increased efficiency and lowered cost

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Image: CoinDesk Consensus Q1 2017 Report

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Validation of Proof of Work and

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Relationship with Crypto Currency

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Receiving BTC in Blockchain.info Wallet

Receiving BTC in Blockchain.info Wallet

Local time when BTC

The receiver’s ‘Receive’ Wallet

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Receiving BTC in Blockchain.info Wallet

The sender’s Status of

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