2. Introduction to Blockchain
Technology
• The invention of Bitcoin in 2008, the world was introduced
to a new concept, which is now likely to revolutionize the
whole of society.
• The last few years, we notice that in 2013 some ideas
started to emerge that suggested usage of blockchain in
other areas than cryptocurrencies.
• Around that time the primary usage of blockchain was
cryptocurrencies, and many new coins emerged during that
time.
3. Graph shows a broad-spectrum outline of year wise
progression and adaption trend of blockchain Technology
4. • Already many projects are underway and set to replace
existing systems.
• for example, Australian Securities Exchange (ASX) is soon
to become the first organization to replace its legacy
clearing and settlement system with blockchain technology.
• There are various consortiums such as Enterprise
Ethereum Alliance (EEA), Hyperledger, and R3, which
have been established for research and development of
blockchain technology.
5. • A large number of start-ups are providing blockchain-
based solutions already.
• Various benefits of this technology are envisioned, such as
decentralized trust, cost savings, transparency, and
efficiency.
• However, there are multiple challenges too that are an
area of active research on blockchain, such as scalability
and privacy.
6. Distributed systems
• Distributed systems are a computing paradigm whereby
two or more nodes work with each other in a coordinated
fashion to achieve a common outcome.
• It is modeled in such a way that end users see it as a
single logical platform.
• For example, Google's search engine is based on a large
distributed system, but to a user, it looks like a single,
coherent platform.
7. • A node can be defined as an individual player in a distributed
system.
• All nodes are capable of sending and receiving messages to and
from each other.
• Nodes can be honest, faulty, or malicious, and they have memory
and a processor.
• A node that exhibits irrational behavior is also known as a
Byzantine node after the Byzantine Generals Problem.
Distributed systems
8. • This distributed system has six nodes out of which one (N4) is a
Byzantine node leading to possible data inconsistency.
• L2 is a link that is broken or slow, and this can lead to partition in
the network.
• The primary challenge in distributed system design is
coordination between nodes and fault tolerance.
• Distributed systems are so challenging to design that a hypothesis
known as the CAP theorem has been proven.
Distributed systems
10. CAP theorem
which states that a “distributed system cannot have all
three of the much-desired properties simultaneously; that
is, consistency, availability, and partition tolerance”.
11. The history of blockchain and Bitcoin
• Blockchain was introduced with the invention of Bitcoin in
2008.
• Bitcoin is the first application of blockchain technology.
• Its practical implementation then occurred in 2009.
• However, it is essential to refer to Bitcoin because, without
it, the history of blockchain is not complete.
• Bitcoin has started a revolution with the introduction of the
very first fully decentralized digital currency, and the one
that has proven to be extremely secure and stable from a
network and protocol point of view.
12. Electronic cash
• Electronic cash is also essential in order to appreciate
the first and astonishingly successful application of
blockchain, Bitcoin, or more broadly cryptocurrencies in
general.
• Two fundamental e-cash system issues need to be
addressed: accountability and anonymity.
Accountability: is required to ensure that cash is
spendable only once (double-spend problem) and that it
can only be spent by its rightful owner.
13. • Double spend problem arises when same money can be
spent twice. As it is quite easy to make copies of digital
data.
• This becomes a big issue in digital currencies as you can
make many copies of same digital cash.
• Anonymity is required to protect users' privacy. As with
physical cash, it is almost impossible to trace back
spending to the individual who actually paid the money.
Electronic cash Cont…
14. • David Chaum solved both of these problems during his work
in 1980s by using two cryptographic operations, namely
blind signatures and secret sharing.
• These terminologies and related concepts will be discussed
later, Symmetric Cryptography and, Public Key Cryptography.
• blind signatures allow for signing a document without
actually seeing it,
• secret sharing is a concept that enables the detection of
double spending, that is using the same e-cash token twice
(double spending).
Electronic cash Cont…
16. Blockchain
• The term chain of blocks evolved over the years into the
word blockchain.
• Block chain technology incorporates a multitude of
applications that can be implemented in various economic
sectors.
• In the finance sector, significant improvement in the
performance of financial transactions and settlements is
seen as resulting in desirable time and cost reductions.
17. Layman's definition: Blockchain is an ever-growing, secure,
shared record keeping system in which each user of the data
holds a copy of the records, which can only be updated if all
parties involved in a transaction agree to update.
Technical definition: Blockchain is a peer-to-peer, distributed
ledger that is cryptographically-secure, append-only,
immutable (extremely hard to change), and updateable only
via consensus or agreement among peers.
Blockchain
18. Peer-to-peer
• There is no central controller in the network, and all
participants talk to each other directly.
• This property allows for cash transactions to be exchanged
directly among the peers without a third-party involvement,
such as by a bank.
19. Distributed ledger
Means that a ledger is spread across the network among all
peers in the network, and each peer holds a copy of the
complete ledger.
20. Cryptographically-secure
• Means that cryptography has been used to provide
security services which make this ledger secure against
tampering and misuse.
• These services include non-repudiation, data integrity,
and data origin authentication.
21. Append-only
• Means that data can only be added to the blockchain in
time-ordered sequential order.
• This property implies that once data is added to the
blockchain, it is almost impossible to change that data and
can be considered practically immutable.
22. Updateable via consensus
Any update made to the blockchain is validated against
strict criteria defined by the blockchain protocol and
added to the blockchain only after a consensus has been
reached among all participating peers/nodes on the
network.
23. • Blockchain can be thought of as a layer of a
distributed peer-to-peer network running on top of
the internet, as can be seen in the following diagram
• It is analogous to SMTP, HTTP, or FTP running on
top of TCP/IP.
The network view of a blockchain shown in Next slide..
24.
25. • The internet, which provides a basic communication
layer for any network.
• A peer-to-peer network runs on top of the internet,
which hosts another layer of blockchain.
• The above layer contains transactions, blocks,
consensus mechanisms, state machines, and
blockchain smart contracts.
• All of these components are shown as a single logical
entity in a box, representing blockchain
• At the top, there are users or nodes that connect to the
blockchain and perform various operations such as
consensus, transaction verification, and processing.
26. • A block is merely a selection of transactions bundled
together and organized logically.
• A transaction is a record of an event, for example, the
event of transferring cash from a sender's account to a
beneficiary's account.
• A block is made up of transactions, and its size varies
depending on the type and design of the blockchain in
use.
• A reference to a previous block is also included in the
block unless it is a genesis block.
27. • A genesis block is the first block in the blockchain that is
hardcoded at the time the blockchain was first started.
• The structure of a block is also dependent on the type
and design of a blockchain.
• The attributes that are essential to the functionality of a
block:
• The block header, which is composed of pointer to
previous block, the timestamp, nonce, Merkle root, and
the block body that contains transactions.
29. • A nonce is a number that is generated and used only
once.
• A nonce is used extensively in many cryptographic
operations to provide replay protection, authentication,
and encryption.
• Merkle root is a hash of all of the nodes of a Merkle
tree.
• Merkle trees are widely used to validate the large data
structures securely and efficiently.
• In the blockchain world, Merkle trees are commonly
used to allow efficient verification of transactions.
30. Generic elements of a blockchain
• Address: Addresses are unique identifiers used in a
blockchain transaction to denote senders and recipients.
• An address is usually a public key or derived from a public
key.
• Transaction: A transaction is the fundamental unit of a
blockchain.
• A transaction represents a transfer of value from one
address to another.
• Block: A block is composed of multiple transactions and
other elements, such as the previous block hash (hash
pointer), timestamp, and nonce.
31. • Peer-to-peer network: As the name implies, a peer-to-
peer network is a network topology wherein all peers can
communicate with each other and send and receive
messages.
• Scripting or programming language: Scripts or programs
perform various operations on a transaction in order to
facilitate various functions.
For example:, in Bitcoin, transaction scripts are predefined in a
language called Script, which consist of sets of commands that
allow nodes to transfer tokens from one address to another.
Generic elements of a blockchain Cont..
32. • Virtual machine: This is an extension of the transaction
script introduced earlier.
• A virtual machine allows Turing complete code to be run
on a blockchain.
• Virtual machines are not available on all blockchains.
• Various blockchains use virtual machines to run programs
such as Ethereum Virtual Machine (EVM) and Chain
Virtual Machine (CVM).
• EVM is used in Ethereum blockchain.
• CVM is a virtual machine developed for and used in an
enterprise-grade blockchain called Chain Core.
Generic elements of a blockchain Cont..
33. • State machine: A blockchain can be viewed as a state
transition mechanism whereby a state is modified from its
initial form to the next one and eventually to a final form
by nodes on the blockchain network as a result of a
transaction execution, validation, and finalization
process.
• Node: A node in a blockchain network performs various
functions depending on the role that it takes on.
• A node can propose and validate transactions and
perform mining to facilitate consensus and secure the
blockchain,
• simple payment verification, validation, transaction signing
function done by Nodes.
34. • Smart contract: These programs run on top of the
blockchain and encapsulate the business logic to be
executed when certain conditions are met.
• These programs are enforceable and automatically
executable.
• Smart contracts have many use cases, including but
not limited to identity management, capital markets,
trade finance, record management, insurance, and
e-governance.
35. How blockchain works
• Nodes are either miners who create new blocks and mint
cryptocurrency (coins) or block signers who validates
and digitally sign the transactions.
• A critical decision that every blockchain network has to
make is to figure out that which node will append the
next block to the blockchain
• This decision is made using a consensus mechanism.
36. How blockchain accumulates blocks
A General idea of how blocks are generated and what
the relationship is between transactions and blocks:
1. A node starts a transaction by first creating and then
digitally signing it with its private key.
A transaction can represent various actions in a blockchain.
Most commonly this is a data structure that represents
transfer of value between users on the blockchain network.
37. 2. A transaction is propagated (flooded) by using a flooding
protocol, called Gossip protocol, to peers that validate the
transaction based on preset criteria. Usually, more than
one node are required to verify the transaction.
3. Once the transaction is validated, it is included in a
block, which is then propagated onto the network. At this
point, the transaction is considered confirmed.
How blockchain accumulates blocks Cont..
38. 4. The newly-created block now becomes part of the
ledger, and the next block links itself cryptographically back
to this block.
• This link is a hash pointer.
• At this stage, the transaction gets its second
confirmation and the block gets its first confirmation.
5. Transactions are then reconfirmed every time a new
block is created. Usually, six confirmations in the Bitcoin
network are required to consider the transaction final.
How blockchain accumulates blocks Cont..
39. Benefits and limitations of blockchain
Decentralization: No third party to validate transactions, a
consensus mechanism is used to agree on the validity of
transactions.
Transparency and trust: blockchains are shared and
everyone can see what is on the blockchain,this allows the
system to be transparent. As a result, trust is established.
• This will be more relevant in scenarios such as the
disbursement of funds or benefits where personal
discretion in relation to selecting beneficiaries needs to be
restricted.
40. Immutability: once data has been written, it is extremely
difficult to modify.
High availability: As the system is based on thousands of
nodes in a peer-to-peer network, and the data is replicated
and updated on every node, the system becomes highly
available.
• Even if some nodes leave the network or become
inaccessible, the network as a whole continues to work.
Highly secure: All transactions on a blockchain are
cryptographically secured and thus provide network integrity.
Benefits and limitations of blockchain
41. Simplification of current paradigms: blockchain can
serve as a single shared ledger among many interested
parties, which simplifying the model by reducing the
complexity of managing the separate systems maintained
by each entity.
Faster dealings: blockchain enables the quick settlement
of trades, since it does not require a lengthy process of
verification, reconciliation, and clearance because a single
version of agreed-upon data is already available on a
shared ledger between financial organizations.
Benefits and limitations of blockchain
42. Cost saving: As no trusted third party or clearing house
is required in the blockchain model, this can massively
eliminate overhead costs in the form of the fees which
are paid to such parties.
The most sensitive blockchain problems are as follows:
• Scalability
• Adaptability
• Regulation
• Relatively immature technology
• Privacy
Benefits and limitations of blockchain
43. Distributed ledgers
• All blockchains are fundamentally distributed ledgers, all
distributed ledgers are not necessarily a blockchain.
• It is distributed among its participants and spread across
multiple sites or organizations.
• This type of ledger can be either private or public.
• The fundamental idea here is that, unlike many other
blockchains, the records are stored contiguously instead
of being sorted into blocks.
• This concept is used in Ripple which is a blockchain
and cryptocurrency based global payment network.
44. Distributed Ledger Technology (DLT)
• Used to describe blockchain in finance industry.
• blockchain and DLT are used interchangeably.
• DLT are very active and thriving area of research in the
financial sector.
• financial sector point of view, DLTs are permissioned
blockchains that are shared and used between known
participants.
• DLTs usually serve as a shared database, with all
participants known and verified.
• They do not have a cryptocurrency or do not require
mining to secure the ledger.
45. Public blockchains
• public blockchains are not owned by anyone.
• They are open to the public, and anyone can participate as
a node in the decision-making process.
• Users may or may not be rewarded for their participation.
• All users of these permissionless or unpermissioned
ledgers maintain a copy of the ledger on their local nodes
and use a distributed consensus mechanism to decide the
eventual state of the ledger.
• Bitcoin and Ethereum are both considered public
blockchains.
46. Private blockchains
• They are open only to a consortium or group of individuals
or organizations who have decided to share the ledger
among themselves.
• There are various blockchains now available in this
category, such as HydraChain and Quorum.
• Optionally, both of these blockchains can also run in public
mode if required, but their primary purpose is to provide a
private blockchain.
47. Semiprivate blockchains
• Part of the blockchain is private and part of it is public.
• This is still just a concept today, and no real world have yet
been developed.
• With a semi-private blockchain, the private part is controlled by
a group of individuals, while the public part is open for
participation by anyone.
• This type of blockchain can also be called a semi-
decentralized model, where it is controlled by a single entity
but still allows for multiple users to join the network by
following appropriate procedures.
48. Sidechains
• More precisely known as pegged sidechains, this is a
concept whereby coins can be moved from one
blockchain to another and moved back again.
• Typical uses include the creation of new altcoins
(alternative cryptocurrencies) whereby coins are burnt as
a proof of an adequate stake.
• Burnt or burning the coins in this context means that the
coins are sent to an address which is unspendable and
this process makes the burnt coins irrecoverable.
49. • This mechanism is also called Proof of Burn (PoB) and is
used as an alternative method for distributed consensus to
PoW and Proof of Stake (PoS).
• This process enables the building of smart contracts for the
Bitcoin network.
• Rootstock is one of the leading examples of a sidechain,
which enables smart contract development for Bitcoin using
this paradigm.
• It works by allowing a two-way peg for the Bitcoin
blockchain, and this results in much faster throughput.
Sidechains
50. Permissioned ledger
• A permissioned ledger is a blockchain where participants
of the network are already known and trusted.
• Permissioned ledgers do not need to use a distributed
consensus mechanism; instead, an agreement protocol
is used to maintain a shared version of the truth about
the state of the records on the blockchain
• For example, Bitcoin can become a permissioned ledger
if an access control layer is introduced on top of it that
verifies the identity of a user and then allows access to
the blockchain.
51. Shared ledger
This is a generic term that is used to describe any
application or database that is shared by the public or a
consortium. Generally, all blockchains, fall into the
category of a shared ledger.
52. Fully private and proprietary blockchains
• They deviate from the core concept of decentralization in
blockchain technology.
• Nonetheless, in specific private settings within an
organization, there could be a need to share data and
provide some level of guarantee of the authenticity of the
data.
• An example of this type of blockchain might be to allow
for collaboration and the sharing data between various
government departments.
53. Tokenized blockchains
• These blockchains are standard blockchains that
generate cryptocurrency as a result of a consensus
process via mining or initial distribution.
• Bitcoin and Ethereum are prime examples of this type of
blockchain.
54. Tokenless blockchains
• These blockchains are designed in such a way that they do
not have the basic unit for the transfer of value.
• This is similar to full private blockchains, the only difference
being that use of tokens is not required.
• This can also be thought of as a shared distributed ledger
used for storing data.
• It does have its benefits when it comes to immutability,
security, and consensus driven updates but are not used for
common blockchain application of value transfer or
cryptocurrency.
55. Consensus
• Consensus is a process of agreement between distrusting
nodes on the final state of data.
• To achieve consensus, different algorithms are used.
• It is easy to reach an agreement between two nodes (in
client-server systems, for example), but when multiple
nodes are participating in a distributed system and they
need to agree on a single value,
• It becomes quite a challenge to achieve consensus.
• This process of attaining agreement common state or value
among multiple nodes despite the failure of some nodes is
known as distributed consensus
56. Consensus mechanism
• A consensus mechanism is a set of steps that are taken
by most or all nodes in a blockchain to agree on a
proposed state or value.
• There are various requirements that must be met to
provide the desired results in a consensus mechanism
57. • Agreement: All honest nodes decide on the same value
• Termination: All honest nodes terminate execution of the
consensus process and eventually reach a decision
• Validity: The value agreed upon by all honest nodes must be
the same as the initial value proposed by at least one honest
node
• Fault tolerant: The consensus algorithm should be able to run
in the presence of faulty or malicious nodes (Byzantine nodes)
• Integrity: This is a requirement that no node can make the
decision more than once in a single consensus cycle
Consensus mechanism
58. CAP theorem and blockchain
• CAP theorem, also known as Brewer's theorem, was
introduced by Eric Brewer in 1998 as conjecture.
• In 2002, it was proven as a theorem by Seth Gilbert and
Nancy Lynch.
• The theory states that “any distributed system cannot
have consistency, availability, and partition tolerance
simultaneously”
59. CAP theorem and blockchain
Consistency is a property which ensures that all nodes in a
distributed system have a single, current, and identical copy of
the data.
Availability means that the nodes in the system are up,
accessible for use, and are accepting incoming requests and
responding with data without any failures as and when required.
Partition tolerance ensures that if a group of nodes is unable
to communicate with other nodes due to network failures, the
distributed system continues to operate correctly. This can
occur due to network and node failures.
60. CAP theorem and blockchain
• This is strange because somehow blockchain manages to
achieve all of these properties.
• To achieve fault tolerance, replication is used.
• Consistency is achieved using consensus algorithms in
order to ensure that all nodes have the same copy of the
data. This is also called state machine replication.
• The blockchain is a means for achieving state machine
replication.
