Emerging Trends in CO and IT (22618)

Unit-3 Blockchain Technology

Content
3.1 Introduction to Blockchain
● Backstory of Blockchain
● What is Blockchain?
3.2 Centralize versus Decentralized System
3.3 Layers of Blockchain
● Application Layer
● Execution Layer
● Semantic Layer
● Propagation Layer
● Consensus Layer
3.4 Importance of Blockchain
● Limitations of Centralized Systems
● Blockchain Adoption So Far
3.5 Blockchain Use and Use Cases

3.1 Introduction to Blockchain

Backstory of Blockchain
When the Internet was made available to the public using the World Wide Web
(WWW) in the early 1990s, it was supposed to be more open and P2P peer-to- peer
because it was built atop the open and decentralized TCP/IP.
The blockchain technology was defined in 1991 by the research scientist Stuart Haber
and W. Scott Stornetta. They wanted to introduce a computationally practical key for
time-stamping digital documents so that they could not be backdated or tampered by
any one. They develop a system using the concept of cryptographically secured chain
of blocks to store the time-stamped documents.
● 1991: In 1991, researcher scientists named Stuart Haber and W. Scott Stornetta
introduce Blockchain Technology and required some Computational Practical
Solution for time-stamping the digital documents so that they couldn’t be tempered
or misdated. Hence both scientists together developed a system using Cryptography
where, the time-stamped documents are stored in a Chain of Blocks.
● 1992: Iin 1992, Merkle Trees established a legal corporation by using a system
developed by Stuart Haber and W. Scott Stornetta with additional features. Hence,
Blockchain Technology became efficient to store several documents to be collected
into one block. Merkle used a Secured Chain of Blocks that stores multiple data
records in a sequence.
● 2000: In the year 2000, Stefan Konst published theory of cryptographic secured
chains, plus ideas for implementation.
● 2004: In the year 2004, Cryptographic activist Hal Finney presented a system for
digital cash known as “Reusable Proof of Work” which was the game-changer in
the history of Blockchain and Cryptography. This System helps to solve the Double
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Spending Problem by keeping the ownership of tokens registered on a trusted

server.
● 2008: In the year 2008, Satoshi Nakamoto conceptualized the concept of
“Distributed Blockchain” called as “A Peer to Peer Electronic Cash System”.
Satoshi Nakamoto modified the model of Merkle Tree and developed a system
which is more secure and contains the secure history of data exchange. This System
follows a peer-to-peer network of time stamping and became so useful that
Blockchain become the backbone of Cryptography.
● 2009: In the year 2009, the evolution of Blockchain is steady and promising and
required in various fields. Blockchain technology is so secure that the following
surprising news will give proof of that. James Howells was an IT worker in the
United Kingdom, started mining bitcoins which are part of Blockchain in 2009 and
stopped this in 2013. He spends $17,000 on it and after he stopped he sells the parts
of his laptop on eBay and keep the drive with him so that when he needs to work
again on bitcoin he will utilize it but while cleaning his house in 2013, he thrashed
his drive with garbage and now his bitcoins cost nearly $127 million. This money
now remains unclaimed in the Bitcoin system.
● 2014: The year 2014 is marked as the turning point for blockchain technology.
Blockchain technology is separated from the currency and Blockchain 2.0 is born.
Financial institutions and other industries started shifting their focus from digital
currency to the development of blockchain technologies.
● 2015: In 2015, Ethereum Frontier Network was launched, thus enabling developers
to write smart contracts and dApps that could be deployed to a live network. In the
same year, the Linux Foundation launched the Hyperledger project.
● 2016: The word Blockchain is accepted as a single word instead of two different
concepts as they were in Nakamoto’s original paper. The same year, a bug in the
Ethereum DAO code was exploited resulting in a hard fork of the Ethereum
Network. The Bitfinex bitcoin exchange was hacked resulting in 120,000 bitcoins
being stolen.
● 2017: In the year 2017, Japan recognized Bitcoin as a legal currency. [Link]
company introduced the EOS blockchain operating system which was designed to
support commercial decentralized applications.
● 2018: Bitcoin turned 10 in the year 2018. The bitcoin value continued to drop,
reaching the value of $3,800 at the end of the year. Online platforms like Google,
Twitter, and Facebook banned the advertising of cryptocurrencies.
● 2019: In the year 2019, Ethereum network transactions exceeded 1 million per day.
Amazon announced the general availability of the Amazon Managed Blockchain
service on AWS.
● 2020: Stablecoins were in demand as they promised more stability than traditional
cryptocurrencies. The same year Ethereum launched Beacon Chain in preparation
for Ethereum 2.0.

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What is Blockchain?
Blockchain is a common, unchallengeable digital ledger that allows the process
of recording transactions and tracking assets in a business network. Where an asset may
be tangible such as a house, car, cash, land or intangible such as intellectual property,
patents, copyrights, branding. Virtually everything of value can be tracked and traded
on a blockchain network, decreasing risk and cutting costs for all involved.
Business runs on information can says better where faster it’s received and the
more accurate it is. Blockchain is perfect which provides immediate, shared and
completely transparent information stored on an immutable digital ledger that can be
accessed only by permissioned network members. A blockchain network can track
orders, payments, accounts, production etc. Hence members share a single view of the
fact, other can see all details of a transaction end to end, giving greater sureness, as well
as new efficiencies and opportunities.
● Blockchain is a peer-to-peer system of transacting values with no trusted third parties
in between.
● It is a shared, decentralized, and open ledger of transactions. This ledger database is
replicated across a large number of nodes.
● This ledger database is an append-only database and cannot be changed or altered. It
means that every entry is a permanent entry. Any new entry on it gets reflected on all
copies of the databases hosted on different nodes.
● There is no need for trusted third parties to serve as intermediaries to verify, secure,
and settle the
● transactions.
● It is another layer on top of the Internet and can coexist with other Internet
technologies.
● Just the way TCP/IP was designed to achieve an open system, blockchain technology
was designed to enable true decentralization. In an effort to do so, the creators of
Bitcoin open-sourced it so it could inspire many decentralized applications.
A typical blockchain may look as shown in Figure 3.1.

Fig. 3.1 The blockchain data structure

The genesis block is the first block in any blockchain referred as Block 0 and
there is no previous block for reference. The Genesis Block has previous hash value set
to 0 to indicate no data was processed before the Genesis Block. The hash of genesis
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block is added to all new transactions in a new block and used to create its unique hash.
This process is repeated until all the new blocks are added to a blockchain.

Every node on the blockchain network has an identical copy of the blockchain
shown in Figure 3.1, where every block is a list of transactions. There are two major
parts in every block. The “header” part pointer links back to the previous block in the
chain and every block header contains the hash of the previous block so that no one can
modify any transaction in the previous block. The other part of a block contents the
validated list of transactions, their amounts, timestamp, the addresses of the parties
involved, and some another details.

3.2 Centralize versus Decentralized System

Blockchain is designed to be decentralized design, instead of the centralized

design. Whether a system is centralized or decentralized, it can still be distributed. A
centralized distributed system is one in which there is a master node also sometime
called as server responsible for breaking down the tasks or data and distribute the load
across nodes. On the other hand, a decentralized distributed system is one where there
is no “master” node as such and yet the computation may be distributed. Blockchain is
one such example.
Centralized System
Figure 3.2 shows representation of a centralized system.

Fig.3.2 Centralized System

A centralized system has a centralized control with all administrative rights and are easy
to design, maintain, enforce trust, and administrate, but suffer from many intrinsic
limitations, as given below:
1. A centralized system has a central point of failure; hence they are less stable.
2. A centralized system is more vulnerable to attack and hence less secured.
3. Centralization of power may lead to unethical operations.
4. Most of the time, scalability is difficult.
Decentralized System

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Figure 3.3 shows representation of a decentralized system.

Fig.3.3 Decentralized System

A decentralized system does not have a centralized control and every node has equal
authority. Such systems are difficult to design, maintain, govern, or impose trust. But,
decentralized system do not suffer from the limitations of conventional centralized
systems. Decentralized systems offer the following advantages:
1. A decentralized system is more stable and fault tolerant as they do not have a
central point of failure.
2. Attack resistant, as no central point to easily attack and hence more secured
3. Symmetric system with equal right to all nodes, so less scope of unethical
operations and usually independent in nature

A distributed system may also be decentralized system, for example, blockchain. But,
the task is not subdivided and delegated to nodes unlike common distributed systems,
because there is no master that in blockchain. A typical decentralized and distributed
system is efficiently a peer-to-peer system as shown in Figure 3.3.

Fig.3.3 A decentralized and peer-to-peer system

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3.3 Layers of Blockchain

Blockchain have a collection of distributed nodes where immutable transactions are
repeated again and again. The blockchain technology is made of a layered architecture
where all these layers are present on all the nodes as shown in Figure 3.5.

Fig.3.5 Layers of Blockchain

1. Application Layer
In the application layer, you can find smart contracts, decentralized applications
(DApps), user interfaces (UIs), and chain code, which is the fifth layer of the blockchain
layers. Hence, this layer consists of services and application programming interfaces
(APIs), client-side programming constructs, scripting, development frameworks that
offer other apps with access to the blockchain network. Application Layer acts as the
front end tool of the blockchain and is basically what a user would typically encounter
when operating within a blockchain network.
2. Execution Layer
The Execution Layer execute the instructions of application in the Application Layer
on all the nodes in a blockchain network. The instructions could be simple instructions
or a set of multiple instructions in the form of a smart contract. In either case, a program
or a script desires to be executed to confirm the correct execution of the transaction. All
the nodes in a blockchain network have to execute the programs or scripts
autonomously. Deterministic execution of programs or scripts on the same set of inputs
and conditions always produces the same output on all the nodes, which helps to avoid
inconsistencies.
3. Semantic Layer
Semantic Layer layer also called as logical layer of blockchain layer and deals in
validation of the transactions done in the blockchain network and also validating the
blocks being created in the network. When a transaction initiated by a node, the set of
instruction are executed on the execution layer and validated by the semantic layer.
Semantic layer is also accountable for the linking of the blocks created in the network.
Each block in the blockchain contains the hash of the earlier block except the Start block
and this linking of block needs to be defined on Semantic layer.
4. Propagation Layer

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A propagation layer is used in the peer-to-peer communications between the nodes that
allow them to discover each other and get synchronized with another node in a network.
When a transaction is done, then gets broadcasted to all other nodes in the network.
Also, when a node advises a block, it is immediately get broadcast in the entire network
so that other nodes can use this newly created block and work on it. Hence, the
propagation of the block or a transaction in the network is defined in this layer and
confirms the stability of the complete network. In the asynchronous Internet network,
there are often latency issues for transaction or block propagation. However, depending
upon the network capacity or bandwidth, the propagation may occur instantly or it may
take a longer.
5. Consensus Layer
Consensus layer is the first layer for most of the blockchain systems and main purpose
is to make sure that all the nodes must get approve on a common state of the shared
ledger. Consensus layer also deals with the safety and security of the blockchain. There
are many consensus algorithms which can be applied for generation of cryptocurrencies
like Bitcoin and Ethereum, they use proof-of-work mechanism to select a node
randomly out of various nodes present on the network that can propose a new block.
Once a new block is created, the block is propagated to all the other nodes to check if
the new block is valid or not with the transactions in it and based on the consensus from
all other nodes the new block gets added on to the blockchain.

3.4 Importance of Blockchain

1. Blockchain helps in the verification and traceability of multistep transactions
needing verification and traceability.
2. Blockchain can provide secure transactions, reduce compliance costs, and speed
up data transfer processing.
3. Blockchain technology can help contract management and audit the origin of a
product.
4. Blockchain can be used in voting platforms and managing titles and deeds.
5. The transactions are done instantly and transparently, as the ledger is updated
automatically.
6. As Blockchain is a decentralized system, no intermediary fee is required
7. In Blockchain, the authenticity of a transaction is verified and confirmed by
participants
8. Blockchain is an immutable public digital ledger, which means when a
transaction is recorded, it cannot be modified
Limitations of Centralized Systems
1. Trust issues
2. Security issue
3. Privacy issue i.e. data sale privacy is being undermined
4. Cost and time factor for transactions
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5. Can’t scale up vertically after a certain limit.

6. Bottlenecks can appear when the traffic spikes.

Advantages of decentralized systems over centralized systems:

1. Elimination of intermediaries
2. Easier and genuine verification of transactions
3. Increased security with lower cost
4. Greater transparency
5. Decentralized and immutable
Blockchain Adoption So Far
1. Blockchain came along with Bitcoin, a digital cryptocurrency, in 2009 via a
simple mailing list.
2. Some companies started with various flavors of blockchain offerings such as
Ethereum, Hyperledger, etc.
3. Microsoft and IBM came up with SaaS (Software as a Service) offerings on their
Azure and Bluemix cloud platforms, respectively.
4. Various start-ups and established companies took blockchain initiatives that
motivated on solving some of the business problems that were not easily solved
before.
5. Financial market, media and entertainment, energy trading, prediction markets,
retail chains, loyalty rewards systems, insurance, logistics and supply chains,
medical records, government and military applications have adopted Blockchain
technology.
3.5 Blockchain Uses and Use Cases
Now, we will see some of the initiatives that are already being taken across industries
such as finance, insurance, banking, healthcare, government, supply chains, IoT
(Internet of Things), and media & entertainment. Some of the existing use cases are
given below.
1. Any type of property or asset may be physical or digital, for example laptops,
mobile phones, diamonds, automobiles, real estate, e-registrations, digital files,
etc. can be registered on blockchain. Blockchain technology can enable these
asset transactions from one person to another, maintain the transaction log, and
check validity or ownerships. Also, notary services, proof of existence, tailored
insurance schemes use cases can be developed.
2. Many financial use cases being developed on blockchain for example cross-
border payments, share trading, loyalty and rewards system, Know Your
Customer (KYC) among banks, etc. Initial Coin Offering (ICO) is one of the
most trending use cases and is the greatest way of crowdsourcing nowadays by
using cryptocurrency as digital assets which is very easy to buy and trade.
3. Blockchain can be used to allow “The Wisdom of Crowds” to take the lead and
shape businesses, economies, and various other national phenomena by using
collective wisdom. Financial and economic forecasts based on the wisdom of
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crowds, decentralized prediction markets, decentralized voting, as well as stocks

trading can be possible on blockchain.
4. The process of determining music royalties has always been complicated. The
Internet-enabled music streaming services facilitated higher market penetration,
but made the royalty determination more complex and can be addressed by
blockchain by maintaining a public ledger of music rights ownership information
as well as authorised distribution of media content.
5. In IoT –Internet of things, with billions of IoT devices everywhere and many
more to join the pool. A whole bunch of different makes, models, and
communication protocols makes it difficult to have a centralized system to
control the devices and provide a common data exchange platform. This is also
an area where blockchain can be used to build a decentralized peer-to- peer
system for the IoT devices to communicate with each other. ADEPT
(Autonomous Decentralized Peer-To-Peer Telemetry) is a joint initiative from
IBM and Samsung that has developed a platform that uses elements of the
Bitcoin’s underlying design to build a distributed network of devices—a
decentralized IOT. ADEPT uses three protocols: BitTorrent for file sharing,
Ethereum for smart contracts, and TeleHash for peer-to-peer messaging in the
platform. The IOTA foundation is another such initiative.
6. In the government sectors as well, blockchain has gained momentum. There are
use cases where technical decentralization is necessary, but politically should be
governed by governments: land registration, vehicle registration and
management, e-Voting, etc. are some of the active use cases. Supply chains are
another area where there are some great use cases of blockchain. Supply chains
have always been prone to disputes across the globe, as it was always difficult to
maintain transparency in these systems.
References:
● [Link]
as-a-data-structure/
● [Link]
● [Link]
Sample Multiple Choice Questions.
1. What does P2P stand for?
a. Password to Password
b. Peer to Peer
c. Product to Product
d. Private Key to Public Key
2. What is a blockchain?
a. A Currency
b. A centralized ledger
c. A type of cryptocurrency
d. A distributed ledger on a peer to peer network
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