BLOCKCHAIN TECHNOLOGIES

UNIT 1: BLOCKCHAIN, DECENTRALIZATION

What is blockchain technology?

Blockchain technology is an advanced database mechanism that allows transparent

information sharing within a business network. A blockchain database stores data in
blocks that are linked together in a chain. The data is chronologically consistent because
you cannot delete or modify the chain without consensus from the network. As a result,
you can use blockchain technology to create an unalterable or immutable ledger for
tracking orders, payments, accounts, and other transactions. The system has built-in
mechanisms that prevent unauthorized transaction entries and create consistency in the
shared view of these transactions.

Why is blockchain important?

Traditional database technologies present several challenges for recording financial

transactions. For instance, consider the sale of a property. Once the money is exchanged,
ownership of the property is transferred to the buyer. Individually, both the buyer and the
seller can record the monetary transactions, but neither source can be trusted. The seller
can easily claim they have not received the money even though they have, and the buyer
can equally argue that they have paid the money even if they haven’t.

To avoid potential legal issues, a trusted third party has to supervise and validate
transactions. The presence of this central authority not only complicates the transaction
but also creates a single point of vulnerability. If the central database was compromised,
both parties could suffer.

Blockchain mitigates such issues by creating a decentralized, tamper-proof system to

record transactions. In the property transaction scenario, blockchain creates one ledger
each for the buyer and the seller. All transactions must be approved by both parties and
are automatically updated in both of their ledgers in real time. Any corruption in
historical transactions will corrupt the entire ledger. These properties of blockchain
technology have led to its use in various sectors, including the creation of digital
currency like Bitcoin.

How do different industries use blockchain?

Blockchain is an emerging technology that is being adopted in innovative manner by

various industries. We describe some use cases in different industries in the following
subsections:
Energy

Energy companies use blockchain technology to create peer-to-peer energy trading

platforms and streamline access to renewable energy. For example, consider these
uses:

 Blockchain-based energy companies have created a trading platform for the sale
of electricity between individuals. Homeowners with solar panels use this
platform to sell their excess solar energy to neighbors. The process is largely
automated: smart meters create transactions, and blockchain records them.

 With blockchain-based crowd funding initiatives, users can sponsor and own
solar panels in communities that lack energy access. Sponsors might also receive
rent for these communities once the solar panels are constructed.

Finance

Traditional financial systems, like banks and stock exchanges, use blockchain services
to manage online payments, accounts, and market trading. For example, Singapore
Exchange Limited, an investment holding company that provides financial trading
services throughout Asia, uses blockchain technology to build a more efficient
interbank payment account. By adopting blockchain, they solved several challenges,
including batch processing and manual reconciliation of several thousand financial
transactions.

Media and entertainment

Companies in media and entertainment use blockchain systems to manage copyright

data. Copyright verification is critical for the fair compensation of artists. It takes
multiple transactions to record the sale or transfer of copyright content. Sony Music
Entertainment Japan uses blockchain services to make digital rights management
more efficient. They have successfully used blockchain strategy to improve
productivity and reduce costs in copyright processing.

Retail

Retail companies use blockchain to track the movement of goods between suppliers
and buyers. For example, Amazon retail has filed a patent for a distributed ledger
technology system that will use blockchain technology to verify that all goods sold on
the platform are authentic. Amazon sellers can map their global supply chains by
allowing participants such as manufacturers, couriers, distributors, end users, and
secondary users to add events to the ledger after registering with a certificate
authority.
What are the features of blockchain technology?

Blockchain technology has the following main features:

Decentralization

Decentralization in blockchain refers to transferring control and decision making from a

centralized entity (individual, organization, or group) to a distributed network.
Decentralized blockchain networks use transparency to reduce the need for trust among
participants. These networks also deter participants from exerting authority or control
over one another in ways that degrade the functionality of the network.

Immutability

Immutability means something cannot be changed or altered. No participant can tamper

with a transaction once someone has recorded it to the shared ledger. If a transaction
record includes an error, you must add a new transaction to reverse the mistake, and both
transactions are visible to the network.

Consensus

A blockchain system establishes rules about participant consent for recording

transactions. You can record new transactions only when the majority of participants in
the network give their consent.

What are the key components of blockchain technology?

Blockchain architecture has the following main components:

A distributed ledger

A distributed ledger is the shared database in the blockchain network that stores the
transactions, such as a shared file that everyone in the team can edit. In most shared text
editors, anyone with editing rights can delete the entire file. However, distributed ledger
technologies have strict rules about who can edit and how to edit. You cannot delete
entries once they have been recorded.
Smart contracts

Companies use smart contracts to self-manage business contracts without the need for an
assisting third party. They are programs stored on the blockchain system that run
automatically when predetermined conditions are met. They run if-then checks so that
transactions can be completed confidently. For example, a logistics company can have a
smart contract that automatically makes payment once goods have arrived at the port.

Public key cryptography

Public key cryptography is a security feature to uniquely identify participants in the

blockchain network. This mechanism generates two sets of keys for network members.
One key is a public key that is common to everyone in the network. The other is a private
key that is unique to every member. The private and public keys work together to unlock
the data in the ledger.

For example, John and Jill are two members of the network. John records a transaction
that is encrypted with his private key. Jill can decrypt it with her public key. This way,
Jill is confident that John made the transaction. Jill's public key wouldn't have worked if
John's private key had been tampered with.

History of Blockchain
Year Event Description

1991 Blockchain Concept Proposal of a cryptographically secure chain of

Introduction blocks to timestamp digital documents.

1998 Introduction of “b-money,” an early digital

B-Money Proposal
currency concept.

2004 Hashcash Adam Back’s proof-of-work system is used to

Implementation combat spam and DDoS attacks.

2008 Satoshi Nakamoto publishes the Bitcoin

Bitcoin Whitepaper whitepaper, outlining a decentralized digital
currency.

2009 Launch of the Bitcoin network and the mining of

Bitcoin Launch
the first block.
Year Event Description

2011 The emergence of alternative cryptocurrencies like

First Altcoins
Namecoin and Litecoin.

2013 Vitalik Buterin proposes Ethereum, enabling smart

Ethereum Proposal
contracts and DApps.

2015 Official launch of Ethereum, expanding

Ethereum Launch
blockchain applications beyond Bitcoin.

2016 Hack of the Decentralized Autonomous

DAO Hack Organization (DAO), leading to an Ethereum hard
fork.

2017 The surge in Initial Coin Offerings (ICOs) for

ICO Boom
blockchain-based projects.

2018 Growth of Decentralized Finance (DeFi) platforms

Rise of DeFi
offering financial services.

2020 Mainstream rise of Non-Fungible Tokens (NFTs)

NFT Popularity
for digital asset ownership.

2021 Ethereum 2.0 Phase 0 Launch of Ethereum 2.0, transitioning to Proof of

Launch Stake for improved scalability.

2022 Growing regulatory frameworks for

Increased Regulation
cryptocurrencies and blockchain technology.

2023 Blockchain Advances in enabling different blockchains to

Interoperability interact and work together.

Phase 1: The Genesis of Blockchain

The Genesis phase of blockchain marks the introduction and early development of
the technology, driven primarily by the launch of Bitcoin. This phase established the
foundational principles and practical use cases of blockchain technology, setting the
stage for further development and innovation.
Year Event Description

2008 Satoshi Nakamoto publishes the Bitcoin whitepaper,

Bitcoin Whitepaper outlining a decentralized digital currency using
blockchain technology.

2009 Genesis Block The first block of the Bitcoin blockchain is mined,
Mined officially launching the Bitcoin network.

2009 First Bitcoin The first transaction using Bitcoin occurs,

Transaction demonstrating its practical use.

2010 Laszlo Hanyecz buys two pizzas for 10,000 BTC,

First Real-World
marking the first commercial transaction with
Bitcoin Purchase
Bitcoin.

2011 Bitcoin Exchanges Early Bitcoin exchanges start operating, allowing

Appear Bitcoin to be traded for traditional currencies.

Key Features

1. Decentralization: Bitcoin’s blockchain operates without a central authority.

2. Proof of Work: A consensus mechanism requiring computational effort to
validate transactions.
3. Security: Once data is added to the blockchain, it is secure and immutable.

Phase 2: Expansion and Diversification

In this phase, blockchain technology extends beyond Bitcoin, leading to the
development of new cryptocurrencies and innovative applications.

Year Event Description

2011- Various alternative cryptocurrencies (altcoins) like

Emergence of
2015 Litecoin and Namecoin are introduced, offering different
Altcoins
features and improvements to Bitcoin’s model.

2013 Ethereum Vitalik Buterin proposes Ethereum, a blockchain platform

Proposal with a built-in programming language for smart contracts,
allowing for more complex and programmable
Year Event Description

transactions.

2015 Ethereum is officially launched, enabling the creation of

Ethereum
decentralized applications (DApps) and smart contracts,
Launch
greatly expanding blockchain’s use cases.

Key Features

1. Smart Contracts: Self-executing contracts with terms written directly into

code, introduced by Ethereum.
2. Decentralized Applications (DApps): Applications that run on a blockchain
network, leveraging smart contracts for functionality.
3. Diverse Use Cases: Beyond digital currency, blockchain starts to be used for
various applications including supply chain management and digital identity.

Phase 3: Mainstream Adoption and Innovation

During this phase, blockchain technology gains widespread acceptance and
continues to evolve with significant innovations and broader applications.

Year Event Description

2016- Major financial institutions and corporations have

2020 begun to explore and integrate blockchain
Institutional
technology for various use cases such as improving
Adoption
transparency, reducing costs, and enhancing
efficiency in processes.

2017 Initial Coin Offerings (ICOs) become a popular

ICO Boom
fundraising method.

2018 Efforts to address scalability issues lead to the

Scaling Solutions
development of solutions like the Lightning Network
and Network
for Bitcoin and Ethereum’s network upgrades to
Upgrades
improve transaction speeds and reduce costs.

2019- Regulatory Governments and regulatory bodies have started to

2020 Developments establish frameworks and guidelines for blockchain
and cryptocurrencies to address legal and
Year Event Description

compliance concerns.

Key Features

1. Increased Investment: Significant financial and institutional investment in

blockchain technology and projects.
2. Enhanced Scalability: Implementation of solutions to improve transaction
throughput and network efficiency.
3. Regulation: Development of regulatory frameworks to ensure the legal and
compliant use of blockchain technologies.
Phase 4: The Era of DeFi and NFTs
This phase highlights the explosive growth of decentralized finance (DeFi) and non-
fungible tokens (NFTs), showcasing blockchain’s expanding versatility and impact
on various sectors.

Year Event Description

2018- Decentralized Finance platforms emerge, offering

2020 Rise of DeFi financial services like lending, borrowing, and trading
without traditional intermediaries.

2020- Non-Fungible Tokens (NFTs) gain significant attention,

NFT
2021 enabling unique digital assets (art, collectibles, etc.) to be
Popularity
bought, sold, and traded on blockchain platforms.

2021 Mainstream
Both DeFi and NFTs gain mainstream visibility.
Adoption

Key Features

1. Decentralized Finance (DeFi): Financial services provided through

blockchain technology without traditional banks or intermediaries, utilizing
smart contracts.
2. Non-Fungible Tokens (NFTs): Unique digital assets verified on the
blockchain, representing ownership of items such as digital art and collectibles.
3. Increased Engagement: Growing involvement from mainstream users,
businesses, and creators in the DeFi and NFT ecosystems.
Phase 5: Web3 and Beyond
This phase represents the next evolution of the internet, characterized by
advancements in blockchain technology that aim to create a more decentralized,
user-centric digital ecosystem, known as Web3.
1. 2021-2023: Web3 Emergence: Web3 concepts gain traction, focusing on
decentralizing control of the internet, giving users greater ownership and control
over their data, and enabling peer-to-peer interactions without intermediaries.
2. Advances in Interoperability: Development of technologies that allow
different blockchains to work together, improving the connectivity and
functionality of decentralized applications (DApps) across multiple platforms.
3. Enhanced Privacy and Security: Introduction of technologies like zero-
knowledge proofs to improve privacy while maintaining transparency and
security in transactions.

Key Features

1. Decentralized Web (Web3): A new vision for the Internet where users have
more control and ownership over their data and digital interactions.
2. Blockchain Interoperability: Improved capability for different blockchain
networks to communicate and operate together seamlessly.
3. Advanced Privacy Solutions: Enhanced methods for securing user data and
maintaining privacy through cryptographic innovations.
Challenges and Criticisms
1. Scalability Issues: Blockchain networks, especially those using Proof of
Work (PoW) like Bitcoin, can face limitations in processing transactions quickly
and efficiently as the number of users and transactions grows. This can lead to
slower transaction times and higher fees.
2. Security Vulnerabilities: While blockchain itself is secure, applications
built on it, such as smart contracts and decentralized applications (DApps), can
have vulnerabilities. Security breaches can lead to financial losses, loss of user
trust, and regulatory scrutiny.
3. Environmental Impact: Certain consensus mechanisms, notably Proof of
Work, require significant computational power, leading to high energy
consumption and environmental concerns.
4. Privacy Concerns: Public blockchains expose transaction details, which can
be a concern for sensitive or personal information. Privacy issues can deter users
and organizations from adopting blockchain technology, especially in sectors
where confidentiality is crucial.
5. Centralization Risks: Some networks and projects can become centralized
over time, either through mining power concentration or governance issues.
Centralization can undermine the foundational principles of blockchain
technology, such as trustlessness and decentralization.
What is Bitcoin?

Satoshi Nakamoto introduced the bitcoin in the year 2008. Bitcoin is a

cryptocurrency(virtual currency), or a digital currency that uses rules of
cryptography for regulation and generation of units of currency. A Bitcoin fell under
the scope of cryptocurrency and became the first and most valuable among them. It is
commonly called decentralized digital currency.

A bitcoin is a type of digital assets which can be bought, sold, and transfer between
the two parties securely over the internet. Bitcoin can be used to store values much
like fine gold, silver, and some other type of investments. We can also use bitcoin to
buy products and services as well as make payments and exchange values
electronically.

A bitcoin is different from other traditional currencies such as Dollar, Pound,

and Euro, which can also be used to buy things and exchange values electronically.
There are no physical coins for bitcoins or paper bills. When you send bitcoin to
someone or used bitcoin to buy anything, you don?t need to use a bank, a credit card,
or any other third-party. Instead, you can simply send bitcoin directly to another party
over the internet with securely and almost instantly.

How Bitcoin Works?

When you send an email to another person, you just type an email address and can
communicate directly to that person. It is the same thing when you send an instant
message. This type of communication between two parties is commonly known as
Peer-to-Peer communication.

Whenever you want to transfer money to someone over the internet, you need to use a
service of third-party such as banks, a credit card, a PayPal, or some other type of
money transfer services. The reason for using third-party is to ensure that you are
transferring that money. In other words, you need to be able to verify that both parties
have done what they need to do in real exchange.

For example, Suppose you click on a photo that you want to send it to another person,
so you can simply attach that photo to an email, type the receiver email address and
send it. The other person will receive the photo, and you think it would end, but it is
not. Now, we have two copies of photo, one is a simple email, and another is an
original file which is still on my computer. Here, we send the copy of the file of the
photo, not the original file. This issue is commonly known as the double-spend
problem.
The double-spend problem provides a challenge to determine whether a transaction is
real or not. How you can send a bitcoin to someone over the internet without needing
a bank or some other institution to certify the transfer took place. The answer arises in
a global network of thousands of computers called a Bitcoin Network and a special
type of decentralized laser technology called blockchain.

In Bitcoin, all the information related to the transaction is captured securely by using
maths, protected cryptographically, and the data is stored and verified across the
entire network of computers. In other words, instead of having a centralized database
of the third-party such as banks to certify the transaction took place. Bitcoin
uses blockchain technology across a decentralized network of computers to securely
verify, confirm and record each transaction. Since data is stored in a decentralized
manner across a wide network, there is no single point of failure. This makes
blockchain more secure and less prone to fraud, tampering or general system failure
than keeping them in a single centralized location.

Blockchain Version

The brief description of the evolution of blockchain technology and

its versioning from 1.0 to 3.0 are explained below.

Blockchain 1.0: Currency

The idea of creating money through solving computational puzzles was first
introduced in 2005 by Hal Finney, who created the first concept for cryptocurrencies
(The implementation of distributed ledger technology). This ledger allows financial
transactions based on blockchain technology or DLT to be executed with Bitcoin.
Bitcoin is the most prominent example in this segment. It is being used as cash for
the Internet and seen as the enabler of an Internet of Money.
Blockchain 2.0: Smart Contracts

The main issues that came with Bitcoin are wasteful mining and lack of network
scalability. To overcome these issues, this version extends the concept of Bitcoin
beyond currency. The new key concepts are Smart Contracts. It is small computer
programs that "live" in the blockchain. They are free computer programs which
executed automatically and checked conditions which are defined earlier like
facilitation, verification or enforcement. The big advantage of this technology that
blockchain offers, making it impossible to tamper or hack Smart Contracts. A most
prominent example is the Ethereum Blockchain, which provides a platform where the
developer community can build distributed applications for the Blockchain network.

Quickly, the blockchain 2.0 version is successfully processing a high number of daily
transactions on a public network, where millions were raised through ICO (Initial
Coin Offerings), and the market cap increased rapidly.

Blockchain 3.0: DApps

DApps is also known as a decentralized application. It uses decentralized storage and

communication. Its backend code is running on a decentralized peer-to-peer network.
A DApp can have frontend code hosted on decentralized storages such as Ethereum
Swarm and user interfaces written in any language that can make a call to its
backend like a traditional Apps.

Consensus Algorithms in Blockchain:

We know that Blockchain is a distributed decentralized network that provides
immutability, privacy, security, and transparency. There is no central authority
present to validate and verify the transactions, yet every transaction in the
Blockchain is considered to be completely secured and verified. This is possible
only because of the presence of the consensus protocol which is a core part of any
Blockchain network. A consensus algorithm is a procedure through which all the
peers of the Blockchain network reach a common agreement about the present state
of the distributed ledger. In this way, consensus algorithms achieve reliability in the
Blockchain network and establish trust between unknown peers in a distributed
computing environment. Essentially, the consensus protocol makes sure that every
new block that is added to the Blockchain is the one and only version of the truth
that is agreed upon by all the nodes in the Blockchain. The Blockchain consensus
protocol consists of some specific objectives such as coming to an agreement,
collaboration, cooperation, equal rights to every node, and mandatory participation
of each node in the consensus process. Thus, a consensus algorithm aims at finding
a common agreement that is a win for the entire network. Now, we will discuss
various consensus algorithms and how they work.
1. Proof of Work (PoW): This consensus algorithm is used to select a miner
for the next block generation. Bitcoin uses this PoW consensus algorithm. The
central idea behind this algorithm is to solve a complex mathematical puzzle and
easily give out a solution. This mathematical puzzle requires a lot of
computational power and thus, the node who solves the puzzle as soon as
possible gets to mine the next block. For more details on PoW, please read Proof
of Work (PoW) Consensus
2. Practical Byzantine Fault Tolerance (PBFT): Please refer to the existing
article on practical Byzantine Fault Tolerance(pBFT).
3. Proof of Stake (PoS): This is the most common alternative to PoW.
Ethereum has shifted from PoW to PoS consensus. In this type of consensus
algorithm, instead of investing in expensive hardware to solve a complex puzzle,
validators invest in the coins of the system by locking up some of their coins as
stakes. After that, all the validators will start validating the blocks. Validators
will validate blocks by placing a bet on them if they discover a block that they
think can be added to the chain. Based on the actual blocks added in the
Blockchain, all the validators get a reward proportionate to their bets, and their
stake increase accordingly. In the end, a validator is chosen to generate a new
block based on its economic stake in the network. Thus, PoS encourages
validators through an incentive mechanism to reach to an agreement.
4. Delegated Proof Of Stake (DPoS): This is another type of Proof of Stake
consensus algorithm. This type of consensus mechanism depends on the basis of
the delegation of votes. The users delegate their votes to other users. Whichever
user then mines the block will distribute the rewards to the users who delegated
to that particular vote. Refer to the article Delegated Proof of Stake for more.
5. Proof of Burn (PoB): With PoB, instead of investing in expensive hardware
equipment, validators ‘burn’ coins by sending them to an address from where
they are irretrievable. By committing the coins to an unreachable address,
validators earn the privilege to mine on the system based on a random selection
process. Thus, burning coins here means that validators have a long-term
commitment in exchange for their short-term loss. Depending on how the PoB is
implemented, miners may burn the native currency of the Blockchain
application or the currency of an alternative chain, such as bitcoin. The more
coins they burn, the better their chances of being selected to mine the next block.
While PoB is an interesting alternative to PoW, the protocol still wastes
resources needlessly. And it is also questioned that mining power simply goes to
those who are willing to burn more money.
6. Proof of Capacity: In the Proof of Capacity consensus, validators are
supposed to invest their hard drive space instead of investing in expensive
hardware or burning coins. The more hard drive space validators have, the better
their chances of getting selected for mining the next block and earning the block
reward.
7. Proof of Elapsed Time: PoET is one of the fairest consensus algorithms
which chooses the next block using fair means only. It is widely used in
permissioned Blockchain networks. In this algorithm, every validator on the
network gets a fair chance to create their own block. All the nodes do so by
waiting for a random amount of time, adding proof of their wait in the block.
The created blocks are broadcasted to the network for others’ consideration. The
winner is the validator which has the least timer value in the proof part. The
block from the winning validator node gets appended to the Blockchain. There
are additional checks in the algorithm to stop nodes from always winning the
election, and stop nodes from generating the lowest timer value.
What is the CAP Theorem in Blockchain?

CAP Theorem stands for Consistency, Availability, and Partition Tolerance.

According to the theory, a distributed system cannot always ensure consistency,
availability, and partition tolerance. When things go wrong, we must prioritize at
most two distributed system features and trade-offs between them.
 CAP Theorem or Brewer’s theorem states that it is feasible to provide either
consistency or availability—but not both—in the event of a network failure on a
distributed database, a theory from theoretical computer science about
distributed data stores. In other words, according to the CAP theorem, a
distributed database system that experiences a partition must choose between
Consistency and Availability.
 We must simultaneously communicate over the network and store data
among several nodes in a distributed system. A distributed system frequently
falls victim to network failures because of its reliance on network calls in a
significant way. Tolerance for partitions is crucial. In this situation, we must
decide, based on our needs, whether to prioritize consistency or availability.
 With blockchain technology, immediate consistency is frequently sacrificed
for availability and partition tolerance. By requiring a specific amount of
“confirmations,” blockchain consensus techniques are simply simplified to
eventual consistency.
 Network failures can affect any distributed system, hence network
partitioning is usually required. There are just two choices remaining in the
event of a partition: consistency or availability. The system will return an error
or time out if a specific piece of information cannot be guaranteed to be current
owing to network segmentation when consistency is chosen above availability.
The system will always process the query and attempt to return the most recent
version of the data even if it cannot ensure that it is up to date because of
network partitioning when availability is preferred over consistency.
 Blockchain is a decentralized database that manages a shared ledger that
cannot be altered. Transactions are what make up the shared ledger. Consensus
techniques are used to record transactions inside the shared ledger. Sharing
distributed transactions naturally raises questions about the CAP theorem.
 Consistency is sacrificed in Blockchain due to the priority given to
Availability and Partition Tolerance. In this case, Partition tolerance (P),
Availability (A), and Consistency (C) on the blockchain are not attained
simultaneously; instead, they are acquired over time.

History of CAP Theorem

 The theory initially surfaced in the fall of 1998, according to computer

scientist Eric Brewer of the University of California, Berkeley. Brewer proposed
it at the 2000 Symposium on Principles of Distributed Computing as a
conjecture. It was first published as the CAP principle in 1999.
 Brewer’s conjecture became a theorem in 2002 after Seth Gilbert and Nancy
Lynch of MIT gave a formal proof of it. The CAP theorem is also known as
 Brewer’s Theorem since Professor Eric A. Brewer introduced it in 2000 during a
talk he gave on distributed computing. Professors Seth Gilbert and Nancy Lynch
from MIT produced proof of “Brewer’s Conjecture” two years later.
 Brewer clarified some of his positions in 2012, explaining why the
frequently used “two out of three” concept may be somewhat misleading
because partition management and recovery techniques already exist, so system
designers only need to sacrifice consistency or availability in the presence of
partitions.
 Brewer also brought up how the definition of consistency in the CAP
theorem and the ACID (Atomicity, Consistency, Isolation, Durability)
definition is different. Since it was first proposed ten years ago, designers and
academics have explored a wide range of unique distributed systems using the
CAP theorem.
 It has also been used by the NoSQL movement to argue against conventional
databases. The implementation of CAP achieved its goal of exposing designers
to a greater variety of systems and tradeoffs; in fact, during the past 10 years, a
wide variety of new systems have evolved along with a heated debate about the
relative advantages of consistency and availability.
 As a result of its propensity to oversimplify the tensions between attributes,
the “2 of 3” formulation was always deceptive. Such subtleties now matter. Only
a small portion of the design area is prohibited by CAP: complete availability
and consistency in the absence of partitions, which is uncommon.

CAP Theorem in Blockchain

As we know that CAP stands for Consistency, Availability, and Partition Tolerance
so, let us understand Consistency, Availability, and Partition Tolerance with the
help of some examples. Let us first understand availability as then it will be much
easier to understand consistency and partition tolerance then.

1. Availability

Availability means that all clients who request data receive a response even if one or
more nodes are down. In a distributed system, every operational node replies to each
valid request made to it, to put it another way.
Example: Imagine you are the customer of a well-known vehicle company in your
city because of the incredible deals and services it provides. In addition, they
provide fantastic customer service, so you can contact them whenever you have
questions or issues and get answers right away. The car company is able to connect
every consumer who phones to one of its customer service representatives. Any
information needed by the customer regarding his cars, such as the service date, the
insurance plan, or other details, can be obtained. Because any customer can connect
to the business or its operator and obtain information about the user or client, we
refer to this as availability.

2. Consistency
Consistency means that the duplicated data item will appear in the same copies on
all nodes during different transactions. an assurance that each node in a distributed
cluster returns the same, most recent, and successful writer. Every client’s
perception of the data must be consistent to be considered consistent. Sequential
consistency, which is a particularly powerful type of consistency, is referred to as
consistency in CAP.
Example: Recently the insurance policy of your car got outdated and you want to
update or get a new insurance policy for your car. You decide to call the bank or the
insurance company and update it with them. When you call, you connect with an
agent. This agent asks you for the relevant details of your previous policy. But once
you have put down the phone, you realize that you missed one detail. So you
frantically call the agent again. But, this time when you call, you connect with a
different agent but then also, they are able to access your records as well and know
that you are registering for your new insurance policy. They make the relevant
changes in the house number and the rest of the address is the same as the one you
told the last operator. We call this Consistency because even though you connect to
a different customer care operator, they were able to retrieve the same information.

3. Partition Tolerance

A communication breakdown—a momentary delay or lost connection between

nodes—is referred to as a partition in a distributed system. Partition tolerance
describes the ability of a cluster to function even in the face of numerous
communication failures between system nodes.
Example: Unfortunately, you need to sell your car because it’s old and outdated and
you don’t use it very often. So you list all of the specifics about your automobile on
a website for sale, and then you get in touch with a buyer. He starts negotiating
because he wants to acquire your car and hence wants to complete the agreement
process. However, because the bargaining was not mutual, neither of you could sign
the agreement. Therefore, we might conclude that the agreement has been breached
or that there is no partition tolerance in this situation.

CAP Theorem NoSQL Database Types

Consistency and high availability are not compatible with NoSQL. Eric Brewer
initially stated this in his CAP Theorem. We can only accomplish two out of the
three guarantees for a database, consistency, availability, and partition tolerance. It
is crucial to comprehend the NoSQL database’s constraints. Consistency and high
availability are not compatible with NoSQL.
It can be observed from the above diagram that Consistency and Availability are
connected by a database CA, Availability and Partition Tolerance by a database AP,
and Consistency and Partition Tolerance by a database CP. Let us discuss what CA,
AP, and CP mean.
CA: CA database provides availability and consistency among all the nodes.
However, it cannot accomplish this if there is a partition between any two system
nodes, hence it is unable to provide fault tolerance. For eg: Applications used in
banking and finance demand available and consistent data.
AP: AP database means that the system continues to operate even in the presence of
node failures. AP-based systems compromise consistency and availability. Non-
distributed databases like PostgreSQL uses AP-based database systems.
CP: CP database means that the system continues to operate even though network
failures are occurring in the database. CP systems are strongly consistent but they
are not properly available.
CAP Theorem Applied

1. Availability over consistency (A+P)

 When availability is preferred over consistency the system will always

process the query and attempt to return the most recent version of the data even
if it cannot ensure that it is up to date because of network partitioning.
 When accumulating data is a top priority, availability is crucial. Consider
factors like user preferences or behavioral data in this situation. In situations like
these, you’ll want to record as much data as you can about what a user or
customer is doing, but it’s not necessary to keep the database updated all the
time. Even when network connections are down, they must still be reachable and
available.
 One more reason to adopt a NoSQL database that puts availability over
consistency is the rising demand for offline application use.
The following picture clearly shows Availability over Consistency:
2. Consistency over availability (C+P)
 When discussing consistency and availability, a lot of technical jargon might
be used, but the core idea is simple: consistency is required if the database’s data
must always be current and aligned, even in the event of a network failure.
 When you need several clients to share the same view of the data,
consistency is a particular use case where you should prioritize it. Use a
database, for instance, that provides consistency and assurance that the data you
are looking at is up to date in cases when the network is unreliable or
malfunctions while dealing with financial or sensitive information.
 For example, Information about bank accounts must be consistent and
accurate because it is sensitive information. Therefore, it is preferable to
announce an outage if the most recent accurate information is not accessible than
to provide the consumer with inaccurate information.
The following picture clearly shows Consistency over Availability:
 CAP Theorem Examples

Example 1: A mobile phone has been designed in such a way that it has space for
only one sim card which means no sharing.
Solution: This system guarantees Consistency, Availability, and Tolerance to
Partitions.
Example 2: Immediately after sending a message to someone, that individual might
not get it.
Solution: With this system, availability and partition tolerance are compromised
without compromising consistency, or AP.
Example 3: When we build a form for a group of individuals, the others can only
access it once we provide them permission to do so.
Solution: CP, or Consistency and Partition Tolerance without Compromising
Availability, is ensured by this system.
The different database of CAP Theorem fits in different software:
 AP: Dynamo, Cassandra, Elastic Search, CouchDB, Riak, MongoDB.
 CP: HBase, MongoDB, Redis, Memcached.
 CA: Postgres, MySQL.

Why does Blockchain Violate CAP Theorem?

 Blockchain obviously violates the CAP theorem. As discussed above both

partition tolerance and availability are “income-producing” characteristics.
 If the blockchain system is unavailable, businesses that use it will begin to
lose money. In other words, it’s critical to record new transactions on a node in
the blockchain system whenever they are submitted, such as when money is
transferred from one business to another.

Centralized Distributed Decentralized

Network/har Maintained & controlled by Spread across multiple data Resources are owned &
dware single entity in a centralized centers & geographies; shared by network
resources location owned by network provider members; difficult to
maintain since no one
owns it

Solution Maintained & controlled by Maintained & controlled by Each member has exact
components central entity solution provider same copy of distributed
ledger
Data Maintained & controlled by Typically owned & Only added through group
central entity managed by customer consensus

Control Controlled by central entity Typically, a shared No one owns the data &
responsibility between everyone owns the data
network provider, solution
provider & customer

Single Point Yes No No

of Failure

Fault Low High Extremely high

tolerance

Security Maintained & controlled by Typically, a shared Increases as # of network

central entity responsibility between members increase
network provider, solution
provider & customer

Performance Maintained & controlled by Increases as Decreases as # of network

central entity network/hardware resources members increase
scale up and out

Example ERP system Cloud computing Blockchain

 In the absence of blockchain, the new transaction is lost. This is the reason
why Blockchain violates the CAP theorem
Decentralization Using Blockchain: A Comprehensive Exploration

Introduction to Decentralization and Blockchain

Decentralization is a transformative approach that shifts control and decision-making power

from a central authority to a distributed network. In blockchain, this means data, decision-
making, and processing power are spread across a peer-to-peer (P2P) network, ensuring no
single entity dominates. Blockchain, a distributed ledger technology, underpins
decentralization by providing a transparent and secure system where participants can
independently verify data and transactions without relying on intermediaries. This trustless
structure forms the foundation of decentralization in blockchain systems.

Core Features of Blockchain-Based Decentralization

Blockchain enables decentralization through its unique features. It operates on a distributed

ledger, where data is stored and maintained by multiple nodes in the network, ensuring no
single point of control or failure. Consensus mechanisms, such as Proof of Work (PoW) and
Proof of Stake (PoS), are central to this process, allowing network participants to agree on
the validity of transactions without requiring central oversight.

Immutability ensures that once data is recorded on the blockchain, it cannot be altered
without the consensus of the network, safeguarding the integrity of the system.
Cryptographic techniques add an additional layer of security, making the system resistant to
tampering. Transparency is another critical feature, as blockchain transactions are recorded
publicly, allowing all participants to verify the ledger’s contents and fostering accountability.

Benefits of Decentralization

Decentralization eliminates single points of failure, enhancing the reliability and resilience
of the system. This makes it highly resistant to cyberattacks and technical failures. Security
is further bolstered by the distributed and cryptographic nature of blockchain, ensuring that
data remains secure and tamper-proof.

Transparency is a key benefit, with blockchain's public ledger allowing participants to

independently verify transactions. This builds trust and fosters accountability. Decentralized
systems are also resistant to censorship, as no authority can block or manipulate transactions.
By removing intermediaries, blockchain reduces operational costs and increases efficiency,
particularly in industries where traditional systems rely on third-party facilitators.
Applications of Decentralization Using Blockchain

Decentralization has diverse applications across industries. Cryptocurrencies such as Bitcoin

and Ethereum are prominent examples, enabling peer-to-peer monetary transactions without
reliance on traditional financial institutions. Decentralized Finance (DeFi) platforms build
on this by offering services like lending, borrowing, and trading without intermediaries.

In supply chain management, blockchain enhances transparency and traceability, enabling

businesses and consumers to track goods from origin to destination. Decentralized
Autonomous Organizations (DAOs) are a novel application, using blockchain to allow
collective decision-making without centralized governance. In healthcare, blockchain
ensures secure and interoperable patient data sharing, empowering patients with control over
their medical records. Identity management is another significant application, where
decentralized systems allow users to manage their digital identities securely without relying
on central authorities.

Challenges in Blockchain Decentralization

Despite its benefits, blockchain-based decentralization faces challenges. Scalability remains

a critical issue, as decentralized networks often struggle with transaction speed and capacity
compared to centralized systems. Some consensus mechanisms, such as Proof of Work, are
energy-intensive, raising environmental concerns.

Regulatory uncertainty is another challenge, as decentralized systems operate outside

traditional legal frameworks, leading to conflicts with authorities. Coordination within a
decentralized network can also be complex, requiring significant resources and agreement
among participants to ensure smooth operation.

Future of Decentralization

Decentralization is set to play a significant role in shaping the future of technology and
governance. Emerging trends in blockchain technology, such as Layer 2 solutions, aim to
address scalability challenges and improve network efficiency. Decentralization is also a
cornerstone of Web 3.0, promising a more user-centric internet. Integration with
technologies like artificial intelligence (AI) and the Internet of Things (IoT) could further
expand its applications, creating systems that are both intelligent and autonomous.

The potential for blockchain-based decentralization to create secure, transparent, and

equitable systems continues to drive innovation and adoption across various sectors, paving
the way for a more decentralized and inclusive digital future.
Methods of Decentralization

Decentralization involves distributing authority, data, and operations across a network rather
than relying on a single central entity. Methods include:

 Protocol-Based Decentralization: Blockchain protocols like Bitcoin and Ethereum

define rules for decentralized operation, enabling peer-to-peer (P2P) interactions.
 Data Decentralization: Examples include IPFS (InterPlanetary File System), which
distributes file storage across nodes, avoiding centralized servers.
 Governance Decentralization: DAOs (Decentralized Autonomous Organizations)
like MakerDAO give governance power to token holders who vote on decisions.
 Operational Decentralization: Distributed computing platforms like Ethereum
enable decentralized execution of applications through smart contracts.

Routes to Decentralization

Routes refer to approaches enabling decentralization in systems:

 Blockchain Technology: Bitcoin pioneered this by decentralizing currency

transactions. Ethereum extends this with smart contracts for creating decentralized
applications (dApps).
 Decentralized Applications (dApps): Applications like Uniswap (a DeFi platform)
operate on blockchains without centralized control.
 Decentralized Autonomous Organizations (DAOs): Examples include Aragon,
which enables the creation of decentralized organizational structures.
 Tokenization: Platforms like Binance enable projects to issue tokens, decentralizing
economic value and incentives.
 Peer-to-Peer Networks: File-sharing systems like BitTorrent allow direct sharing of
data among users without intermediaries.

Blockchain and Full Ecosystem Decentralization

Blockchain drives full ecosystem decentralization by creating a unified, trustless framework

for diverse activities:

 Trustless Transactions: Bitcoin eliminates intermediaries in payments by validating

transactions cryptographically.
 Smart Contracts: Ethereum enables automated execution of agreements, like those
in real estate or supply chain management.
 Interoperability: Polkadot facilitates communication between blockchains, ensuring
decentralized systems can collaborate.
 Decentralized Identity (DID): Platforms like Sovrin let users control their digital
identities without relying on centralized databases.
Pertinent Terminology

Understanding core concepts is vital for grasping decentralization:

 Distributed Ledger Technology (DLT): The foundation of blockchain; data is

shared across a network. Example: Bitcoin ledger tracks every transaction.
 Consensus Mechanism: Rules for validating data. Proof of Work (Bitcoin) ensures
miners solve computational puzzles; Proof of Stake (Ethereum 2.0) relies on
validators staking tokens.
 dApps: Decentralized Applications like Aave enable borrowing and lending without
banks.
 Nodes: Computers in the network that validate and store blockchain data, ensuring
its redundancy and security.
 Smart Contracts: Programs like those used in NFTs automatically execute
agreements when predefined conditions are met.

Platforms for Decentralization

Several platforms enable and enhance decentralized systems:

 Ethereum: Known for its robust smart contract capabilities, it supports DeFi
platforms like Compound and dApps like OpenSea.
 Binance Smart Chain (BSC): Offers low-cost, high-speed transactions, enabling
DeFi projects like PancakeSwap.
 Polkadot: Ensures interoperability, allowing blockchains to communicate and share
data seamlessly.
 Cardano: Focuses on sustainability and scalability with projects like the Atala
PRISM for identity management.
 Solana: Known for high-speed transactions, it's used in decentralized exchanges like
Serum.

Innovative Trends in Decentralization

Emerging trends push decentralization further into new domains:

 Layer 2 Solutions: Technologies like Optimism and zkRollups reduce congestion

on Ethereum by processing transactions off-chain.
 Web 3.0: The decentralized internet allows users to control their data. Platforms like
Filecoin offer decentralized data storage.
 Decentralized Finance (DeFi): Platforms like MakerDAO and Compound provide
banking services like lending without intermediaries.
 NFT Ecosystems: Decentralized platforms like OpenSea enable ownership and
trading of digital assets, transforming industries like art and gaming.
 AI and Blockchain: Projects like Fetch.ai integrate artificial intelligence with
blockchain for autonomous operations, like optimizing supply chains.

These elements collectively illustrate the potential and versatility of decentralization using
blockchain.
Important Questions for Blockchain Technologies – Unit 1

2-Marks Questions

1. Define blockchain technology.

2. What is the purpose of a distributed ledger?
3. Explain the concept of immutability in blockchain.
4. What is a consensus mechanism?
5. Define cryptographic hash functions.
6. List two differences between centralized and decentralized systems.
7. What is a Genesis block?
8. Mention two uses of blockchain technology.
9. What is a peer-to-peer (P2P) network?
10. Name any two popular blockchain platforms.

5-Marks Questions

1. Explain the architecture of a blockchain system.

2. Discuss the role of cryptographic hash functions in ensuring security.
3. Write a short note on the types of blockchains (public, private, and consortium).
4. Describe the significance of consensus mechanisms in blockchain with examples.
5. Compare Proof of Work (PoW) and Proof of Stake (PoS) mechanisms.
6. Explain the benefits of decentralization in blockchain systems.
7. Write briefly on the key characteristics of blockchain.
8. Describe how blockchain enhances security in transactions.

10-Marks Questions

1. Describe the evolution of blockchain technology and its current applications.

2. Explain in detail the working of blockchain technology with a neat diagram.
3. Analyze the advantages and limitations of blockchain technology.
4. Discuss the concept of decentralization and its impact on various industries.
5. Explain the types of consensus mechanisms used in blockchain technology and
compare their effectiveness.
6. Elaborate on the challenges in implementing blockchain systems and suggest
possible solutions.