22/03/2024, 12:52 Fundamentals of Blockchain Architecture: A Comprehensive Guide

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Decoding the
Fundamentals of
Blockchain Architecture: A
Comprehensive Guide
Nikita Miakish
Blockchain & Frontend Developer 32 mins | April 13, 2023

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22/03/2024, 12:52 Fundamentals of Blockchain Architecture: A Comprehensive Guide

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The total value locked (TVL) in decentralized finance (DeFi) protocols has increased significantly
in recent years, reaching a peak of over $200 billion in November 2021, according to DeFi Pulse.

Blockchain gained popularity because it offers a decentralized and transparent way of recording
and verifying transactions and data.

We, at SumatoSoft, decided to summarize some fundamental knowledge of blockchain in this

article. We wrote it from the perspective of developers since we are a blockchain development
service provider. This article is for those who want to get a grasp on Web3 and Blockchain
technology and understand it as well as for novice programmers who are faced with the choice
of the direction in which they want to develop. More experienced developers, in turn, can
systematize their knowledge on blockchain and web3.

Definitions
For a complete understanding of the material, the following definitions are required:
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A DLT (also called a shared ledger or distributed ledger) is a consensus of replicated,

shared, and synchronized digital data that is geographically dispersed (distributed) across
Services
many sites, countries, Case
or institutions. Studies
Unlike About
a centralized us
database, Insights registry
a distributed
doesn’t require a central administrator and therefore doesn’t have a single (central) point of
failure.

A node is a computer permanently connected to a particular blockchain network.

Mining is the process of creating a new block in the blockchain. It’s necessary for the
normal functioning of the blockchain network.

The protocol is the set rules for blockchain operations. The protocol defines the interaction
rules between the network nodes, rules for data transactions, and confirmation of the
generation of a new block.

The consensus algorithm is the rule by which blocks are generated in the blockchain.

Validators are nodes that can check that blocks created by different participants follow the
consensus rules.

Cryptography (in this article) is a set of methods of hiding content and information. The
basis of which is the functional transformation of information.

A peer-to-peer network is a network of multiple computers communicating directly

without a central element.

Transaction (in this article) is an operation consisting of transferring funds from one
account to another.

Hash is a string of fixed length. Hash is the result of the data transformation according to a
given mathematical algorithm. The amount of information on a page can be translated, for
example, into the following string
“25AE3AC4EA3300E517579B5253D5B47CFBA5B60E3C20DB03F963A02C007C61C1”
using the SHA-256 algorithm. Hash allows quickly checking the integrity of the received
information because it is faster to check one line than several hundred pages.

What Is Blockchain

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Blockchain is a type of Distributed Ledger Technology (DLT) that consists of a growing list of
records, called blocks, that are securely linked to each other using cryptography, or, more
simply, a chain of securely linked blocks. This is the ideological definition of blockchain.

On the physical (low-level) side, blockchain is a peer-to-peer network that has its own protocol
and consensus algorithm.

The most famous example of blockchain usage is cryptocurrency transactions, where each
transaction is recorded as a “block” on the blockchain. The blockchain provides a secure and
decentralized ledger that tracks the ownership and transfer of digital assets, such as Bitcoin,
without the need for intermediaries like banks. Each block is cryptographically linked to the
previous block, creating an unbreakable chain of transaction history that is resistant to tampering
or fraud. This enables secure and transparent transactions without the need for a trusted third
party.

What Is Blockchain
Architecture
Blockchain architecture is a complete blockchain with all its components.

Usually, this architecture is divided into 4-5 levels:

hardware layer;

data layer

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network layer;

consensus layer;Services Case Studies About us Insights

application layer.

Since blockchain architecture isn’t the topic of discussion in this article, we won’t plunge into it.
Further in the article, we’ll get a bird’s-eye view of the blockchain as a whole and its separate
components

Blockchain History – Timeline

The history of the idea of blockchain as a distributed ledger dates back to the 1970s, long before
the release of the founding document for Bitcoin in 2008 (authored by an anonymous author
with the pseudonym Satoshi Nakamoto).

1979
The idea of immutably linking blocks of information to a cryptographic hash function originated
in Ralph Merkle’s 1979 thesis, in which the author explains how information can be linked in a
structure now known as a “Merkle tree”. Merkle tree is a hierarchical data structure in which each
node has no more than two children. Nodes contain hashes from data blocks. Parent vertices
contain hashes from the addition of values in child vertices. The tree’s root node contains a hash
of the entire data set.

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1990 – 1991
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Subsequently, in 1990-91, Stuart HaberCase Studies
and Scott About
Stornetta us these ideas
applied Insights
in “How to
Timestamp a Digital Document”, establishing Surety company in 1994. Looking at this
document, you can find ideas for what is now called a blockchain. However, this document only
includes some of the elements and methods of blockchain.

To prevent an attacker from undue influence on the block generation process, many systems
require new blocks to include “proof of (computational) work”.

1992
In 1992, Cynthia Dwork and Moni Naor proposed proof-of-computing to combat spam. But the
idea and construction behind Proof of Work (PoW) can be seen in its nascent form in 1974’s
Merkle Mysteries. Bitcoin was the first to use PoW for both mining and consensus building.

2008
The Bitcoin document published in 2008 is known as the “Bitcoin White Paper” and was
authored by an individual or group of individuals using the pseudonym Satoshi Nakamoto. The
white paper outlined the concept of a decentralized digital currency that would allow for peer-
to-peer transactions without the need for intermediaries like banks.

2012
On September 27, 2012, the Bitcoin Foundation was formed by a group of prominent members
of the Bitcoin community, including Gavin Andresen, Charlie Shrem, and Jon Matonis. The
foundation aimed to promote the development and widespread adoption of Bitcoin, work
towards standardizing the Bitcoin protocol, and protect the digital currency from threats and
regulatory challenges. It played a significant role in advocating for Bitcoin and supporting its
infrastructure during its early years.

2014
Ethereum, a significant advancement in the blockchain ecosystem, was proposed by a young
programmer named Vitalik Buterin in late 2013. Ethereum went live on July 30, 2014, after a
successful crowdsale. Ethereum introduced the concept of “smart contracts,” which are self-
executing contracts with the terms of the agreement directly written into code. This new
blockchain platform opened up new possibilities for decentralized applications (DApps) and
inspired a wave of innovation in the blockchain space.

2017
On August 1, 2017, Bitcoin underwent a hard fork, resulting in the creation of a new
cryptocurrency called Bitcoin Cash (BCH). The hard fork was initiated due to disagreements
within the Bitcoin community over proposed solutions to the network’s scalability problem.
Bitcoin Cash increased the block size from 1 MB to 8 MB, allowing for more transactions to be
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processed per block. The event highlighted the potential for divisions within blockchain
communities and the importance of consensus-building.
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2020
Decentralized Finance (DeFi) saw explosive growth in 2020, with the total value locked in DeFi
platforms surpassing $10 billion by September. DeFi refers to financial services built on top of
blockchain platforms, primarily Ethereum, that aim to disintermediate traditional financial
institutions. DeFi projects offer services such as lending, borrowing, trading, and yield farming,
all powered by smart contracts. This surge in DeFi adoption marked a new era for blockchain
technology, as it began to gain traction in the financial sector and showcased the potential for
decentralized financial services.

Decentralized or Distributed?

Some people confuse decentralization and a distributed ledger. Everything is simple here.

A decentralized system is one where there is no central authority, organization, or entity that has
control over the network or its resources. In a blockchain, this means that decision-making and
control are spread across all the participants (nodes) in the network, rather than being
concentrated in a single central entity like a bank, a government, or a corporation.
Decentralization ensures that no single entity can manipulate or take control of the blockchain

A distributed system is one where the components of the system (such as data, computing
resources, or decision-making) are spread across multiple locations or devices, rather than being
centralized in one place. In the context of blockchain, this refers to the fact that the blockchain

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ledger (the record of all transactions) is stored and maintained by multiple nodes across the
network.
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Each node in a blockchain network keeps a complete copy of the blockchain, and every time a
new block is added, this information is propagated to all the nodes, which then update their local
copies. This distributed nature of the blockchain ensures that the system remains resilient to
failures and attacks, as even if one node goes offline or gets compromised, the other nodes in the
network can continue to function and maintain the integrity of the ledger.

Almost all blockchain cryptocurrencies (protocols) are decentralized and distributed.

Blockchain Types: Private,

Public, Consortium
Public Blockchain Private Blockchain Blockchain consortium

Anonymity Yes No No

No (may be publicly read

Publicity Yes No
records)

Owner No Yes Several

Operation
Low High High
speed

For transactions or
Global network (online In the company for their
information exchange
stores, startups, needs, for example, for
Usage between multiple
decentralized accounting and
companies (ideally the
applications) accounting of any data
same industry)

There are three types of blockchains that differ by the level of access to the network:

Public blockchain
In this network, anyone can connect, make transactions, watch records, check block generation (if
connected as a node).

Anonymity: Yes

Publicity: Yes

Owner: No

Operation speed: Low

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Usage: Global network (online stores, startups, decentralized applications).

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Private blockchain
On the other hand, sets its own rules for who can connect, make transactions, and watch
network records. Such blockchains are partially distributed by their structure.

Anonymity: No

Publicity: No

Owner: Yes

Transaction speed: High (low cost)

Usage: In the company for their needs, for example, for bookkeeping and data accounting

Blockchain consortium
They are on the border between the first and second types, combining both properties.

Anonymity: No

Public: No (may be publicly read records)

Owner: Several

Transaction speed: High

Usage: For transactions and information exchange between multiple companies (ideally within
the same industry).

Blocks and Data: Definition,

Role
In the blockchain, the term “block” means “a data record”. Every block features a data structure.
Structures may vary from network to network, and it’s definned inside a protocol.

Usually, the data inside the block has a hash of this block, a hash of the previous block, and
transaction data.

It is cryptographic hashing and chain storage of hashes of previous blocks that

ensure network security.

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The first block in the chain is slightly different. It has a zero parent block hash because there is no
block in front of it. Such a block is called a genesis block.
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Let’s consider the Ethereum network. In its blocks, information is divided into execution-level
data and consensus-level data.

Let’s consider some of the items in the consensus-level data:

the block size;

block creation time;

gas (block creation fee);

transactions;

block hash;

parent block hash;

system state in the form of a Merkle tree.

Consensus data refers to the data that is used to reach consensus among nodes in the
blockchain network about the validity of the transactions or smart contract executions recorded
in the block. Among the data of the consensus level, you can see information related to the
blocks themselves and network validators.

Execution data refers to the data that is used to record the actual transactions or smart contract
executions that occur on the blockchain. This data includes information such as the sender and
receiver addresses, the amount of cryptocurrency being transferred, and any other relevant
details about the transaction or contract execution.

It is worth noting that blocks can be viewed by anyone who can connect to this network, unless
we are talking about private and consortium blockchains (more on that later).

Consensus Algorithms

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Proof of Work
Proof of Work (PoW, or Proof-of-Work) is a bitcoin consensus algorithm that led to the
emergence of a new profession on the market – a miner. The meaning, as always, lies in the
name. To participate in the transaction, network members need to solve an arbitrary
mathematical puzzle to find the hash and publicly prove the work done in order to avoid cheating
the system. The first one who was lucky enough to find the right solution gets the opportunity to
add a block to the chain and the opportunity to receive a reward for the work done, this is the
main motivator for participating in this protocol.

Examples of use: Bitcoin, Litecoin

Flaws:

1. Large and senseless energy consumption, which is fundamentally unenvironmental. After

all, miners use the power of computers in parallel, but the work of only one is accepted –
the fastest, who coped with the task. (In 2015, it was estimated that a single bitcoin
transaction required an amount of electricity comparable to the energy needed to power
1.57 American homes a day. Therefore, PoS was introduced to conserve energy.)

2. Mining has become not so much a tool to maintain the network as a way to cash in on
rewards.

3. May reduce network scalability. It was the case with Etherium blockchain which limits its
transaction speed to around 30 transactions per second. Etherium switched to te proof-of-
stake mechanism in 2022.

Benefits:
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1. The main benefit is that this algorithm follows the initial blockchain principles:
decentralization, security, fairness.
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Proof o Stake
Proof of Stake (Pos or Proof-of-Stake) was created as an alternative to Proof-of-Work and seeks
to cover its shortcomings. This mechanism reduces the amount of computational work required
to validate the blocks and transactions that ensure the security of the blockchain, as a result,
reducing power consumption. Computing power for checking blocks is replaced by staking,
whereby a person’s mining ability is randomized by the network. Instead of buying $1,000 worth
of mining hardware, members can lock up the equivalent of $1,000 worth of crypto. It’s called
“staking” or “stcke their tokens”. Users can then simply vote for the desired block on the network
and digitally sign their vote. If done correctly, they add a block to the chain and are rewarded for
their contribution. The block with the most votes wins, after which it is added to the chain.
However, if a user proposes to add a block that is known to be wrong or a block with a lower
number of votes, he loses part of his staking assets as a penalty.

Usage examples: Ethereum, NXT, Tezos, Peercoin, Blackcoin

Flaws:

1. Motivation for the concentration of funds appears. This can lead to the centralization of the
network.

Benefits:

1. Energy efficiency. PoS doesn’t require miners to solve complex mathematical puzzles to
validate transactions and add new blocks to the chain. Instead, validators are selected to
validate transactions based on the amount of cryptocurrency they hold and “stake” as
collateral.

Proof-of-Burn
Proof-of-Burn (PoB) – to apply it, the miner sends coins to a random address, from which it is
almost impossible to spend funds. For burning coins the miner gets a constant chance to find a
PoB block and be rewarded. The chances of mining increase as the number of coins burned
increases. Economically, burning coins can be considered buying a drilling rig for mining.

This algorithm can be used, for example, to transfer from an old to a new cryptocurrency on the
same blockchain. The miners burn the old coins to get new ones. This algorithm is used on the
Slimcoin platform.

Flaws:

At an early stage of cryptocurrency development, everything can “stall” due to a lack of

“fuel” for burning.

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These are the most popular consensus algorithm. We list other existing algorithms without
describing them as they are not so widespread in usage.
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Proof of Capacity (PoC)

Proof of Identity (PoI)

Proof of Activity (PoA)

Proof of Elapsed Time (PoET)

Why Is Blockchain So Hard to

Hack?

If an attacker tries to change the data on the chain, the network will find and fix the bad block,
and the attacker will fail. How does it work? Well, let’s examine it step by step.

Firstly, Blockchain Cryptography Is Complicated

For example, Bitcoin uses SHA-256 hashing functions, Ethereum uses KECCAK-256. Hashing
has the following characteristics:

It works one-way – a hash is not decoded back into data.

It is deterministic – the same information is translated into the same hash.

It works fast.

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Has no avalanche effect. The effect does not allow preserving the similarity of hashes by
changing, for example, just a symbol. If one hashed information is even slightly different
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from the other, then the output is two completely different hashes.

Secondly, All Blocks Are Interconnected

Each block has its own hash and the hash of the previous block, that is, in order to hack,
information needs to be changed in several blocks.

Thirdly, All Nodes Store Blockchain

The blockchain, as already mentioned, is a peer-to-peer system. All nodes are interconnected
and keep a copy of the entire blockchain in memory. According to the consensus algorithm, all
nodes determine whether to add a new block to the chain or not.

Security in Nutshell
As a result, if an attacker tries to change the data of the block, then the block hash changes
dramatically. It generated the wrong chain of blocks which the nodes will cut off using the
consensus algorithm and replace with the correct one.

Edges and Drawbacks of

Blockchain

Contents

Overview

Definitions

What Is
Blockchain

What Is
Blockchain
Architecture

Blockchain
History –
Timeline

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Edges (for a Network Without Restrictions):

Openness: everyone can become a member of the network, and no checks and
permissions are needed.

Transparency: everyone can see when, how many and by whom certain transactions were
performed.

Immutability: You can’t change records that have already been added. Ite means no
retroactive transactions or fake edits.

Anonymity: thanks to some tools, you can achieve complete anonymity in the blockchain
network. No one will trace the path to your wallet in the transaction. In Ethereum, for
example, this can be done using the “Tornado” utility. Moreover, no one will know the
owner of the wallet.

Security: Strong cryptography and modern hashing make it possible to store data with the
lowest possible chance of being hacked.

Fault Tolerance: Constantly exchanging data and storing it in memory will not allow the
peer-to-peer network to fail, and also allows you to eliminate any interference in the
network.

Cost savings and trust: In finance and business, it is important to trust your partner when
closing deals. With the help of blockchain and smart contracts, you can save money and
time by conducting transactions directly with your partner without intermediates.

Flaws:
Scalability: Blocks store a limited amount of information and cannot be expanded.

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Energy consumption: Quite a lot of networks operate using the PoW algorithm that
requires a huge volume of electricity. In general, it isn’t environmentally friendly.
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Time-consuming: Calculating a new hash and adding new blocks to the chain takes time.
Although transactions go quickly, they may take some time.

Legality: Blockchain is illegal in a number of countries.

Data storage: Blockchain is getting bigger over time. There may be problems connecting
new nodes in the future.

How to Build Your Own

Blockchain
Programming languages such as C ++, Python, JavaScript, Rust, Ruby are mainly used for this
purpose. For example, you can use Solidity or Rust to develop smart contracts.

However, building a market-competitive blockchain requires great technical skills and

knowledge of data structures, consensus methods, decentralized ledgers, cryptography, and
cryptocurrencies.

The Usage of Blockchain

Today, blockchain has found application in many areas and industries. We wrote about the top
20 blockchain consulting companies and blockchain business ideas. Here we want to mention
some examples of blockchain usage:

Medicine
There are many successful projects in this area. Transparency, immutability, security and
anonymity help store and send data, and communicate with medical staff safely and efficiently.
Several companies have successfully implemented blockchain technology in this area:

Drug supply chain management: Blockchain technology helps in tracking and verifying the
provenance of pharmaceutical drugs, ensuring their authenticity and preventing counterfeit
medicines from entering the supply chain. It enables transparency, immutability, and real-
time tracking of drug movement from the manufacturer to the end consumer, improving
the overall safety and efficiency of the distribution process. Examples: MediLedger project,
IBM blockchain for supply chain.

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Patient data management: Blockchain can be used to create a decentralized, secure, and
tamper-proof platform for storing and sharing patient medical records. This allows
Services
healthcare providers Case Studies and accurate
to access a comprehensive About uspatient history,
Insights
while
ensuring the privacy and security of sensitive information, ultimately improving diagnosis,
treatment planning, and coordination of care. Examples: MedRec, Healthbank.

Finance

Smart contracts may cover a lot of financial transactions without referring to intermediaries.
Securities signing, consensus, vesting, transactions, transaction accounting, accounting and much
more can make it faster and easier to use blockchain in this area.

Cross-border Payments: Blockchain technology allows for faster, more secure, and cost-
effective cross-border transactions by eliminating intermediaries, reducing transaction fees,
and decreasing processing times. Examples: Ripple (XRP)б Stellar Lumens (XLM)

Decentralized Finance (DeFi): DeFi is an ecosystem of financial applications built on

blockchain networks that provide users with decentralized alternatives to traditional
financial services, such as lending, borrowing, and trading. Examples: Compound Finance.
Uniswap.

Charity
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Due to its transparency, blockchain crowdfunding is more trustworthy than regular fees. After
all, you can not only track where the money went, but also get acquainted with the conditions for
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depositing funds (if a smart contract was used for this).

Transparent donation tracking: Blockchain technology enables donors to track their

contributions and ensure that their donations reach the intended recipients or causes,
improving transparency and accountability in the charity sector. Examples: Alice,
GiveTrack.

Decentralized crowdfunding: Blockchain platforms can facilitate decentralized

crowdfunding campaigns, enabling individuals and organizations to raise funds directly
from a global network of donors without intermediaries. Examples: Giveth, WeTrust
Spring.

SumatoSoft – Practitioners in
Blockchain Development
We are a talented software development team that uses modern technologies to digitalize
businesses. We’ve worked for 10 years on the market of custom software development services
and have become a reliable technical partner to our Clients. Blockchain development services are
one of the areas of our expertise along with:

big data services;

machine learning services;

Iot development services;

machine learning services.

To learn more about us, check out the page about us.

Consider yourself a talented specialist? Try yourself in the interview for some open positions.
We need such a specialist!

Plan to develop a blockchain project? Contact us, and we will tackle your projects in days!

Conclusion
In conclusion, blockchain technology has evolved significantly over the years, and various
consensus algorithms like Proof-of-Work, Proof-of-Stake, and Proof-of-Burn have been
developed to meet different needs and preferences. Blockchain’s inherent security features, such
as complex cryptography and the interconnected nature of blocks, make it incredibly difficult to
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22/03/2024, 12:52 Fundamentals of Blockchain Architecture: A Comprehensive Guide

hack. Additionally, the numerous benefits of blockchain, including transparency, immutability,

and cost savings, have led to its widespread adoption across various industries like medicine,
finance, and charity. Services Case Studies About us Insights

However, it is crucial to consider the drawbacks of blockchain technology, such as scalability,

energy consumption, and legality, when developing or adopting a blockchain-based solution.
Developing a blockchain project requires extensive technical knowledge and skills in data
structures, consensus methods, decentralized ledgers, cryptography, and cryptocurrencies.

As blockchain technology continues to advance, it will undoubtedly find new and innovative
applications in various industries, revolutionizing the way we store and transact data.

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Aleh Kanoika
27 mins | March 1, 2024
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