UNIT-I

Introduction to Blockchain
Technology
 Introduction to Blockchain Technology
A blockchain is a constantly growing ledger which keeps a permanent record
of all the transactions that have taken place in a secure, chronological, and
immutable way.
Let's breakdown the definition
• Ledger: It is a file that is constantly growing.
• Permanent: It means once the transaction goes inside a blockchain, you can put up it
permanently in the ledger.
• Secure: Blockchain placed information in a secure way. It uses very advanced
cryptography to make sure that the information is locked inside the blockchain.
• Chronological: Chronological means every transaction happens after the previous one.
• Immutable: It means as you build all the transaction onto the blockchain, this ledger can
never be changed.
 Introduction to Blockchain Technology
A blockchain is an open, distributed ledger that can record transactions
between two parties efficiently and in a verifiable and permanent way without
the need for a central authority.
Key Characteristics:
Open: Anyone can access blockchain.
Distributed or Decentralised: Not under the control of any single authority.
Efficient: Fast and Scalable.
 Verifiable: Everyone can check the validity of information because each
node maintains a copy of the transactions.
Permanent: Once a transaction is done, it is persistent and can’t be altered.
 Distributed Systems
• Understanding distributed systems is essential to understand
blockchain.
• A blockchain is originally intended to be and is usually used as a
decentralized platform. It can be thought of as a system that has
properties of the both decentralized and distributed paradigms. It is a
decentralized-distributed system.
• Distributed systems are a computing paradigm whereby two or more
nodes work with each other in a coordinated fashion in order to
achieve a common outcome and it's modeled in such a way that end
users see it as a single logical platform.
 Distributed Systems
• In a distributed system a node can be defined as an individual player.
• All nodes are capable of sending and receiving messages to and from
each other.
• There is no Central Server or System which keeps the data of
Blockchain.
• The data is distributed over Millions of Computers around the world
which are connected with the Blockchain.
• Nodes can be honest, faulty, or malicious and have their own memory
and processor.
 Distributed Systems

• Nodes can be honest, faulty, or malicious and have their own memory
and processor.
• A node that can exhibit arbitrary behavior is also known as a
Byzantine node.
• This arbitrary behavior can be intentionally malicious, which is
detrimental to the operation of the network.
 Distributed Systems
• The main challenge in distributed system design is coordination between nodes and
fault tolerance. Even if some of the nodes become faulty or network links break, the
distributed system should tolerate this and should continue to work flawlessly in
order to achieve the desired result.
HISTORY OF BLOCKCHAIN
 HISTORY OF BLOCKCHAIN

• The blockchain technology was described in 1991 by the research

scientist Stuart Haber and W. Scott Stornetta. They wanted to introduce
a computationally practical solution for time-stamping digital documents
so that they could not be backdated or tampered.
• In 1992, Merkle Trees were incorporated into the design, which makes
blockchain more efficient by allowing several documents to be collected
into one block.
• Merkle Trees are used to create a 'secured chain of blocks.' It stored a
series of data records, and each data records connected to the one before it.
The newest record in this chain contains the history of the entire chain.
 HISTORY OF BLOCKCHAIN

• In 2004, computer scientist and cryptographic activist Hal Finney

introduced a system called Reusable Proof Of Work(RPoW) as a
prototype for digital cash.
• RPoW solved the double-spending problem.
• In 2008, Satoshi Nakamoto conceptualized the theory of distributed
blockchains.
• He improves the design in a unique way to add blocks to the initial
chain without requiring them to be signed by trusted parties. The
modified trees would contain a secure history of data exchanges.
 HISTORY OF BLOCKCHAIN

• It utilizes a peer-to-peer network for timestamping and verifying each

exchange. It could be managed autonomously without requiring a
central authority.
• These improvements were so beneficial that makes blockchains as the
backbone of cryptocurrencies.
• The words block and chain were used separately in Satoshi
Nakamoto's original paper but were eventually popularized as a single
word, the Blockchain, by 2016.
 CAP Theorem
• The CAP theorem, also known as Brewer's theorem, was introduced by Eric
Brewer in 1998 as a conjecture. In 2002, it was proven as a theorem by Seth
Gilbert and Nancy Lynch. The theorem states that any distributed system cannot
have consistency, availability, and partition tolerance simultaneously.
 CAP Theorem

• In order to achieve fault tolerance, replication is used. This is a

common and widely used method to achieve fault tolerance.
• Consistency is achieved using consensus algorithms to ensure that all
nodes have the same copy of data.
• This is also called state machine replication.
• Blockchain is basically a method to achieve state machine replication.
 CAP Theorem
• It seems thet the CAP theorem is violated in blockchain but this is not
true.
• In blockchain the consistency is sacrificed in favor of Availability and
Partition tolerance.
• In the most famous blockchain application, bitcoin , Consistency is not
achieved simultaneously with Partition tolerance and A vailability.
• In Bitcoin blockchain consistency is achieved as a result of validation
from multiple nodes over time.
• For this purpose the concept of mining was introduced, which
facilitates the achievement of consensus through a mechanism called
PoW(Proof of Work).
 Benefits of blockchain

Numerous benefits of blockchain technology are:

 Decentralization : This is a core concept and benefit of blockchain.
There is no need for a trusted third party or intermediary to validate
transactions; instead a consensus mechanism is used to agree on the
validity of transactions.
 Transparency and trust : As blockchains are shared and everyone can
see what is on the blockchain, this allows the system to be transparent
and as a result trust is established. This is more relevant in scenarios
such as the disbursement of funds or benefits where personal
discretion should be restricted.
 Benefits of blockchain

• Immutability: Once the data has been written to the blockchain, it is

extremely difficult to change it back. It is not truly immutable but, due
to the fact that changing data is extremely difficult and almost
impossible, this is seen as a benefit to maintaining an immutable
ledger of transactions.
• High availability: As the system is based on thousands of nodes in a
peer-to-peer network, and the data is replicated and updated on each
and every node, the system becomes highly available. Even if nodes
leave the network or become inaccessible, the network as a whole
continues to work, thus making it highly available.
 Benefits of blockchain

• Highly secure: All transactions on a blockchain are cryptographically

secured and provide integrity.
• Simplification of current paradigms: The current model in many
industries such as finance or health is rather disorganized, wherein
multiple entities maintain their own databases and data sharing can
become very difficult due to the disparate nature of the systems.
• But as a blockchain can serve as a single shared ledger among
interested parties, this can result in simplifying this model by reducing
the complexity of managing the separate systems maintained by each
entity.
 Benefits of blockchain

• Faster dealings: In the financial industry, especially in post-trade

settlement functions, blockchain can play a vital role by allowing the
quicker settlement of trades as it does not require a lengthy process of
verification, reconciliation, and clearance because a single version of
agreed upon data is already available on a shared ledger between
financial organizations.
• Cost saving: As no third party or clearing houses are required in the
blockchain model, this can massively eliminate overhead costs in the
form of fees that are paid to clearing houses or trusted third parties.
 Challenges and limitations of blockchain
technology
• As with any technology there are challenges that need to be addressed in order
to make a system more robust, useful, and accessible. Blockchain technology is
no exception; in fact a lot of effort is being made in Academia and Industry to
overcome the challenges posed by blockchain technology. A selection of the
most sensitive challenges are presented as follows:
 Scalability
 Adaptability
 Regulation
 Relatively immature technology
 Privacy
 Decentralization
• Decentralization is a core benefit and service provided by blockchain
technology. By design, blockchain is a perfect vehicle for providing a
platform that does not need any intermediaries and that can function
with many different leaders chosen via consensus mechanisms.
• This model allows anyone to compete to become the decision-making
authority. A consensus mechanism governs this competition, and the
most famous method is known as Proof of Work (PoW).
• Decentralization is applied in varying degrees from a semi-
decentralized model to a fully decentralized one depending on the
requirements and circumstances.
• Decentralization can be viewed from a blockchain perspective as a
mechanism that provides a way to remodel existing applications and
paradigms, or to build new applications, to give full control to users.
• Information and communication technology (ICT) has conventionally
been based on a centralized paradigm whereby database or
application servers are under the control of a central authority, such
as a system administrator.
• The following diagram shows the different types of systems that
currently exist: central, distributed, and decentralized.
• Different types of networks/systems
 Centralized systems are conventional (client-server) IT systems in which there is a
single authority that controls the system, and who is solely in charge of all
operations on the system. All users of a centralized system are dependent on a
single source of service. The majority of online service providers, including
Google, Amazon, eBay, and Apple's App Store, use this conventional model to
deliver services.
 In a distributed system, data and computation are spread across multiple nodes
in the network. Sometimes, this term is confused with parallel computing. While
there is some overlap in the definition, the main difference between these
systems is that in a parallel computing system, computation is performed by all
nodes simultaneously in order to achieve the result.
 For example, parallel computing platforms are used in weather research and
forecasting, simulation, and financial modeling.
 On the other hand, in a distributed system, computation may not
happen in parallel and data is replicated across multiple nodes that
users view as a single, coherent system. Variations of both of these
models are used to achieve fault tolerance and speed. In the parallel
system model, there is still a central authority that has control over all
nodes and governs processing. This means that the system is still
centralized in nature.
 A decentralized system is a type of network where nodes are not
dependent on a single master node; instead, control is distributed
among many nodes. This is analogous to a model where each
department in an organization is in charge of its own database server,
thus taking away the power from the central server and distributing it
to the sub-departments, who manage their own databases.
 A comparison between centralized and decentralized systems
(networks/applications) is shown in the following table:
Feature Centralized Decentralized

Ownership Service provider All users

Architecture Client/server Distributed, different topologies

Security Basic More secure

High availability No Yes

Fault tolerance Basic, single point of failure Highly tolerant, as service is replicated

Highly resistant, as consensus

Basic, because it's under the control of a
Collusion resistance algorithms ensure defense against
group or even single individual
adversaries

Application replicated across all nodes

Application architecture Single application
on the network

Trust Consumers have to trust the service provider No mutual trust required

Cost for consumer Higher Lower

 Methods of Decentralization
• Two methods can be used to achieve decentralization: disintermediation and
competition.
Disintermediation:
 This can be explained with the help of an example. Imagine you want to send
money to your friend in another country. You go to a bank that will transfer
your money to the bank in the country of your choice for a fee. In this case,
the bank keeps a central database that is updated, confirming that you have
sent the money.
 With blockchain technology, it is possible to send this money directly to your
friend without the need for a bank. All you need is the address of your friend
on the blockchain. This way, the intermediary is no longer required and
decentralization is achieved by disintermediation. Nevertheless, this model
can be used not only in finance but also in many other different industries.
• Competition:
• In this method, a group of service providers compete with each other in order to
be selected for the provision of services by the system. This paradigm does not
achieve complete decentralization, but to a certain degree ensures that an
intermediary or service provider is not monopolizing the service.
• In the context of blockchain technology, a system can be envisioned in which
smart contracts can choose an external data provider from a large number of
providers based on their reputation, previous score, reviews, and quality of
service.
• This will not result in full decentralization, but it allows smart contracts to make a
free choice. This way, an environment of competition is cultivated among service
providers, whereby they compete with each other to become the data provider
of choice.
• In the following diagram, varying levels of decentralization are shown. On the left
side, the conventional approach is shown where a central system is in control,on
the right side, complete disintermediation is achieved, as intermediaries are
entirely removed. Competing intermediaries or service providers are shown in the
center. At that level, intermediaries or service providers are selected based on
reputation or voting, thus achieving partial decentralization:
 Routes to decentralization
• Even though there are systems that existed before bitcoin or
blockchain that can be classed as decentralized to a certain degree,
such as BitTorrent or Gnutella file sharing, with the advent of the
blockchain technology many initiatives are being taken in order
leverage this new technology for decentralization.
• Usually, the bitcoin blockchain is the first choice for many as it has
proven to be the most resilient and secure blockchain with a market
cap of almost 12 billion dollars.
• An alternative approach is to use other blockchains, such as Ethereum,
which is currently the tool of choice of many developers for building
decentralized applications.
 How to decentralize?
• A framework has been proposed by Arvind Narayanan and others that
can be used to evaluate the decentralization requirements of a variety
of things in the context of blockchain technology. The framework
basically proposes four questions that, once answered, provide a clear
idea as to how a system can be decentralized. These questions are
listed as follows:
• 1. What is being decentralized?
• 2. What level of decentralization is required?
• 3. What blockchain is used?
• 4. What security mechanism is used?
• The first question simply asks what system is being decentralized. This can be any
system, for example an Identity system or trading.
• Second question can be answered by specifying the level of decentralization
required by looking at the scale of decentralization. It can be full
disintermediation or partial disintermediation.
• The third question is quite straightforward, where developers can make a choice
as to which blockchain is suitable for a particular application. It can be bitcoin
blockchain, Ethereum blockchain, or any other blockchain that is deemed fit for a
specific application.
• Finally, a key question needs to be answered about the security mechanism as to
how the security of a decentralized system can be guaranteed. It can be
Atomicity, for example, whereby either the transaction executes in full or does
not execute at all.
Decentralization framework example
• The four questions discussed previously are used to evaluate the
decentralization requirements of this application. The answers to these
questions are as follows:
1. Money transfer system
2. Disintermediation
3. Bitcoin
4. Atomicity
 Blockchain and full ecosystem decentralization
• In order to achieve complete decentralization, it is necessary that the
environment around the blockchain is also decentralized. Blockchain itself is a
distributed ledger that runs on top of conventional systems. These elements
include storage, communication, and computation.
STORAGE
• Data can be stored directly in a blockchain, and with this, it does achieve
decentralization, but a major disadvantage of this approach is that blockchain is
not suitable for storing large amounts of data by design.
• A better alternative is to use distributed hash tables (DHTs). DHTs were originally
used in peer-topeer file sharing software, such as BitTorrent, Napster, Kazaa, and
Gnutella. DHT research was made popular by CAN, Chord, Pastry, and Tapestry
projects. BitTorrent turns out to be the most scalable and fast network, but the
issue is that there is no incentive for users to keep the files indefinitely.
• Users do not usually keep files permanently, and if nodes leave the
network that has data required by someone, there is no way to
retrieve it except having the required nodes rejoin the network again
so that the files become available once more.
• Two main requirements here are high availability and link stability,
which means that data should be available when required and
network links should also always be accessible.
• Inter Planetary File System (IPFS) by Juan Benet possesses both of
these properties and the vision is to provide a decentralized World
Wide Web by replacing the HTTP protocol.
• IPFS uses Kademlia DHT and merkle DAG (Directed Acyclic Graph) to
provide the storage and searching functionality.
• The incentive mechanism is based on a protocol known as Filecoin
that pays incentives to nodes that store data using the BitSwap
mechanism. The BitSwap mechanism allows nodes to keep a simple
ledger of bytes sent or bytes received under a one-to-one
relationship.
• There are other alternatives, such as Ethereum swarm, storj, and
maidsafe. Ethereum has its own decentralized and distributed
ecosystem that uses Swarm for storage and the whisper protocol for
communication. Maidsafe is aiming to provide a decentralized World
Wide Web.
• BigChainDB is another storage layer decentralization project aimed at
providing a scalable, fast, and linearly scalable decentralized database as
opposed to a traditional filesystem. BigChainDB complements decentralized
processing platforms and file systems such as Ethereum and IPFS.
COMMUNICATION
• The Internet (the communication layer in blockchain) is considered to be
decentralized. This belief is correct to some extent, as the original vision of
the Internet was to develop a decentralized communications system.
Services such as email and online storage are now all based on a paradigm
where the service provider is in control, and users trust such providers to
grant them access to the service as requested.
• This model is based on the unconditional trust of a central authority (the
service provider) where users are not in control of their data. Even user
passwords are stored on trusted third-party systems.
• Thus, there is a need to provide control to individual users in such a
way that access to their data is guaranteed and is not dependent on a
single third party.
• Access to the Internet (the communication layer) is based on Internet
Service Providers (ISPs) who act as a central hub for Internet users. If
the ISP is shut down for any reason, then no communication is
possible with this model.
• An alternative is to use mesh networks. Even though they are limited
in functionality when compared to the Internet, they still provide a
decentralized alternative where nodes can talk directly to each other
without a central hub such as an ISP.
• The original vision of the Internet was to build a decentralized network; however,
over the years, with the advent of large-scale service providers such as Google,
Amazon, and eBay, control is shifting toward these big players. For example, email
is a decentralized system at its core; that is, anyone can run an email server with
minimal effort and can start sending and receiving emails.
• There are better alternatives available. For example, Gmail and Outlook already
provide managed services for end users, so there is a natural inclination toward
selecting one of these large centralized services as they are more convenient and
free to use. This is one example that shows how the Internet has moved toward
centralization.
• Free services, however, are offered at the cost of exposing valuable personal data,
and many users are unaware of this fact. Blockchain has revived the vision of
decentralization across the world, and now concerted efforts are being made to
harness this technology and take advantage of the benefits that it can provide.
Computing power and decentralization
• Decentralization of computing or processing power is achieved by a
blockchain technology such as Ethereum, where smart contracts with
embedded business logic can run on the blockchain network. Other
blockchain technologies also provide similar processing-layer
platforms, where business logic can run over the network in a
decentralized manner.
• The following diagram shows an overview of a decentralized
ecosystem. In the bottom layer, the Internet or mesh networks
provide a decentralized communication layer.
• In the next layer up, a storage layer uses technologies such as IPFS and
BigChainDB to enable decentralization.
• Finally, in the next level up, you can see that the blockchain serves as a
decentralized processing (computation) layer.
• Blockchain can, in a limited way, provide a storage layer too, but that severely
hampers the speed and capacity of the system. Therefore, other solutions
such as IPFS and BigChainDB are more suitable for storing large amounts of
data in a decentralized way.
• The Identity and Wealth layers are shown at the top level. Identity on the
Internet is a vast topic, and systems such as bitAuth and OpenID provide
authentication and identification services with varying degrees of
decentralization and security assumptions.
Computing power and decentralization