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UNIT 1 – INTRODUCTION
What is Centralization?
Centralization is an organizational structure that gives the ability of decision-making
responsibilities to higher management. Few selected members are given the authority to
create and determine strategies and goals. It also clarifies the motives and mission of the
organization, which must follow to achieve its goals.

In centralization, the type of organizational structure allows higher management to create the
rules including procedures that are used to communicate with lower-level employees. Lower-
level employees have to obey the rules made by the higher management organization without
doubting the rules and regulations.

What is Decentralization?
Decentralization is an organizational structure where the delegates are assigned to manage the
organization. They are selected by the higher authorities. The selected candidates are mostly
their middle and lower subordinates.

The decentralization type of management helps to organize daily duties. They also take part
in minor decision-making. A lot of responsibilities are given to the middle and lower levels
subordinates.

Because of the well-distributed job roles, the higher management authorities get a chance to
focus more on major business decisions.

DECENTRALIZED LEDGER SYSTEM:- A decentralized ledger is a record of all

transactions on a network. This ledger is maintained and updated by many independent
nodes, who collaborate based on a ruleset established by the protocol. Bitcoin uses a
blockchain and a Proof-of-Work mechanism to organize the network and maintain its
decentralized ledger.

Traditional banks use centralized ledgers to track balances. Each bank branch periodically
updates this central ledger, but this ledger is neither public nor auditable. The Bitcoin
protocol changes this paradigm by allowing anyone to read and write directly to the ledger.
Anyone is capable of publishing a Bitcoin transaction. Miners will add that transaction to the
blockchain, and anyone can query the blockchain to check their balances and transaction
history.
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A decentralized ledger system is a type of database that is distributed across a network of

computers rather than being owned and managed by a central authority. This type of system
is often referred to as a blockchain, which is a specific type of decentralized ledger.

Decentralized ledger systems use cryptographic algorithms to ensure the integrity and
security of transactions and data. Each block in the blockchain contains a timestamp, a hash
of the previous block, and a set of transactions. Once a block is added to the blockchain, it
cannot be modified without altering the hash of every subsequent block, making it virtually
tamper-proof.

Decentralized ledger systems offer several advantages over centralized systems. They can
provide greater security, as there is no single point of failure or attack. They can also increase
transparency and accountability by allowing all participants to see the same information at
the same time. Additionally, they can reduce costs by eliminating the need for intermediaries
or third-party authorities.

NEED OF DECENTRALIZED LEDGER SYSTEM

There are several needs for decentralized ledger systems, including:

1. Trust: Decentralized ledger systems allow for transactions to be verified and processed in
a trustless environment, meaning that participants do not need to trust one another to transact
securely.

2. Security: Decentralized ledger systems are designed to be secure and resistant to

tampering, making them ideal for applications that require high levels of security and
integrity.

3. Transparency: Decentralized ledger systems are transparent by design, allowing all

participants to see the same information at the same time, which can increase trust and
accountability.
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4. Efficiency: Decentralized ledger systems can be more efficient than traditional systems
because they eliminate the need for intermediaries and reduce the time and cost required to
process transactions.

5. Accessibility: Decentralized ledger systems can provide access to financial services and
other applications to individuals who may not have access to traditional financial systems,
such as those in developing countries.

6. Innovation: Decentralized ledger systems have the potential to enable new applications
and business models that were not previously possible, such as decentralized finance (DeFi)
and peer-to-peer marketplaces.

ADVANTAGES OF CENTRALIZED TRUSTED SYSTEMS

1. Control: A centralized trusted system is owned and controlled by a single entity, allowing
for a high degree of control and management over the system.

2. Efficiency: Centralized systems can be more efficient than decentralized systems because
they have fewer intermediaries and can be designed for a specific purpose.

3. Familiarity: Centralized systems are familiar to most people, making them easier to use
and understand.

4. Standards: Centralized systems can be designed to meet specific standards, ensuring

consistency and interoperability.

5. Security: Centralized systems can have robust security measures in place to protect against
unauthorized access and data breaches.

DISADVANTAGES OF CENTRALIZED TRUSTED SYSTEMS

1. Single Point of Failure: A centralized system has a single point of failure, meaning that if
the system goes down, the entire system is affected.

2. Cost: Centralized systems can be expensive to set up and maintain, as they require a
significant investment in infrastructure and personnel.

3. Vulnerability: Centralized systems are vulnerable to cyber attacks, data breaches, and
other forms of malicious activity.

4. Lack of Transparency: Centralized systems can lack transparency, making it difficult to

see how the system is being managed and how data is being used.

5. Control: Centralized systems can be subject to abuse by those who control them, as they
have significant power over the system.
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SECURITY ISSUES OF A DECENTRALIZED SYSTEM

Decentralized systems face a range of security issues, including:

1. 51% attacks: In a decentralized system that relies on a blockchain, a 51% attack occurs
when a single entity or group of entities control more than 51% of the network's computing
power. This can allow them to manipulate transactions and potentially double-spend
cryptocurrency.

2. Smart contract vulnerabilities: Smart contracts are used to automate transactions and
enforce rules in decentralized systems, but they can contain vulnerabilities that allow
attackers to exploit the system. These vulnerabilities can include coding errors, logical flaws,
and other issues.

3. Malware and phishing attacks: Decentralized systems can be vulnerable to malware and
phishing attacks, which can trick users into giving away their private keys or other sensitive
information. Once an attacker has access to a user's private key, they can access the user's
account and steal their cryptocurrency.

4. Forks: In a decentralized system that uses a blockchain, a fork occurs when a group of
users splits off from the main network and creates a new blockchain. This can happen for
various reasons, such as a disagreement over the network's rules or a security breach. Forks
can cause confusion and potentially harm the value of the cryptocurrency.

5. Social engineering attacks: Decentralized systems can be vulnerable to social engineering

attacks, which rely on manipulating human behavior to gain access to sensitive information.
These attacks can include phishing emails, fake social media accounts, and other tactics.

INTEGRITY ISSUES OF A DECENTRALIZED SYSTEM

Integrity issues can arise in decentralized systems due to several factors, such as:

1. Data tampering: Decentralized systems rely on a distributed ledger, which makes it

difficult to tamper with data once it has been recorded on the blockchain. However, if an
attacker gains control of a majority of nodes, they could potentially manipulate the data and
undermine the integrity of the system.

2. Consensus mechanism vulnerabilities: Consensus mechanisms, such as proof-of-work or

proof-of-stake, are used to ensure that transactions are verified and added to the blockchain in
a secure and trustworthy manner. However, these mechanisms can be vulnerable to attacks,
such as double-spending or manipulation.

3. Governance issues: Decentralized systems often rely on a governance model that allows
users to vote on changes to the network. However, this model can be vulnerable to
manipulation, centralization, and collusion.
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4. Smart contract vulnerabilities: Smart contracts are used to enforce rules and automate
transactions in decentralized systems. However, these contracts can contain vulnerabilities
that can be exploited by attackers, leading to the loss of funds or other negative outcomes.

5. Code vulnerabilities: The code that powers decentralized systems can contain
vulnerabilities that can be exploited by attackers. These vulnerabilities can include coding
errors, logical flaws, or other issues.

Overall, ensuring the integrity of a decentralized system requires a comprehensive approach

that includes secure coding practices, network monitoring, user education, and ongoing
maintenance and updates to address emerging threats. Additionally, governance and
consensus mechanisms must be designed in a way that ensures decentralization and prevents
manipulation or centralization of power.

PRIVACY ISSUES OF A DECENTRALIZED System

Privacy is a critical concern in decentralized systems, particularly for transactions involving
sensitive information or personal data. Some privacy issues that can arise in decentralized
systems include:

1. Public ledger: Decentralized systems often rely on a public ledger, such as a blockchain,
to record transactions. While this provides transparency and immutability, it can also expose
personal information and transaction details to anyone with access to the ledger.

2. Pseudonymity: While decentralized systems often offer some level of anonymity or

pseudonymity, it is not always enough to protect user privacy. In some cases, users' identities
can be revealed through analysis of transaction data or by correlating multiple transactions.

3. Malicious actors: Decentralized systems can be vulnerable to malicious actors who use
various tactics to exploit vulnerabilities and steal data or funds. These actors can include
hackers, scammers, and other criminals who seek to profit from the system's weaknesses.

4. Smart contract vulnerabilities: Smart contracts are a critical component of many

decentralized systems, but they can contain vulnerabilities that can be exploited to gain
access to user data or funds. For example, a smart contract could contain a coding error that
allows an attacker to siphon off funds or steal user data.

5. Network surveillance: Decentralized systems can be vulnerable to network surveillance,

particularly if they rely on unencrypted communications or if users connect to the network
through insecure channels.

Overall, ensuring privacy in decentralized systems requires a comprehensive approach that

includes encryption, pseudonymity, secure coding practices, network monitoring, and user
education. Additionally, privacy regulations and standards must be considered and integrated
into the system's design and implementation to protect users' sensitive information and data.
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MAIN BARRIERS TO BLOCKCHAIN ADOPTION

There are several barriers to widespread adoption of blockchain technology, including:

1. Scalability: One of the primary barriers to blockchain adoption is scalability. Blockchain

networks, particularly those that rely on a proof-of-work consensus mechanism, can be slow
and inefficient, which can limit their ability to handle large volumes of transactions.

2. Interoperability: Another barrier to blockchain adoption is interoperability. Many

blockchain networks are isolated from each other, which makes it difficult for them to
communicate and share data. This can limit the potential benefits of blockchain technology
and make it more difficult for organizations to adopt it.

3. Regulation: Blockchain technology is still largely unregulated, which can create

uncertainty and hesitation among potential adopters. Regulatory hurdles, such as the need for
licenses or compliance with anti-money laundering (AML) and know-your-customer (KYC)
regulations, can also make it more difficult for organizations to adopt blockchain technology.

4. Complexity: Blockchain technology can be complex and difficult to understand, which

can deter potential adopters who may not have the technical expertise or resources to
implement it.

5. Cost: Implementing and maintaining a blockchain network can be costly, particularly for
smaller organizations. This can limit the adoption of blockchain technology and make it more
difficult for it to become widely adopted.

6. Security: While blockchain technology offers many security benefits, it is not immune to
attacks or vulnerabilities. The risk of security breaches can make it more difficult for
organizations to adopt blockchain technology.

7. Technical complexity:- One of the main barriers to blockchain adoption is the technical
complexity of the technology itself. Blockchain involves complex concepts such as
cryptography, consensus algorithms, smart contracts, and distributed ledger. These concepts
require a high level of technical expertise and skills to understand, implement, and maintain.
Moreover, blockchain technology is still evolving and developing, which means that there are
no standardized protocols, frameworks, or best practices for blockchain development and
integration.

8. Organizational resistance:- A third barrier to blockchain adoption is the organizational

resistance that may arise from the existing stakeholders and processes. Blockchain
technology requires a paradigm shift in the way organizations operate and collaborate. It
challenges the traditional roles and functions of intermediaries, central authorities, and legacy
systems. It also requires a high level of trust and cooperation among the participants of the
blockchain network. Therefore, blockchain adoption may encounter resistance from those
who are reluctant to change, lose control, or share information. This may result in cultural,
political, or operational conflicts within or between organizations.
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9. Business value:- A fourth barrier to blockchain adoption is the difficulty of demonstrating

and measuring the business value of the technology. Blockchain technology is often hyped as
a disruptive and innovative solution for various problems and opportunities. However, not all
use cases and scenarios require or benefit from blockchain technology. Some may be better
served by existing or alternative technologies. Therefore, blockchain projects need to have a
clear and realistic vision, strategy, and roadmap for how blockchain technology can create
value for the organization and its customers.

10. Skills gap:- A fifth barrier to blockchain adoption is the skills gap that exists in the
market. Blockchain technology requires a diverse and multidisciplinary set of skills and
competencies, such as technical, business, legal, and social skills. However, there is a
shortage of qualified and experienced professionals who can design, develop, and deploy
blockchain solutions. According to a report by LinkedIn, blockchain was the most in-demand
skill in 2020, but there were not enough candidates to meet the demand. This creates a
challenge for organizations to find, attract, and retain talent for their blockchain projects.

11. User adoption:- A sixth barrier to blockchain adoption is the user adoption that depends
on the awareness, understanding, and acceptance of the technology by the end-users.
Blockchain technology is still relatively new and unfamiliar to many people, who may not
fully grasp its benefits, risks, and implications. Moreover, some users may have concerns or
misconceptions about blockchain technology, such as its complexity, security, privacy, or
legality. Therefore, blockchain projects need to educate and engage their users and
stakeholders, and provide them with a user-friendly and intuitive interface and experience.

USE OF BLOCKCHAIN TECHNOLOGY

Blockchain technology enables a decentralized peer-to-peer network for organizations or
apps like Airbnb and Uber. It allows people to pay for things like toll fees, parking, etc.
Blockchain technology can be used as a secure platform for the healthcare industry for the
purposes of storing sensitive patient data.

Blockchain technology has many potential uses across various industries, some of which
include:

1. Cryptocurrencies and digital assets: The most well-known use case for blockchain
technology is cryptocurrencies, such as Bitcoin and Ethereum, which allow for secure,
decentralized, and transparent transactions without the need for intermediaries.

2. Supply chain management: Blockchain technology can be used to improve supply chain
transparency and traceability by creating a decentralized and immutable record of all
transactions and events in the supply chain.

3. Identity verification: Blockchain technology can be used to securely store and verify
identities, which could potentially reduce identity theft and fraud.
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4. Voting systems: Blockchain technology can be used to create secure and transparent
voting systems that are resistant to fraud and manipulation.

5. Smart contracts: Blockchain technology can be used to create and enforce programmable
contracts that automatically execute when certain conditions are met, which can reduce the
need for intermediaries and increase efficiency.

6. Healthcare: Blockchain technology can be used to securely store and share patient data,
improving the efficiency and accuracy of healthcare processes.

7. Gaming and virtual worlds: Blockchain technology can be used to create decentralized
gaming and virtual worlds that allow for secure ownership and exchange of virtual assets.
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UNIT 2 - Technological and Cryptographic Elements in Blockchain

PRIVATE KEY
In the Private key, the same key (secret key) is used for encryption and decryption. In this
key is symmetric because the only key is copied or shared by another party to decrypt the
cipher text. It is faster than public-key cryptography.

In blockchain, a public key is used as an address to receive cryptocurrency or digital assets. It

is derived from a user's public key cryptography and is generated by applying a hashing
algorithm to the user's public key.

When a user wants to receive cryptocurrency or digital assets, they share their public key
(which is also their blockchain address) with the sender. The sender uses this address to send
the cryptocurrency or digital asset to the user's wallet, which is secured by the corresponding
private key.

When a transaction is broadcast to the blockchain network, the public key is used to verify
the transaction and to ensure that the sender has the necessary funds to complete the
transaction. The transaction details are encrypted using the sender's private key, which
ensures that only the intended recipient can access the funds.

PUBLIC KEY
In a Public key, two keys are used one key is used for encryption and another key is used for
decryption. One key (public key) is used to encrypt the plain text to convert it into cipher text
and another key (private key) is used by the receiver to decrypt the cipher text to read the
message.

In blockchain, a private key is a secret cryptographic key that is used to sign and verify
digital transactions. It is generated alongside a public key in a public key cryptography
system, and together they form a unique key pair.

The private key is a string of alphanumeric characters that is kept secret and known only to
the owner of the cryptocurrency or digital asset. It is used to prove ownership and to
authorize the transfer of funds from one address to another. When a user wants to send
cryptocurrency or digital assets to another user, they sign the transaction using their private
key, which generates a digital signature that is broadcast to the blockchain network.

The private key is crucial for securing a user's digital assets, and it is important to keep it safe
and secure. Losing or sharing the private key can result in the loss of funds, as anyone who
has access to the private key can transfer the associated assets to their own wallet.
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Many blockchain wallets, such as hardware wallets, mobile wallets, and desktop wallets, use
advanced security measures to protect the private keys of their users. These measures can
include encryption, multi-factor authentication, and other security features designed to
prevent unauthorized access to the private key.

DIFFERENCE BETWEEN PRIVATE KEY AND PUBLIC KEY

S.NO Private Key Public Key

1. The private key is faster than the It is slower than a private key.
public key.
2. In this, the same key (secret key) In public-key cryptography, two keys are
and algorithm are used to encrypt used, one key is used for encryption, and the
and decrypt the message. other is used for decryption.
3. In private key cryptography, the key In public-key cryptography, one of the two
is kept a secret. keys is kept a secret.
4. The private key is Symmetrical The public key is Asymmetrical because
because there is only one key that is there are two types of keys: private and
called a secret key. public keys.
5. In this cryptography, the sender and In this cryptography, the sender and receiver
receiver need to share the same key. do not need to share the same key.
6. In this cryptography, the key is In this cryptography, the public key can be
private. public and a private key is private.
7. It is an efficient technology. It is an inefficient technology.
8. It is used for large amounts of text. It is used for only short messages.
9. There is the possibility of losing the There is less possibility of key loss, as the
key that renders the systems void. key is held publicly.
10. The private key is to be shared The public key can be used by anyone.
between two parties.
11. The Performance testing checks the The Load testing checks the sustainability of
reliability, scalability, and speed of the system.
the system.
12. The private key is used in algorithms The public key is used in algorithms such as
such as AES 128, AES 192 and AES RSA, DSA, etc.
256.
13. The private key is kept secret. The public key is widely distributed.
14. It is used to protect disk drives and It is used to secure web sessions and emails.
other data storage devices.
15. The recipient‘s private key decrypts The recipient‘s public key encrypts the
the message. message.
16. If the private key is the locking key, If the public key is the locking key, then it
then the system can be used to verify can be used to send private communication.
documents sent by the holder of the
private key.
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DIGITAL SIGNATURE
Digital Signing in Blockchain is a process to verify the user‘s impressions of the transaction.
It uses the private key to sign the digital transaction, and its corresponding public key will
help to authorize the sender. However, in this way, anyone with the sender‘s public key can
easily decrypt the document.

In blockchain, a digital signature is a cryptographic technique used to verify the authenticity

and integrity of digital transactions. It is created using the sender's private key and is used to
prove that the transaction was created and authorized by the sender.

When a user sends a transaction in blockchain, they create a digital signature by applying a
mathematical function to the transaction data using their private key. The resulting signature
is then broadcast to the network along with the transaction data.

Once the signature is received, the blockchain network uses the sender's public key to decrypt
the signature and verify its authenticity. If the signature is valid, the transaction is added to
the blockchain and becomes a part of the permanent ledger. If the signature is invalid, the
transaction is rejected and not added to the blockchain.

The use of digital signatures in blockchain technology provides a high degree of security and
tamper resistance. Since each signature is unique and based on the sender's private key, it is
virtually impossible to forge or tamper with a digital signature without access to the sender's
private key.
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HASH VALUE IN BLOCK CHAIN

A hash value is a numeric value of a fixed length that uniquely identifies data. Hash values
represent large amounts of data as much smaller numeric values, so they are used with digital
signatures. You can sign a hash value more efficiently than signing the larger value.

A hash function takes an input string (numbers, alphabets, media files) of any length and
transforms it into a fixed length. The fixed bit length can vary (like 32-bit or 64-bit or 128-bit
or 256-bit) depending on the hash function which is being used. The fixed-length output is
called a hash. This hash is also the cryptographic byproduct of a hash algorithm. We can
understand it from the following diagram.

In blockchain, a hash value is a fixed-length string of characters that is generated using a

cryptographic hash function. The hash function takes an input data of any length and
generates a fixed-size output that is unique to the input data.

In the context of blockchain, hash values are used to represent blocks of transaction data.
Each block in the blockchain network contains a hash value that is generated by applying a
cryptographic hash function to the block's transaction data. The hash value is unique to the
block's transaction data, and any change to the data will result in a different hash value.

Hash values are important for ensuring the security and immutability of the blockchain
network. Since each block's hash value is based on the transaction data of the previous block,
any attempt to alter a block's data will result in a mismatch between the block's hash value
and the hash value stored in the subsequent block. This makes it extremely difficult to alter or
tamper with data on the blockchain without being detected.

Hash values are also used to verify the authenticity of digital assets and to provide a secure
way to store passwords and other sensitive information. By applying a hash function to
sensitive information, the original data is transformed into a unique hash value that can be
stored securely without revealing the original data.
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The hash algorithm has certain unique properties:

 It produces a unique output (or hash).

 It is a one-way function.

SHA-256
A Bitcoin's blockchain uses SHA-256 (Secure Hash Algorithm) hashing algorithm. In 2001,
SHA-256 Hashing algorithm was developed by the National Security Agency (NSA) in the
USA.

TRANSACTIONS, MODIFY TRANSACTIONS, MAINTAIN

TRANSACTIONS IN BLOCK CHAIN
In a blockchain network, transactions are recorded in blocks and added to the chain in a
chronological order. Each block contains a set of transactions that have been validated and
confirmed by the network participants through a consensus mechanism. Once a block has
been added to the chain, the transactions within it are considered to be immutable and cannot
be easily modified or deleted.

Modifying transactions on a blockchain network is a challenging process due to the

decentralized and immutable nature of the technology. Once a transaction has been recorded
on the blockchain, it is cryptographically secured and linked to the previous block in the
chain. To modify a transaction, a user would need to have control over more than 50% of the
computing power on the network, which is highly unlikely in a well-designed blockchain
network. In addition, modifying a transaction would require changing the hash value of the
block containing the transaction, which would invalidate the entire chain after that point.

To maintain transactions on a blockchain network, nodes on the network must continuously

validate and process new transactions. This requires a significant amount of computing power
and energy, particularly for larger networks. Nodes that participate in the network are
incentivized through transaction fees and rewards in the form of cryptocurrency. By
processing transactions and adding them to the blockchain, nodes help to maintain the
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accuracy and integrity of the network. If a node is found to be acting maliciously or

attempting to manipulate the network, it can be penalized or removed from the network.
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UNIT 3 - CLASSIFICATION OF BLOCKCHAIN PLATFORMS

TRUSTLESSNESS AND IMMUTABILITY OF BLOCKCHAIN TECHNOLOGY

Trustlessness and immutability are two key features of blockchain technology that make it
unique and valuable for a wide range of use cases.

Trustlessness refers to the fact that blockchain technology enables secure transactions to take
place without the need for intermediaries or trusted third parties. This is made possible
through the use of a distributed ledger that is maintained by a decentralized network of nodes.
Each transaction is verified and validated by the network, and once it is confirmed, it is
recorded on the blockchain and becomes a permanent part of the ledger. This eliminates the
need for traditional intermediaries such as banks, brokers, or other financial institutions to
facilitate transactions, reducing costs and increasing efficiency.

Immutability — the ability for a blockchain ledger to remain a permanent, indelible, and
unalterable history of transactions — is a definitive feature that blockchain evangelists
highlight as a key benefit. Immutability has the potential to transform the auditing process
into a quick, efficient, and cost-effective procedure, and bring more trust and integrity to the
data businesses use and share every day.

Immutability refers to the fact that once a transaction has been recorded on the blockchain, it
cannot be easily modified or deleted. This is made possible through the use of complex
cryptographic algorithms that secure the data on the blockchain and link each block to the
one before it, creating a chain of blocks that is tamper-proof. As a result, the integrity and
accuracy of the data on the blockchain is maintained, and there is no need for centralized
authorities to manage or oversee the process.

The combination of trustlessness and immutability in blockchain technology makes it a

powerful tool for a wide range of use cases, including financial transactions, supply chain
management, voting systems, and more. By removing the need for intermediaries and
providing a secure, immutable ledger, blockchain technology has the potential to
revolutionize the way that we exchange value and information.

Cryptography + Blockchain Hashing Process = Immutability

Benefits of immutability
1. Complete Data Integrity — Ledgers that deploy blockchain technology can guarantee the
full history and data trail of an application: once a transaction joins the blockchain, it stays
there as a representation of the ledger up to that point in time. The integrity of the chain can
be validated at any time by simply re-calculating the block hashes — if a discrepancy exists
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between block data and its corresponding hash, that means the transactions are not valid. This
allows organizations and its industry regulators to quickly detect data tinkering.

2. Simplified Auditing — Being able to produce the complete, indisputable history of a

transactional ledger allows for an easy and efficient auditing process. Proving that data has
not been tampered with is a major benefit for companies that need to comply with industry
regulations. Some common use cases include supply chain management, finance (for
example, Sarbanes-Oxley disclosures), and identity management.

3. Increase in efficiencies — Maintaining a full historical record is not only a boon to

auditing, but also provides new opportunities in query, analytics, and overall business
processes. FlureeDB, for instance, takes advantage of the concept of time travel for business
applications — where queries can be specified as of any block — or point in time — and
reproduce that time‘s version of the database, immediately.

This capability allows for a host of time and cost savings — including tracking the
provenance of major bugs, auditing specific application data, backup and restoring database
state changes to retrieve information. Immutability can make the most modern-day data
problems that plague enterprise applications irrelevant.

4. Proof of Fault — Disputes over fault in business are all-too-common. The construction
industry accounts for $1 Trillion dollars in losses as a result of unresolved disputes. While
blockchain won‘t wholly dissolve this massive category of legal proceedings, it could be
leveraged to prevent a majority of disputes related to data provenance and integrity
(essentially proving who did what and at what time).

PROOF OF WORK
Proof of Work (PoW) is a consensus mechanism used in blockchain networks to validate
transactions and secure the network. In a PoW system, miners compete to solve complex
mathematical problems to add a new block to the blockchain. The miner who solves the
problem first and finds the solution adds the new block to the blockchain and receives a
reward in the form of cryptocurrency.

The mining process requires a significant amount of computing power, as miners must use
their hardware to solve the mathematical problem, which involves guessing a random number
until the correct answer is found. This process is computationally intensive, which makes it
difficult for a single miner to dominate the network or manipulate the blockchain. This is
because the probability of solving the mathematical problem is proportional to the amount of
computing power a miner contributes to the network.

PoW is used in the Bitcoin network and other blockchain networks that require a high level of
security and trust. One of the advantages of PoW is that it is a proven and well-established
consensus mechanism that has been used successfully in Bitcoin for over a decade. However,
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the high energy consumption associated with PoW has been criticized for being
environmentally unsustainable and for contributing to climate change.

 Proof of work (PoW) is a decentralized consensus mechanism that requires network

members to expend effort in solving an encrypted hexadecimal number.
 Proof of work is also called mining, in reference to receiving a reward for work done.
 Proof of work allows for secure peer-to-peer transaction processing without needing a
trusted third party.
 Proof of work at scale requires vast amounts of energy, which only increases as more
miners join the network.

PROOF OF STAKE
Proof of Stake (PoS) is a consensus mechanism used in blockchain networks to validate
transactions and secure the network. In a PoS system, instead of miners competing to solve
complex mathematical problems, validators are selected to add new blocks to the blockchain
based on their stake in the network.

Validators are required to put up a certain amount of cryptocurrency as a stake to participate

in the network. The amount of cryptocurrency a validator can stake is proportional to their
ability to add new blocks to the blockchain. Validators are selected to add new blocks to the
blockchain based on their stake, and they receive rewards in the form of transaction fees and
newly minted cryptocurrency.

PoS is considered to be a more energy-efficient consensus mechanism compared to Proof of

Work (PoW), which requires a significant amount of computing power. This is because PoS
does not require miners to compete to solve complex mathematical problems, which results in
a lower energy consumption.

Another advantage of PoS is that it reduces the risk of centralization in the network, as it is
more difficult for a single entity to accumulate a large amount of cryptocurrency and
dominate the network. However, there are some challenges associated with PoS, such as the
potential for a "nothing at stake" problem, where validators may have no disincentive to
participate in multiple forks of the blockchain.

PoS is used in a number of blockchain networks, including Ethereum, Cardano, and Binance
Smart Chain. It is considered to be a promising alternative to PoW and is being actively
researched and developed in the blockchain industry.

 With proof-of-stake (POS), cryptocurrency owners validate block transactions based

on the number of staked coins.
 Proof-of-stake (POS) was created as an alternative to Proof-of-work (POW), the
original consensus mechanism used to validate a blockchain and add new blocks.
 18

 While PoW mechanisms require miners to solve cryptographic puzzles, PoS

mechanisms require validators to hold and stake tokens for the privilege of earning
transaction fees.
 Proof-of-stake (POS) is seen as less risky regarding the potential for an attack on the
network, as it structures compensation in a way that makes an attack less
advantageous.
 The next block writer on the blockchain is selected at random, with higher odds being
assigned to nodes with larger stake positions.

Proof-of-stake reduces the amount of computational work needed to verify blocks and
transactions. Under proof-of-work, it kept blockchain secure. Proof-of-stake changes the way
blocks are verified using the machines of coin owners, so there doesn't need to be as much
computational work done. The owners offer their coins as collateral—staking—for the
chance to validate blocks and then become validators.

S.No. Proof of Work (PoW) Proof of Stake (PoS)

1. The probability of mining a block The probability of validating a new block is
is determined by how much determined by how large of a stake a person
computational work is done by holds (how many coins they possess).
miner.
2. A reward is given to first miner to The validator donot receive a block reward
solve cryptographic puzzle of instead they collect network fee as their reward.
each block.
3. To add each block to chain, There is no competition as block creator is
miners must compete to solve .chosen by an algorithm based on user stake.
difficult puzzles using their
computer process power
4. Hackers would need to have 51% Hackers would need to own 51% of all
of computation power to add cryptocurrency on network, which is practically
malicious block. impossible.
5. Proof of work systems are less Proof of Stake systems are much more cost and
energy efficient and are less energy efficient than POW systems but less
costly but more proven. proven.
6. Specialized equipment to Standard server grade unit is more than enough.
optimize processing power.
7. Initial investment to buy Initial investment to buy stake and build
hardware. reputation.
8. Bitcoin is most well known crypto Some of cryptocurrencies that use different
with a Proof-of-Work consensus variants of proof-of-stake consensus are: EOS
building algorithm which uses (EOS), Tezos (XTZ), Cardano (ADA), Cosmos
most well known proof-of-work (ATOM), Lisk (LSK).
function is called SHA256.
 19

TOKEN
In blockchain technology, tokens are digital assets that are created and managed on a
blockchain network. They can represent any type of asset or value, such as currency, stocks,
property rights, or even loyalty points. Tokens are used to enable peer-to-peer transactions on
a blockchain, and can be exchanged for other tokens or for fiat currency. A crypto token is a
representation of an asset or interest that has been tokenized on an existing cryptocurrency's
blockchain.

TOKENIZING SHARES
Tokenizing shares refers to the process of creating digital tokens that represent shares in a
company. Tokenized shares can be bought, sold, and traded on a blockchain network, just
like traditional shares in a company. Tokenization provides several benefits, including
increased liquidity, reduced transaction costs, and faster settlement times.
 20

Tokenized shares are often issued using smart contracts, which are self-executing contracts
that are encoded on a blockchain. Smart contracts can be programmed to automatically
execute specific actions when certain conditions are met, such as transferring ownership of a
tokenized share when payment is received.

Tokenization is an important development in blockchain technology, as it has the potential to

revolutionize the way that assets are bought, sold, and traded. By enabling the fractional
ownership of assets, tokenization can make it easier for individuals and organizations to
invest in a wider range of assets, and can provide greater liquidity and transparency to the
market.

Based on the shares that the custodian holds in reserve, tokens are issued on a blockchain.
The price of each token is pegged to the value of the shares.

The tokens can then be listed on a cryptocurrency exchange where they can be bought and
traded like any other cryptocurrency. Those who hold a stock token gain exposure to the
underlying stock pretty much as if they owned it, including dividend payouts where
applicable. However, they don‘t actually own shares. They own a derivative that is backed by
actual shares.

FUND RAISING
Blockchain technology has provided a new way of fundraising for businesses and startups
called Initial Coin Offerings (ICOs). An ICO is a type of crowdfunding campaign in which a
company creates and issues digital tokens or coins to the public in exchange for investment
funds.

ICOs offer several advantages over traditional fundraising methods, including:

1. Global Reach: With blockchain technology, businesses can access a global pool of
investors without having to go through traditional intermediaries.

2. Transparency: ICOs are transparent and publicly available on the blockchain, which
provides greater transparency and accountability to investors.

3. Lower Fees: ICOs generally have lower fees compared to traditional fundraising methods,
which can help businesses to save costs.

4. Fast and Efficient: The entire ICO process can be completed in a matter of weeks,
compared to months or even years for traditional fundraising methods.

However, ICOs are not without risks. One of the main risks associated with ICOs is the lack
of regulation, which makes it difficult for investors to protect themselves against fraud or
 21

scams. Additionally, there is no guarantee that the tokens issued during an ICO will hold their
value, which can result in losses for investors.

Initial exchange offering

An IEO is like an ICO, except the entire issuance occurs via selected cryptocurrency
exchanges. The project owner receives peace of mind because they know their token will be
available to any investor with access to the exchange. If an exchange is reputable and well-
established, exchange backings can give investors reassurance that their funds are protected.

The tradeoff is the high cost of having the exchange manage the coins directly. This includes
paying a listing fee for the token, as well as giving up a percentage of the token sales. In
essence, the exchange is loaning out its reputation to the project for financial gain.

This situation differs from when a cryptocurrency exchange chooses to list a project's token.
Based on the exchange's own conditions, an exchange might list a token once it
independently deems the project worth listing.

Security token offering

The less popular security token offering is a more cautionary approach to crypto fundraising.
As the name already implies, this approach already recognizes the token as a security. This
means that they comply with security regulations as necessary.

Regulations may include Know Your Customer (KYC) and Anti-Money Laundering (AML)
requirements. KYC and AML policies ensure that financial services recognize and minimize
risks in accordance with government regulations.
 22

Initial DEX offering

A DEX is a decentralized exchange. DEXs work as automated market makers. They rely on
smart contracts to execute fund transfers, thereby eliminating the need for a third party. KYC
and AML compliance are also not required. This may subject them to stringent regulations
later on when the hammer drops, though. Instead of personal identification, all anyone needs
to participate is a digital wallet address to receive the coin in question.

HYPERLEDGER
Hyperledger is an open source project created to support the development of blockchain-
based distributed ledgers. Hyperledger consists of a collaborative effort to create the needed
frameworks, standards, tools and libraries to build blockchains and related applications.

Hyperledger is an open-source collaborative effort created to advance cross-industry

blockchain technologies. It is a global collaboration of developers and enterprises that aim to
create an ecosystem of blockchain-based solutions for various industries, including finance,
healthcare, supply chain, and more.

Hyperledger offers several blockchain frameworks, tools, and libraries, including:

1. Hyperledger Fabric: a permissioned blockchain framework that allows for the creation of
smart contracts, asset issuance, and transactions.

2. Hyperledger Sawtooth: a modular and scalable blockchain platform that allows for easy
deployment and management of distributed ledgers.

3. Hyperledger Indy: a decentralized identity management platform that allows individuals

to own and control their identities.

4. Hyperledger Burrow: a permissioned Ethereum virtual machine that allows for smart
contract execution.

Hyperledger also offers various tools and resources, including development environments,
documentation, and support services, to help developers and enterprises build, deploy, and
manage blockchain solutions.

One of the key benefits of Hyperledger is that it provides a common platform for businesses
and developers to collaborate and build blockchain-based solutions. Hyperledger also offers a
level of trust and security that is important for enterprise use cases, and its modular design
allows for flexibility and scalability.
 23

UNIT 4 - RISKS AND LIMITATIONS OF BLOCKCHAIN

RANSOMWARE
Ransomware attacks involve the encryption of a victim's files or data by a cybercriminal, who
then demands a ransom payment in exchange for the decryption key. Blockchain technology
has been used by attackers to facilitate ransomware attacks in several ways.

One method involves the use of cryptocurrencies, which are based on blockchain technology,
as a means of payment for the ransom. Since cryptocurrency transactions are anonymous and
irreversible, it can be difficult for law enforcement agencies to track and trace the attackers.

Another method involves the use of blockchain-based ransomware. This type of ransomware
is designed to encrypt a victim's data and demand payment in cryptocurrency, with the
promise of providing the decryption key once the payment is received. The attacker may also
threaten to publish the victim's data publicly if the ransom is not paid.

To combat the use of blockchain technology in ransomware attacks, companies and

organizations can implement various security measures, including regular data backups,
antivirus software, and employee education on cybersecurity best practices. Additionally,
regulatory bodies and law enforcement agencies are increasingly taking steps to regulate
cryptocurrencies and blockchain technology to prevent their use for illegal activities.

 Crypto-ransomware is a type of harmful program that encrypts files stored on a

computer or mobile device in order to extort money.
 Encryption 'scrambles' the contents of a file, so that it is unreadable. To restore it for
normal use, a decryption key is needed to 'unscramble' the file.
 Crypto-ransomware essentially takes the files hostage, demanding a ransom in
exchange for the decryption key needed to restore the files.

How To Prevent From Ransomware In Blockchain

Preventing ransomware attacks in blockchain involves implementing a combination of
technical and non-technical measures. Here are some ways to prevent ransomware attacks in
blockchain:

1. Keep your software updated: Regularly update your blockchain software to ensure that it
is equipped with the latest security patches and features.

2. Use strong passwords: Use strong and unique passwords for your blockchain accounts
and change them regularly.

3. Backup your data: Regularly back up your blockchain data to an external hard drive or
cloud storage. This will help you restore your data in case of a ransomware attack.
 24

4. Use antivirus software: Use reputable antivirus software to protect your system from
malware and viruses.

5. Educate employees: Educate employees on how to identify and avoid phishing attacks
and other cybersecurity threats. This includes not opening suspicious emails, links or
attachments, and not downloading software or applications from untrusted sources.

6. Implement access controls: Implement access controls to limit access to sensitive

blockchain data to only authorized personnel.

7. Have a response plan: Have a ransomware response plan in place, including steps to take
if an attack occurs. This plan should include steps for isolating and containing the affected
systems, notifying stakeholders, and restoring data from backups.

MONEY LAUNDERING IN BLOCKCHAIN

According to blockchain analytics firm Chainalysis, Criminals laundered $2.8bn in 2019 in
Bitcoin to exchanges.

Money laundering is the process of disguising the proceeds of illegal activity as legitimate
funds. Blockchain technology has been touted as a potential solution for reducing money
laundering due to its transparency and immutability. However, it is important to note that
blockchain technology is not inherently immune to money laundering.

One way that money laundering can occur in blockchain is through the use of anonymous
cryptocurrencies. These cryptocurrencies, such as Monero and Zcash, can provide a high
level of privacy and anonymity, making it difficult to trace the flow of funds. Criminals can
use these cryptocurrencies to launder their illicit proceeds by converting them into a more
established cryptocurrency, such as Bitcoin, and then cashing out the Bitcoin through an
exchange.

Another way that money laundering can occur in blockchain is through the use of "mixers" or
"tumblers." These are services that allow users to mix their cryptocurrency transactions with
others in order to obscure the source and destination of the funds. While mixers can be used
for legitimate purposes, they can also be used to launder funds by mixing illicit transactions
with legitimate ones.

Additionally, criminals can use the anonymity of blockchain to create fake identities and shell
companies in order to move illicit funds without detection. They can also use the
decentralized nature of blockchain to set up illegal marketplaces or to facilitate the purchase
and sale of illegal goods and services.

In summary, while blockchain technology has the potential to help combat money laundering,
it is not a silver bullet solution. It is important for governments and regulatory bodies to work
 25

with blockchain companies to develop effective measures to prevent money laundering and
other illicit activities on the blockchain.

 Criminals open online accounts with digital currency exchanges, which accept fiat
currency from traditional bank accounts. Then, they start a ‗cleansing‘ process
(mixing and layering), i.e., moving money into the cryptocurrency system by using
mixers, tumblers, and chain hopping (also called cross-currency). Money is moved
from one cryptocurrency into another, across digital currency exchanges — the less-
regulated the better — to create a money trail that is almost impossible to track.
 According to the ―Cryptocurrency Anti-Money Laundering Report,‖ criminals also
use theft and gambling to launder cryptocurrencies.
 Creation of Dark Web or Dark Market which cause it to exploit users through
hacking.
 With a market capitalization of $350 billion, bitcoin is the largest cryptocurrency in
the world. A distinctive feature of bitcoin is that a record of all transactions is held in
a public ledger maintained simultaneously across thousands of computers. As per
bitcoin proponents, the latter are prone to manipulation or hacking.
 Cryptocurrency does not have any legal tender. So, it cannot be authorized and can be
subscribed by anyone which results in money laundering.
 Since it doesn‘t have regulatory authority, it is easy to trade between countries and
can cause money laundering in disguise of trading.
 Cryptocurrency is highly encrypted and cannot be traced easily.
 Layering: Cryptocurrencies can be purchased with cash (fiat) or other types of crypto
(altcoin). Online cryptocurrency trading markets (exchanges) have varying levels of
 26

compliance with regulations regarding financial transactions. Legitimate exchanges

follow regulatory requirements for identity verification and sourcing of funds and are
Anti-Money Laundering (AML) compliant. Other exchanges are not as AML
compliant. This vulnerability is where most transactions related to bitcoin money
laundering take place.
 Hiding: Crypto-based transactions can generally be followed via the blockchain.
However, once a dirty cryptocurrency is in play, criminals can use an anonymizing
service to hide the funds‘ source, breaking the links between bitcoin transactions. This
can be accomplished both on regular crypto exchanges or by participating in an Initial
Coin Offering (ICO), where using one type of coin to pay for another type, can
obfuscate the digital currency‘s origin.
 Integration: The point at which you can no longer easily trace dirty currency back to
criminal activity is the integration point – the final phase of currency laundering.
Despite the currency no longer being directly tied to crime, money launderers still
need a way to explain how they came into possession of the currency. Integration is
that explanation. A simple method of legitimizing the illicit income is to present it as
the result of a profitable venture or other currency appreciation. This can be very hard
to disprove in a market when the value of any given altcoin can change by the second.
 Tumblers: Mixing services, known as ―tumblers,‖ can effectively split up the dirty
cryptocurrency. Tumblers send it through a series of various addresses, then
recombine it. The reassembly results in a new, ―clean‖ total (less any service fees,
which can often be substantial.
 Unregulated Exchanges: Another avenue through which criminals can undertake
bitcoin money laundering is unregulated cryptocurrency exchanges.
 Peer to Peer: To lower bitcoin money laundering risk, many criminals turn to
decentralized peer-to-peer networks which are frequently international. Here, they can
often use unsuspecting third parties to send funds on their way to the next destination.
 Gaming site: Online gambling and gaming through sites that accept bitcoin or other
cryptocurrencies is another way to conduct a crypto money-laundering scheme.
Crypto can be used to buy credit or virtual chips which users can cash out again after
just a few small transactions.

Solution/Prevention
 Bringing KYC norms into cryptocurrencies.
 Bringing Japan Model where they are provided with licenses and can be easily
traceable.
 Adhering to FATF guidelines regarding cryptocurrency.
 Need to expand capabilities on ways to probe virtual assets and regulate virtual asset
provides to prevent money laundering.
 A multi-disciplinary agency to work with public and private partnership is key
tackling criminal finances.
 27

 Enforcing new technologies in criminal finance networks.

 Enacting Data Protection Laws, hiring ‗‘White Caps‘‘ and enabling web audits of
money transfer by banks.

CYBER CURRENCIES
Cyber currencies, also known as digital currencies or cryptocurrencies, are a type of currency
that is created and managed using cryptographic techniques, and is often built on top of a
blockchain platform. Examples of popular cyber currencies include Bitcoin, Ethereum, and
Litecoin.

A cryptocurrency is a digital currency, which is an alternative form of payment created using

encryption algorithms. The use of encryption technologies means that cryptocurrencies
function both as a currency and as a virtual accounting system.

One of the main advantages of cyber currencies is that they are decentralized, meaning that
they are not controlled by any central authority or government. Transactions are recorded on
a public ledger called a blockchain, which is maintained by a network of users who
collectively validate and verify each transaction.

Cyber currencies have several features that make them attractive to users, including:

1. Anonymity: Transactions are often anonymous, meaning that users can transact without
revealing their true identities.

2. Security: Cryptographic techniques are used to secure transactions and protect the privacy
of users.

3. Transparency: Transactions are publicly visible on the blockchain, making it difficult for
fraudulent transactions to go undetected.

4. Accessibility: Cyber currencies can be used by anyone with an internet connection,

regardless of their location.

However, cyber currencies also have several challenges and risks that need to be addressed,
such as:

1. Volatility: Cyber currencies can be highly volatile, with prices fluctuating rapidly in
response to market conditions.

2. Regulation: There is often a lack of clear regulatory frameworks for cyber currencies,
which can make it difficult for businesses and users to operate legally and safely.

3. Security: Cyber currencies are often the target of hacking and other cyber attacks, which
can result in the loss of funds for users.
 28

UNIT 5 – CRYPTOCURRENCY
CRYPTOCURRENCY INTRODUCTION
 As of March 2023, there are 22,904 cryptocurrencies in existence.
 there are around 20,000 cryptocurrencies available in the Indian crypto market.
 In India 11 cryptocurrency exchanges - CoinDCX, BuyUcoin, CoinSwitch Kuber,
Unocoin, Flitpay, Zeb IT Services Pvt Ltd, Secure Bitcoin Traders Pvt Ltd, Giottus
Technologies, Awlencan Innovations India Pvt Ltd (ZebPay), Zanmai Labs (WazirX),
and Discidium Internet Labs.

A cryptocurrency is a digital currency, which is an alternative form of payment created using

encryption algorithms. The use of encryption technologies means that cryptocurrencies
function both as a currency and as a virtual accounting system. To use cryptocurrencies, you
need a cryptocurrency wallet.

Cryptocurrency is a digital or virtual currency that uses cryptography for security and
operates independently of a central bank. It is based on a decentralized system, meaning that
transactions are recorded on a public ledger called a blockchain that is maintained by a
network of users.

Cryptocurrencies are often created through a process called mining, which involves using
specialized computers to solve complex mathematical problems and verify transactions on
the blockchain. In exchange for their efforts, miners are rewarded with new units of the
cryptocurrency.

The most well-known cryptocurrency is Bitcoin, which was created in 2009. Since then,
thousands of other cryptocurrencies have been created, including Ethereum, Litecoin, and
Ripple.

One of the main advantages of cryptocurrencies is that they allow for peer-to-peer
transactions without the need for a centralized authority, such as a bank or government. This
makes them ideal for people who want to transact with others without having to go through
traditional financial institutions.

Cryptocurrencies are also often associated with increased security and privacy, as
transactions are encrypted and can be difficult to trace. However, this has also led to concerns
around their use for illegal activities, such as money laundering and terrorism financing.

HISTORY
Cryptocurrency is a relatively new phenomenon that emerged in the late 2000s with the
creation of Bitcoin, the world's first decentralized digital currency. However, the concept of
digital currencies can be traced back to the early 1980s, when cryptographer David Chaum
created the first digital cash system called "eCash."
 29

In 2008, an anonymous person or group of people under the pseudonym "Satoshi Nakamoto"
published a whitepaper outlining a new decentralized digital currency called Bitcoin. The
goal was to create a currency that would allow people to make transactions without the need
for a centralized authority, such as a bank or government.

Bitcoin uses a decentralized public ledger called the blockchain to record transactions and
prevent fraud. The blockchain is maintained by a network of users who validate and verify
each transaction, ensuring its authenticity and preventing double-spending.

Bitcoin gained popularity among tech enthusiasts and investors, and its value surged in 2013,
reaching an all-time high of over $1,000. Since then, numerous other cryptocurrencies have
emerged, including Ethereum, Ripple, and Litecoin.

While cryptocurrencies have gained widespread attention and adoption, they have also faced
criticism and regulatory challenges. Concerns around money laundering, terrorist financing,
and market manipulation have led to increased scrutiny and regulation from governments and
financial institutions.

DISTRIBUTED LEDGER
Distributed ledger technology is a platform that uses ledgers stored on separate, connected
devices in a network to ensure data accuracy and security. Blockchains evolved from
distributed ledgers to address growing concerns that too many third parties are involved in
too many transactions.
 30

Distributed ledgers use independent computers (referred to as nodes) to record, share

and synchronize transactions in their respective electronic ledgers (instead of keeping
data centralized as in a traditional ledger).

A distributed ledger is a type of database that is spread across multiple nodes or computers on
a network. Each node on the network has a copy of the database, and any changes to the
database are replicated and synchronized across all nodes in real-time.

One of the most well-known examples of a distributed ledger is the blockchain, which is used
as the underlying technology for cryptocurrencies like Bitcoin and Ethereum. In a blockchain,
each block contains a set of transactions that have been validated by network participants,
and each block is cryptographically linked to the previous block, creating a chain of blocks
that contains a complete history of all transactions on the network.

Distributed ledgers offer several advantages over traditional centralized databases. For one,
they are more secure, as data is stored across multiple nodes, making it difficult for any one
entity to tamper with or corrupt the data. Additionally, distributed ledgers are more
transparent, as all participants on the network have access to the same data and can validate
transactions in real-time.

Distributed ledgers are being used in a wide range of applications beyond cryptocurrencies,
including supply chain management, identity verification, and voting systems. By using
distributed ledgers, these applications can benefit from increased security, transparency, and
efficiency.

BITCOIN
Bitcoin is a decentralized digital currency that operates on a peer-to-peer network.
Transactions on the Bitcoin network are validated and verified by network participants called
miners, who are incentivized to participate in the network through a process called mining.

 Bitcoin was launched in 2009 by an individual or group of known under the

pseudonym Satoshi Nakamoto.
 31

 Total Bitcoins:- 21 million bitcoins

 Mined:- almost 19 million
 Till 21 million bitcoins will be mined:- 120 years

MINING STRATEGY AND REWARDS OF BITCOIN

Bitcoin mining ensures that blocks of transactions are created and stacked in the right order in
a way that can be traced and proven mathematically. With the creation of blocks comes
bitcoins as a reward, which increases the number of bitcoins in circulation.

Mining involves using specialized computers to solve complex mathematical problems in

order to verify transactions and add them to the blockchain. This process is resource-
intensive, and miners are rewarded for their efforts with newly created bitcoins and
transaction fees.

The mining reward is an important aspect of the Bitcoin protocol, as it is used to incentivize
network participation and ensure the security and integrity of the network. When Bitcoin was
first launched in 2009, the mining reward was set at 50 bitcoins per block. However, this
reward is designed to decrease over time, in order to limit the total supply of bitcoins to 21
million.

Every 210,000 blocks, the mining reward is halved, meaning that miners receive half the
amount of bitcoins for verifying transactions. This process is known as the halving, and it is
designed to ensure that the total supply of bitcoins does not exceed 21 million.

Currently, the mining reward is 6.25 bitcoins per block, as the most recent halving occurred
in May 2020. However, as the mining reward continues to decrease over time, it is expected
that transaction fees will become a more significant source of revenue for miners.

In order to stay competitive in the mining process, miners must continually upgrade their
hardware and software to solve mathematical problems more quickly and efficiently. This has
led to the development of specialized mining equipment, such as ASICs (Application-
Specific Integrated Circuits), which are designed specifically for Bitcoin mining.
 32

ETHEREUM

Ethereum is a decentralized, open-source blockchain platform that enables developers to

build decentralized applications (dApps) using smart contracts. It was proposed by Vitalik
Buterin in 2013 and launched in 2015.

 Ethereum is not just a cryptocurrency but more of a decentralized global computer.

 Ethereum was funded through crowdfunding, which made it decentralized from the
start.
 Ethereum is in the process of a significant change from Proof-of-Work to Proof-of-
Stake.

The Ethereum blockchain allows developers to create and deploy custom dApps, which can
range from financial applications, such as decentralized exchanges and stablecoins, to gaming
and social media platforms. These dApps can interact with each other through the Ethereum
network, creating a decentralized ecosystem of applications.

One of the key features of Ethereum is its support for smart contracts, which are self-
executing contracts that automatically enforce the terms of an agreement when certain
conditions are met. Smart contracts are written in programming languages such as Solidity
and can be used to automate complex financial transactions and other operations.

Ethereum uses a proof-of-work (PoW) consensus algorithm, similar to Bitcoin, to validate

transactions and add new blocks to the blockchain. However, Ethereum is currently in the
process of transitioning to a proof-of-stake (PoS) consensus algorithm, which will reduce the
energy consumption required for mining and improve network scalability.

The native cryptocurrency of the Ethereum network is Ether (ETH), which is used to pay for
transaction fees and incentivize network participants to validate transactions and create new
blocks.

In addition to its support for dApps and smart contracts, Ethereum has also been used as a
fundraising tool for blockchain-based projects through initial coin offerings (ICOs).
However, ICOs have come under scrutiny from regulators in recent years, and many projects
are now using alternative fundraising methods such as initial exchange offerings (IEOs) and
security token offerings (STOs).

 Ether is used as a digital or virtual currency for investment whereas Ethereum is

a network of blockchain where Ether is exchanged.
 Proposed in late 2013 by Vitalik Buterin (cryptocurrency researcher and programmer)
 Online crowdsale during summer 2014
 Bitcoin on steroids!
 33

Ethereum Features
 Ether: This is Ethereum‘s cryptocurrency.
 Smart contracts: Ethereum allows the development and deployment of these types of
contracts.
 Ethereum Virtual Machine: Ethereum provides the underlying technology—the
architecture and the software—that understands smart contracts and allows you to
interact with it.
 Decentralized applications (Dapps): A decentralized application is called a Dapp
(also spelled DAPP, App, or DApp) for short. Ethereum allows you to create
consolidated applications, called decentralized applications.
 Decentralized autonomous organizations (DAOs): Ethereum allows you to create
these for democratic decision-making.

ETHEREUM – CONSTRUCTION
Ethereum is constructed as a decentralized, open-source blockchain platform. It is built on
top of a peer-to-peer network that allows for the creation of decentralized applications
(dApps) and smart contracts.

At its core, Ethereum is a distributed database that stores information about transactions and
contracts on the network. Each node on the network has a copy of the Ethereum blockchain,
which is continually updated as new transactions and blocks are added.

One of the key features of Ethereum is its support for smart contracts, which are self-
executing contracts that are programmed to automatically execute when certain conditions
are met. These contracts are written in Solidity, a programming language specifically
designed for the Ethereum network.

Smart contracts are used to automate a wide range of operations, from financial transactions
to voting systems and supply chain management. They are stored on the Ethereum blockchain
and can be accessed and executed by anyone on the network, making them transparent,
secure, and resistant to censorship.

Ethereum uses a consensus algorithm called proof-of-work (PoW) to validate transactions

and add new blocks to the blockchain. However, the Ethereum network is currently in the
process of transitioning to a proof-of-stake (PoS) consensus algorithm, which will improve
network scalability and reduce energy consumption.

The native cryptocurrency of the Ethereum network is Ether (ETH), which is used to pay for
transaction fees and incentivize network participants to validate transactions and create new
blocks.
 34

DAO (Decentralized Autonomous Organization)

A DAO (Decentralized Autonomous Organization) is an organization that is run by rules
encoded as computer programs on a blockchain, rather than being controlled by a central
authority or management team. These rules are enforced through smart contracts, which are
self-executing contracts with the terms of the agreement between buyer and seller being
directly written into code.

The concept of a DAO is based on the idea that organizations can be run in a decentralized
and transparent way, without the need for intermediaries such as banks, lawyers, or other
third parties. This can reduce costs, increase transparency, and provide greater control and
autonomy to members.

In a DAO, members can participate in decision-making and management of the organization

by voting on proposals and contributing to the development of the platform. They can also be
rewarded for their contributions with tokens, which can appreciate in value as the
organization grows and becomes more successful.

One of the most well-known examples of a DAO is The DAO, which was launched on the
Ethereum blockchain in 2016. The DAO was designed as a venture capital fund, allowing
members to invest in promising blockchain-based startups. However, it was also subject to a
high-profile hack, which resulted in the loss of millions of dollars worth of Ether.

Since then, there have been many other attempts at creating successful DAOs, with varying
levels of success. While the concept of a decentralized and autonomous organization has the
potential to revolutionize the way that we organize and govern ourselves, there are still many
challenges to be overcome, including issues of governance, security, and scalability.

 An organization represented by rules encoded as a computer program, which is

transparent, controlled by shareholders and not influenced by a central government.
 It's notionally like the example for getting funds for a small conference, except that it
includes much more. Members buy shares in the DAO and can vote on things
according to the number of shares they have. The dreamers have the idea they'll
replace Democracy and run entire countries this way.
 The DAO was the largest crowdfunding in history, having raised over $150m from
more than 11,000 enthusiastic members. (ICO)
 A DAO‘s financial transaction record and program rules are maintained on a
blockchain.

Benefits of DAOs
Some of the benefits of this form of management include:

1. Decentralization. Decisions impacting the organization are made by a collection of

individuals as opposed to a central authority that is often vastly outnumbered by their peers.
 35

Instead of relying on the actions of one individual (CEO) or a small collection of individuals
(Board of Directors), a DAO can decentralize authority across a vastly larger range of users.

2. Participation. Individuals within an entity may feel more empowered and connected to the
entity when they have a direct say and voting power on all matters. These individuals may
not have strong voting power, but a DAO encourages token holders to cast votes, burn
tokens, or use their tokens in ways they think is best for the entity.

3. Publicity. Within a DAO, votes are cast via blockchain and made publicly viewable. This
requires users to act in ways they feel is best, as their vote and their decisions will be made
publicly viewable. This incentivizes actions that will benefit voters' reputations and
discourage acts against the community.

4. Community. The concept of a DAO encourages people from all over the world to
seamlessly come together to build a single vision. With just an internet connection,
tokenholders can interact with other owners wherever they may live.

Limitations of DAOs
Here are some limitations to the DAO structure.

1. Speed. If a public company is guided by a CEO, a single vote may be needed to decide a
specific action or course for the company to take. With a DAO, every user is given an
opportunity to vote. This requires a much longer voting period, especially considering time
zones and prioritizes outside of the DAO.
 36

2. Education. Similar to the issue of speed, a DAO has the responsibility of educating a lot
more people in regards to pending entity activity. A single CEO is much easier to keep
comprised of company developments, while tokenholders of a DAO may have ranging
educational backgrounds, understanding of initiatives, incentives, or accessibility to
resources. A common challenge of DAOs is that while they bring a diverse set of people
together, that diverse set of people must learn how to grow, strategize, and communicate as a
single unit.

3. Inefficiency. Partially summarizing the first two bullets, DAOs run a major risk of being
inefficient. Because of the time needed to administrative educate voters, communicate
initiatives, explain strategies, and onboard new members, it is easy for a DAO to spend much
more time discussing change than implementing it. A DAO may get bogged down in trivial,
administrative tasks due to the nature of needing to coordinate much more individuals.

4. Security. An issue facing all digital platforms for blockchain resources is security. A DAO
requires significant technical expertise to implement; without it, there may be invalidity to
how votes are cast or decisions made. Trust may be broken and users leave the entity if they
can't rely on the structure of the entity. Even through the use of multi-sig or cold wallets,
DAOs can be exploited, treasury reserves stolen, and vaults emptied.

SMART CONTRACT
Smart contracts are simply programs stored on a blockchain that run when predetermined
conditions are met. They typically are used to automate the execution of an agreement so that
all participants can be immediately certain of the outcome, without any intermediary's
involvement or time loss.

How a “Traditional” contract works

 37

How a “Smart Contract” contract works

A smart contract is a self-executing contract with the terms of the agreement between buyer
and seller being directly written into code. Smart contracts are programmed on a blockchain
and automatically enforce the rules and regulations specified within the code.

Smart contracts are designed to automate the execution of contractual obligations and enable
trust and security in the absence of intermediaries. They can be used for a wide range of
applications, including financial transactions, real estate, supply chain management, and
voting systems.

Smart contracts are typically written in a high-level programming language, such as Solidity
for the Ethereum blockchain. Once deployed on the blockchain, they can be accessed and
executed by anyone on the network, making them transparent, secure, and resistant to
censorship.

The benefits of smart contracts include increased efficiency, transparency, and security, as
well as the ability to automate complex processes and reduce the need for intermediaries. For
example, in a real estate transaction, a smart contract could be used to automatically transfer
ownership of a property once certain conditions are met, such as the completion of a building
inspection and the transfer of funds from the buyer to the seller.

However, there are also limitations and challenges associated with smart contracts. These
include issues related to code quality, scalability, and interoperability with other systems.
Additionally, smart contracts are only as good as the code they are written in, and
vulnerabilities or errors in the code can lead to significant losses or other issues.
 38

GHOST (Greedy Heaviest Observed Sub-Tree)

GHOST ("Greedy Heaviest Observed Sub-Tree") is a protocol used in cryptocurrency to
improve the performance of blockchain networks. It was first introduced in 2013 as a
proposed enhancement to the Bitcoin protocol, but was not implemented due to concerns over
its security.

The GHOST protocol is designed to increase transaction throughput and reduce network
congestion by allowing orphaned blocks to be included in the blockchain. Orphaned blocks
are blocks that are not part of the main chain because they were not mined fast enough or
received by nodes too late. In the original Bitcoin protocol, orphaned blocks are simply
discarded, leading to wasted mining efforts and reduced transaction throughput.

The GHOST protocol solves this problem by allowing orphaned blocks to be included in the
blockchain as "uncles." Uncles are blocks that are not part of the main chain but are still valid
and contribute to the security of the network. By including uncles in the blockchain, the
GHOST protocol increases the reward for miners and reduces the risk of network congestion.

The GHOST protocol has been implemented in several cryptocurrencies, including Ethereum
and Litecoin. However, it is important to note that the GHOST protocol is not without its
limitations and challenges. For example, including uncles in the blockchain can lead to
increased complexity and potential security vulnerabilities, and the protocol must be carefully
designed and tested to ensure its effectiveness and security.

VULNERABILITIES (कमजोररयों)

1. 51% Attack: A 51% attack occurs when a single entity or group of entities control more
than 50% of the mining power in a blockchain network. This can allow them to manipulate
transactions, double-spend coins, or even rewrite the entire blockchain.

2. Sybil Attack: A Sybil attack occurs when a single entity creates multiple fake identities
(or nodes) to gain control or influence over a network.

3. Smart Contract Vulnerabilities: Smart contracts are self-executing programs that run on
a blockchain. If a smart contract has a vulnerability or flaw in its code, it can be exploited by
attackers to steal or manipulate funds.

4. Fraud:- Fraud is a vulnerability for any financial system and can happen in online
marketplaces if a platform misappropriates its client‘s funds. It can also occur with initial
coin offering (ICO) scams. With a false ICO, an investor transfers bitcoins to a recipient who
they believe is a legitimate ICO campaign. In reality, the recipient doesn‘t make any
investments and keeps the bitcoin for themselves.

5. Private key security attack:- A private key is a unique code allowing investors to access
their funds and transactions. Private key security attacks involve hackers recovering private
 39

keys (or wallet keys) and using them. Unfortunately, tracking criminal activity from a stolen
private key is difficult.

6. Data breach:- Bitcoin marketplaces can experience a data breach where hackers steal
login credentials and use them to transfer bitcoins to themselves. Luckily, sufficient network
protocols can prevent bitcoins from getting lost.

7. Phishing and Social Engineering:- Phishing schemes use false emails or website
interfaces to trick users into giving hackers their login credentials. A hacker could create a
realistic email pretending to be a legitimate company and embed the email with fake
hyperlinks asking users to verify their login information.

Attackers can use social engineering techniques to trick users into giving up their private keys
or other sensitive information. This can be done through phishing attacks, fake ICOs (initial
coin offerings), or other means.

8. SIM swap attack:- SIM swapping is designed to undermine two-factor authentication

(2FA) security protocols. Here is how a SIM swap works:

 The hacker obtains the victim‘s phone number.

 The hacker calls the victim‘s mobile network operator pretending to be the victim.
They‘ll ask to transfer the victim‘s phone number to a new SIM card.
 Once the phone number is transferred to a new SIM card, the hacker will receive the
victim‘s calls and texts. This access means hackers can use account recovery features
to change account login details since they‘ll receive the SMS authentication text.

9. Routing attack:- In a routing attack, a hacker intercepts a real-time data transfer by

dropping the connection or hijacking the IP prefix. This interception prevents the system
from completing the transfer and gives the hacker access to confidential data or currency.

10. Malware and Hacking: Malware and hacking attacks can target cryptocurrency wallets,
exchanges, and other platforms to steal private keys or gain unauthorized access to user
accounts.

11. Insider Threats: Insider threats can come from employees or contractors who have
access to sensitive information or systems. They can use their access to steal funds or
manipulate transactions.

SIDE CHAIN
A sidechain is a separate blockchain that runs independent of Ethereum and is connected to
Ethereum Mainnet by a two-way bridge. The prominent examples of sidechains include the
Liquid Network and RootStock or RSK, which work as Bitcoin's sidechains.
 40

A sidechain is a separate blockchain that is connected to a parent blockchain, allowing for the
transfer of assets and data between the two chains. Sidechains are designed to address some
of the limitations of the main blockchain, such as scalability and transaction speed, while still
maintaining the security and trustlessness of the blockchain network.

In a sidechain, users can transfer assets from the parent blockchain to the sidechain, where
they can be used for different purposes, such as faster and cheaper transactions, smart
contract execution, or privacy features. Once the assets are no longer needed on the
sidechain, they can be transferred back to the parent blockchain.

Sidechains can be useful for a variety of applications, such as:

1. Scaling: By offloading some of the transaction volume to a sidechain, the main blockchain
can be relieved of some of the processing burden and can handle more transactions overall.

2. Privacy: Sidechains can be used to implement privacy features, such as confidential

transactions or encrypted data storage, that are not possible or practical on the main
blockchain.

3. Interoperability: Sidechains can allow for the transfer of assets and data between different
blockchain networks, enabling greater interoperability and collaboration between different
projects.

There are several examples of sidechain implementations in cryptocurrency, such as the

Lightning Network for Bitcoin and the Plasma network for Ethereum. However, sidechains
also come with their own set of challenges, such as ensuring the security and reliability of the
connection between the parent blockchain and the sidechain, and ensuring that the sidechain
does not compromise the security of the main blockchain.
 41

PROS AND CONS OF SIDECHAINS

Pros Cons

The technology underpinning sidechains is well- Sidechains trade off some measure of
established and benefits from extensive research decentralization and trustlesness for
and improvements in design. scalability.

Sidechains support general computation and offer A sidechain uses a separate consensus
EVM compatibility (they can run Ethereum- mechanism and doesn't benefit from
native dapps). Ethereum's security guarantees.

Sidechains use different consensus models to Sidechains require higher trust assumptions
efficiently process transactions and lower (e.g., a quorum of malicious sidechain
transaction fees for users. validators can commit fraud).

EVM-compatible sidechains allow dapps to

expand their ecosystem

NAME COIN

Namecoin (NMC) is a blockchain system and cryptocurrency which allows users to protect
domain name servers (DNS) by embedding them on a distributed ledger. The stated purpose
of Namecoin is to protect free speech by making the Internet resistant to censorship.

Namecoin is a cryptocurrency that was created in 2011 as a fork of the Bitcoin protocol. It
was designed to provide an alternative to the centralized Domain Name System (DNS) by
creating a decentralized domain name registration system.

Namecoin operates on its own blockchain, separate from Bitcoin, but it shares many of the
same technical features, such as proof-of-work mining and a limited supply of coins. The
primary difference is that Namecoin includes a decentralized name registration system, which
allows users to register and manage domain names without relying on a centralized authority.

Namecoin domain names are stored on the blockchain, making them resistant to censorship
and seizure. Users can register and transfer domain names using Namecoin's own name
registration system, which is similar to the traditional DNS but without the need for a
centralized authority. Domain name owners can also associate additional information with
their domains, such as contact information or public keys for encryption.
 42

In addition to its domain name system, Namecoin can also be used for other applications that
require decentralized, secure, and censorship-resistant data storage, such as identity
management, file storage, and voting systems.

While Namecoin has not achieved the same level of popularity or market capitalization as
some other cryptocurrencies, it is still actively developed and used by a dedicated community
of users and developers.
 43

UNIT VI CRYPTOCURRENCY REGULATION

STAKEHOLDERS
Stakeholders in the cryptocurrency ecosystem include a wide range of individuals and
organizations who have an interest in the development, adoption, and regulation of
cryptocurrencies. Here are some examples:

1. Users: Cryptocurrency users are individuals who own, buy, sell, or use cryptocurrencies
for various purposes, such as investments, payments, remittances, and online commerce.
Users play a crucial role in the adoption and growth of cryptocurrencies.

2. Developers: Cryptocurrency developers are individuals or groups who create, maintain,

and improve the software protocols that underpin cryptocurrencies. They are responsible for
writing the code, fixing bugs, and implementing new features and upgrades.

3. Miners: Cryptocurrency miners are individuals or groups who contribute computing

power to verify transactions and secure the blockchain. They are rewarded with new
cryptocurrency coins or transaction fees for their efforts.

4. Exchanges: Cryptocurrency exchanges are online platforms where users can buy, sell, and
trade cryptocurrencies with fiat currencies or other cryptocurrencies. They are an essential
gateway for users to enter and exit the cryptocurrency ecosystem.

5. Wallet providers: Cryptocurrency wallet providers are companies or applications that

provide software or hardware tools for users to store, manage, and access their
cryptocurrency holdings. They are responsible for the security and usability of these tools.

6. Regulators: Cryptocurrency regulators are government agencies or international

organizations that oversee the regulation of cryptocurrencies and related activities, such as
exchanges, wallets, and ICOs. They are responsible for protecting consumers, ensuring
compliance with laws and regulations, and promoting innovation and growth.

7. Investors: Cryptocurrency investors are individuals or institutions who invest in

cryptocurrencies for financial gain. They play a significant role in the price volatility and
market capitalization of cryptocurrencies.

8. Merchants: Cryptocurrency merchants are businesses or individuals who accept

cryptocurrencies as payment for goods and services. They are a crucial driver of
cryptocurrency adoption and mainstream acceptance.
 44

Stakeholder types

 Primary:- Primary stakeholders are fundamental to the operations of an organization.

This group includes all those who enjoy an economic relationship with the
organization, such as shareholders, workers, suppliers, and customers.
 Secondary:- Secondary stakeholders are all those groups that do not participate
directly in any exchange with a specific company, but they can be affected by the
actions of the company. This category includes competitors, the media, and non-
governmental organizations.

ROOTS OF BITCOIN
Bitcoin was first introduced to the world in a whitepaper published in 2008 by an unknown
person or group using the pseudonym Satoshi Nakamoto. The paper, titled "Bitcoin: A Peer-
to-Peer Electronic Cash System," described a new digital currency that would allow for
secure, decentralized transactions without the need for intermediaries like banks or
governments.

The roots of Bitcoin can be traced back to several earlier attempts to create digital currencies.
In the 1980s and 1990s, several pioneering computer scientists and cryptographers, including
David Chaum, Nick Szabo, and Adam Back, proposed various forms of digital currencies and
electronic cash systems. However, these early attempts were hampered by technical
limitations and the lack of a reliable decentralized infrastructure.

LEGAL ASPECTS-CRYPTO CURRENCY EXCHANGE

The legal aspects of cryptocurrency exchanges can vary depending on the jurisdiction in
which the exchange is operating. In general, exchanges must comply with a range of
regulations related to financial transactions, money laundering, and cybersecurity. Here are
some key legal aspects to consider when operating a cryptocurrency exchange:

1. Registration and licensing: Many jurisdictions require cryptocurrency exchanges to

register with financial regulatory agencies and obtain appropriate licenses. These
requirements can vary depending on the size and scope of the exchange's operations.

2. Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance:

Cryptocurrency exchanges must comply with KYC and AML regulations to prevent money
laundering and other illicit activities. This can involve collecting and verifying personal
information from users, monitoring transactions for suspicious activity, and reporting
suspicious activity to relevant authorities.
 45

3. Security measures: Cryptocurrency exchanges must implement robust security measures

to protect user funds and prevent hacks or cyberattacks. This can involve using multi-factor
authentication, encrypting user data, and storing funds in secure offline wallets.

4. Taxation: Cryptocurrency exchanges must comply with tax regulations in their respective
jurisdictions. This can involve collecting and remitting taxes on transactions or profits earned
by users.

5. Consumer protection: Cryptocurrency exchanges must ensure that users are protected
from fraud, scams, and other forms of misconduct. This can involve implementing refund
policies, dispute resolution mechanisms, and user education and support programs.

Crypto currency Exchange in india

Cryptocurrency exchanges in India operate in a regulatory environment that is still evolving,
with some uncertainty around the legality of cryptocurrencies and their use in financial
transactions. Here are some key things to know about cryptocurrency exchanges in India:

Regulatory landscape: In 2018, the Reserve Bank of India (RBI) banned banks and other
financial institutions from dealing with cryptocurrency exchanges, making it difficult for
exchanges to operate. However, in March 2020, the Supreme Court of India overturned the
ban, allowing cryptocurrency exchanges to resume operations.

Compliance requirements: Cryptocurrency exchanges in India must comply with a range of

regulatory requirements, including those related to KYC and AML, cybersecurity, and
taxation. The Securities and Exchange Board of India (SEBI) has also proposed new
regulations that would require cryptocurrency exchanges to register with the regulator and
comply with various reporting and disclosure requirements.

Exchange options: There are several cryptocurrency exchanges operating in India, including
CoinDCX, WazirX, and Zebpay. These exchanges allow users to buy, sell, and trade various
cryptocurrencies, and many offer features like mobile apps, margin trading, and staking.

Payment options: Cryptocurrency exchanges in India typically allow users to fund their
accounts using bank transfers, UPI, or other payment methods. However, some exchanges
have faced challenges in processing payments due to the regulatory environment.

Future outlook: The regulatory environment for cryptocurrencies in India is still uncertain,
with ongoing debates around how to regulate and tax these assets. However, many in the
cryptocurrency community are optimistic about the potential for growth and innovation in
India's rapidly evolving digital economy.
 46

Legal position of cryptocurrencies in India

India being one of the countries that makes the best use of cryptocurrencies the future
perspective of digital currencies stands as the topic of much discussion. RBI has often issues
press releases about the security concerns of cryptocurrencies such as Bitcoin. A committee
was also constituted in India 2017 under the chairmanship of Shri Subhash Chandra Garg to
analyse the legal issues associated with virtual currencies. The Committee Report stated that
all private cryptocurrencies should not be allowed in India.

RBI issued a circular In April 2018 preventing commercial and co-operative banks, small
finance banks, payment banks and NBFC from not only from dealing in virtual currencies
themselves but also directing them to stop providing services to all entities which deal with
virtual currencies. on My 15 2018, The Internet and Mobile Association of India (IMAI) filed
a writ petition in the Supreme Court for withdrawing RBI Circular. Supreme court passed a
decision, quashing the earlier ban imposed by the RBI.

As a next step government introduced Digital currency bill 2019. Under the bill, Mining,
holding, selling, issuing, transferring or using cryptocurrency is punishable with an
imprisonment of up to 10 years . The bill paved the way for the government to introduce its
own digital currency, namely Digital Rupee,' by the Central Bank.

Under the Bill, Cryptocurrency is defined as any information, code, or token which has a
digital representation of value and has utility in a business activity, or acts as a store of value
or a unit of account.

Recently on 29 January 2021, in circular number 2,022, in the E' new bills section under
Legislative business, the Indian government proposed a new bill. The government has listed
the new bill that will prohibit all private cryptocurrencies in India and provide a framework
for creation of an official digital currency to be issued by the Reserve Bank of India. The new
bill to be called as The Cryptocurrency and Regulation of Official Digital Currency Bill
2021, seeks to create a facilitative framework for an official digital currency that will be
issued by the Reserve Bank of India (RBI).

The bill also contains provisions for banning all private cryptocurrencies such as Bitcoin,
Ether, and Ripple but will exempt certain uses and the promotion of the underlying
technology of such tenders. In an RBI booklet on payment systems, the government also
mulled the creation of a digital version of India Rupee.

Black Market and Global Economy in cryptocurrency

Cryptocurrencies have been associated with black markets due to their perceived anonymity
and lack of regulatory oversight. However, the extent to which cryptocurrencies are used for
illegal activities is often exaggerated, and the majority of cryptocurrency transactions are
legitimate.
 47

That being said, cryptocurrencies have been used on the black market for activities like drug
trafficking, money laundering, and other illicit transactions. This is due in part to the
decentralized and pseudonymous nature of cryptocurrencies, which can make it difficult for
authorities to track and regulate their use.

However, it's important to note that many legitimate businesses and individuals also use
cryptocurrencies for legitimate purposes, such as investing, trading, and online transactions.

In terms of the global economy, cryptocurrencies have the potential to disrupt traditional
financial systems by providing new ways to store and transfer value. They also have the
potential to increase financial inclusion by providing access to financial services for people
who are unbanked or underbanked.

However, cryptocurrencies also pose challenges for governments and financial institutions, as
they can be difficult to regulate and monitor. This has led to a range of responses from
different countries, with some embracing cryptocurrencies and others cracking down on their
use.

Overall, cryptocurrencies are a complex and evolving topic, with both benefits and risks for
the global economy. As the technology and regulatory landscape continue to evolve, it will be
important to carefully consider the role of cryptocurrencies in shaping the future of finance.
 48

UNIT 7-SELECTION CRITERIA FOR BLOCKCHAIN APPLICATIONS

BLOCKCHAIN FOR SUPPLY CHAIN FINANCING

Blockchain technology has the potential to revolutionize supply chain financing by
improving transparency, reducing risk, and increasing efficiency. Here are some ways in
which blockchain can be used for supply chain financing:

1. Increased transparency: Blockchain technology can provide a single, shared ledger that
records all transactions within a supply chain. This can improve transparency and reduce the
risk of fraud, as all parties can see and verify the authenticity of transactions.

2. Reduced risk: By using smart contracts, blockchain can automate many aspects of supply
chain financing, reducing the risk of errors and delays. Smart contracts can automatically
trigger payments when certain conditions are met, such as the delivery of goods or the
completion of a project.

3. Improved efficiency: Blockchain can help streamline the supply chain financing process
by reducing the need for intermediaries and manual processes. This can help speed up the
process of financing and reduce costs for all parties involved.

4. Enhanced traceability: Blockchain can help track the movement of goods and materials
within a supply chain, providing an immutable record of their origin, quality, and
authenticity. This can be particularly useful for industries like food and pharmaceuticals,
where traceability is critical for safety and compliance.

What are the advantages?

 Total visibility for all transaction participants
 Better control of complex transactions involving multiple parties
 Improved logistics and timing
 Automated actions reduce need for manpower
 Reduced risk
 Lower costs such as insurance and financing fees
 Less risk of unethical behaviour
 Encourages more lenders to fund more deals

What are the disadvantages?

 Low take-up by SMEs due to non-scientific bias against blockchain or lack of
information
 IT and methodology change for sales teams and buyer departments
 Synchronisation between buyer/supplier/lender trading systems
 49

An example of blockchain in supply chain finance

Buyer, supplier, lender have sight of each block in the chain. Here‘s a simplified example:

 Global Retail places an order for cardboard boxes with ABC Cartons – a box
manufacturer.
 The order is inserted into a blockchain established to manage the transaction.
 ABC asks their bank to fund the cost of raw materials to produce the boxes. The bank
agrees and they enter a new block in the chain. The action is also visible to Global.
 ABC receives the funds and makes the boxes. They ship them to Global along with
the invoice. The bank has sight of the shipping and billing, which are new blocks in
the chain.
 Global receives the boxes and pays ABC. Two more blocks are added to the digital
ledger. ABC and the bank see these actions.
 ABC repays the bank, and the bank closes the loan record. (Two more blocks).
 Global closes the chain. (Final block).

BLOCKCHAINS FOR TRADE FINANCE

Blockchain technology has the potential to revolutionize trade finance by providing a
decentralized, secure, and transparent platform for conducting transactions.

Trade finance is the process of financing international trade transactions, including the
movement of goods, services, and capital across borders. The traditional methods of trade
 50

finance are often slow, expensive, and prone to fraud, with a heavy reliance on paper-based
documentation and intermediaries.

The resulting blockchain-based trade network is designed to improve the trade finance
lending process, helping banks access new markets with new products, while reducing risk
and streamlining cross-border trade for buyers and sellers as they grow their business and
expand into new countries.

Blockchain technology can offer a solution to these problems by providing a decentralized

and secure platform for conducting trade finance transactions. Blockchain allows for a
distributed ledger of all transactions, with each party having access to the same information.
This eliminates the need for intermediaries and reduces the risk of fraud.

Smart contracts are a key feature of blockchain technology that can automate many of the
processes involved in trade finance. Smart contracts are self-executing contracts with the
terms of the agreement between buyer and seller being directly written into lines of code.
This automation can reduce the time and cost of executing trade finance transactions.

In addition, blockchain technology can facilitate faster and more efficient financing by
providing real-time visibility into the movement of goods and the status of transactions. This
can help reduce the risk of delays and errors, and improve the overall efficiency of trade
finance.

Proven Benefits Of A Blockchain-Based Solution For Trade Finance

By participating in a blockchain-based platform for trade finance, banks can:

 Pursue new revenue streams through new financing products and alternatives to
letters of credit
 51

 Offer banking services to small and medium enterprises (SMEs) and companies that
would traditionally use open account trading
 Gain deep insights into client financial positions and transaction histories
 Reduce operating costs by digitizing slow and cumbersome paper processes
 Employ blockchain security attributes to demonstrate greater visibility and control of
their transactions, thereby positively affecting the bank‘s capital adequacy position
 Speed financing approval processes and trading cycles

Buyer and seller companies that use the platform can:

 Access trade finance products and services offered by participating banks more
readily than through traditional routes
 Reduce the risk of non-payment or late payment by a new buyer
 Track all steps in a trade deal end-to-end
 Expand reach and grow business through access to global markets
 Speed business processes with digitization and automation

Permissioned Blockchains Used In Enterprise Network

A permissioned blockchain requires user approval to join and is generally used for enterprise
purposes, whereas a permissionless blockchain is used for public purposes that require less
transparency and control. Permissioned blockchains are generally used to manage supply
chains, create contracts, verify payment between parties, and much more.

Permissioned blockchains are private blockchain networks that are restricted to a specific
group of participants who are authorized to access and validate transactions. Unlike public
blockchains, where anyone can join and participate in the network, permissioned blockchains
are controlled by a central authority, which sets the rules and regulates access to the network.

Enterprises are increasingly using permissioned blockchains to streamline their operations,

reduce costs, and increase efficiency. Here are some use cases of permissioned blockchains in
enterprises:

1. Supply chain management: Permissioned blockchains can provide end-to-end visibility

and traceability across the supply chain, enabling enterprises to track products from the point
of origin to the point of consumption. This can help reduce the risk of counterfeiting, theft,
and fraud, and improve the overall efficiency of the supply chain.

2. Digital identity management: Permissioned blockchains can provide a secure and

decentralized platform for managing digital identities, enabling enterprises to authenticate
and verify the identity of users and devices. This can help reduce the risk of fraud and
identity theft, and improve the overall security of digital transactions.
 52

3. Financial services: Permissioned blockchains can be used to streamline and automate

financial transactions, such as cross-border payments, trade finance, and securities trading.
This can help reduce the time and cost of executing transactions, and improve the overall
efficiency of financial services.

4. Healthcare: Permissioned blockchains can be used to securely and efficiently manage

healthcare data, such as medical records, prescriptions, and insurance claims. This can help
improve the quality of care, reduce costs, and increase transparency and trust between
patients and healthcare providers.

Example:- A good permissioned blockchain example is Ripple, which is a large

cryptocurrency that supports permission-based roles for network participants. A lot of
businesses prefer permissioned blockchain networks because they allow network
administrators to configure settings and place restrictions as needed.

Characteristics OF PERMISSIONLESS BLOCKCHAIN

1. Decentralization:- Permissionless blockchains are typically decentralized. As such, a
single entity alone cannot edit the ledger, shut down the network or alter its protocols. This is
heavily anchored in the consensus protocol, which relies on the majority and their sense of
integrity. Such a consensus typically requires the agreement of more than 50% of its users.

2. Transparency:- Users within a permissionless network can access all types of information
(except private keys). Because the very nature of a decentralized network is to eschew central
authority figures, transparency of transactions in a permissionless network is valued.

3. Anonymity:- Unlike permissioned networks, permissionless blockchains do not ask users

for their identification or personal information when they create an address.

4. Tokens:- Permissionless blockchains allow the utilization of tokens or digital assets. These
typically serve as incentives for users to take part in the network. Tokens and assets can
either increase in value or decrease in value over time, depending on the market.
53
 54

UNIT 8 - BLOCKCHAIN APPLICATIONS

INTERNET OF THINGS
IoT stands for the Internet of Things. It refers to a network of physical devices, vehicles,
home appliances, and other items embedded with electronics, sensors, software, and
connectivity that enable them to connect and exchange data with each other and with other
systems over the internet. The IoT allows devices to collect and share data, interact with their
environment, and automate tasks to improve efficiency, convenience, and productivity.
Examples of IoT devices include smart home devices like thermostats and cameras, wearable
fitness trackers, smart medical devices, and industrial equipment used in factories and
logistics operations.

Here are some of the blockchain applications in the IoT space:

1. Supply Chain Management: Blockchain can be used to improve supply chain

management by providing a tamper-proof ledger of all transactions and movements of goods.
This can help reduce the risk of fraud, increase transparency, and improve traceability.

2. Smart Contracts: Smart contracts can be used to automate the process of exchanging data
and value between IoT devices. For example, a smart contract could be created to
automatically transfer funds from one device to another when a certain condition is met.

3. Asset Tracking: Blockchain can be used to track and manage assets in real-time. This is
particularly useful in industries such as logistics and transportation where it is important to
know the exact location and condition of goods at all times.

4. Energy Management: Blockchain can be used to manage the distribution of energy

between devices in a decentralized manner. This can help reduce energy waste and improve
efficiency.

5. Identity Management: Blockchain can be used to create secure and decentralized identity
systems for IoT devices. This can help prevent unauthorized access and ensure that devices
are communicating with trusted parties.

6. Automotive Industry:- Digitization has swept across all sectors of the industry, and the
automotive industry is no exception. Today, automotive companies are leveraging IoT-
enabled sensors to develop fully automated vehicles. The automotive industry is further
inclined to connecting IoT enabled vehicles with Blockchain tech to allow multiple users to
exchange crucial information easily and quickly. Also, the industry is readily exploiting
Blockchain IoT use cases that can transform autonomous cars, smart parking, and automated
traffic control for the better.

7. Pharmacy Industry:- One of the biggest challenges of the pharmaceutical sector is the
increasing incidence of counterfeit medicines. Thanks to Blockchain IoT, the pharmacy
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industry is now capable of countering this issue. Blockchain IoT allows all the stakeholders
involved in the drug manufacturing process to be responsible and update the Blockchain
network with relevant information in real-time.

8. Smart Homes Industry:- In the traditional centralized approach, exchanging information

generated by IoT devices lacks the security standards and ownership of data. However,
thanks to Blockchain IoT allows homeowners to manage the home security system remotely
from the smartphone. Blockchain could elevate Smart Homes security by eliminating the
limitations of centralized infrastructure.

For instance, Telstra, an Australian telecommunication and media company, provides smart
home solutions.

MEDICAL RECORD MANAGEMENT SYSTEM

In addition to financial transactions, blockchain can secure and verify any personal, legal, and
business document—wills, trusts, patents, contracts, notarizations, marriage certificates,
death certificates, anything. And now medical records. ―When new healthcare data for a
particular patient is created (e.g. from a consultation, surgery), a new block is instantiated and
distributed to all peers in the patient network. After a majority of the peers have approved the
new block, the system will insert it in the chain. This allows us to achieve a global view of
the patient‘s medical history in an efficient, verifiable, and permanent way,‖ the authors
explain.

Here are some of the blockchain applications in medical record management:

1. Decentralized storage: Blockchain can be used to create a decentralized storage system

for medical records, where patients own and control their data, and grant access to healthcare
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providers and other authorized parties on a need-to-know basis. This can help reduce the risk
of data breaches and improve privacy.

2. Interoperability: Blockchain can facilitate the interoperability of medical records between

different healthcare providers, systems, and jurisdictions, by providing a standardized and
secure way to share data. This can help improve the quality and continuity of care, reduce
duplication and errors, and save time and costs.

3. Identity management: Blockchain can be used to create a secure and immutable identity
system for patients, healthcare providers, and other stakeholders in the healthcare ecosystem.
This can help prevent identity theft, fraud, and other forms of misuse of personal information.

4. Clinical trials: Blockchain can be used to improve the efficiency, transparency, and
security of clinical trials, by providing a tamper-proof and auditable record of all trial data,
from recruitment to analysis. This can help reduce the risk of data manipulation and increase
the trust of participants and regulators.

5. Research and analytics: Blockchain can be used to create a shared and secure platform
for medical research and analytics, where data can be contributed, accessed, and analyzed by
researchers, institutions, and other stakeholders, with appropriate privacy protections and
incentives. This can help accelerate medical discoveries, improve population health, and
create new business models and opportunities.
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DOMAIN NAME SERVICE

The DNS, the Domain Name System, is a service at the heart of how the Internet operates. It
functions as a public directory that associates domain names with resources on the Internet,
such as IP addresses. When a user enters an address in his browser, a DNS server translates
this humanly understandable address into an IP address that is understandable by computers
and networks. This is DNS resolution. This system, created in 1983, is fundamental to the
functioning of many services such as websites, mail servers, VoIP telephony and many
others. It is constantly evolving to meet ever-increasing needs in terms of functionality and
security.

Blockchain technology has the potential to transform the domain name service (DNS)
industry by providing a secure, decentralized, and tamper-proof system for domain name
registration, management, and resolution. Here are some of the blockchain applications in the
DNS space:
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1. Decentralized domain name registration: Blockchain can be used to create a

decentralized system for domain name registration, where domain names are registered on a
blockchain network instead of with centralized domain name registrars. This can help prevent
domain name squatting, reduce the risk of cyberattacks, and ensure that domain names are
owned and controlled by their rightful owners.

2. Smart contracts for domain name management: Blockchain can be used to create smart
contracts for domain name management, which can automate the process of updating and
transferring domain names, and enforce rules and conditions for domain name ownership and
use. This can help reduce administrative costs, increase transparency, and improve security.

3. Distributed domain name resolution: Blockchain can be used to create a distributed

domain name resolution system, where domain name resolution is performed by a network of
nodes instead of centralized DNS servers. This can help improve the speed, reliability, and
resilience of domain name resolution, and prevent DNS attacks and censorship.

4. Cryptographic domain name verification: Blockchain can be used to create a

cryptographic system for domain name verification, where domain names are verified using
digital signatures and public key infrastructure (PKI). This can help prevent domain name
spoofing, phishing, and other forms of domain name fraud.

5. Incentivized domain name system: Blockchain can be used to create an incentivized

domain name system, where domain name owners and validators are rewarded with
cryptocurrency or other tokens for participating in the domain name network. This can help
create a self-sustaining and decentralized domain name system that is resistant to
centralization and control by a single entity.

The Blockchain technology meets several DNS needs:

1. Availability: a decentralized, peer-to-peer network cannot be stopped. It could replace or

complement Anycast infrastructures.

2. Integrity: the consensus protocol of a Blockchain guarantees, by nature, the integrity of

the data. Furthermore, the data cannot be modified. These properties would eliminate the
need for DNSSEC and its famous key renewal ceremony.

3. Confidentiality: Requests made to read the Blockchain data can be encapsulated in an

HTTPS channel in the same way as the DNS over HTTPS (DoH) protocol. There are few
DoH resolvers today, so traffic is centralized around a limited number of actors. The use of a
Blockchain would offer the possibility of querying any node on the network, thus limiting
centralization and SPF (single point of failure).

The data included in the DNS zone files, i.e. the domain name configurations, could therefore
be distributed on a Blockchain. Each player (registries, registrars) could directly interact with
this Blockchain to manage the domain names. This is the idea of the DNS on Blockchain.
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FUTURE OF BLOCKCHAIN
According to a forecast by research firm Gartner, by 2026 the business value added by
blockchain will increase to over $360 billion. Then, by 2030, that will increase to more than
$3.1 trillion. With current and future trends, blockchain is predicted to make a big revolution
in the coming decades.

Here are some potential developments and trends in the future of blockchain:

1. Mainstream adoption: As blockchain technology becomes more mature, user-friendly,

and scalable, it is likely to be adopted by more businesses, governments, and individuals
around the world. This could lead to the creation of new blockchain-based products and
services, and the integration of blockchain with existing systems and applications.

2. Interoperability and standardization: As more blockchain networks and platforms

emerge, there will be a growing need for interoperability and standardization across different
blockchain systems, protocols, and applications. This could lead to the development of cross-
chain technologies and standards, and the integration of blockchain with other emerging
technologies, such as AI and IoT.

3. Decentralization and governance: The decentralization and governance of blockchain

networks and applications will continue to be a key challenge and opportunity in the future of
blockchain. As blockchain becomes more widely adopted, there will be a need for effective
governance mechanisms and incentives that balance decentralization with security,
scalability, and usability.

4. Privacy and security: Privacy and security will remain important considerations in the
future of blockchain, as blockchain-based systems and applications handle sensitive data and
assets. As such, there will be a growing need for privacy-enhancing technologies, such as
zero-knowledge proofs and homomorphic encryption, and for security-focused protocols and
standards, such as proof-of-stake and sharding.

5. New use cases and applications: As blockchain technology evolves and becomes more
widely adopted, it is likely to create new use cases and applications that are currently
unimaginable. These could include blockchain-based identity systems, decentralized social
networks, autonomous organizations, and more.

6. Finance – Banking:- In 2021, El Salvador was one of the first countries to accept Bitcoin
as a legal tender. Due to global inflation and rising costs of money transfers between financial
intermediaries. Many researchers think that developing countries are likely to accept
cryptocurrencies soon. In addition, another promising area for blockchain development trends
is national cryptocurrencies. It can work in conjunction with existing traditional currencies.
This currency helps users to make transactions without depending on any third parties. It also
allows central banks to control the circulating supply.
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7. Medical:- Blockchain can be used to develop applications to manage patient data, control
drug supply, automate medical examination and treatment transactions, and more.

In particular, concerns about the production and distribution of counterfeit vaccines have
been resolved. Because blockchain will be an effective tool to verify the authenticity of
vaccine shipments and track vaccine distribution. IBM is one of the pioneers when it comes
to leveraging blockchain to develop a vaccine delivery system.

8. Marketing:- Blockchain will be a useful technology in this area. Because it can monitor
and measure the effectiveness of advertising campaigns, minimizing cases of advertising
fraud. Blockchain technology helps in automatic censorship, removing virtual accounts, and
verifying advertising engagement. In addition, it can help collect data on customer behavior
and psychology.