Dr.
Poornima B V
Assistant Professor,
Computer Science and Engineering,
Sahyadri College of Engineering and Management,
Adyar, Mangalore-575007.
Email: Poornima.cs@sahyadri.edu.in
1
2
3
4
5
6
► Blockchain technology is a structure that stores transactional records, also known as
the block, of the public in several databases, known as the “chain,” in a network
connected through peer-to-peer nodes.
► Typically, this storage is referred to as a ‘digital ledger.’ Every transaction in this ledger
is authorized by the digital signature of the owner, which authenticates the
transaction and safeguards it from tampering.
► Hence, the information the digital ledger contains is highly secured.
► In simpler words, the digital ledger is like a Google spreadsheet shared among
numerous computers in a network, in which, the transactional records are stored
based on actual purchases.
► The fascinating angle is that anybody can see the data, but they can’t corrupt it
7
Blockchain definition
► Layman's definition: Blockchain is an ever-growing, secure, shared
record keeping system in which each user of the data holds a copy of the
records, which can only be updated if all parties involved in a transaction
agree to update.
► Technical definition: Blockchain is a peer-to-peer, distributed ledger
that is cryptographically-secure, append-only, immutable (extremely
hard to change), and updateable only via consensus or agreement among
peers.
8
9
Distributed systems
It is a distributed ledger which can be centralized or decentralized.
A blockchain is originally intended to be and is usually used as a decentralized
platform.
It can be thought of as a system that has properties of both decentralized and
distributed paradigms.
It is a decentralized-distributed system.
10
Distributed systems are a computing paradigm whereby two or more nodes work
with each other in a coordinated fashion to achieve a common outcome.
Google's search engine is based on a large distributed system, but to a user, it looks
like a single, coherent platform.
A node can be defined as an individual player in a distributed system.
All nodes are capable of sending and receiving messages to and from each other.
11
Nodes can be honest, faulty, or malicious, and they have memory
and a processor.
A node that exhibits irrational behavior is also known as a Byzantine
node.
Byzantine node leading to possible data inconsistency.
12
13
14
Design of a distributed system: N4 is a Byzantine
node, L2 is broken or a slow network link
15
16
Challenges of Distributed System
► The primary challenge in distributed system design is coordination
between nodes and fault tolerance.
► Even if some of the nodes become faulty or network links break, the
distributed system should be able to tolerate this and continue to
work to achieve the desired result.
► Distributed systems are so challenging to design that a hypothesis
known as the CAP theorem has been proven, which states that a
distributed system cannot have all three of the much-desired
properties simultaneously; that is, consistency, availability, and
partition tolerance.
17
Keywords in the definitions
► Peer-to-peer: This means that there is no central controller in the network,
and all participants talk to each other directly. This property allows for
cash transactions to be exchanged directly among the peers without a
third-party involvement, such as by a bank.
► Distributed ledger: Ledger is spread across the network among all peers
in the network, and each peer holds a copy of the complete ledger.
18
Keywords in the definitions
► Cryptographically-secure: Cryptography has been used to provide
security services which make this ledger secure against tampering and
misuse. These services include non-repudiation, data integrity, and data
origin authentication.
► Append-only: Data can only be added to the blockchain in time-ordered
sequential order. This property implies that once data is added to the
blockchain, it is almost impossible to change that data and can be
considered practically immutable.
19
► Non-repudiation: Ensures that a sender cannot deny having sent
a message, typically using digital signatures.
► Data Integrity: Guarantees that data remains unchanged during
transmission or storage, often verified using cryptographic hash
functions.
► Data Origin Authentication: Confirms the source of received
data, ensuring it comes from a trusted sender, usually
implemented through digital certificates or message
authentication codes (MACs).
20
Updateable via consensus
► Finally, the most critical attribute of a blockchain is that it is
updateable only via consensus. This is what gives it the power of
decentralization.
► In this scenario, no central authority is in control of updating the ledger.
Instead, any update made to the blockchain is validated against strict
criteria defined by the blockchain protocol and added to the blockchain
only after a consensus has been reached among all participating
peers/nodes on the network.
► To achieve consensus, there are various consensus facilitation
algorithms which ensure that all parties are in agreement about the
final state of the data on the blockchain network and resolutely agree
upon it to be true.
21
The network view of a blockchain
22
Elements of block chain
► Address
► Transaction
► Block
► Peer-to-peer network
► Scripting or programming language
► Virtual machine
► State machine
► Node
► Smart contract
23
► Scripts or programs perform various operations on a transaction
in order to facilitate various functions. For example, in Bitcoin,
transaction scripts are predefined in a language called Script,
which consist of sets of commands that allow nodes to transfer
tokens from one address to another.
24
The generic structure of a block
25
Pointer to Previous Block's Hash: Links blocks together, ensuring the chain is
tamper-proof.
Nonce: A number used by miners to find a valid block hash in Proof of Work systems.
Merkle Root: The cryptographic hash representing all the transactions in the block,
ensuring secure verification.
Timestamp: The exact time the block was mined, establishing the order of the
blockchain.
List of Transactions: Contains the actual data (like payments or contracts) recorded in
the block
26
Generic elements of a blockchain
27
How blockchain accumulates blocks
1. A node starts a transaction by first creating and then digitally signing it with
its private key.
2. A transaction is propagated (flooded) by using a flooding protocol, called
Gossip protocol, to peers that validate the transaction based on preset criteria.
Usually, more than one node are required to verify the transaction.
3. Once the transaction is validated, it is included in a block, which is then
propagated onto the network. At this point, the transaction is considered
confirmed.
4. The newly-created block now becomes part of the ledger, and the next block
links itself cryptographically back to this block. This link is a hash pointer. At
this stage, the transaction gets its second confirmation and the block gets its
first confirmation.
5. Transactions are then reconfirmed every time a new block is created. Usually,
six confirmations in the Bitcoin network are required to consider the
28
transaction final.
29
The history of Blockchain
► Blockchain was introduced with the invention of Bitcoin in 2008.
Its practical implementation then occurred in 2009.
Electronic cash
Since the 1980s, e-cash protocols have existed that are based on a
model proposed by David Chaum.
The idea of electronic cash is essential in order to appreciate the
first and astonishingly successful application of blockchain, Bitcoin,
or more broadly cryptocurrencies in general.
30
► Two fundamental e-cash system issues need to be addressed:
accountability and anonymity
► Accountability is required to ensure that cash is spendable only
once (double-spend problem) and that it can only be spent by its
rightful owner.
► Double spend problem arises when same money can be spent
twice. As it is quite easy to make copies of digital data, this
becomes a big issue in digital currencies as you can make many
copies of same digital cash
31
► Anonymity is required to protect users' privacy. As with physical
cash, it is almost impossible to trace back spending to the
individual who actually paid the money.
► David Chaum solved both of these problems during his work in
1980s by using two cryptographic operations, namely blind
signatures and secret sharing.
► Blind signatures allow for signing a document without actually
seeing it, and secret sharing is a concept that enables the
detection of double spending, that is using the same e-cash
token twice (double spending)
32
► In 2009, the first practical implementation of an electronic cash
(e-cash) system named Bitcoin appeared. The term
cryptocurrency emerged later.
► For the very first time, it solved the problem of distributed
consensus in a trustless network. It used public key cryptography
with a Proof of Work (PoW) mechanism to provide a secure,
controlled, and decentralized method of minting digital currency.
► The key innovation was the idea of an ordered list of blocks
composed of transactions and cryptographically secured by the
PoW mechanism.
33
► Concepts from electronic cash schemes and distributed systems
were combined to create Bitcoin and what now is known as
blockchain.
► In 2008, a groundbreaking paper entitled Bitcoin: A Peer-to-Peer
Electronic Cash System was written on the topic of peer-to-peer
electronic cash under the pseudonym Satoshi Nakamoto.
► It introduced the term chain of blocks
34
35
Benefits of blockchain technology
1. Decentralization
2. Transparency and Trust
3. Immutability
4. High availability
5. Highly secure
6. Simplification of current paradigms
7. Faster dealings
8. Cost Saving
36
Limitations of blockchain
1. Scalability
2. Adaptability
3. Regulation
4. Relatively immature technology
5. Privacy
37
Tiers of blockchain technology
1. Blockchain 1.0
2. Blockchain 2.0
3. Blockchain 3.0
4. Blockchain X.0
38
► Blockchain 1.0: This tier was introduced with the invention of
Bitcoin, and it is primarily used for cryptocurrencies. Also, as
Bitcoin was the first implementation of cryptocurrencies, it
makes sense to categorize this first generation of blockchain
technology to include only cryptographic currencies.
► This generation started in 2009 when Bitcoin was released and
ended in early 2010.
39
► Blockchain 2.0: This second blockchain generation is used by
financial services and smart contracts. This tier includes various
financial assets, such as derivatives, options, swaps, and bonds.
Applications that go beyond currency, finance, and markets are
incorporated at this tier. Ethereum, Hyperledger, and other
newer blockchain platforms are considered part of Blockchain
2.0.
► This generation started when ideas related to using blockchain
for other purposes started to emerge in 2010.
40
► Blockchain 3.0: This third blockchain generation is used to
implement applications beyond the financial services industry
and is used in government, health, media, the arts, and justice.
Again, as in Blockchain 2.0, Ethereum, Hyperledger, and newer
blockchains with the ability to code smart contracts are
considered part of this blockchain technology tier.
► This generation of blockchain emerged around 2012 when
multiple applications of blockchain technology in different
industries were researched.
41
► Blockchain X.0: This generation represents a vision of blockchain
singularity where one day there will be a public blockchain
service available that anyone can use just like the Google search
engine.
42
Features of a blockchain
1. Distributed consensus
2. Transaction verification
3. Platform for smart contract
4. Transforming value between peers
5. Generation of cryptocurrency
6. Smart property
7. Provider of security
8. Immutability
9. Uniqueness
43
Distributed ledgers
► A distributed ledger is a broad term describing shared databases;
hence, all blockchains technically fall under the umbrella of
shared databases or distributed ledgers.
► All blockchains are fundamentally distributed ledgers, all
distributed ledgers are not necessarily a blockchain.
► Distributed ledger does not necessarily consist of blocks of
transactions to keep the ledger growing.
► A blockchain is a special type of shared database that is
comprised of blocks of transactions.
► An example of a distributed ledger that does not use blocks of
transactions is R3's Corda.
44
Distributed Ledger
► Corda is a distributed ledger which is developed to record and
manage agreements and is especially focused on financial
services industry.
► On the other hand, more widely-known blockchains like Bitcoin
and Ethereum make use of blocks to update the shared database.
45
46
Types of blockchain
1. Public blockchains
2. Private blockchains
3. Semiprivate blockchains
4. Sidechains
5. Permissioned ledger
6. Shared ledger
7. Tokenized blockchains
8. Tokenless blockchains
47
As the name suggests, public blockchains are not owned by anyone. They are open
to the public, and anyone can participate as a node in the decision-making process
All users of these permissionless or unpermissioned ledgers maintain a copy of the
ledger on their local nodes and use a distributed consensus mechanism to decide
the eventual state of the ledger. Bitcoin and Ethereum are both considered public
blockchains 48
► Private blockchain: They are open only to a consortium or group of individuals
or organizations who have decided to share the ledger among themselves.
There are various blockchains now available in this category, such as
HydraChain and Quorum.
49
With semiprivate blockchains, part of the blockchain is private and part of it is
public. With a semi-private blockchain, the private part is controlled by a group of
individuals, while the public part is open for participation by anyone.
This hybrid model can be used in scenarios where the private part of the blockchain
remains internal and shared among known participants, while the public part of the
blockchain can still be used by anyone
50
Sidechains
► More precisely known as pegged sidechains, this is a concept whereby coins
can be moved from one blockchain to another and moved back again.
51
Permissioned ledger
A permissioned ledger is a type of distributed ledger where only authorized participants
can access and validate transactions.
Unlike permissionless ledgers, where anyone can join, permissioned ledgers restrict access
and often offer more privacy and faster consensus mechanisms.
These ledgers are commonly used in industries that require privacy, trust, and regulatory
compliance, such as banking and healthcare.
52
Shared ledger
► This is a generic term that is used to describe any application or
database that is shared by the public or a consortium. Generally, all
blockchains, fall into the category of a shared ledger.
53
Tokenized blockchains
► These blockchains are standard blockchains that generate cryptocurrency as a result of a
consensus process via mining or initial distribution.
► Tokenized refers to systems where assets or rights are represented by digital tokens, which can
be traded or transferred on a blockchain or distributed ledger.
Tokenless blockchains
• This is similar to full private blockchains, the only difference being that use of tokens is not
required. This can also be thought of as a shared distributed ledger used for storing data.
• Tokenless systems, on the other hand, do not use digital tokens to represent assets. Instead,
they may rely on traditional methods for verifying transactions or ownership without the need
for tokens, often focusing on the direct exchange of data or values
54
Consensus
► Consensus is the backbone of a blockchain and, as a result, it
provides decentralization of control through an optional process
known as mining.
► Consensus is a process of agreement between distrusting nodes
on the final state of data.
► To achieve consensus, different algorithms are used.
► It is easy to reach an agreement between two nodes (in
client-server systems, for example), but when multiple nodes are
participating in a distributed system and they need to agree
on a single value, it becomes quite a challenge to achieve
consensus.
► This process of attaining agreement common state or value
among multiple nodes despite the failure of some nodes is known
55
as distributed consensus.
56
57
58
59
Consensus mechanism
1. Agreement: All honest nodes decide on the same value
2. Termination: The consensus process must eventually end with a decision,
and every honest node must reach that conclusion.
3. Validity: The decision made by the honest nodes must be based on
something that was initially proposed by a real, honest participant.
4. Fault tolerant: The consensus algorithm should be able to run in the
presence of faulty or malicious nodes (Byzantine nodes)
5. Integrity: This is a requirement that no node can make the decision more
than once in a single consensus cycle
60
61
62
63
Types of consensus mechanisms
► All consensus mechanisms are developed to deal with faults in a
distributed system and to allow distributed systems to reach a
final state of agreement.
► There are two general categories of consensus mechanisms.
These categories deal with all types of faults:
64
► Traditional Byzantine Fault Tolerance (BFT)-based: With no
compute-intensive operations, such as partial hash inversion (as
in Bitcoin PoW), this method relies on a simple scheme of nodes
that are publisher-signed messages. Eventually, when a certain
number of messages are received, then an agreement is reached.
► Leader election-based consensus mechanisms: This
arrangement requires nodes to compete in a leader election
lottery, and the node that wins proposes a final value. For
example, the PoW used in Bitcoin falls into this category.
65
66
67
68
69
70
CAP theorem and blockchain
► The theory states that any distributed system cannot have
consistency, availability, and partition tolerance simultaneously:
1. Consistency is a property which ensures that all nodes in a
distributed system have a single, current, and identical copy of
the data.
2. Availability: data is available at each node and the nodes are
responding to requests.
3. Partition tolerance ensures that if a group of nodes is unable to
communicate with other nodes due to network failures, the
distributed system continues to operate correctly. This can
occur due to network and node failures.
71
72
Decentralization using blockchain
► Decentralization is a core benefit and service provided by
blockchain technology.
► Blockchain is a perfect vehicle for providing a platform that does
not need any intermediaries and that can function with many
different leaders chosen via consensus mechanisms.
► This model allows anyone to compete to become the
decision-making authority.
► This competition is governed by a consensus mechanism, and the
most commonly used method is known as Proof of Work (PoW).
73
► Decentralization in blockchain refers to the distribution of
control, decision-making, and authority across a network, rather
than being controlled by a central entity (such as a government
or corporation).
► In a decentralized blockchain, no single party has full control over
the entire system.
► Instead, multiple participants (or nodes) collaborate to maintain,
validate, and secure the blockchain, ensuring transparency,
security, and trust without relying on a central authority.
74
Key aspects of decentralization in blockchain
► Distributed Ledger: The blockchain ledger is maintained across a
network of computers (nodes), and every participant has a copy
of the entire blockchain, making it harder for any single entity to
manipulate or control the data.
► Consensus Mechanisms: Decentralized blockchains rely on
consensus mechanisms (e.g., Proof of Work) to validate
transactions and add blocks to the chain. These mechanisms
ensure that all nodes agree on the state of the blockchain
without requiring a central authority.
75
► Security: In a decentralized system, since data is spread across
many participants, it is more resistant to hacking, fraud, or
censorship. To alter data on the blockchain, an attacker would
need to compromise a majority of the nodes, which is practically
very difficult.
► Transparency and Immutability: Since the data is distributed and
visible to all participants, it ensures transparency. Once data is
added to the blockchain, it becomes nearly impossible to change
(immutable), providing integrity to the system.
76
77
78
79
80
81
Different types of networks/systems
82
Methods of decentralization
1. Disintermediation
2. Contest-driven decentralization
83
► Disintermediation is when you remove the middleman (or intermediary)
in a transaction.
► Normally, if you want to send money to a friend , you'd use a bank. The
bank acts as a middleman, confirming and processing the payment for a
fee.
► However, with blockchain technology, you can send money directly to
your friend without the need for a bank. Instead of the bank keeping
track of the transaction, the blockchain does it in a decentralized way,
using an address for your friend.
► So, disintermediation through blockchain means you don't need a
trusted middleman like a bank to handle your transactions.
84
85
86
87
88
Contest-driven decentralization
89
► Contest-driven decentralization in blockchain means using
competitions or rewards to encourage people to participate in
the blockchain network.
► For example, in Bitcoin, miners compete to solve complex math
problems, and the first one to solve it gets rewarded with new
coins.
► This competition helps secure the network because more people
participate in validating transactions.
► Instead of relying on one central authority, like a bank, everyone
in the network has a chance to contribute and earn rewards. This
makes the system decentralized and more secure. 90
Routes to decentralization
► There were systems that pre-existed blockchain and Bitcoin,
including BitTorrent and the Gnutella file sharing system,
which to a certain degree could be classified as decentralized.
► The Bitcoin blockchain is typically the first choice for many, as it
has proven to be the most resilient and secure blockchain and has
a market cap of nearly $145 billion at the time of this writing.
► Alternatively, other blockchains, such as Ethereum, serve as the
tool of choice for many developers for building decentralized
applications.
► As compared to Bitcoin, Ethereum has become a more prominent
choice because of the flexibility it allows for programming any
business logic into the blockchain by using smart contracts.
91
Key routes to decentralization:
Peer-to-Peer (P2P) Networks
► In a decentralized blockchain, all participants (or nodes)
communicate directly with each other without relying on a
central server or authority.
► This ensures that no single entity has control over the network,
and the power is distributed among many participants.
92
Consensus Mechanisms
► Proof of Work (PoW): Miners compete to solve complex problems,
and the first to solve it gets to validate transactions. This encourages
decentralized participation by anyone who can provide computing
power.
► Proof of Stake (PoS): Validators are chosen based on how many coins
they hold and are willing to "stake" as collateral. This encourages
decentralization by letting anyone with a stake participate in validating
transactions.
► Delegated Proof of Stake (DPoS): A smaller group of elected delegates
validate transactions, reducing the number of active participants but
still keeping the system decentralized by using democratic voting.
93
Is a blockchain really needed? When is a blockchain required? In
what circumstances is blockchain preferred over traditional
databases?
94
95
96
97
Open-Source Protocols:
► Many decentralized blockchain networks are open-source,
meaning anyone can participate in their development or create
their own versions of the blockchain.
► This openness promotes decentralization because it allows
anyone to contribute to or fork the network.
98
How to decentralize
► The framework raises four questions whose answers provide a
clear understanding as to how a system can be decentralized:
1. What is being decentralized? Trading or identity system
2. What level of decentralization is required? Full disintermediation
or partial
3. What blockchain is used? Bitcoin or Etherium
4. What security mechanism is used?
99
The decentralization framework example
► A money transfer system as an example of an application selected
to be decentralized. The four questions discussed previously are
used to evaluate the decentralization requirements of this
application. The answers to these questions are as follows:
1. Money transfer system
2. Disintermediation
3. Bitcoin
4. Atomicity
100
