MODULE-1

Blockchain is a buzzword in today’s technology and this technology is described as the

most disruptive technology of the decade. Thus, Blockchain is used for the secure
transference of items like money, contracts, property rights, stocks, and even networks
without any requirement of Third Party Intermediaries like Governments, banks, etc. Once
the data is stored in the Blockchain it becomes very difficult to manipulate the stored data.
A Blockchain is a Network Protocol like SMTP. However, Blockchain cannot be run
without the Internet. BlockChain is useful in many areas like Banking, Finance, Healthcare,
Insurance, etc.

A blockchain is an open, distributed ledger that can record transactions between two parties
efficiently and in a verifiable and permanent waywithout the need for a central authority.

Key Characteristics:
● Open: Anyone can access blockchain.

● Distributed or Decentralised: Not under the control ofany single authority.

● Efficient: Fast and Scalable.

● Verifiable: Everyone can check the validity of information because each

node maintains a copyofthe transactions.

● Permanent: Once atransaction is done, it is persistent and can’t be altered.

Blockchain can be defined as the Chain of Blocks that contain some specific
Information. Thus, a Blockchain is a ledger i.e file that constantly grows and
keeps the record of all transactions permanently. This process takes place in a
secure, chronological (Chronological means every transaction happens after the
previous one) and immutable way. Each time when a block is completed in
storing information, a new block is generated.
Distributed Systems:

Understanding distributed systems is essential to our understanding blockchain, as blockchain was a distributed system
at its core. It is a distributed ledger that 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 the both
decentralized and distributed paradigms. It is a decentralized-distributed system.

Distributed systems are a computing paradigm whereby two or more nodes work with each other in a coordinated
fashion to achieve a common outcome. It is modeled in such a way that end users see it as a single logical platform. For
example, Google's search engine is based on a large distributed system; however, 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. There is no Central Server or System which keeps the data of Blockchain. The data is
distributed over Millions of Computers around the world which are connected with the Blockchain. This system allows
Notarization of Data as it is present on every Node and is publicly verifiable.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.

Nodes can be honest, faulty, or malicious and have their own memory and processor. A node that can exhibit arbitrary
behavior is also known as a Byzantine node. This arbitrary behavior can be intentionally malicious, which is detrimental
to the operation of the network. Generally, any unexpected behavior of a node on the network can be categorized as
Byzantine. This term arbitrarily encompasses any behavior that is unexpected or malicious.

The main challenge in distributed system design is coordination between nodes and fault tolerance. Even if some of the
nodes become faulty or network links break, the distributed system should tolerate this and should continue to work
flawlessly in order to achieve the desired result. This has been an area of active research for many years and several
algorithms and mechanisms has been proposed to overcome these issues.
A network of nodes: A node is a computer connected to the Blockchain Network. Node gets connected with Blockchain
using the client. Client helps in validating and propagates transaction on to the Blockchain. When a computer connects
to the Blockchain, a copy of the Blockchain data gets downloaded into the system and the node comes in sync with the
latest block of data on Blockchain. The Node connected to the Blockchain which helps in the execution of a Transaction
in return for an incentive is called Miners.
Disadvantages of current transaction system:
● Cash can only be used in low amount transaction locally.
● Huge waiting time in the processing of transactions.
● Need to third party for verification and execution of Transaction make the process complex.
● If the Central Server like Banks is compromised, whole System is affected including the participants.
● Organization doing validation charge high process thus making the process expensive.

Building trust with Blockchain:

Blockchain enhances trust across a business network. It’s not that you can’t trust those who you conduct business
with its that you don’t need to when operating on a Blockchain network.
Blockchain builts trust through the following five attributes:

● Distributed: The distributed ledger is shared and updated with every incoming transaction among the
nodes connected to the Blockchain. All this is done in real-time as there is no central server controlling the data.
● Secure: There is no unauthorized access to Blockchain made possible through Permissions and
Cryptography.
● Transparent: Because every node or participant in Blockchain has a copy of the Blockchain data, they
have access to all transaction data. They themselves can verify the identities without the need for mediators.
● Consensus-based: All relevant network participants must agree that a transaction is valid. This is
achieved through the use of consensus algorithms.
● Flexible: Smart Contracts which are executed based on certain conditions can be written into the
platform. Blockchain Network can evolve in pace with business processes.

History of Blockchain:

● In 1991, researcher scientists named Stuart Haber and W. Scott Stornetta introduce Blockchain Technology.
These scientists wanted some Computational practical Solution for time-stamping the digital documents so that they
couldn’t be tempered or misdated. So both scientists together developed a system with the help of Cryptography. In
this System, the time-stamped documents are stored in a Chain of Blocks.

● After that in 1992, Merkle Trees formed a legal corporation by using a system developed by Stuart Haber
and W. Scott Stornetta with some more features. Hence, Blockchain Technology became efficient to store
several documents to be collected into one block. Merkle used a Secured Chain of Block which stores multiple
data records in a sequence. However, this Technology became unused when Patent came into existence in 2004.

● However, in the same year 2004, Cryptographic activist Hal Finney introduced a system for digital
cash known as “Reusable Proof of Work”. This step was the game-changer in the history of Blockchain
and Cryptography. This System helps others to solve the Double Spending Problem by keeping the
ownership of tokens registered on a trusted server.

● After that in 2008, Satoshi Nakamoto conceptualized the concept of “Distributed Blockchain” under his white
paper: ”A Peer to Peer Electronic Cash System”. He modified the model of Merkle Tree and created a system that
is more secure and contains the secure history of data exchange. His System follows a peer- to- peer network
oftime stamping. His system became so useful that Blockchain become the backbone of
 Cryptography.

● After that, the evolution of Blockchain is steady and promising and became a need in various fields. Blockchain
technology is so secure that the following surprising news will give proof about that. A person named, James
Howells was an IT worker in the United Kingdom, he starts mining bitcoins which are part of Blockchain in 2009
and stopped this in 2013. He spends $17,000 on it and after he stopped he sells the parts of his laptop on eBay and
keep the drive with him so that when he needs to work again on bitcoin he will utilize it but while cleaning his
house in 2013, he thrashed his drive with garbage and now his bitcoins cost nearly $127 million. This money now
remains unclaimed in the Bitcoin system.

The blockchain is the public ledger of all Bitcoin transactions that have ever been exe‐ cuted. It is constantly growing as
miners add new blocks to it (every 10 minutes) to record the most recent transactions. The blocks are added to the
blockchain in a lin‐ ear, chronological order. Each full node (i.e., every computer connected to the Bitcoin network
using a client that performs the task of validating and relaying transactions) has a copy of the blockchain, which is
downloaded automatically when the miner joins the Bitcoin network. The blockchain has complete information about
addresses and balances from the genesis block (the very first transactions ever executed) to the most recently completed
block.

Blockchain is the backbone Technology of Digital CryptoCurrency BitCoin. The blockchain is a distributed database
of records of all transactions or digital event that have been executed and shared among participating parties. Each
transaction verified by the majority of participants of the system. It contains every single record of each transaction.
BitCoin is the most popular cryptocurrency an example of the blockchain. Blockchain Technology Records Transaction
in Digital Ledger which is distributed over the Network thus making it incorruptible. Anything of value like Land
Assets, Cars, etc. can be recorded on Blockchain as a Transaction.

One of the famous use of Blockchain is Bitcoin. The bitcoin is a cryptocurrency and is used to exchange digital assets
online. Bitcoin uses cryptographic proof instead of third-party trust for two parties to execute transactions over the
internet. Each transaction protects through digital signature.
Peer -to - Peer
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
a ledger is spread across the network among all peers in the network, and
each peer holds a copy of the complete ledger.
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. Nonetheless, it can be changed in rare scenarios wherein
collusion against the blockchain network succeeds in gaining more than 51 percent of the power.
There may be some legitimate reasons to change data in the blockchain once it has been added,
such as the right to be forgotten or right to erasure (also defined in General Data Protection
(GDPR) ruling

Updateable via consensus

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.
Blockchain can be thought of as a layer of a distributed peer-to-peer network running
on top of the internet, as can be seen in the following diagram.
Structure of a Block
BLOCK
A block in a blockchain network is similar to a link in a chain. In the field of cryptocurrency,
blocks are like records that store transactions like a record book, and those are encrypted into a
hash tree. There are a huge number of transactions occurring every day in the world. The users
need to keep track of those transactions, and they do it with the help of a block structure.
Generic structure of a Blockchain
Addresses
Addresses are unique identifiers that are used in a transaction on the blockchain to
denote sender and recipients
Transaction, Block and Peer to Peer Network
A transaction is the fundamental unit of a blockchain .
A Transaction represents a transfer of value from one address to another.
A block is composed of multiple transactions and some other elements such
as the previous block hash (hash pointer ), Timestamp and nonce
As the name implies , this is a network topology whereby all peers
can communicate with each other and send and receive messages.
 Features of Block chain
1. Distributed Consesus
2. Transaction Verification
3. Platforms for Smart Contracts Transferring Value
4. Transferring value between peers
5. Generating Cryptocurrency
6. Smart Property
7. Provider for security
8. Immutability
9. Uniqueness

Distributed Consesus
• This enables a blockchain to present a single version of truth that is agreed upon by all parties
without the requirement of a central authority.
• TRANSACTION VERIFICATION
• Any transactions posted from nodes on the blockchain are verified based on a predetermined set of
rules and only valid transactions are selected for inclusion in a block.
• PLATFORMS FOR SMART CONTRACTS
• A blockchain is a platform where programs can run that execute business logic on behalf of the users.
As explained earlier, not all blockchains have a mechanism to execute smart contracts; however,
this is now a very desirable feature.
 This enables a blockchain to present a single version of truth that is agreed upon by all parties
without the requirement of a central authority.
• TRANSACTION VERIFICATION
• Any transactions posted from nodes on the blockchain are verified based on a predetermined set of
rules and only valid transactions are selected for inclusion in a block.
• PLATFORMS FOR SMART CONTRACTS
• A blockchain is a platform where programs can run that execute business logic on behalf of the users.
As explained earlier, not all blockchains have a mechanism to execute smart contracts; however,
this is now a very desirable feature.
PROVIDER OF SECURITY
• Blockchain is based on proven cryptographic technology that ensures the Integrity and availability
of data.
• IMMUTABILITY
• This is another key feature of blockchain: records once added onto the blockchain are immutable.
There is the possibility of rolling back the changes but this is considered almost impossible to do
as it will require an unaffordable amount of computing resources. For example, in much desirable
case of bitcoin if a malicious user wants to alter the previous blocks then it would require
computing the PoW again for all those blocks that have already been added to the blockchain.
Applications of blockchain technology
1. Finance
2. Industry
3. Government
4. Media
5. Law and arts
Tiers of blockchain technology

1. Blockchain 1.0
2. Blockchain 2.0
3. Blockchain 3.0
4. Blockchain X (Generation X)
 BLOCKCHAIN 1.0
• This was introduced with the invention of bitcoin and is basically used for cryptocurrencies. Also,
as bitcoin was the first implementation of cryptocurrencies it makes sense to categorize Generation
1 of blockchain technology to only include cryptographic currencies. All alternative coins and
bitcoin fall into this category. This includes core applications such as payments and applications.
• BLOCKCHAIN 2.0
• Generation 2.0 blockchains are used by financial services and contracts are introduced in this
generation.This includes various financial assets, for example derivatives, options, swaps, and
bonds. Applications that are beyond currency, finance, and markets are included at this tier.
• BLOCKCHAIN 3.0
• Generation 3 blockchains are used to implement applications beyond the financial services industry
and are used in more general-purpose industries such as government, health, media, the arts, and
justice.
• GENERATION X (BLOCKCHAIN X)
• This is a vision of blockchain singularity where one day we will have a public blockchain service
available that anyone can use just like the Google search engine. It will provide services in all
realms of society. This is a public open distributed ledger with general-purpose rational agents
(Machina Economicus) running on blockchain, making decisions and interacting with other
intelligent autonomous agents on behalf of humans and regulated by code instead of law or paper
contracts.
 Types of Blockchain
Public blockchains
• Private blockchains
• Semi-private blockchains
• Sidechains
• Permissioned ledger
• Distributed ledger
• Shared ledger
• Fully private and proprietary blockchains
• Tokenized blockchain
• Tokenless blockchain
• Consensus in blockchain

The following two categories of consensus mechanism exist:

1. Proof _based , Leader_based or the Nakamoto consensus whereby a leader is elected and
proposes a final value.
2. Byzantine Fault tolerance _based , which is a more traditional approach based on rounds
of votes .

Proof of Work
This type of consensus mechanism relies on proof that enough computational resources
have been spent before proposing a value for acceptance by the network. This is used in
bitcoin and other cryptocurrencies. Currently , this is the only algorithm that has proven
astonishingly successful against Sybil Attacks.
CAP theorem:

The CAP theorem, also known as Brewer's theorem, was introduced by Eric Brewer in 1998 as a conjecture. In 2002,
it was proven as a theorem by Seth Gilbert and Nancy Lynch. The theorem states that any distributed system cannot
have consistency, availability, and partition tolerance simultaneously:

● Consistency is a property that ensures that all nodes in a distributed system have a single, current, and identical
copyof the data.

Consistency is achieved using consensus algorithms in order to ensure that all nodes have the same copy of
the data. This is also called state machine replication. The blockchain is a means for achieving state machine
replication.

● Availability means that the nodes in the system are up, accessible for use, and are accepting incoming requests
and responding with data without any failures as and when required. In other words, data is available at each
node and the nodes are responding...

The CAP theorem states that a distributed database system has to make a tradeoff between Consistency and
Availability when a Partition occurs. A distributed database system is bound to have partitions in a real-world
systemdue to network failure or some other reason.

The CAP Theorem is comprised of three components (hence its name) as they relate to distributed data
stores:
Consistency. All reads receive the most recent write or an error.

Availability. All reads contain data, but it might not be the most recent.

Partition tolerance.

The CAP Theorem is comprised ofthree components (hence its name) as theyrelate to distributed data stores:

● Consistency. Allreads receive the most recent write or an error.

● Availability. Allreads contain data, but it might not be the most recent.
● Partition tolerance. The system continues to operate despite network failures (ie; dropped partitions,
slow network connections, or unavailable network connections between nodes.)
In normal operations, your data store provides all three functions. But the CAP theorem maintains that when a distributed
database experiences a network failure, you can provide either consistency or availability.

It’s a tradeoff. All other times, all three can be provided. But, in the event of a network failure, a choice must be made.In
the theorem, partition tolerance is a must. The assumption is that the system operates on a distributed data store so the
system, by nature, operates with network partitions. Network failures will happen, so to offer any kind ofreliable service,
partition tolerance is necessary—the P of CAP.
That leaves a decision between the other two, C and A. When a network failure happens, one can choose to guarantee
consistency or availability:

● High consistency comes at the cost of lower availability.

● High availability comes at the cost of lower consistency.

Benefits and limitations of blockchain:

Numerous benefits of blockchain technology are being discussed in the industry and proposed by thought leaders
around the world in blockchain space. The top 10 benefits are listed and discussed as follows.

Decentralization :

This is a core concept and benefit of blockchain. There is no need for a trusted third partyor intermediary to validate

transactions; instead a consensus mechanism is used to agree onthe validity of transactions.

Transparency and trust :

As blockchains are shared and everyone can see what is on the blockchain, this allows the system to be transparent
and as a result trust is established. This is more relevant in scenarios such as the disbursement of funds or benefits
where personal discretion should be restricted.
Immutability:

Once the data has been written to the blockchain, it is extremely difficult to change it back. It is not truly immutable
but, due to the fact that changing data is extremely difficult and almost impossible, this is seen as a benefit to
maintaining an immutable ledger of transactions.

High availability:

As the system is based on thousands of nodes in a peer-to-peer network, and the data is replicated and updated on each
and every node, the system becomes highly available. Even if nodes leave the network or become inaccessible, the
network as a whole continues to work, thus making it highly available.

Highly secure:

Alltransactions on a blockchain are cryptographically secured and provide integrity.

Simplification of current paradigms:

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

Faster dealings:

In the financial industry, especially in post-trade settlement functions, blockchain can play a vital role by allowing the
quicker settlement of trades as it does not require a lengthy process of verification, reconciliation, and clearance because
a single version of agreed upon data is already available on a shared ledger between financial organizations.

Cost saving:

As no third party or clearing houses are required in the blockchain model, this can massively eliminate overhead
costs in the form of fees that are paid to clearing houses or trusted third parties.