MC4013 CRYTOCURRENCY AND BLOCKCHAIN TEHNOLOGY

UNIT I OVERVIEW OF BLOCKCHAIN

What is BLOCKCHAIN?

Blockchain is a system of recording information in a way that makes it difficult or

impossible to change, hack, or cheat the system. A blockchain is essentially a digital
ledger of transactions that is duplicated and distributed across the entire network of
computer systems on the blockchain.

Each block in the chain contains a number of transactions, and every time a new
transaction occurs on the blockchain, a record of that transaction is added to
every participant’s ledger. The decentralised database managed by multiple
participants is known as Distributed Ledger Technology (DLT).

Blockchain is a type of DLT in which transactions are recorded with an

immutable cryptographic signature called a hash .

This means if one block in one chain was changed, it would be immediately
apparent it had been tampered with. If hackers wanted to corrupt a blockchain
system, they would have to change every block in the chain, across all of the
distributed versions of the chain.

Blockchains such as Bitcoin   and Ethereum are constantly and continually

growing as blocks are being added to the chain, which significantly adds to the
security of the ledger.

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Bitcoin and Ethereum are popular examples of blockchains. Everyone is allowed to
connect to the blockchain and transact on them.
Simply put, a blockchain is a shared database or ledger. Pieces of data are stored in
data structures known as blocks, and each node of the network has an exact replica of the
entire database.

The basic application of the blockchain is to perform transactions in a secure network.

That’s why people use blockchain and ledger technology in different scenarios. One can
set up multichain to prevent unauthorized access to sensitive data. It is not available to
the public, and can only be available to authorized entities in the organization. It depends
on the organization which type it requires to choose for their work. 
By using blockchain we can track orders and payments from end to end.
Advantage using blockchain :
1. It provides greater trust among users. 
2. It provides greater security among data. 
3. Reduce the cost of production. 
4. Improve Speed. 
5. Invocation and tokenization.
6. It provides immutable records. 
7. Smart contracts
Disadvantages  using blockchain :
1. Data modification is not possible. 
2. It requires large storage for a large database. 
3. The owner cannot access the private key again if they forget or lose it.
 

Real life application of blockchain :

Here is a list of real world problem where we can use blockchain :

1. In a secure and full-proof voting management system. 
2. To supply chain management. 
3. In healthcare management. 
4. Real estate project. 
5. NFT marketplace. 
6. Avoid copyright and original content creation. 
7. In the personal identity system 
8. To make an immutable data backup.
9. Internet of Things

Permissionless Blockchain

It is also known as trustless or public blockchains, are available to everyone to participate

in the blockchains process that use to validate transactions and data. These are used in
the network where high transparency is required. 
Characteristics:

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 Permissionless blockchain has no central authority.
 The platform is completely open-source.
 Full transparency of the transaction.
 Heavy use of tokens.
  
Advantages:
 Everyone can participate only requirement is good hardware and internet.
 Bring trust among users or entities. 
 It has a high level of transparency as it’s a larger network. 
 Broader decentralization of access to more participants.
Disadvantages:
 Poor energy efficiency due to large network.
 Lower performance scalability.
 Less privacy as many of the things is visible.
 

Permissioned Blockchain

These are the closed network only a set of groups are allowed to validate transactions or
data in a given blockchain network. These are used in the network where high privacy
and security are required.
Characteristics:
 A major feature is a transparency based on the objective of the organization.
 Another feature is the lack of anatomy as only a limited number of users are allowed.
 It does not have a central authority.
 Developed by private authority.
Advantages:
 This blockchain tends to be faster as it has some nodes for validations.
 They can offer customizability.
 Strong Privacy as permission is needed for accessing transaction information.
 As few nodes are involved performance and scalability are increased.
Disadvantages:
 Not truly decentralized as it requires permission
 Risk of corruption as only a few participants are involved.
 Anytime owner and operator can change the rules as per their need.

Types of Blockchain

There are 4 types of blockchain:

 Public Blockchain.
 Private Blockchain.
 Hybrid Blockchain.
 Consortium Blockchain.

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1. Public Blockchain

These blockchains are completely open to following the idea of decentralization. They
don’t have any restrictions, anyone having a computer and internet can participate in the
network.
 As the name is public this blockchain is open to the public, which means it is not
owned by anyone. 
 Anyone having internet and a computer with good hardware can participate in this
public blockchain.
 All the computer in the network hold the copy of other nodes or block present in the
network
 In this public blockchain, we can also perform verification of transactions or records
Advantages:
 Trustable: There are algorithms to detect no fraud. Participants need not worry about
the other nodes in the network
 Secure: This blockchain is large in size as it is open to the public. In a large size, there
is greater distribution of records
 Anonymous Nature: It is a secure platform to make your transaction properly at the
same time, you are not required to reveal your name and identity in order to
participate.
 Decentralized: There is no single platform that maintains the network, instead every
user has a copy of the ledger.
Disadvantages:
 Processing: The rate of the transaction process is very slow, due to its large size.
Verification of each node is a very time-consuming process.
 Energy Consumption: Proof of work is high energy-consuming. It requires good
computer hardware to participate in the network
 Acceptance: No central authority is there so governments are facing the issue to
implement the technology faster.
Use Cases: Public Blockchain is secured with proof of work or proof of stake they can be
used to displace traditional financial systems. The more advanced side of this blockchain
is the smart contract that enabled this blockchain to support decentralization. Examples
of public blockchain are Bitcoin, Ethereum.

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2. Private Blockchain

These blockchains are not as decentralized as the public blockchain only selected nodes
can participate in the process, making it more secure than the others.
 These are not as open as a public blockchain.
 They are open to some authorized users only.
 These blockchains are operated in a closed network.
 In this few people are allowed to participate in a network within a
company/organization.
Advantages:
 Speed: The rate of the transaction is high, due to its small size. Verification of each
node is less time-consuming.
 Scalability: We can modify the scalability. The size of the network can be decided
manually.
 Privacy: It has increased the level of privacy for confidentiality reasons as the
businesses required.
 Balanced: It is more balanced as only some user has the access to the transaction
which improves the performance of the network.
Disadvantages:
 Security- The number of nodes in this type is limited so chances of manipulation are
there. These blockchains are more vulnerable.
 Centralized- Trust building is one of the main disadvantages due to its central nature.
Organizations can use this for malpractices.
 Count- Since there are few nodes if nodes go offline the entire system of blockchain
can be endangered.
Use Cases: With proper security and maintenance, this blockchain is a great asset to
secure information without exposing it to the public eye. Therefore companies use them
for internal auditing, voting, and asset management. An example of private blockchains is
Hyperledger, Corda.
3. Hybrid Blockchain
It is the mixed content of the private and public blockchain, where some part is controlled
by some organization and other makes are made visible as a public blockchain.
 It is a combination of both public and private blockchain. 
 Permission-based and permissionless systems are used.
 User access information via smart contracts
 Even a primary entity owns a hybrid blockchain it cannot alter the transaction
Advantages:
 Ecosystem: Most advantageous thing about this blockchain is its hybrid nature. It
cannot be hacked as 51% of users don’t have access to the network
 Cost: Transactions are cheap as only a few nodes verify the transaction. All the nodes
don’t carry the verification hence less computational cost.
 Architecture: It is highly customizable and still maintains integrity, security, and
transparency.
 Operations: It can choose the participants in the blockchain and decide which
transaction can be made public.
Disadvantages:

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 Efficiency: Not everyone is in the position to implement a hybrid Blockchain. The
organization also faces some difficulty in terms of efficiency in maintenance.
 Transparency: There is a possibility that someone can hide information from the
user. If someone wants to get access through a hybrid blockchain it depends on the
organization whether they will give or not.
 Ecosystem: Due to its closed ecosystem this blockchain lacks the incentives for
network participation.
Use Case: It provides a greater solution to the health care industry, government, real
estate, and financial companies. It provides a remedy where data is to be accessed
publicly but needs to be shielded privately. Examples of Hybrid Blockchain are Ripple
network and XRP token.

4. Consortium Blockchain :

It is a creative approach that solves the needs of the organization. This blockchain
validates the transaction and also initiates or receives transactions.
 Also known as Federated Blockchain. 
 This is an innovative method to solve the organization’s needs. 
 Some part is public and some part is private. 
 In this type, more than one organization manages the blockchain.
Advantages:
 Speed: A limited number of users make verification fast. The high speed makes this
more usable for organizations.
 Authority: Multiple organizations can take part and make it decentralized at every
level. Decentralized authority, makes it more secure.
 Privacy: The information of the checked blocks is unknown to the public view. but any
member belonging to the blockchain can access it.
 Flexible: There is much divergence in the flexibility of the blockchain. Since it is not a
very large decision can be taken faster.
Disadvantages:
 Approval: All the members approve the protocol making it less flexible. Since one or
more organizations are involved there can be differences in the vision of interest.
 Transparency: It can be hacked if the organization becomes corrupt. Organizations
may hide information from the users.
 Vulnerability: If few nodes are getting compromised there is a greater chance of
vulnerability in this blockchain
Use Cases: It has high potential in businesses, banks, and other payment processors.
Food tracking of the organizations frequently collaborates with their sectors making it a
federated solution ideal for their use. Examples of consortium Blockchain are Tendermint
and Multichain.

STRUCTURE OF BLOCKCHAIN
The blockchain data structure is an ordered, back-linked list of blocks of transactions.
The blockchain can be stored as a flat file, or in a simple database. The Bitcoin Core client
stores the blockchain metadata using Google's LevelDB database.

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Core Component of Blockchain
Blockchain:
In 1991, the term blockchain was coined. Blockchain’s founder was an anonymous person
who goes by the pseudonym Satoshi Naka Moto. For the first time in 2009, the blockchain
was implemented in accordance with bitcoin and bitcoin is a crypto valuta.  Due to its
open-source nature, Blockchain has grown geometrically. Bitcoin was the first prominent
blockchain. It is a decentralized technology, an unchangeable ledger for documenting
transactions between two parties. A blockchain is a chain of blocks containing unique
data that solves the problem of double-spending
Core components of Blockchain:
Setup of Blockchain and Network operations are based on the four core components that
are –
 The Distributed Ledger –
The record of all transactions is a blockchain itself. Bitcoin is the original currency of
the Bitcoin blockchain. It is decentralized, which serves its advantage. Soon we’ll be in
a position to set up and manage our own digital identity, and that’s so fast.
 
 Peer-to-Peer Networks (P2P) –
Many nodes are linked to the Internet in a clustered way. It Stores the complete
synchronized blockchain edition. At all points of time, each node in Peer-to-Peer
networks agrees to one blockchain state, so that anyone can check a transaction
independently. It works mainly on a decentralized system.
 
 Consensus Mechanism –
It is built on the Consensus Algorithm and protocol. It is a Process that utilizes
protocol and algorithm so that nodes will agree on the same state of the blockchain
without having to trust one another. It is a series of rules that control the whole
network operation and all core components. Since bitcoin is having a protocol so it is a
member of the consensus Mechanism. Two of the most popular consensus algorithms
and their respective incentive Mechanism are Proof-of-stake and Proof-of-work. To
secure the network the Proof-of-work uses intensive Resource as compare to Proof-of-
Stake. A proof-of-work secure the blockchain. When we combine Ledger and Peer-to-
Peer network the result obtained is not inherently secure and reliable but by using the
Consensus Mechanism we can make the obtained result secure, reliable, and
inherently immutable.
 
 Incentive Mechanism –
The original currency encourages participation in the decentralized network. While
discussing blockchain we can consider an incentive as a transaction, so the transaction
has to be secure, it means we have to check the security of an Incentive by analyzing
the mutual behavior of intermediates nodes. If intermediate nodes are Honest and
participate successfully then they are awarded from a blockchain transaction. An
incentive mechanism is receiver-collusion resistant or a receiver-non competitive
resistant, where the receiver and any party of his neighbors, using any strategic
profile other than that, cannot maximize their anticipated amount of utilities.
Application of blockchain: 
 For Loans

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 For supply chains
 For mortgage
 For identity verification
 Emirate’s business
Advantages of Blockchain:
 High security and less fraud
 Low-cost transaction
 Faster processing time
 Free of friction
 Assets are controlled by the owner
 Verification is independent
 More transaction trust
 It is completely transparent, so it is safer.
Disadvantage of Blockchain:
 Not suitable where data has to be deleted.
 It’s really energy-intensive

DATA DISTRIBUTION IN BLOCK CHAIN

Blockchain relies on distributed ledger technology (DLT). The DLT acts as a
decentralized database of information about transactions between various parties.
Operations fill the DLT in chronological order and are stored in the ledger as a series of
blocks.

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Blockchain is one type of a distributed ledger. 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).
BLOCK VALIDATION IN BLOCKCHAIN
A blockchain validator is someone who is responsible for verifying transactions on a
blockchain. Once transactions are verified, they are added to the distributed ledger.
For a public blockchain, the decision to add a transaction to the chain is made by
consensus. This means that the majority of “nodes” (or computers in the network) must
agree that the transaction is valid. The people who own the computers in the network
are incentivized to verify transactions through rewards.

HOWBLOCKSAREVALIDATED
What makes a Bitcoin transaction successful only after it has been validated, so how does
bitcoin get validated? Once you make a transaction on a blockchain, your transaction data
gets stored in a new block; this new block is then added to the blockchain system. Before
this process can occur, the information contained in the block must first be verified by the
network. This is made possible by the creation of a hash.  

Hash and how they are created

The sole purpose of a hash is to identify data stored in the block; it is a 256-bit number
created by nodes. Hash is created when several nodes come together to solve complex
mathematical problems. After successfully solving these complex maths problems, each

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 node has to ensure their calculations are right. The creation of a new hash and solving of
mathematical problems is known as mining. Nodes are the miners who use the computer
(computers with high computational power) and specialized computer hardware to solve
these complex, mathematical problems.  

Blockchain validation protocols

With the absence of a centralized authority, validation protocols become essential for the
operation of the blockchain. These protocols are generally apparent when trading
transactions through platforms like Bitcoin code are in operation. here are some of the
main protocols;  

Proof of Works (PoW)

This protocol is the first. It was introduced with bitcoin in 2009 and remains the most used
across all blockchain networks. It works for Bitcoin, Ethereum, Bitcoin, and many others,
but on the downside, mining using the Proof of Works system starts very simple with little
demand for computing power and electricity,  but as the network grows, so makes the
demand for more power. This is why mining top cryptos demands high technology gadgets
and electricity consumption; mining is less eco-friendly and expensive for miners to
maintain.  

Proof of Stake(PoS)
Proof of Stake was created to correct the shortcomings of Proof of Works; this protocol
makes the mining process more accessible by reducing the computing power required to
mine. This protocol has some rules and methods for picking nodes. These rules are based
on;

 random selection
 selection based on speed
 selection based on seniority
 selection based on a vote
Another feature introduced by Proof of Stake is the payment method. All coins are pre-
mined and issued, so nodes are rewarded with a transaction fee rather than being paid in
newly issued coins. It is important to note that nodes are regarded as forgers, not miners
because mining doesn’t occur. Proof of Works and Proof of Stake protocols are the main
validation protocols. Every other protocol in the blockchain is mostly just variants. Each of
these variants attempts to solve one shortcoming or the other. There are many more
protocols but let us stop at these two. Let us have it at the back of our mind that validation
protocol is essential; it has witnessed a lot of changes; these changes are meant to make it
better.  

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Proof of Burn Consensus Algorithm in Blockchain
Blockchain is the backbone technology of digital cryptocurrency Bitcoin that allows
digital information to be decentralized and distributed. It provides immutability, privacy,
security, and transparency. In Blockchain no central authority is present to validate and
verify the transactions, yet every transaction in the Blockchain is
completely secured and verified. The transactions are considered to be secured and
verified because of the consensus protocol which is a core part of any Blockchain
network.
Consensus Algorithm: A consensus algorithm is an algorithm or we can say a procedure
through which all the peers of the Blockchain network reach a common
agreement about the present state of the distributed ledger. In this way, consensus
algorithms help to achieve reliability in the Blockchain network and establish trust
between unknown peers in a distributed computing environment. It makes sure that
every new block that is added to the Blockchain is the one and only version of the truth
that is agreed upon by all the nodes in the Blockchain.
Proof of Work (PoW): Bitcoin uses a PoW consensus algorithm . This algorithm is used to
select a miner for the next block generation. The idea behind this algorithm is to solve a
complex mathematical puzzle that requires a lot of computational power and easily gives
out a solution. Thus, the node that solves the mathematical puzzle as soon as possible
gets to mine the next block.
Proof of Burn (PoB): With PoB, instead of investing in expensive hardware equipment,
the validators follow the following approach:
 They burn coins by sending them to an address from where they are irretrievable. 
 By committing the coins to an unreachable address, validators earn a privilege to mine
on the system based on a random selection process.
 Thus, burning coins means that validators have a long-term commitment in exchange
for their short-term loss.
 Depending on how the PoB is implemented, miners may burn the native currency of
the Blockchain application or the currency of an alternative chain, such as bitcoin.
 The more coins validators burn, the better are their chances of being selected to mine
the next block.
While PoB is an interesting alternative to PoW, the protocol still wastes resources
needlessly. It is also questioned that mining power simply goes to those who are willing
to burn more money.
Why Proof of Burn Required?
There were some drawbacks in the PoW consensus algorithm which made researchers
work towards a new consensus algorithm i.e PoB.
 The first drawback is that the power consumption of PoW is very high. Miners are
awarded by upgrading the ledger under a POW model. Computational power is
employed to solve a math problem in exchange for remuneration. Greater the money a
miner spends to solve the problem, the greater the chances that they will be allowed
to mine blocks.
 PoW requires very high capital investments.
How PoB Works?
1. As the name itself suggests, there is something which should be burned. Here as we
are talking in the context of virtual currency so it’s obvious that in PoB virtual

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 currency is burned. The more the currencies are burned by miners the more they have
the power to create blocks.
2. By burning we don’t exactly mean burning. It means not using that coin. This may be
done if it is sent to somewhere where it can’t be spent. So miners send these coins to
such addresses from where they can’t be used. It is sent to a public verifiable address
where it cannot be accessed and thus can not be used.
3. When the coin is burnt its availability decreases leading to a potential increase in the
value of the coin.
4. Now the question is why do we need to burn the coin? The basic explanation for this is
that by destroying the currency, the consumer is displaying a big commitment to the
currency by foregoing a narrow profit in exchange for a long-term profit.
5. To avoid any undue advantages for early adopters, the PoB has devised a method that
allows for the periodic burning of crypto coins in order to maintain mining capacity.
Any time a fresh block is mined, the energy of burned coins decreases slightly.
6. It is a deflationary idea in which the quantity of currencies reduces over time,
increasing deficiency and, as a result, the currency holders’ value. Coins that grow
their quantity over time, on the other hand, tend to lose value.
Proof of Stake (PoS):
Another commonly used consensus algorithm is PoS (Proof of Stake). This is the most
common alternative to PoW. In this consensus algorithm, instead of investing in
expensive hardware to solve a complex mathematical puzzle, the validator uses the
following approach:
 They invest in the coins by locking up some of their coins as a stake.
 All the validators will start validating the blocks.
 Validators will validate blocks by placing a bet on them if they find a block that they
think can be added to the chain.
 Based on the actual blocks added in the Blockchain, all the validators get a reward
proportionate to their bets, and their stake increase accordingly.
 In the end, a validator is chosen based on their economic stake in the network to
generate a new block.
Thus, PoS encourages validators through an incentive mechanism to reach an agreement.
It doesn’t use hash functions, it uses digital signatures as the proof of ownership of the
coins. Block forgers or minters are used for the validation of new blocks. The forger who
puts more coins at stake has a greater chance to be selected as the block validator. There
are no block rewards in the PoS system.
Advantages of PoB Over PoS: In Pos blockchain, market scarcity is not permanent. The
scarcity is only for a certain amount of time i.e. until the forger stakes their coin which is
usually done by locking them up. But the coins come back into circulation if the forger
who is leaving takes those coin and sell them in the market. While in the case of PoB the
coins are destroyed thus the scarcity is permanent.
Advantages of PoB:
 It required very little power compared to PoW.
 It reduces energy consumption by wasting insignificant resources when coins are
burned.
 It encourages long-term involvement in a project as a consumer is displaying a big
commitment to the currency by foregoing a narrow profit in exchange for a long-term
profit.
 The coin distribution is more fair compared to all other consensuses.

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Disadvantages Of PoB:
 It is risky because one doesn’t know that will they gain the wealth they have burnt in
the future or not.
 As coins are burnt, so technically if we see then resources are wasted.
 It may suffer from rich getting richer phenomena. In which those who are wealthy are
getting wealthier by having more coins.

Proof of Elapsed Time (PoET)

What Is Proof of Elapsed Time (PoET)?

Proof of elapsed time (PoET) is a blockchain network consensus mechanism that prevents

high resource utilization and energy consumption; it keeps the process more efficient by
following a fair lottery system.

The algorithm uses a randomly generated elapsed time to decide mining rights and block
winners on a blockchain network. By running a trusted code within a secure environment,
the PoET algorithm also enhances transparency by ensuring lottery results are verifiable
by external participants.

 Proof of elapsed time (PoET) is a consensus algorithm developed by Intel

Corporation that enables permissioned blockchain networks to determine who
creates the next block.
 PoET follows a lottery system that spreads the chances of winning equally across
network participants, giving every node the same chance.
 The PoET algorithm generates a random wait time for each node in the blockchain
network; each node must sleep for that duration.
 The node with the shortest wait time will wake up first and win the block, thus
being allowed to commit a new block to the blockchain.
 The PoET workflow is similar to Bitcoin's proof of work (PoW) but consumes less
power because it allows a node to sleep and switch to other tasks for the specified
time, thereby increasing network energy efficiency.

Understanding Proof of Elapsed Time (PoET)

A consensus mechanism is a method used by blockchain networks to verify transactions

and create more blocks. Proof of elapsed time (PoET) is a consensus mechanism often
used on permissioned blockchain networks to decide the mining rights or the block
winners on the network. Permissioned blockchain networks are types that require any
would-be participant to identify themselves before they are allowed to join.

The PoET network consensus mechanism needs to ensure two crucial factors. First, it
ensures that the participating nodes genuinely select a time that is indeed random and not
a shorter duration chosen purposely by the participants to win. Second, it establishes that
the winner has completed the waiting time.

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Proof of elapsed time uses much less energy than proof of work since it randomly selects a
node instead of using all the miners on a network in a competition.
The PoET concept was invented in early 2016 by Intel Corporation (INTC), the chip
manufacturing giant.1 It offers a readymade high-tech tool to solve the
computing problem of "random leader election." The ingrained mechanism allows
applications to execute trusted code in a protected environment, ensuring that
both requirements—randomly selecting the waiting time for all participating nodes and
genuine completion of waiting time by the winning participant—are fulfilled.

Proof of authority (PoA) is an algorithm used with blockchains that delivers

comparatively fast transactions through a consensus mechanism based on identity as a
stake.
In PoA-based networks, transactions and blocks are validated by approved accounts,
known as validators. Validators run software allowing them to put transactions in blocks.
The process is automated and does not require validators to be constantly monitoring their
computers.
Sufficient proof of authority means documentation that shows a representative has
authority to act on behalf of a protected consumer. "

The Proof-Of-Authority (PoA) is a consensus method that gives a small and designated

number of blockchain actors the power to validate transactions or interactions with
the network and to update its more or less distributed registry .

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