Unit I: Role of Cryptography in Blockchain

Introduction to Cryptography:
Cryptography is the science of using mathematics to encrypt and decrypt data.
Cryptography enables you to store sensitive information or transmit it across insecure networks
so that it cannot be read by anyone except the intended recipient. The art and science of
concealing the messages to introduce secrecy in information security is recognized as
cryptography. Cryptography is the practice of securing communication from unauthorized
access by converting the original information into a secret code that can only be read by
authorized individuals.
Cryptography is the study of secure communications techniques that allow only the
sender and intended recipient of a message to view its contents. The term is derived from the
Greek word kryptos, which means hidden. As civilizations evolved, human beings got
organized in tribes, groups, and kingdoms. This led to the emergence of ideas such as power,
battles, supremacy, and politics. These ideas further fuelled the natural need of people to
communicate secretly with selective recipient which in turn ensured the continuous evolution
of cryptography as well.
The roots of cryptography are found in Roman and Egyptian civilizations. Ancient
Egyptians were known to use these methods in complex hieroglyphics, and Roman Emperor
Julius Caesar is credited with using one of the first modern ciphers. Some 4000 years ago, the
Egyptians used to communicate by messages written in hieroglyph. Caesar Shift Cipher relies
on shifting the letters of a message by an agreed number (three was a common choice), the
recipient of this message would then shift the letters back by the same number and obtain the
original message. The Caesar cipher is named after Julius Caesar, who used it with a shift of
three to protect messages of military significance.

It involves techniques for secure communication in the presence of third parties, often
referred to as adversaries or attackers. Cryptography uses mathematical algorithms to convert
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the original message, called plaintext, into an unintelligible form, called ciphertext. Only
individuals who have the knowledge to convert the ciphertext back into plaintext can access
the original message. It is closely associated to encryption, which is the act of scrambling
ordinary text into what's known as ciphertext and then back again upon arrival.

A message is plaintext (sometimes called cleartext). The process of disguising a message in

such a way as to hide its substance is encryption. An encrypted message is ciphertext. The
process of turning ciphertext back into plaintext is decryption. A cipher (or cypher) is an
algorithm for performing encryption or decryption—a series of well-defined steps that can be
followed as a procedure.
The various components of a cryptography are −
• Plaintext: It is the data to be protected during transmission.
• Encryption Algorithm: It is a mathematical process that produces a ciphertext for any
given plaintext and encryption key. It is a cryptographic algorithm that takes plaintext
and an encryption key as input and produces a ciphertext.
• Ciphertext: It is the scrambled version of the plaintext produced by the encryption
algorithm using a specific the encryption key. The ciphertext is not guarded. It flows
on public channel. It can be intercepted or compromised by anyone who has access to
the communication channel.
• Decryption Algorithm: It is a mathematical process, that produces a unique plaintext
for any given ciphertext and decryption key. It is a cryptographic algorithm that takes
a ciphertext and a decryption key as input, and outputs a plaintext. The decryption
algorithm essentially reverses the encryption algorithm and is thus closely related to it.

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 • Encryption Key: It is a value that is known to the sender. The sender inputs the
encryption key into the encryption algorithm along with the plaintext in order to
compute the ciphertext.
• Decryption Key: It is a value that is known to the receiver. The decryption key is
related to the encryption key but is not always identical to it. The receiver inputs the
decryption key into the decryption algorithm along with the ciphertext to compute the
plaintext.
• An interceptor (an attacker) is an unauthorized entity who attempts to determine the
plaintext. He can see the ciphertext and may know the decryption algorithm. He,
however, will never know the decryption key.
Features Of Cryptography:
1. Confidentiality: Information can only be accessed by the person for whom it is
intended and no other person except him can access it.
2. Integrity: Information cannot be modified in storage or transition between sender and
intended receiver without any addition to information being detected.
3. Non-repudiation: The creator/sender of information cannot deny his intention to send
information at later stage.
4. Authentication: The identities of sender and receiver are confirmed. As well as
destination/origin of information is confirmed.
Types of Cryptography:
In general, there are three types of cryptography.
1. Symmetric Key Cryptography
2. Asymmetric Key Cryptography
3. Hash Functions
1. Symmetric Key Cryptography: It is a process to change the form of any message to
protect it from reading by anyone. In Symmetric-key encryption the message is
encrypted by using a key and the same key is used to decrypt the message which makes
it easy to use but less secure. It also requires a safe method to transfer the key from one
party to another. Such an approach of encoding data has been largely used to facilitate
secret communication between governments and militaries. With this form of
cryptography, the key should be known to both the sender and the receiver. The
complexity with this approach is the distribution of the key.

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 Examples of symmetric-key algorithms: Advanced Encryption Standard (AES) and
Data Encryption Standard (DES), Triple Data Encryption Standard (Triple DES),
International Data Encryption Algorithm (IDEA).
2. Asymmetric Key Cryptography: It uses a pair of keys for the encryption and
decryption of the data – the keys are known as the public key and private key,
respectively. The private key is kept a secret with the owner and is used to decrypt the
data encrypted with the public key made available to everyone in the public domain.
Another use of this type of algorithm is for user authentication where the data encrypted
with the private key can be decrypted with the public key to verify the fact that only the
owner of the private key can encrypt the data. Since this type of algorithm doesn’t rely
on a single key for security, it overcomes the limitation of the symmetric key algorithms
and is used for information exchange on the internet as a part of various information
exchange protocols. One of the major limitations of these algorithms as compared to
symmetric algorithms is that they are computationally expensive hence using them
frequently within a process is not easy.

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Examples of Asymmetric-key algorithms: Rivest Shamir Adleman (RSA), Digital Signature
Standard (DSS), Digital Signature Algorithm (DSA), Elliptical Curve Cryptography (ECC),
Diffie-Hellman exchange method.

Symmetric Key Encryption Asymmetric Key Encryption

It requires two keys, a public key

It only requires a single key for both and a private key, one to encrypt
encryption and decryption. and the other one to decrypt.

The size of cipher text is the same or The size of cipher text is the same or
smaller than the original plain text. larger than the original plain text.

The encryption process is very fast. The encryption process is slow.

It is used when a large amount of It is used to transfer small amounts

data is required to transfer. of data.

It provides confidentiality,
It only provides confidentiality. authenticity, and non-repudiation.

The length of key used is 128 or 256 The length of key used is 2048 or
bits higher

In symmetric key encryption,

resource utilization is low as
compared to asymmetric key In asymmetric key encryption,
encryption. resource utilization is high.

It is efficient as it is used for handling It is comparatively less efficient as it

large amount of data. can handle a small amount of data.

Security is less as only one key is It is more secure as two keys are
used for both encryption and used here- one for encryption and
decryption purpose. the other for decryption.

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 Symmetric Key Encryption Asymmetric Key Encryption

Examples: 3DES, AES, DES and Examples: Diffie-Hellman, ECC, El

RC4 Gamal, DSA, and RSA

3. Hash Functions: A cryptographic hash function is a hash function that takes an arbitrary block
of data and returns a fixed-size bit string, the cryptographic hash value, such that any
(accidental or intentional) change to the data will (with very high probability) change the hash
value. The data to be encoded are often called the message, and the hash value is sometimes
called the message digest or simply digest.

The ideal cryptographic hash function has four main properties:

• It is easy to compute the hash value for any given message.
• It is infeasible to generate a message that has a given hash.
• It is infeasible to modify a message without changing the hash.
• It is infeasible to find two different messages with the same hash.
Examples of Hash algorithms: MD5, SHA-1, SHA-2, NTLM, and LANMAN
Applications:
• Secure communication: Cryptography is widely used to secure communication
channels between two or more parties. This includes email, instant messaging, voice
calls, and video conferencing.
• Online transactions: Cryptography plays a vital role in securing online transactions,
including online banking, e-commerce, and mobile payments. This ensures that
sensitive financial information is protected from unauthorized access.
• Password protection: Cryptography is used to protect passwords by encrypting them.
This ensures that passwords cannot be easily cracked, thereby providing an additional
layer of security to user accounts.
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 • Digital signatures: Cryptography is used to create digital signatures that verify the
authenticity of electronic documents, including contracts and legal documents.
• Data protection: Cryptography is used to protect sensitive data, including medical
records, personal information, and intellectual property. This ensures that the data
cannot be easily accessed by unauthorized users.
• Military and Intelligence Operations: Cryptography is used to secure classified
information in military and intelligence operations. This includes encrypted
communication channels, encrypted files, and encrypted data storage.
• IoT security: Cryptography is used to secure Internet of Things (IoT) devices, ensuring
that they are not vulnerable to attacks that can compromise their functionality or data
security.
• Blockchain technology: Cryptography is a key component of blockchain technology,
which is used to secure transactions and maintain the integrity of the blockchain.
Advantages:
• Confidentiality: Cryptography allows for the encryption of messages or data, ensuring
that only authorized parties can access the information. This can be especially important
for sensitive or private information.
• Integrity: Cryptography can be used to ensure the integrity of data by verifying that it
has not been altered in transit. This can be accomplished through the use of digital
signatures or message authentication codes.
• Authentication: Cryptography can be used to authenticate the identity of the sender or
recipient of a message or data. This is commonly achieved through the use of digital
certificates or public key infrastructure.
• Non-repudiation: Cryptography can be used to provide non-repudiation, meaning that
the sender of a message or data cannot later deny having sent it.
• Security: Cryptography can be used to provide a high level of security for information
and data. This can be especially important in situations where unauthorized access or
theft of information could have serious consequences.
Use of Cryptography in Blockchain: Cryptography is a method of securing data from
unauthorized access. In the blockchain, cryptography is used to secure transactions
taking place between two nodes in a blockchain network. As discussed above, in a
blockchain there are two main concepts cryptography and hashing. Cryptography is
used to encrypt messages in a P2P network and hashing is used to secure the block
information and the link blocks in a blockchain. Cryptography primarily focuses on

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 ensuring the security of participants, transactions, and safeguards against double-
spending. It helps in securing different transactions on the blockchain network. It
ensures that only the individuals for whom the transaction data is intended can obtain,
read and process the transaction. Cryptography plays a crucial role in blockchain
technology by ensuring the security, integrity, and privacy of transactions and data.
Some of the key cryptographic techniques used in blockchain include:
• Hash functions: Hash functions are used to convert the data in a block into a fixed-
length digital fingerprint or hash. This ensures the integrity of the data as even a small
change in the data results in a completely different hash. A hash function is a
mathematical function that takes in an input (or 'message') of arbitrary length and
produces a fixed-size output. Message authentication: Hash functions are used to
verify the integrity of messages or data, ensuring that they have not been tampered with
or modified. Digital signatures: Hash functions are used in digital signature schemes
to provide a unique identifier for a message or document. Password storage: Hash
functions are often used to store passwords securely, so that the original password is
not stored in plain text and is not easily recoverable. Data indexing: Hash functions
are used in databases and search engines to quickly locate data based on its hash value.
Encryption: Hash functions can also be used in encryption algorithms to create a
unique encryption key based on the hash of a given input.

• Public key cryptography: Public key cryptography is used to authenticate and encrypt
transactions. In blockchain, each user has a public and private key. The public key is
used to encrypt the transaction, while the private key is used to decrypt it. This ensures
that only the intended recipient can read the transaction.
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• Digital signatures: Digital signatures are used to verify the authenticity of transactions.
In blockchain, each user signs their transactions with their private key, which is then
verified using their public key. A digital signature is a mathematical scheme for
verifying the authenticity and integrity of digital documents or messages. It is a way of
providing assurance that a document or message has not been altered or tampered with
since it was digitally signed by the sender. Digital signatures work by using
cryptographic algorithms to create a unique digital signature that can only be generated
by the sender of the document. This signature is created by combining the document's
content with the sender's private key, which is kept secret and known only to the sender.
To verify the authenticity of a digital signature, the recipient of the document or
message can use the sender's public key to decrypt the signature and compare it with a
newly generated signature created from the same content. If the two signatures match,
it provides assurance that the document or message has not been tampered with since it
was digitally signed. Digital signatures are widely used in electronic transactions, such
as online banking and e-commerce, to provide a secure and reliable way to authenticate
the identity of the sender and ensure the integrity of the transmitted data. They are also
commonly used in government and legal contexts, where the authenticity and integrity
of documents are of utmost importance.

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 • Merkle trees: Merkle trees are used to verify the integrity of data in a block. Each
block contains a Merkle tree, which is a hierarchical data structure that summarizes all
the transactions in the block. This allows for efficient and secure verification of the
data. Merkle trees, also known as hash trees, are a data structure used to efficiently
verify the integrity and consistency of large amounts of data. They were invented by
Ralph Merkle in 1979. Merkle trees are built by recursively hashing pairs of data until
a single hash value, called the root hash, is produced. Each level of the tree contains
hash values of the data below it. The leaves of the tree are the original data items. One
of the key properties of Merkle trees is that changing any piece of data in the tree results
in a different root hash value. This property allows for the efficient detection of any
changes or errors in the data. Merkle trees are commonly used in distributed systems,
such as blockchain, to ensure the integrity of data stored across multiple nodes. In a
blockchain, each block contains a Merkle tree of the transactions included in that block,
and the root hash of the tree is included in the block header. This allows nodes to quickly
verify that the transactions in a block have not been tampered with by checking the root
hash against the block header.

Cryptographic algorithm: A cryptographic algorithm is the mathematical equation used to

scramble the plain text and make it unreadable. They are used for data encryption,
authentication, and digital signatures.
There are three types of cryptography:
• Symmetric-key cryptography: Both sender and receiver share a single key and the
sender uses this key to encrypt plaintext. The cipher text is sent to the receiver, and the
receiver can apply this same key to decrypt the message and recover the plain text from
the sender.

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 • Public-key or asymmetric cryptography: In public key cryptography (PKI), also
known as asymmetric cryptography, there are two related keys called the public and
private key. While the public key may be freely distributed, the paired private key must
remain confidential. The public key is used for encryption and the private key is used
for decryption. The most used asymmetric cryptography algorithms are RSA and ECC.
TLS/SSL certificates frequently use RSA keys, and the recommended size of these keys
is continually increasing (e.g.,1024 bit to 2048 bit) to maintain sufficient cryptographic
strength. An alternative to RSA is ECC, which can offer the same level of cryptographic
strength at much smaller key sizes, offering improved security with reduced
computational and storage requirements.
• Hash-function: No key is used in this algorithm, but a fixed-length value is calculated
from the plaintext, which makes it impossible for the contents of the plaintext to be
recovered. Hash functions are often used by computer systems to encrypt passwords. A
popular hash algorithm is 256-SHA.

Cryptographic Elements: Cryptographic elements are the fundamental building blocks of

cryptography, which is the science of secure communication in the presence of adversaries.
Cryptographic elements are used to protect sensitive information such as passwords, financial
transactions, and other types of confidential data. The following are some of the most important
cryptographic elements:
• Encryption: Encryption is the process of transforming plaintext into ciphertext to
prevent unauthorized access to information. It involves using a cryptographic algorithm

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 and a secret key to scramble the original message, making it unreadable to anyone who
doesn't have the key.
• Decryption: Decryption is the process of transforming ciphertext back into plaintext
using the same cryptographic algorithm and secret key that were used for encryption.
Only those who have the key can decrypt the message.
• Hashing: Hashing is the process of taking an input and generating a fixed-size output,
called a hash. A hash function should be one-way, meaning that it is practically
impossible to recover the original input from the hash.
• Digital signatures: A digital signature is a mathematical technique used to verify the
authenticity and integrity of a message or document. It involves using a private key to
create a unique digital signature, which can then be verified using the corresponding
public key.
• Key management: Key management involves generating, storing, distributing, and
revoking cryptographic keys. Secure key management is critical to the security of
cryptographic systems.
• Random number generation: Random numbers are often used in cryptography to
provide a source of unpredictability. A good random number generator should be
unpredictable and unbiased.
Cryptocurrency and its Benefits: Cryptocurrency is a digital or virtual currency that uses
cryptography for security and operates independently of a central bank. Cryptocurrencies use
decentralized technology, such as blockchain, to enable peer-to-peer transactions and to create
a secure and transparent way to transfer funds without the need for a middleman or
intermediary. cryptocurrencies became a worldwide phenomenon during the talk that they are
visiting to replace general currencies within the near future. Cryptocurrencies adoption
continues to understand momentum partially due to the world’s progression towards a cashless
society. The fact that some people, nowadays, transact through electronic money continues to
affirm suggestions that cryptocurrencies could be the currencies of the long term. However, it
will take it slow before they find their way into the mainstream sector, given the strong
opposition from regulators worldwide. Cryptocurrencies have gained popularity as a
speculative investment, as well as a means of payment for goods and services in some cases.
However, the lack of regulation and the potential for volatility have also raised concerns among
some investors and regulators. Some of the most popular cryptocurrencies include Bitcoin,
Ethereum, and Litecoin etc…

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Benefits of Cryptocurrency:

• Decentralization: Cryptocurrency is decentralized, which means it is not controlled by

any government or financial institution. This gives users greater freedom and control
over their money.
• Security: Cryptocurrency uses advanced cryptographic techniques to ensure the
security and privacy of transactions. This makes it almost impossible for hackers to
steal your funds.
• Transparency: All transactions on the blockchain are transparent and can be viewed
by anyone. This increases accountability and reduces the risk of fraud.
• Speed: Cryptocurrency transactions are processed almost instantly, eliminating the
need for intermediaries such as banks.
• Lower transaction fees: Cryptocurrency transactions have lower transaction fees
compared to traditional banking transactions, which can save users a lot of money.
• Borderless: Cryptocurrency can be used anywhere in the world, without any
restrictions or limitations imposed by governments or financial institutions.
• Accessibility: Anyone can use cryptocurrency, regardless of their background, income,
or location. This makes it more inclusive and accessible to people who may not have
access to traditional banking services.
Introduction to Decentralized System: In blockchain, Decentralization refers to the transfer
of control and decision-making from a centralized entity (individual, organization, or group
thereof) to a distributed network. Decentralized networks strive to reduce the level of trust that
participants must place in one another and deter their ability to exert authority or control over
one another in ways that degrade the functionality of the network. When building a technology
solution, three primary network architectures are typically considered: Distributed,
Centralized, and Decentralized. While blockchain technologies often make use of decentralized
networks, a blockchain application itself cannot be categorized simply as being decentralized
or not. Rather, decentralization is a sliding scale and should be applied to all aspects of a
blockchain application. By decentralizing the management of and access to resources in an
application, greater and fairer service can be achieved. Decentralization typically has some
trade-offs such as lower transaction throughput, but ideally, the trade-offs are worth the
improved stability and service levels they produce.

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 Parameters Centralized Distributed Decentralized
Network/hardware Maintained & Spread across multiple Resources are owned &
resources controlled by single data centres & shared by network
entity in a geographies; owned by members; difficult to
centralized location network provider maintain since no one
owns it
Solution Maintained & Maintained & Each member has exact
components controlled by controlled by solution same copy of distributed
central entity provider ledger
Data Maintained & Typically owned & Only added through
controlled by managed by customer group consensus
central entity
Control Controlled by Typically, a shared No one owns the data &
central entity responsibility between everyone owns the data
network provider,
solution provider &
customer
Single Point of Yes No No
Failure
Fault tolerance Low High Extremely high
Security Maintained & Typically, a shared Increases as # of
controlled by responsibility between network members
central entity network provider, increase
solution provider &
customer
Performance Maintained & Increases as Decreases as # of
controlled by network/hardware network members
central entity resources scale up and increase
out
Example ERP system Cloud computing Blockchain

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 Decentralized systems are designed to distribute computing power and data storage
across a network of nodes or computers, thereby eliminating the need for a central authority.
This design has many benefits, such as increased scalability, improved fault tolerance, and
enhanced security. However, decentralized systems also present unique security, integrity, and
privacy challenges that must be addressed to ensure the reliability and trustworthiness of the
system.
1. Security Issues:
a. Sybil attacks: Attackers can create multiple identities or nodes to take control
of the network.
b. Distributed Denial of Service (DDoS) attacks: Attackers can flood the
network with fake traffic or requests, making it difficult for legitimate users to
access the system.
c. 51% attacks: If an attacker controls more than 50% of the network's computing
power, they can modify or reverse transactions and disrupt the system's
operation.
d. Smart contract vulnerabilities: Decentralized systems rely on smart contracts,
which are code executed on the blockchain. If there are vulnerabilities in the
smart contract code, attackers can exploit them to steal funds or cause other
damage.
e. Malicious code execution: Decentralized systems are vulnerable to malware
and malicious code that can compromise the integrity of the system.
2. Integrity Issues:
a. Double Spending: Decentralized systems must ensure that users cannot spend
the same asset twice.
b. Timestamp tampering: Attackers can manipulate the timestamp on
transactions to change their order or perform fraudulent activities.
c. Forking attacks: If the network splits into two or more versions, attackers can
manipulate transactions and block confirmations.
3. Privacy Issues:
a. Public Ledger: Decentralized systems rely on a public ledger or blockchain,
which makes all transactions publicly visible. While the user's identity is
hidden, it is still possible to track their transactions and infer information about
their behaviour.

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 b. Pseudonymous Identities: While user identities are not directly linked to their
real-world identities, attackers can use statistical analysis and other techniques
to infer users' identities.
c. Data Leakage: Decentralized systems rely on a distributed network of nodes to
store and process data. If one of these nodes is compromised, sensitive data can
be leaked.
To mitigate these security, integrity, and privacy challenges, decentralized systems can
use cryptographic techniques such as encryption, digital signatures, and multi-factor
authentication. Additionally, implementing robust governance frameworks and consensus
mechanisms can help ensure the reliability and trustworthiness of the network.

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Unit II: Introduction to Blockchain Technology
What is Bitcoin?

Bitcoin is a decentralized digital currency that enables instant payments to

anyone, anywhere in the world. It was created in 2009 by an unknown person or group of
people under the name Satoshi Nakamoto and operates on a decentralized network called the
blockchain. Unlike traditional currencies, bitcoin is not backed by any government or financial
institution, and its value is determined by supply and demand in the open market. Bitcoin
transactions are recorded on the blockchain, which is a public ledger that is maintained by a
network of computers around the world. To use bitcoin, users must have a digital wallet and
can buy or receive bitcoin through a variety of methods, including mining, purchasing from a
bitcoin exchange, or receiving it as payment for goods or services.

Bitcoin has gained popularity as a decentralized and secure way to transfer

value and has been used for a wide range of transactions, including online purchases,
remittances, and even as a store of value. However, its price is highly volatile and there are still
concerns about its security and regulatory environment. Bitcoin can be divided into smaller
units known as “satoshis” (up to 8 decimal places) and used for payments, but it’s also
considered a store of value like gold. This is because the price of a single bitcoin has increased
considerably since its inception – from less than a cent to tens of thousands of dollars. When
discussed as a market asset, bitcoin is represented by the ticker symbol BTC. The term
“decentralized” is used often when discussing cryptocurrency, and simply means something
that is widely distributed and has no single, centralized location or controlling authority. In the
case of bitcoin, and indeed many other cryptocurrencies, the technology and infrastructure that
govern the creation, supply, and security of it do not rely on centralized entities, like banks and
governments, to manage it.

• October 31, 2008: Bitcoin whitepaper published by the anonymous Satoshi

Nakamoto.
• January 3, 2009: The Genesis Block or block number one is mined.
• January 12, 2009: The first Bitcoin transaction.
• December 16, 2009: Version 0.2 is released.
• November 6, 2010: Market cap value exceeds $1 million USD.
• October 2011: Bitcoin forks for the first time to create Litecoin.
 • June 3, 2012: Block 181919 created with 1322 transactions. It is the largest block
to-date.
• June 2012: Coinbase launches.
• September 27, 2012: Bitcoin Foundation is formed.
• 4th December 2013: Price reaches a high of $1,079.
• 7th December 2013: Price falls to around $760.
• February 7, 2014: Mt. Gox gets hacked. This was one of the worst hacks ever which
led to a drop in price.
• June 2015: BitLicense gets established. This is one of the most significant
cryptocurrency regulations.
• August 1, 2017: Bitcoin forks again to form Bitcoin Cash.
• August 23, 2017: SegWit gets activated.
• September 2017: China bans BTC trading.
• December 2017: First bitcoin futures contracts were launched by CBOE Global
Markets (CBOE) and the Chicago Mercantile Exchange (CME).
• December 2017: Bitcoin price reaches its all-time high.
• January 2018: Price drops as a result of the 2018 cryptocurrency market crash.
• September 2018: Cryptocurrency value collapses 80% from their peak in January
2018, making the 2018 cryptocurrency bearish run worse than the Dot-com bubble’s
78% collapse.
• November 15, 2018: Bitcoin’s market cap value fell below $100 billion for the first
time since October 2017.
• October 31, 2018: 10-year anniversary of Bitcoin
Mechanics of Bitcoin:

Bitcoin is a decentralized digital currency that is based on a distributed ledger

technology called blockchain. The mechanics of Bitcoin can be understood by looking at
three key components: the blockchain, the network, and the cryptocurrency.
• The blockchain: The blockchain is a public ledger that contains a record of all Bitcoin
transactions. It is maintained by a network of computers around the world, which work
together to verify and record transactions. Each transaction is added to the blockchain
as a "block" of data. Once a block is added to the blockchain, it cannot be altered or
deleted.
• The network: The Bitcoin network is a peer-to-peer network that allows users to send
and receive Bitcoin payments without the need for a central authority. Transactions are
 broadcast to the network, and nodes on the network work to validate the transactions
and add them to the blockchain. The network is secured by a consensus algorithm called
Proof of Work, which requires nodes to solve complex mathematical problems in order
to add new blocks to the blockchain.
• The cryptocurrency: Bitcoin is a digital currency that is used to pay for goods and
services online. It is created through a process called mining, in which computers on
the network compete to solve the mathematical problems required to add new blocks to
the blockchain. As a reward for solving these problems, miners receive newly created
Bitcoin. The total supply of Bitcoin is limited to 21 million, and new Bitcoin is created
at a decreasing rate over time.
Overall, the mechanics of Bitcoin are designed to be decentralized and transparent,
allowing users to send and receive payments without the need for a central authority or
intermediary. The system is secured through a combination of cryptography, consensus
algorithms, and economic incentives.
Bitcoin transaction:
Bitcoin is basically a digital currency that is currently used as a form of payment. Bitcoin is a
cryptocurrency and the transactions related to bitcoins take place in the blockchain network.
Every bitcoin is stored in a virtual wallet and transaction involves the transfer of bitcoin from
one wallet to another. Bitcoins can be sent from peer to peer irrespective of geographical
location without any intermediator in between. it works in a decentralized way, meaning
nobody can interfere with your digital money, only you are responsible for your bitcoins.
• Bitcoin Transaction: Bitcoin transaction means sending bitcoin from one person to
the other in the secured blockchain network. These are messages that are digitally
signed using cryptography and are verified by the miners that are present in the
blockchain network. The miner is the person who solves mathematical puzzles (also
called proof of work) to validate the transaction. Anyone with mining hardware and
high processing power can take part in this. Numerous miners take part simultaneously
to solve the complex mathematical puzzle, the one who solves it first, wins 12.5 bitcoin
as a reward. miner verifies the transactions (after solving the puzzle) and then adds the
block to the blockchain when confirmed. The transaction input is the bitcoin address
from which the money was sent, and the transaction output is the bitcoin address to
which the money was sent. Generally, a bitcoin transaction takes 10 to 20 minutes to
confirm any transactions. if network congestion takes place, then time might take even
60 minutes.
 • Transaction Fees: The transaction rate or speed is dependent on the amount the user
pays for it. If a user pays a small amount, the transaction rate will be slow, the
transaction will take more time to happen, vice versa is applicable here. Due to limited
space, only a limited number of transactions are possible at one point in time. Consider
a case where heavy network traffic occurs, then the miners prioritize those transactions
that have the highest fees so that even in the hectic congestion, the highest-paid
transaction gets executed. Many bitcoin wallets allow users to set transaction fees
manually. The fees are directly sent to the miners. When the bitcoin hits a bull run, the
transaction fees shoot up to an all-time high. there is no such minimum transaction fee
a user must pay, but the highest transaction fees mainly lie between $24 to $31. as the
highest-paid transaction gets confirmed first, therefore the fees tend to fluctuate based
on the demand of the user. Sending or exchanging bitcoins undergoes lots of procedures
underneath. The bitcoin wallet and the network ensure that the digital currency reaches
the receiver properly. There are two basic terminologies related to this-
1. Public key: Also known as a bitcoin address, these are publicly known to all
like your username in social media handles. In order to receive bitcoins, the user
must share his public key with the other user.
2. Private key: These are kept secret and must not be shared with anyone, similar
to the user’s password of social media accounts. Private keys are the most
important thing in the whole cryptocurrency concept. The private key allows
the user to have access to bitcoins, if the user forgets the private keys, there’s
no way to recover the bitcoins or the private key. Therefore, it is advised to
make a proper backup of the private key in a safe place.
Transaction input is nothing but the address of the sender which gets registered in the
network and remains in an encrypted and inaccessible state. Transaction output is the receiver’s
address which is registered on the bitcoin network. For Example, if a user opens his bitcoin
account and signs a transaction detail with his private key, and then broadcasted to a bitcoin
network called blockchain, where miners compete to find a hash value called “nonce” which
solves the mathematical puzzle thereby verifying the transaction.
The miners create new blocks by abiding by the fact that the transaction volume must
be less than 21 million. 21 million is the total number of bitcoins that can be generated. The
verified transaction gets a unique identification code and is linked with the previous verified
transaction. In the bitcoin network, every transaction is traceable via linked blocks. Anyone
can understand who sent it to who at any point in time. thus, bitcoin works in a transparent
manner.
Different Types of Bitcoin Address. There are mainly three types of bitcoin addresses:
P2PKH addresses: These addresses start with number 1. For example, 1WX23.
P2SH addresses: These addresses start with number 2. For example, 2WX23.
Bech32 addresses: These addresses start with bc1. For example, bc12WX23.
Internal Vs External Transactions: An internal transaction is a transaction that doesn’t come
under any external third party.it works inside the internal function of business thereby doesn’t
exchange any sort of resources. Internal transaction doesn’t have any impact on the cash flow
as it deals only with interdepartmental transactions. An External transaction is a transaction
that comes under any external third party.it basically is an exchange medium between an
internal organization and a third party. Since it involves exchange with third parties, it has a
huge impact on the cash flow.
How To Send/receive Bitcoin: To send or receive bitcoins, one must possess a bitcoin wallet
application. After installing the bitcoin wallet app, select the type of currency you want to send.
Write in the receiver’s address. Type the amount of bitcoin you wish to send. Pay the required
transaction fee. Press the “send bitcoin” button and the cryptocurrency will be transferred. In
order to receive bitcoins, do the following steps: Open the wallet and click receive. Share the
public key address. It can be a QR code or a combination of numbers and letters. Anyone with
a public address can send the cryptocurrency.
Introduction of Block chain:
A blockchain is a chain of blocks which contain information. Each block records all of
the recent transactions, and once completed goes into the blockchain as a permanent database.
Each time a block gets completed; a new block is generated. A blockchain can be used for the
secure transfer of money, property, contracts, etc. without requiring a third-party intermediary
like bank or government. Blockchain is a software protocol, but it could not be run without the
Internet (like SMTP used in email).

A blockchain is a distributed ledger with growing lists of records (blocks) that are
securely linked together via cryptographic hashes. Each block contains a cryptographic hash
of the previous block, a timestamp, and transaction data (generally represented as a Merkle
tree, where data nodes are represented by leaves). Since each block contains information about
the previous block, they effectively form a chain (compare linked list data structure), with each
additional block linking to the ones before it. Consequently, blockchain transactions are
irreversible in that, once they are recorded, the data in any given block cannot be altered
retroactively without altering all subsequent blocks.
Blockchains are typically managed by a peer-to-peer (P2P) computer network for use
as a public distributed ledger, where nodes collectively adhere to a consensus algorithm
protocol to add and validate new transaction blocks. Although blockchain records are not
unalterable, since blockchain forks are possible, blockchains may be considered secure by
design and exemplify a distributed computing system with high fault tolerance. A blockchain
was created by a person (or group of people) using the name (or pseudonym) Satoshi Nakamoto
in 2008 to serve as the public distributed ledger for bitcoin cryptocurrency transactions, based
on previous work by Stuart Haber, W. Scott Stornetta, and Dave Bayer.
The implementation of the blockchain within bitcoin made it the first digital currency
to solve the double-spending problem without the need of a trusted authority or central server.
The bitcoin design has inspired other applications and blockchains that are readable by the
public and are widely used by cryptocurrencies. The blockchain may be considered a type of
payment rail. Private blockchains have been proposed for business use. The blockchain is
essentially a decentralized database or ledger that stores and verifies transactions. Each block
in the chain contains a number of transactions and is linked to the previous block through a
cryptographic hash function, creating a chain of blocks that can't be altered without affecting
the entire network.
The use of cryptographic hashing ensures the security of the blockchain network. The
information in a block cannot be altered without changing the hash of the block, which would
be immediately detected by the network. Additionally, the decentralized nature of the
blockchain means that there is no central authority controlling the network, which makes it
very difficult for any one entity to manipulate or corrupt the data. The potential uses of
blockchain technology go beyond cryptocurrency and include areas such as supply chain
management, voting systems, healthcare, and more. Its secure and transparent nature has made
it a popular choice for industries looking to increase trust and efficiency in their operations.

History of Blockchain:
1991: 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.
1992: 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 Blocks that stores multiple data records in a sequence. However, this
technology became unused when the Patent came into existence in 2004.
2000: In the year 2000, Stefan Konst published his theory of cryptographic secured chains,
plus ideas for implementation.
2004: In the 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.
2008: After that 2008, Satoshi Nakamoto conceptualized the concept of “Distributed
Blockchain” in 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 of time stamping. His system
became so useful that Blockchain become the backbone of Cryptography.
2009: After that, the evolution of Blockchain is steady and promising and became a need in
various fields. In 2009, Satoshi Nakamoto Releases Bitcoin White Paper. Blockchain
technology is so secure that the following surprising news will give proof of 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.
2014: The year 2014 is marked as the turning point for blockchain technology. Blockchain
technology is separated from the currency and Blockchain 2.0 is born. Financial institutions
and other industries started shifting their focus from digital currency to the development of
blockchain technologies.
2015: In 2015, Ethereum Frontier Network was launched, thus enabling developers to write
smart contracts and dApps that could be deployed to a live network. In the same year, the Linux
Foundation launched the Hyperledger project.
2016: The word Blockchain is accepted as a single word instead of two different concepts as
they were in Nakamoto’s original paper. The same year, a bug in the Ethereum DAO code was
exploited resulting in a hard fork of the Ethereum Network. The Bitfinex bitcoin exchange was
hacked resulting in 120,000 bitcoins being stolen.
2017: In the year 2017, Japan recognized Bitcoin as a legal currency. Block.one company
introduced the EOS blockchain operating system which was designed to support commercial
decentralized applications.
2018: Bitcoin turned 10 in the year 2018. The bitcoin value continued to drop, reaching the
value of $3,800 at the end of the year. Online platforms like Google, Twitter, and Facebook
banned the advertising of cryptocurrencies.
2019: In the year 2019, Ethereum network transactions exceeded 1 million per day. Amazon
announced the general availability of the Amazon Managed Blockchain service on AWS.
2020: Stablecoins were in demand as they promised more stability than traditional
cryptocurrencies. The same year Ethereum launched Beacon Chain in preparation for Ethereum
2.0.
2022: Ethereum has shifted from Proof of Work (PoW) to Proof of Stake (PoS) consensus
mechanism. The original Ethereum mainnet merged with Beacon Chain which has Proof-of-
Stake. Now it is existing as one chain. Ethereum’s energy consumption has reduced by
~99.95%.

Block chain Technology Definition:

Blockchain is a distributed digital ledger that enables secure, transparent and tamper-
resistant record-keeping of transactions and data across a network of computers. It is often
associated with cryptocurrencies, but its potential applications extend far beyond that. In a
blockchain, each block contains a cryptographic hash of the previous block, creating a chain of
blocks that cannot be altered without invalidating all subsequent blocks. This makes it virtually
impossible to manipulate or hack the data stored in the blockchain, ensuring a high degree of
trust and integrity in the system. Blockchains can be used for a wide range of applications,
including financial transactions, supply chain management, digital identity verification, and
more. “Each block contains a hash (a digital fingerprint or unique identifier), timestamped
batches of recent valid transactions, and the hash of the previous block. The previous block
hash links the blocks together and prevents any block from being altered or a block being
inserted between two existing blocks.”
The four key concepts behind blockchain are:
• Shared ledger: A shared ledger is an “append-only” distributed system of record
shared across a business network. “With a shared ledger, transactions are recorded only
once, eliminating the duplication of effort that’s typical of traditional business
networks.”
• Permissions: Permissions ensure that transactions are secure, authenticated, and
verifiable. “With the ability to constrain network participation, organizations can more
easily comply with data protection regulations, such as those stipulated in the Health
Insurance Portability and Accountability Act (HIPAA)” and the EU General Data
Protection Regulation (GDPR).
• Smart contracts: A smart contract is “an agreement or set of rules that govern a
business transaction; it’s stored on the blockchain and is executed automatically as part
of a transaction.”
• Consensus: Through consensus, all parties agree to the network-verified transaction.
Blockchains have various consensus mechanisms, including proof of stake, multi
signature, and PBFT (practical Byzantine fault tolerance).
Each blockchain network has various participants who play these roles, among others:
• Blockchain users: Participants (typically business users) with permissions to join the
blockchain network and conduct transactions with other network participants.
• Regulators: Blockchain users with special permissions to oversee the transactions
happening within the network.
• Blockchain network operators: Individuals who have special permissions and
authority to define, create, manage, and monitor the blockchain network.
• Certificate authorities: Individuals who issue and manage the different types of
certificates required to run a permissioned blockchain.
Blockchain characteristics and components:
• Ledger: Any file with a constantly growing record related to the transaction.
• Permanent: transaction means that once the transaction goes inside a Blockchain, it is
stored permanently in the record and immutable.
 • Secure: Information is stored securely through this technology as highly advanced
cryptographic techniques are used to ensure that your information is locked within the
Blockchain.
• Chronological: It means every transaction occurs after the previous one.
• Immutable: It means as you build all the transaction onto the blockchain, this ledger
can never be changed.
Types of Block Chain:
• Public Blockchain
• Private Blockchain
• Hybrid Blockchain
• Consortium Blockchain
1. Public Blockchain:

The first type of blockchain technology is public blockchain. This is where

cryptocurrency like Bitcoin originated and helped to popularize Distributed Ledger
Technology (DLT). It removes the problems that come with centralization, including
less security and transparency. DLT doesn't store information in any one place, instead
distributing it across a peer-to-peer network. Its decentralized nature requires some
method for verifying the authenticity of data. That method is a Consensus Algorithm
whereby participants in the blockchain reach agreement on the current state of the
ledger. Proof of work (PoW) and proof of stake (PoS) are two common consensus
methods.
Public blockchain is non-restrictive and permissionless, and anyone with
internet access can sign on to a blockchain platform to become an authorized node. This
user can access current and past records and conduct mining activities, the complex
computations used to verify transactions and add them to the ledger. No valid record or
transaction can be changed on the network, and anyone can verify the transactions, find
bugs, or propose changes because the source code is usually open source.
Advantages of Public Blockchain:
• Trustable: Public Blockchain nodes do not need to know or trust each other because
the proof-of-work procedure ensures no fraudulent transactions.
• Secure: A public network can have as many participants or nodes as it wants, making
it a secure network. The higher the network's size, the more records are distributed, and
the more difficult it is for hackers to hack the entire network.
• Open and Transparent: The data on a public blockchain is transparent to all member
nodes. Every authorized node has a copy of the blockchain records or digital ledger.
Disadvantages of Public Blockchain:
• Lower Transactions Per Second (TPS): The number of transactions per second in a
public blockchain is extremely low. This is because it is a large network with many
nodes which take time to verify a transaction and do proof-of-work.
• Scalability Issues: Its transactions are processed and completed slowly. This harms
scalability. Because the more we try to expand the network's size, the slower it will
become.
• High Energy Consumption: The proof-of-work device is expensive and requires lots
of energy. Technology will undoubtedly need to develop energy-efficient consensus
methods.
Applications of Public Blockchain:
• Voting: Governments can use a public blockchain to vote, ensuring openness and trust.
• Fundraising: Businesses or initiatives can use the public Blockchain to improve
transparency and trust.
2. Private blockchain:

A blockchain network that works in a restrictive environment like a closed

network, or that is under the control of a single entity, is a private blockchain. While it
operates like a public blockchain network in the sense that it uses peer-to-peer
connections and decentralization, this type of blockchain is on a much smaller scale.
Instead of just anyone being able to join and provide computing power, private
 blockchains typically are operated on a small network inside a company or
organization. They're also known as permissioned blockchains or enterprise
blockchains.
Advantages of Private Blockchain:
• Speed: Private Blockchain transactions are faster. This is because a private network
has a smaller number of nodes, which shortens the time it takes to verify a transaction.
• Scalability: You can tailor the size of your private Blockchain to meet your specific
requirements. This makes private blockchains particularly scalable since they allow
companies to easily raise or decrease their network size.
Disadvantages of Private Blockchain:
• Trust Building: In a private network, there are fewer participants than in a private
network.
• Lower Security: A private blockchain network has fewer nodes or members, so it is
more vulnerable to a security compromise.
• Centralization: Private blockchains are limited in that they require a central Identity
and Access Management (IAM) system to function. This system provides full
administrative and monitoring capabilities.
Applications of Private Blockchain:
• Supply Chain Management: A private blockchain can be used to manage a company's
supply chain.
• Asset Ownership: A private blockchain can be used to track and verify assets.
• Internal Voting: Internal voting is also possible with a private blockchain.
3. Hybrid Blockchain:
 Sometimes, organizations will want the best of both types, and they'll use hybrid
blockchain, a type of blockchain technology that combines elements of both private
and public blockchain. It lets organizations set up a private, permission-based system
alongside a public permissionless system, allowing them to control who can access
specific data stored in the blockchain, and what data will be opened up publicly.
Typically, transactions and records in a hybrid blockchain are not made public but can
be verified when needed, such as by allowing access through a smart contract.
Confidential information is kept inside the network but is still verifiable. Even though
a private entity may own the hybrid blockchain, it cannot alter transactions. When a
user joins a hybrid blockchain, they have full access to the network. The user's identity
is protected from other users unless they engage in a transaction. Then, their identity is
revealed to the other party.
Advantages of Hybrid Blockchain:
• Secure: Hybrid Blockchain operates within a closed environment, preventing outside
hackers from launching a 51 percent attack on the network.
• Cost-Effective: It also safeguards privacy while allowing third-party contact.
Transactions are inexpensive and quick and scale better than a public blockchain
network.
Disadvantages of Hybrid Blockchain:
• Lack of Transparency: Because information can be hidden, this type of blockchain
isn't completely transparent.
• Less Incentive: Upgrading can be difficult, and users have no incentive to participate
in or contribute to the network.
Applications of Hybrid Blockchain:
• Real Estate: Real-estate companies can use hybrid networks to run their systems and
offer information to the public.
• Retail: The hybrid network can also help retailers streamline their processes.
• Highly Regulated Markets: Hybrid blockchains are also well-suited to highly
regulated areas like the banking sector.
4. Consortium blockchain:
The fourth type of blockchain, consortium blockchain, also known as a
Federated Blockchain, is like a hybrid blockchain in that it has private and public
blockchain features. But it's different in that multiple organizational members
collaborate on a decentralized network. Essentially, a Consortium Blockchain is a
 private blockchain with limited access to a particular group, eliminating the risks that
come with just one entity controlling the network on a private blockchain. In a
consortium blockchain, the Consensus procedures are controlled by preset nodes. It
has a validator node that initiates, receives, and validates transactions. Member nodes
can receive or initiate transactions.

Advantages of Consortium Blockchain:

• Secure: A consortium blockchain is more secure, scalable, and efficient than a public
blockchain network. It, like private and mixed blockchains, has access controls.
Disadvantages of Consortium Blockchain:
• Lack of Transparency: The consortium blockchain has a lower degree of
transparency. If a member node is infiltrated, it can still be hacked, and the Blockchain's
rules can render the network inoperable.
Applications of Consortium Blockchain:
• Banking and Payments: A consortium can be formed by a group of banks working
together. They have control over which nodes will validate transactions.
• Research: A consortium blockchain can be employed to share research data and
outcomes.
• Food Tracking: It is also apt for food tracking.
Peer to Peer Network:
A peer-to-peer (P2P) network is a Distributed Network Architecture where participants
(or peers) share resources and information directly with each other, rather than through a central
server or authority. Blockchain technology, on the other hand, is a distributed ledger
technology that allows for secure and transparent record-keeping. A blockchain network can
be designed as a P2P network where each participant, or node, has a copy of the ledger and can
validate and add new transactions to it. In a peer-to-peer blockchain network, each node can
communicate and exchange data with other nodes in the network without the need for
intermediaries.
One example of a peer-to-peer blockchain network is the Bitcoin network, where nodes
communicate with each other using the Bitcoin protocol and work together to validate
transactions and add them to the blockchain. Each node has a copy of the entire blockchain
ledger and can verify the authenticity of new transactions before adding them to the ledger.
Peer-to-peer blockchain networks are often considered more secure and resistant to censorship
than traditional centralized networks, as there is no single point of failure or control. However,
they can also be more challenging to scale and can require significant computing resources to
maintain the network.
There are no central in peer-to-peer blockchain networks. Instead, all nodes (peers) are
connected to one another. A mesh network with a “flat” topology connects the network nodes
and there is no hierarchy. In a peer-to-peer network, nodes simultaneously give and consume
services with reciprocity serving as the motivation for participation, making P2P networks
open, decentralized, and robust by nature.
 Each node on the network must serve as both a client and a server to other nodes in a
P2P network, making it distinct from a traditional client-server setup. There is always a central
server in a client-server configuration from which the client downloads files. On the contrary,
in a decentralized setup, each node acts as a server that can download files and share them with
other nodes. A node may perform both the sharing and receiving functions concurrently, which
accounts for the P2P network’s speed, security, and efficiency. The measures listed below can
help to ensure the security of your P2P networking systems:

Types of peer-to-peer (P2P) networks:

P2P architecture can be categorized into structured, unstructured and hybrid peer-to-
peer networks:
• Structured peer-to-peer networks: In this type of network, nodes interact based on
an organized structure, enabling nodes to precisely search for files, even if the content
is unavailable. However, due to an organized system, some sort of centralization exists
in structured P2P networks. Unlike unstructured peer-to-peer networks, structured peer-
to-peer networks are challenging to set up, although they provide simple data access.
• Unstructured peer-to-peer networks: There is no set structure for the nodes in this
kind of network, allowing network participants to join or leave the network as they
desire. Also, due to a lack of definite structure, participants converse with one another
at random. However, unstructured P2P networks require all nodes to remain active to
power a high number of transactions, mandating huge CPU power to ensure that the
network runs properly.
• Hybrid peer-to-peer networks: This type of P2P network mixes some P2P design
aspects with the traditional client-server approach. For example, it makes it possible to
locate a node using the central server. A distributed network application framework
called the client-server architecture assigns tasks to servers and clients in the same
system that connect via a computer network or the Internet.
Advantages of P2P blockchain networks:
• As blockchain is a decentralized system of peer to peer network, it is highly available
due to decentralization.
• Because of P2P networking capability, even if one peer gets down, the other peers are
still present. Thus, nobody can take down the blockchain.
• P2P networks offer greater security compared to traditional client-server systems.
When you are using cloud computing to store your data, you need to trust AWS and
Google drives, but with the blockchain, because it utilizes peer to peer network you
don’t need to trust any third parties which can modify your crucial data. These are non-
resistant to censorship by central authorities.
• These networks are virtually immune to the Denial-of-Service (DoS) attacks. The
distributed peer-to-peer network, when paired with a majority consensus requirement,
gives blockchains a relatively high degree of resistance to malicious activity.
Limitations of P2P blockchain networks:
• As there is no centralized server, any virus or malware may get injected into all the
participating nodes from the infected one. Similarly, nodes can distribute copyrighted
content as no centralized party controls the system.
• Anyone can create parallel networks called a hard fork of the blockchain if they want,
implying that the software needs to be updated to comply with the new guidelines. For
instance, following the Ethereum Merge, proof-of-work Ethereum (ETHW) was
created by a Chinese miner.
• P2P networks frequently have a sizable number of users who consume the resources
shared by other nodes while keeping their own resources to themselves. Such free-
riding nodes are called “leechers” that may support unethical and immoral behaviour.
P2P crypto trading:
Peer-to-peer trading allows buyers and sellers to trade directly on decentralized
exchanges (DEXs). P2P cryptocurrency exchanges give users more control over prices and
payment options. Nonetheless, this freedom comes at the cost of decreased liquidity compared
to traditional exchanges, restricting the range of cryptocurrencies that may be traded at peer-
to-peer marketplaces like Binance. No involvement of the third party, zero transaction costs
and flexible prices make P2P crypto trading attractive to cryptocurrency traders. However,
many nations aim to outlaw the trading and transaction of cryptocurrencies in response to
governments worldwide trying to control the cash flow surrounding digital currencies and
influence the crypto markets.
 Since P2P crypto marketplaces trade on a worldwide market while remaining local,
they can get around these cryptocurrencies-related regulations. Additionally, all transactions
on a peer-to-peer network are protected by escrow smart contracts, preventing fraud against
either party involved in P2P trades. Tokens are transferred to the escrow, a third-party smart
contract, before a transaction is made. Until the necessary payment conditions are met, the
escrow retains the tokens that have been deposited. However, the parties to the transaction must
ensure that the agreed-upon good or service is provided and that money is received. Despite
such safety measures, P2P trading is not entirely safe. For instance, using the chargeback
feature (return of money to the payer) of P2P payment platforms, scammers may request the
payment back. Therefore, conducting due diligence on P2P marketplaces may protect you
against peer-to-peer trading scams.
Platform for decentralization:
In blockchain, decentralization refers to the transfer of control and decision-making
from a centralized entity (individual, organization, or group thereof) to a distributed network.
Decentralized networks strive to reduce the level of trust that participants must place in one
another and deter their ability to exert authority or control over one another in ways that degrade
the functionality of the network. Decentralization in blockchain refers to the distribution of
power and decision-making among multiple nodes or participants in a network, rather than
having a central authority control the system. This is achieved through a consensus mechanism,
where all nodes in the network must agree on the validity of transactions and new blocks before
they are added to the blockchain.
In a decentralized blockchain network, there is no single point of failure, and the
network is more resilient to attacks and censorship. Decentralization also enables greater
transparency and accountability, as all participants have access to the same information and
can verify the integrity of the system. The degree of decentralization in a blockchain network
can vary depending on factors such as the consensus mechanism used, the number of nodes in
the network, and the level of participation by users. Some blockchain networks, such as Bitcoin
and Ethereum, are highly decentralized.
Benefits of decentralization:
• Provides a trustless environment: In a decentralized blockchain network, no one has
to know or trust anyone else. Each member in the network has a copy of the exact same
data in the form of a distributed ledger. If a member’s ledger is altered or corrupted in
any way, it will be rejected by the majority of the members in the network.
 • Improves data reconciliation: Companies often exchange data with their partners.
This data, in turn, is typically transformed and stored in each party’s data silos, only to
resurface when it needs to be passed downstream. Each time the data is transformed, it
opens opportunities for data loss or incorrect data to enter the workstream. By having a
decentralized data store, every entity has access to a real-time, shared view of the data.
• Reduces points of weakness: Decentralization can reduce points of weakness in
systems where there may be too much reliance on specific actors. These weak points
could lead to systemic failures, including failure to provide promised services or
inefficient services due to the exhaustion of resources, periodic outages, bottlenecks,
lack of sufficient incentives for good service, or corruption.
• Optimizes resource distribution: Decentralization can also help optimize the
distribution of resources so that promised services are provided with better performance
and consistency, as well as a reduced likelihood of catastrophic failure.
Comparison of Centralized, Distributed and Decentralized:
Centralized Distributed Decentralized
Network/hardware Maintained & Spread across multiple Resources are owned
resources controlled by data centres & & shared by network
single entity in a geographies; owned by members; difficult to
centralized network provider maintain since no one
location owns it
Solution Maintained & Maintained & controlled Each member has
components controlled by by solution provider exact same copy of
central entity distributed ledger
Data Maintained & Typically owned & Only added through
controlled by managed by customer group consensus
central entity
Control Controlled by Typically, a shared No one owns the data
central entity responsibility between & everyone owns the
network provider, data
solution provider &
customer
Single Point of Yes No No
Failure
Fault tolerance Low High Extremely high
Security Maintained & Typically, a shared Increases as # of
controlled by responsibility between network members
central entity network provider, increase
solution provider &
customer
Performance Maintained & Increases as Decreases as # of
controlled by network/hardware network members
central entity resources scale up and increase
out
Example ERP system Cloud computing Blockchain
Decentralized Applications (dApps):
Decentralized applications (dApps) are digital applications or programs that exist and run on a
blockchain or peer-to-peer (P2P) network of computers instead of a single computer. DApps
are thus outside the purview and control of a single authority. dApps have been developed to
decentralize and disintermediate a range of functions and applications. These include things
from self-executing financial contracts to multi-user games and social media platforms. DApps
have also been developed to facilitate secure, blockchain-based voting and governance, DApps
can also be integrated into web browsers to function as plugins that can help serve ads, track
user behaviour, and solicit crypto donations.
• Financial services: dApps can be used to facilitate peer-to-peer financial transactions,
such as the exchange of currencies or the transfer of assets.
• Supply chain management: dApps can be used to track the movement of goods
through a supply chain, ensuring transparency and accountability.
• Identity verification: dApps can be used to securely store and verify identity
information, such as for voting systems or passport applications.
• Real estate: dApps can be used to facilitate the buying and selling of real estate
directly between buyer and seller, as well as the tracking of property ownership and
related documentation such as deeds.
• Healthcare: dApps can be used to store and track healthcare records, as well as to
facilitate the communication and collaboration of healthcare professionals.
• Education: dApps can be used to create decentralized learning platforms, allowing
students and teachers to interact and collaborate directly without the need for
intermediaries.
• Social media: dApps can be used to create decentralized social media platforms,
allowing users to interact and share content without the need for a central authority.
• Predictive markets: dApps can be used to create decentralized platforms for
predictive markets, allowing users to make predictions on a variety of topics and
potentially earn rewards for accurate predictions.
dApp Scams:
There are several types of scams that have been perpetrated through
decentralized applications (dApps). Ponzi schemes, in which earlier investors are paid
using the investments of more recent investors, have been known to occur on dApps.
Fake initial coin offerings (ICOs) have also been used to raise funds for the
development of a new cryptocurrency or dApp, but are designed to steal investors'
money without actually developing a viable product. Phishing attacks, which use fake
 websites or emails to trick people into revealing sensitive information, have also been
seen on dApps. In addition, some dApps have been used to distribute malware or
viruses, which can compromise users' devices and steal sensitive information. It is
important for users to be cautious and do their due diligence when interacting with
dApps, as the decentralized nature of these applications can make it difficult to track
or hold perpetrators accountable. Industry analytics group Dapp Radar found that there
were a record 312 hacks and vulnerabilities affecting dApps in 2022, leading to losses
of around $48 billion.
Pros:
• Promotes user privacy.
• Resists censorship.
• Flexible platform enables dApp development.
Cons:
• Experimental, may not be able to scale.
• Challenges in developing a user-friendly interface.
• Difficult to make needed code modifications.
Ethereum dApps:
These are decentralized applications that are powered and developed using the
Ethereum platform. Ethereum dApps use smart contracts for their logic. They are deployed
on the Ethereum network and use the platform's blockchain for data storage.
 DApps built on Ethereum:
• Uniswap
• OpenSea
• MakerDAO
• MetaMask
• Axie Infinity
• Compound
• Wormhole
Transactional blocks:
In a blockchain, a transactional block is a collection of transactions that are grouped
together and added to the chain in a single unit. Each block typically contains a set of
transactions, a timestamp, and a reference to the previous block in the chain. Once a block is
added to the chain, the transactions it contains are verified and permanently recorded on the
blockchain. This means that they cannot be altered or deleted without the consensus of the
network. Transaction blocks are crucial to the security and functionality of a blockchain. By
grouping transactions together into blocks, the blockchain can maintain a distributed ledger
that is secure, transparent, and resistant to fraud or tampering.
In addition, the use of transaction blocks helps to ensure that transactions are processed
efficiently and quickly, which is essential for many blockchain applications, such as
cryptocurrencies and smart contracts. By processing multiple transactions at once, transaction
blocks help to reduce the overall transaction processing time and increase the capacity of the
blockchain network.
Authentication: The original blockchain was designed to operate without a central authority
(i.e., with no bank or regulator controlling who transacts), but transactions still must be
authenticated. This is done using cryptographic keys, a string of data (like a password) that
identifies a user and gives access to their “account” or “wallet” of value on the system. Each
user has their own private key and a public key that everyone can see. Using them both creates
a secure digital identity to authenticate the user via digital signatures and to ‘unlock’ the
transaction they want to perform.
Authorisation: Once the transaction is agreed between the users, it needs to be approved, or
authorised, before it is added to a block in the chain. For a public blockchain, the decision to
add a transaction to the chain is made by consensus. This means that many “nodes” (or
computers in the network) must agree that the transaction is valid. The people who own the
computers in the network are incentivised to verify transactions through rewards. This process
is known as ‘proof of work’.
Proof of Work: Proof of Work requires the people who own the computers in the network to
solve a complex mathematical problem to be able to add a block to the chain. Solving the
problem is known as mining, and ‘miners’ are usually rewarded for their work in
cryptocurrency. But mining isn’t easy. The mathematical problem can only be solved by trial
and error and the odds of solving the problem are about 1 in 5.9 trillion. It requires substantial
computing power which uses considerable amounts of energy. This means the rewards for
undertaking the mining must outweigh the cost of the computers and the electricity cost of
running them, as one computer alone would take years to find a solution to the mathematical
problem.
The Power of Mining: The Cambridge Bitcoin Electricity Consumption Index estimates the
bitcoin mining network consumes almost 70 terawatt-hours (TWh) of electricity per year,
ranking it the 40th largest consumer of electricity by ‘country’. By way of comparison, Ireland
(ranked 68th) uses just over a third of Bitcoin’s consumption, or 25 TWh, and Austria at
number 42 consumes 64.6 TWh of electricity per year, according to 2016 data compiled by
the CIA.
Proof of Work: To create economies of scale, miners often pool their resources together
through companies that aggregate a large group of miners. These miners then share the rewards
and fees offered by the blockchain network. As a blockchain grows, more computers join to
try and solve the problem, the problem gets harder, and the network gets larger. In practice
though, mining power has become concentrated in the hands of a few mining pools.
Proof of Stake: Later blockchain networks have adopted “Proof of Stake” validation
consensus protocols, where participants must have a stake in the blockchain - usually by
owning some of the cryptocurrency - to be in with a chance of selecting, verifying & validating
transactions. This saves substantial computing power resources because no mining is required.
In addition, blockchain technologies have evolved to include “Smart Contracts” which
automatically execute transactions when certain conditions have been met.
A transactional block in a blockchain is a set of transactions that have been grouped
together and added to the blockchain in a single batch. Each block typically contains multiple
transactions, and once a block is added to the blockchain, the transactions within that block
become permanent and cannot be altered or deleted. The process of adding a block to the
blockchain involves several steps. First, transactions are collected and verified by network
participants called validators or miners.
These validators check that each transaction is valid and meets the rules of the network.
Once the validators reach consensus on the validity of the transactions, the transactions are
grouped into a block. Next, the block is assigned a unique identifier called a hash. The hash is
generated using a cryptographic algorithm that ensures the integrity of the block's contents.
The hash of the previous block in the chain is also included in the new block's hash, which
creates a secure and unbreakable link between the two blocks. Finally, the block is added to
the blockchain, and all participants on the network receive a copy of the updated blockchain.
The addition of each new block to the chain increases the overall security and trustworthiness
of the blockchain network. In summary, a transactional block in a blockchain is a collection of
verified transactions that are added to the blockchain in a single batch. Blocks are linked
together in a chain, and once added to the blockchain, transactions within a block are permanent
and cannot be altered or deleted.
 A blockchain network’s transactions are composed of sequential groups of data that are
packaged together into “blocks” strung together linearly. Each block also contains a set of
transaction data that is processed once the block is finalized. The individual blocks that make
up the larger blockchain contain crucial information for the functioning of the network. Each
new block contains cryptographically verifiable data regarding transactions, as well as a
numerical challenge that must be completed for the current block to be approved and added to
the blockchain. Here, we will explore the anatomical structure of a block in the Bitcoin
blockchain and the respective roles of its individual components.
why use blockchain technology:
Blockchain technology is a distributed ledger technology that enables secure,
transparent, and tamper-resistant record-keeping. It has several benefits and use cases,
including:
• Decentralization: One of the primary advantages of blockchain technology is that
it is decentralized. This means that no central authority or intermediary is required
to manage transactions or data. Instead, transactions are validated and recorded by
a network of users, making it difficult for any single entity to manipulate the data.
• Security: Blockchain technology is highly secure due to its cryptographic
algorithms and consensus mechanisms. Each block in the chain is encrypted and
linked to the previous block, making it virtually impossible to alter or delete
transactions without detection.
• Transparency: Since blockchain transactions are publicly visible, it enables
greater transparency and accountability. This is particularly useful in industries
where trust and transparency are critical, such as supply chain management,
healthcare, and finance.
• Efficiency: Blockchain technology can automate many manual processes, making
them faster and more efficient. Smart contracts, for example, can automate
complex financial and legal agreements, reducing the need for intermediaries and
saving time and money.
• Immutable record-keeping: Once a transaction is recorded on the blockchain, it
cannot be altered or deleted. This makes blockchain an excellent solution for
maintaining a tamper-proof and verifiable record of ownership, identity, or any
other data.
Some of the popular use cases for blockchain technology include cryptocurrency,
supply chain management, identity verification, voting systems, digital asset
ownership.