BLOCKCHAIN

ARCHITECTURE, DESIGN AND

USE CASES
Dr. Sudeep Tanwar
Professor, CSE

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 Image courtesy: http://beetfusion.com/

THE ARCHITECTURAL PRINCIPLES

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 THE BLOCKCHAIN

• A Platform for executing transactional services.

• Blockchain is a public ledger of a timestamped, ordered, and immutable
list of all transactions on the Bitcoin network. Each block is identified by a
hash in the chain and is linked to its previous block by referencing the
previous block's hash.
• Spanned over multiple organizations or individuals who may not trust each
other.
• An append-only shared ledger of digitally signed and encrypted
transactions replicated across a network of peer nodes.
THE BLOCK IN A BLOCKCHAIN – SECURING DATA CRYPTOGRAPHICALLY

• What is there inside the Block. How

individual Blocks are getting
connected.
• Digitally signed and encrypted
transactions verified by the peers,
which means the participants can only
view what is inside the Block.
• Cryptographic security – Ensures that
participants can only view information
on the ledger that they are
authorized to see.
Image source: http://dataconomy.com/
 STRUCTURE OF A BLOCK

•A block is a container data structure that contains a series of

transactions.
• InBitcoin: A block may contain more than 2000 transactions on
average, the average size of a block is around 1 MB (an upper bound
proposed by Satoshi Nakamoto in 2010)
• May grow up to 8 MB or sometime higher
• Larger blocks can help in processing large number of transactions in one go,
which is one of the advantage of having larger size block, but it has some
challenges also-We will discuss these when we discuss consensus mechanism
STRUCTURE OF A BLOCK
STRUCTURE OF A BLOCK HEADER
 STRUCTURE OF A BLOCK HEADER

• As shown in Tables, blockchain is a chain of blocks where

each block is linked to its previous block by referencing the
previous block header's hash.
• This linking makes sure that no transaction can be modified
unless the block that records it and all blocks that follow it
are also modified.
• The first block is not linked to any previous block and is
known as the genesis block.
 GENESIS BLOCK

• First block in the Bitcoin blockchain.

• Hardcoded in the bitcoin core software of the applications
that utilize its blockchain.
• In 2009, Bitcoin's named developer, Satoshi Nakamoto,
created the Genesis Block, which launched the process of
Bitcoin trading that's in place today.
• Also, known as Block 0.
 MORE ABOUT BLOCK

• Stale blocks are created when a block is solved and every other miner who
is still working to find a solution to the hash puzzle is working on that block.

• Orphan blocks, often referred to as stale blocks, are blocks that are not
accepted into the blockchain network due to a time lag in the acceptance of
the block. Orphan blocks are valid and verified blocks but have been
rejected by the chain.

• Orphan blocks are also called detached blocks and were accepted at one
point in time by the network as valid blocks but were rejected when a proven
longer chain was created that did not include this initially accepted block.
 NETWORK FORKS

• Because of the distributed nature of blockchain, network forks.

• In cases, where two nodes simultaneously announce a valid block can
result in a situation where there are two blockchains with different
transactions.
• This is an undesirable situation but can be addressed only by
accepting the longest chain.
• In this case, the smaller chain will be considered orphaned.
• If an adversary manages to gain 51% control of the network hash
rate (computational power), then they can impose their own version
of transaction history.
 NETWORK FORKS: SOFT AND HARD FORKS
• In soft fork, a client which chooses not to upgrade to the latest
version supporting the updated protocol will still be able to work
and operate normally.
• In this case, previous and new blocks are both acceptable, thus
making soft fork backwards compatible.
• In soft fork, only miners are required to upgrade to the new client
software in order to make use of the new protocol rules.
• Hard fork invalidates previously valid blocks and requires all users
to upgrade.
• For example, new transaction types are sometimes added as a soft
fork, and any changes such as block structure change or major
protocol changes results in a hard fork.
 STRUCTURE OF A BLOCK (REFERENCE: BITCOIN)
• Two components:
• Block Header
• List of Transactions
• Block height is the number of
blocks before a particular
block in the blockchain.
• The current height of the
blockchain is 766,171 blocks.
• The current size of the bitcoin
blockchain as of July 2023,
stands at approx. 451 GB.

Block Source: https://blockchain.info/

BLOCK HEADER (REFERENCE: BITCOIN)
H0
• Metadata about a block – (1) Previous block hash,
(2) Mining statistics used to construct the block, (3) H1 =
Hash(H0)
Merkle tree root (which store all the transactions or
hash values) H2 =
Hash(H1)
• Previous block hash: Every block inherits from the
H3 =
previous block – we use previous block’s hash to Hash(H2)
create the new block’s hash – make the blockchain
H4 =
tamper proof. Hash(H3)
 BLOCK HEADER (REFERENCE: BITCOIN)
• Mining – the mechanism to generate the hash H0
• The mechanism needs to be complicated enough, to make the
blockchain tamper proof H1 =
• In Bitcoin Mining, the hash function looks like: Hash(H0)
Hk = Hash(Hk-1 || T || Nonce) H2 =
• T is set of transactions Hash(H1)
• So, the task of the miner is to find the nonce (random value) such H3 =
that Hk has certain predefined complexity (number of zeros at Hash(H2)
the prefix, means complexity of the mining algorithms)
• If Hk is known, then we can not find out message but if message is H4 =
known then we can find out Hk Hash(H3)
• The header contains mining statistics – timestamp, nonce and difficulty
BLOCK HEADER (REFERENCE: BITCOIN)
• Merkle Tree Root: The Root Hash
Merkle Root
transactions are organized in a Hroot=Hash(H0+H1)
Merkle Tree structure. The root
of the Merkle tree is a
L1 Hash L1 Hash
verification of all the H1=Hash(H10+H11)
H0= Hash(H00+H01)
transactions.
• L-Leaf nodes
L2 Hash L2 Hash L2 Hash L2 Hash
H00=Hash(T1) H01=Hash(T2) H10=Hash(T3) H11=Hash(T4)

T1 T2 T3 T4
 BLOCK HEADER (REFERENCE: BITCOIN)

Block Source: https://blockchain.info/

• BTC.TOP is the miner who has generated this block
• Difficulty level based on the hash finding/mining algorithm, Bits: how many bits are there in
the Block, Weight: balances size among different blocks, Nonce: which is used to generate
the Hash value, Block Reward: means the total bitcoin which the miner will get after
generating this block.
THE HASHES IN A BLOCK HEADER (REFERENCE: BITCOIN)

• Block identifier – the hash of the current block header (Hash algorithm: Double SHA256)
• Previous block hash is used to compute the current block hash
• If attacker making any change in the transaction, then Merkle root gets changed, then
corresponding hash value gets changed and finally the next block value gets changed.
• Ultimately, attacker need to change the entire blockchain, which is not possible
TRANSACTIONS IN A BLOCK (REFERENCE: BITCOIN)

• Transactions are organized as a Merkle Tree. The Merkle Root is used to

construct the block hash
• If you change a transaction, you need to change all the subsequent block
hash
• Thedifficulty of the mining algorithm determines the toughness of
tampering with a block in a blockchain
• If the difficulty is not very high then it many happen that by the time a
miner will accepts a block, an attacker can change the hash of all the
blocks (means attacker may be successful)
• So, in this situation, one must ensure that finding the hash value is as
tough as possible so that attacker can not change the hash value of the
entire blockchain.
 TRANSACTIONS IN A BLOCK (REFERENCE: BITCOIN)

This is not a transaction. Here, one miner got some BTC from mining procedure

Block Source: https://blockchain.info/

THE BLOCK IN A BLOCKCHAIN - SUMMARY

• The Block contains two parts – the header and the data (the
transactions)
• The header of a block connects the transactions – any change in any
transaction will result in a change at the block header
• The headers of subsequent blocks are connected in a chain – the entire
blockchain needs to be updated if you want to make any change
anywhere
THE BLOCKCHAIN REPLICAS

• Next part is How you will manage the Replica.

• Every peer in a Blockchain network maintains a local copy
of the Blockchain.
• Requirements
• All the replicas need to be updated with the last mined block
• All the replicas need to be consistent – the copies of the Blockchain at
different peers need to be exactly similar
Here the notion of Consensus comes into the picture???
THE NOTION OF DISTRIBUTED CONSENSUS

• Ensure that different nodes in the network see the same data nearly at
the same point of time.
• All
nodes in the network need to agree or give their consent on a
regular basis, that the data stored by them is the same. (This
algorithm, we call it as Consensus Algorithm (CA))
• CA ensures that there is no single point of failure – the data is
decentralized
• The system can provide service even in the presence of failures until
and unless the network get disconnected.
THE NOTION OF DISTRIBUTED CONSENSUS

• Starting from early 90’s a large number of works have been devoted
on the development of consensus algorithms over a network
• The basic philosophy is based on message passing – inform your
current state to others so that everyone can match their current
state with others in the network and they validate their local data.
• You can check that you have the latest data that your peers have.
• However, this philosophy requires that the participants in the consensus
algorithm knows each other. Because you need to find out with which
node you need to validate or match your data.
 THE NOTION OF DISTRIBUTED CONSENSUS
• Canwe achieve consensus even when the network is arbitrarily large ?,
and no participant in the network really know all other participants?
• Thiswe call as: An open network scenario or the permission-less
protocol – you do not record your identity while participating in the
consensus system
• Forthat: A challenge-response based system, where the network would
pose a challenge, and each node in the network would attempt to solve
the challenge
• So here nodes need not to reveal their identity and network giving them
the challenge.
• Traditional message passing algorithms not work directly here because you
don’t know from which node you validate your data
CHALLENGE-RESPONSE TO PERMISSION-LESS CONSENSUS

• Now interesting part is “The challenge-response protocol”: The nodes in

the network tries to solve the challenge posed by the network
• The nodes or the participants do not need to reveal their identity
• The node that can solve the challenge first, would get to dictate what the
next set of data or state elements to be added
• This will continue iteratively at different rounds
CHALLENGE-RESPONSE TO PERMISSION-LESS CONSENSUS

• Design of a good challenge – ensures that different nodes will win the
challenge at different runs.
• This ensures that no node would be able to control the network
• So, in one round one node will solve the challenge and, in another node,
will say I am ready to solve this challenge and this block is valid block,
add it in the BC.
• ThisIdea is known as: The Bitcoin Proof of Work (PoW) algorithm –
ensures consensus over a permission-less setting based on
challenge-response
THE ECONOMICS BEHIND BLOCKCHAIN CONSENSUS

• The challenge-response requires that every node spend large amount of

computational power/time to solve a mathematical challenge in each
iteration of consensus.
• What is the incentive/benefit for nodes/Why they participate in this
challenge response mechanism? Only one (or sometime a very few of
them) will win in each round
• What would be the incentive for others?
• Then, Digital money comes into the picture
THE ECONOMICS BEHIND BLOCKCHAIN CONSENSUS

• The Digital Money

• Ensures operational efficiency
• More levels of controlling monetary policy
• 1998: Wei Dai published ‘b-money’ – an anonymous distributed cash
system (Mother of the concept of Cryptocurrency or BITCOIN)
• There is no physical currency and network will generate the currency
• Cryptocurrency – a currency beyond the control of banks and
governments
• Network will generate the currency.
THE ECONOMICS BEHIND BLOCKCHAIN CONSENSUS
• The mining ensures that no node has the power to sabotage the network
and gain control (good part of the BTC n/w)
• No one can hold the control of the cryptocurrency
• The computational effort expended by the nodes in achieving consensus
would be paid for by cryptocurrency generated and managed by the
network
• So there is a kind of participating benefits to the miners that if the
participate then they will get certain amount of money because they spent
some of their computational resources.
• Blockchain ensures that the currency is secure and tamper-proof.
IN SUMMARY

• The Technology behind Blockchain

• The Data Structure – Distributed Ledger
• Cryptography and Digital Signatures – Ensure security and
tamper-proof architecture
• The Consensus over a Permission-less Environment
• The Economy of the Revenue Model – Encourages participants to
join in the mining procedure
 WHY IS BLOCK SIZE IMPORTANT
• The size of individual blocks on a blockchain can have a potentially large impact on the speed
and capacity of the network, but there are always trade-offs.
• Blocks themselves are batches of transaction data, and the amount of data contained in
each block combined with the chain’s block generation speed determines the number of
transactions per second, or TPS, that the network can handle. Obviously, having a high rate
of TPS is more attractive, so developers are always looking for ways to improve this metric.
• Actual rates vary based upon network conditions, but Bitcoin currently maxes out around
seven TPS, and Ethereum isn’t much better at 15 TPS. For comparison, Visa can process
something around 1,700 TPS, so it is imperative that improvements be made if these
networks want to compete as global payment solutions. Because the TPS rate of a
blockchain is deeply tied to the size of each block, this becomes a major factor in finding
a path to mainstream adoption.
• However, simply increasing the size indefinitely is only one way to approach the issue, and
there are many different philosophies as how to move forward.
 WHAT ARE SOME WAYS BLOCKCHAINS CAN SCALE

• Scaling solutions come in two forms: on-chain and off-chain. Both come with pros and
cons, but as of now, there is no agreement as to which is more promising for future
growth.
• On-chain scaling: refers to the philosophy of changing something about the
blockchain itself to make it faster. For example, one approach to scaling includes
shrinking the amount of data used in each transaction so that more transactions fit
into a block. By altering how the transaction data is handled, this patch to Bitcoin
allowed a notable improvement to overall network capacity.
• Another way to potentially boost the TPS of a network is to increase the rate of
block generation. While this can be helpful up to a point, there are limitations to this
method relating to the time it takes to propagate a new block through the network.
Basically, you don’t want new blocks being created before the previous block was
communicated to all (or virtually all) of the nodes on the network, as it can cause
issues with consensus.
 WHAT ARE SOME WAYS BLOCKCHAINS CAN SCALE?

On-chain scaling
• Then there’s a technique called sharding, in which transactions are broken up into “shards,” and different nodes
only confirm certain shards, effectively performing parallel processing to speed up the system. This can be
applied to proof-of-work or proof-of-stake systems and is going to form a major component of Ethereum 2.0.
This offers the potential to improve the capacity and speed of the network, and developers are hoping that
they will see upward of 100,000 TPS become a reality.
• Sharding increases the chances of a “double-spend” occurring as a result of an attack. The issue here is that it
takes notably fewer resources to take over individual shards than it does to perform a traditional 51% attack.
This can lead to transactions being confirmed that would otherwise be seen as invalid, such as the same Ether
(ETH) being sent to two different addresses.
• Some projects have attempted to improve network speeds by limiting the amount of validating nodes — a very
different philosophy from Ethereum’s. One example is EOS, which has limited its validators to just 21. These 21
validators are then voted on by token holders in an attempt to keep a fair, distributed form of governance —
with mixed results. This has given the network a reported 4,000 TPS,
• To scale a blockchain there is need to increase the size of individual blocks. For example,, the average block on
the Bitcoin Cash network is still under 1 MB, the debate on this is as of yet unsettled, and we will explore the
issue more thoroughly below.
 OFF-CHAIN SCALING
Off-chain scaling
• There are also ways to improve network throughput that don’t directly change anything about the blockchain. These are
often called “second-layer solutions,” as they sit “on top of” the blockchain. One of the most well known of these projects
is the Lightning Network for Bitcoin. Basically, Lightning Network nodes can open up “channels” between each other and
transact back and forth directly, and only when the channel is closed does the Lightning Network transmit the final tally to
be recorded on-chain. These nodes can also be strung together, making a much faster, cheaper payment system that only
interacts with the main network a fraction of the time.
• Ethereum, of course, also has solutions along these lines. For one, there is the Raiden Network, designed to be Ethereum’s
version of the Lightning Network, as well as a more general blockchain product called the Celer Network. These projects
implement not only off-chain transactions but also state changes, which allow for the processing of smart contracts.
Currently, the biggest drawback with these systems is that they are a work in progress, and there are still bugs and other
technical issues that can arise if channels aren’t created or closed correctly.
• A similar idea is something called “sidechains.” These are basically blockchains that are “branched off” of the main
chain, with the ability to move the native asset between them. This means sidechains can be created for specific purposes,
which will keep that transaction activity off of the primary network, freeing up the overall bandwidth for things that need
to be settled on the main chain. This is implemented for Bitcoin through the Liquid sidechain, and Ethereum’s version is
known as Plasma. One downside here is that each sidechain itself needs to be secured by nodes, which can lead to issues
with trust and security if a user is unaware of who is running them behind the scenes.
WHAT ARE THE ARGUMENTS FOR AND AGAINST INCREASING BLOCK
SIZE
• Larger blocks not only improve capacity and speed but also push down fees. Detractors are concerned
that larger blocks will lead to greater centralization.
• As block size increases, not only can more transactions be confirmed in each block, but also the average
transaction fee will drop.
• Increasing the size of blocks does have some consequences. As simply buying time and not solving the
real issue, and that more sophisticated solutions are necessary. The reason they give for why larger blocks
are such a problem is that node operators need to download each new block as it is propagated, which
with current hardware is of no major issue if blocks are 1 MB, 4 MB or even 32 MB in size. However, if a
blockchain is to be adopted globally, then even this is not enough. Before long, blocks would need to be on
the scale of gigabytes, and this could be a roadblock for many. If most average users cannot afford
hardware or internet connections capable of handling this, then, presumably, fewer and fewer would do so,
leading to increased centralization. As Bitcoin Core developer Gregory Maxwell has stated:
WHAT ARE THE ARGUMENTS FOR AND AGAINST INCREASING BLOCK
SIZE
• “There’s an inherent tradeoff between scale and decentralization when you talk about transactions on the
network. […] You’d need a lot of bandwidth, on the order of a gigabit connection. It would work. The
problem is that it wouldn’t be very decentralized, because who is going to run a node?”

• Ultimately, the ones who decide on these changes to a network are the miners, who can “signal” that they
support an upgrade to the network’s protocol. Because many miners are grouped into large pools, which
ultimately all signal together, this can potentially be another form of centralization, as these conglomerates
have far more say than lone miners ever could. Fortunately, there is more than one way to approach this
issue, and not all projects want to see open-ended block sizes. Other developers negate this problem in
other, clever ways in the hopes of putting scaling to rest once and for all.
 HOW HAVE DIFFERENT PROJECTS APPROACHED THE ISSUE?

• No single solution has emerged as the best one, and projects are still actively exploring creative versions of all
these philosophies in an attempt to make scalable networks.
• At the time of writing, Bitcoin hasn’t natively upgraded the nature of its blocks since the implementation of
SegWit. That being said, Lightning Network and sidechain research is still going strong, and many expect
some form of it to be what enables everyday purchasing with Bitcoin to become the norm. As mentioned,
projects such as Bitcoin Cash have embraced the creation of bigger blocks, and BitcoinSV has taken this
further with an upper limit on its blocks of a whopping 2 GB. This has, admittedly, led to an increase in the
cost of maintaining a node as well as more frequent issues with orphaned blocks.

• Not all projects are taking the larger block approach, of course. While networks such as Zilliqa have
joined Ethereum in looking to sharding as their primary means of creating a scalable platform, Ethereum
itself is looking to migrate over to a new proof-of-stake system that is being labeled Casper. On the other
hand, the project Cardano has developed a new approach called Hydra, which sees each user generating
10 “heads” and each head acting as a new channel for throughput on the network.