Module 1 Introduction to Block chain

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

to change, hack, or cheat the system. A blockchain is essentially a digital ledger of
transactions that is duplicated and distributed across the entire network of computer systems
on the blockchain. Each block in the chain contains a number of transactions, and every time
a new transaction occurs on the blockchain, a record of that transaction is added to every
participant’s ledger. The decentralised database managed by multiple participants is known as
Distributed Ledger Technology (DLT).Blockchain is a type of DLT in which transactions are
recorded with an immutable cryptographic signature called a hash.

Business runs on information. The faster it’s received and the more accurate it is, the better.
Blockchain is ideal for delivering that information because it provides immediate, shared and
completely transparent information stored on an immutable ledger that can be accessed only
by permissioned network members. A blockchain network can track orders, payments,
accounts, production and much more. And because members share a single view of the truth,
you can see all details of a transaction end to end, giving you greater confidence, as well as
new efficiencies and opportunities.

1.1 Centralized v/s Decentralized system

In the world of blockchain, you will find the decentralized vs centralized debate a lot. After
all, blockchain technology can make centralized systems a thing of the past.
Third-Party Involvement Yes No
Control Full control stays with the Control stays with the user
central authority itself
Hackable More prone to hacks and Less prone to hacks and data
data leaks leaks as no single point of
failure
Single Point of failure Yes No
Ease of use Intuitive and easy to use Not easy to use
Exchange fees Higher fees Less fees
Anonymous Users are not anonymous Offers anonymity
What is Centralization? And, How Does It Work?
Centralization revolves around us more than you can expect. If you are using social media
platforms such as Facebook, then you are using a centralized system. Other popular online
platforms such as YouTube are also centralized.
So, what does it mean?
It means that a central authority is in control of the data and functions of the said platform. So,
if you are using the Facebook platform, then the company Facebook has complete control over
the different aspects of their features including the ability to decide who and who cannot join
the platform.
If you want a technical perspective, then the centralized system requires third-party
intermediaries to verify data. This means if you are sending a message to your friend using the
Facebook platform, then the data will be verified and then transferred by the said platform.
Another great example would be sending an email. The moment you send an email to another
person, the email service provider has the knowledge of what you sent and when you sent it.
This information is stored privately without any identifier, but the email service, in any case,
has a copy of that information.
In short, the centralized services have your information stored with your consent. If you
remember the first time you create an account on any centralized platform such as Facebook,
Yahoo, Gmail, etc., then you you had to give them your full name, nationality, date of birth,
and any other information to register on the platform.
The fact that everything is stored in a centralized place, it is bound to get hacked or misused
for other purposes. Yahoo, in 2015, noticed one of the biggest hacks where the group of hackers
was able to view private emails of millions of accounts!
Centralization can also refer to an organization structure where the decision-making capacity
is only with few people. This means that we will also cover the decentralized vs centralized
organization.
Now that we have got a grasp of a centralized entity, now, let’s take a look at how it works.

Advantages of Centralization
There are undoubtedly multiple benefits or advantages of centralization. They are listed below.
1. Command chain
With centralized, the command chain is clearly defined. If an organization utilizes
centralization, they know the chain of command. This means that every person in the
organization knows their role and whom they need to report too. They also know which person
is under their control and are responsible for their subordinates’ actions as well.
All of these also mean that delegation is easy in the chain. Senior executives can easily delegate
work to their subordinates and finalize and finish the work in the best possible way. If work is
successfully completed, it creates a level of trust among the workers and chain, improving the
confidence required to make it work.

When it comes to a network that utilizes centralization, one central node or a collection of
nodes are responsible for transactional verification.
2. Reduced Costs
One of the biggest advantages of centralization is the cost associated with it. Any centralized
network or infrastructure requires less support and cost. As centralized organizations or
networks are pre-planned, the costs associated with it do not cross budgets until and unless it
is absolutely required to expand the network.
3. Quick Decision Implementation
There is no doubt that centralization organizations or networks enable quick decision
implementation. As centralized networks have fewer nodes or people, it requires less
communication among the different levels of authorization.
Also, if a centralized network decides to implement a change, it can be done in a matter of
minutes. For instance, a centralized network can put more stress on the KYC procedure and
decided to add more requirements for it. As the network is centralized, they can push the new
guidelines or change the KYC procedure which can go live almost instantly after proper testing.
Disadvantages of Centralization
There are also various disadvantages of centralization. Some of them are as below:
1. Trust
Even though centralized organizations are secure and trustable, they are not 100% secure or
trustable. The trust is an agreement that is set by the service provider and the user.
However, that’s an agreement and it can break easily. Big corporations suffer from trust issues
from their users, from time to time.
It happens when there is a lapse of security in the system, people tend to ignore the service for
some time before the service provider mends the trust by offering solutions and remuneration
to those affected.
All of this happens because of centralization and the reason that all the data are stored in a
centralized database.
2. Single point of failure
Centralization also means that the whole network is dependent on a single point of failure.
Organizations know about the disadvantage and hence have deployed measures to contain it.
However, the fact that there is a chance for failure is a big disadvantage for mission-critical
services.
3. Scalability Limitation
As a single server is used in most cases, it leads to scalability limitations.
What’s the current state of Centralization?
Centralization is undoubtedly an effective way to manage organizations or networks. It has
been effectively used by big organizations such as Microsoft, Facebook, Yahoo, and so on. In
fact, our governments are also reliant on a centralized approach.
In the case of a centralized government, the political executives coordinate the power. You can
also exert the power in multiple cases.
For a big corporation, centralization ensures that its data remains safe. This is needed so that
their trade secrets do not get leaked. However, there is a modified way of handling the data
with the option to use decentralized networks such as blockchain.
We can easily say that centralization is still very prevalent in the current market. And, not all
businesses don’t need to adopt decentralization just for the sake of it. Different business models
thrive in a centralized network and it will take a while before more and more business move
towards decentralized models.
What is Decentralization? And, How Does It Work?
The idea of decentralization is new. It came to light with the release of bitcoin in 2009. It also
introduced one new cool concept that makes decentralization possible, i.e., blockchain
technology. Here if one user sends bitcoin to another user, it doesn’t have to go through a
centralized authority.
However, this doesn’t mean that the transaction is not verified. The transactions are verified
with the use of consensus algorithms.
The network used by bitcoin is connectable by anyone.
That means it is open. It also exhibited other key features such as transparency, where anyone
can verify the transactions if needed. In such a network, a person or machine that connects to
the network is termed as “node.” In the end, there will be a network with thousands of nodes
that are capable of sending and receiving funds from each other.
Let’s take a real-world example to understand the concept.
A decentralized energy network is where people can connect and buy energy from other
independent entries. This way, they do not have to pay the intermediaries for accessing energy
in the first place.
The distributed energy network relies on blockchain technology with no need for a centralized
authority. The nodes that are generating the energy can share it with the network and get paid
for it.
Advantages of Decentralization
There are multiple advantages of decentralization.
1. Full Control
One of the most significant advantages of decentralization is that the users are in full control
of their transactions.
This means that they can start a transaction when they want without the need to authorize it
from a centralized authority. In simple terms that the verification process is not dependent on
third-parties and a decentralized network utilizes consensus methods to verify the information.
2. Data cannot be altered or deleted
Blockchain technology’s data structure is append-only. This means that there is no chance for
anyone to modify or alter the data once it is stored. There is another blockchain technology that
utilizes different data models such as Corda, but they also follow the immutability property.
3. Secure
Decentralized networks are secure because of how they handle data and transactions. They use
cryptography to ensure that the data ledgers are secure. Also, the data in the current block
require data from the adjacent block so that it can use cryptography to validate the data.
4. Censorship
Decentralization also means less censorship. In a centralized system, there are more chances
that information can be censored. However, the decentralized network is less prone to
censorship, as there is no central authority that controls the data. Let’s take an example to
understand the scenario.
Twitter, for example, is known to censor accounts as it finds some offensive posts or does it
when the government tries to censor accounts if it goes against their agenda.
In the case of decentralization, peers can interact directly, and hence there is no or less
censorship.
5. Open development
Decentralized networks mostly support open development. This is because of its nature and
how it operates. By having an open development environment, the network gets amazing
services, tools, and products built on top of it.
Linux, for example, is open-source and has an ecosystem that enables anyone to improve on it.
The same is true for decentralized networks. In comparison, a centralized network or closed
solutions do not get the chance to have open development. This limits development to a great
extent.
Disadvantages of Decentralization
There are of course many disadvantages of decentralization. Some of the disadvantages include
the following:
1. Conflict: Decentralization can lead to conflict if it is not well maintained in an
organizational structure
2. Cost: In an organizational setting, decentralization can cost more than centralization as
it requires setting up of systems that can make communication more automatic.
3. Crime: When it comes to decentralized blockchain, then the crime can be one big
disadvantage. As everything is done on the network is anonymous and can lead to
misuse.
 4. Volatility: Decentralized cryptocurrency shows volatile behavior where the prices
fluctuate a lot!
What is the current state of Decentralization?
Decentralization is here to stay. You’ll see that many of the major companies, organizations,
and even governments are adopting it as it offers more efficiency to the network in the long
run.
Dubai is one of the first waves of governments that are currently adopting blockchain to its
whole governance structure. It is now termed as the blockchain development world capital, as
decentralization or blockchain technology is influencing it.
At the time of writing, Dubai has been able to integrate blockchain into eight industry sectors,
including real estate, tourism, security, transportation, finance, health, and education. The end
result is to become the world’s first blockchain city.
IBM is also at the forefront of embracing blockchain technology and using it to improve the
food supply chain.
They created IBM Food Trust, which is all about bringing efficiency and transparency to food
supply chains. They are working in conjunction with Walmart and benefit all the participants
in the network with actionable and traceable information.
There are also various decentralized ledger projects out there including the likes of
Hyperledger, Corda, and others.
Use-cases Centralized vs Decentralized
All these use-cases will help you better understand how each of these concepts differentiates
and how decentralization can really help to solve some of the key core problems of centralized
systems.
Payments System
One of the most obvious use-cases of decentralization is the payment system. After all, the
concept itself arose with the introduction of bitcoin, the first event decentralized currency.
All the currencies in the world that are operated by banks work on top of centralized servers.
By doing so, they have full control over all the operations and also know about all your entire
financial activities.
This means that they know about your spending habits. However, one of the worst things about
using a centralized currency is that if someone gets hold of your bank credentials, they can
easily access all your money and use it for their own benefit.
Another disadvantage of centralized payment systems is that there can be a disruption or failure
and you will not be able to access your funds when you need it.
So, how does a decentralized system solve all of these? Well, by being decentralized. As there
is no central authority or point of failure, your funds are always available.
It also removes the chance of your funds getting hacked or accessed by a malicious actor. So,
if you use cryptocurrency as a way to receive and send payments, you take out the role of the
centralized entity from the process — improving it in all the way. You can term these
cryptocurrencies as peer-to-peer digital currencies.
Another benefit of the payment system is the removal of intermediate fees. The only fees that
are associated with the process are either small or non-existent. They are also borderless and
secure.
So, what are the pros of using a global payment system? They are as below.
 Quick transactions
 Cheap transactions
 No information is shared among the third party
 Secure
 No single point of failure
 Transparent
Government Voting
Voting has always been a controversial topic among the government and the people who
choose the government. The opposing parties are also keen to use the topic to find a way to
defend themselves. So, what actually happens.
The whole voting scenario is dealing with one most important issue, transparency. The current
way of carrying out the vote doesn’t take transparency into account. This results in a lot of
conspiracy theories on how the votes are manipulated internally. As these theories exist, there
is no way to validate them as the system is not transparent.
That’s where a decentralized voting platform can come into rescue. Governments can use it to
run the votes and provide transparent voting. This way, they can rest all the theories that come
out when general election results are declared.
By using a transparent voting system or a voting system running on a decentralized network,
the voters can easily verify the votes. This also means that no party can do frauds when it comes
to counting of votes. Another benefit of using this approach is that results can be declared as
soon as voting is finished.
So, what are the benefits of a decentralized voting system?
 There won’t be any manipulation or fraud
 No conspiracy theories
 No threats
Energy
Right now, centralized entities mainly control and distribute the energy who decide where they
want to provide their services and at what price.
To solve this, decentralization can come up with a unique solution. It can use a decentralized
power grid which you can use to cut the middleman.
Both centralized and decentralized have their own benefits. There is no doubt that governments,
organizations, and companies want control over their assets, even when they have to give up
efficiency for the sake of it.
But, decentralization is here to stay! And, with time, it will grow as more companies will realize
the benefit of it. Also, you can also implement decentralization with a sustainable close
environment and with the help of hybrid or federated blockchain solutions.
This leads us to the end of our decentralized vs centralized guide. By now, you should have a
good idea of what each of them has to offer.

1.2 Need for Decentralized system

Nowadays, technology is advancing day by day and the number of users is also increasing.
For the administration of the system, the centralized system is failing to meet all the criteria.
So Decentralized system is becoming very useful day by day. It creates an efficient, secured,
and reliable administration. It improves peer-to-peer networks. It ensures the right of each
user. Each individual has the right to decision-making. Users also have access to the
database. The biggest advantage of decentralization is if a part of the network crashes, the
whole network will work uninterrupted. The main reason why decentralization is better than
centralization is the flexibility and data to adapt to market demands quickly.
1.3 Design principles of the Blockchain economy
1. Network Integrity
Principle
Integrity is encoded in the network and not just vested in a single or few members.

Problem to be solved
Over the internet, we need intermediaries to solve the integrity problem. Though you can

share data files, photos, etc., easily over the internet, the same doesn’t hold for money
because there is the risk of double-spending.

Breakthrough
The blockchain offers a consensus mechanism that could solve the double-spend problem
through the time stamping of the first transaction and all the transactions thereon.

To be valid, every new block on the chain must refer to the preceding block. In addition, the
proof of work mechanism ensures integrity over the bitcoin blockchain.

Implication
The authors say — “Trust is the sine qua non of the digital economy, and a platform for

secure and reliable mass collaboration holds many possibilities for a new kind of
organization and society.”
2. Distributed Power
Principle
The power is distributed across the network with no single point of control. As a result, no

single party can shut the system down. And, if someone tries to do that, the system will still
survive.

Problem to be solved
Big organizations or central powers have proven time and again that they can use the power

of data without the user’s knowledge and implement large-scale changes without the user’s
consent.

Breakthrough
Blockchain means mass collaboration at its best. The user has the power over their data and
the level of participation.

The blockchain is everywhere. There is no backdoor entry or dealing. Every transaction is

broadcasted to everyone. Nothing is with a central third party; nothing is stored on a central
server.

Implication
 A platform to enable distributed models of wealth creation
 A peer-to-peer collaboration to transfer real powers to the citizens

3. Value as Incentive
Principle
A blockchain is designed to incentivize its users and people who want to hold on to these
incentives.
Problem to be solved
 The concentration of power over the internet
 Improper use of data because of invariable incentives over the dot com era
 People who receive the incentive do not bother when the data gets leaked because it is
the consumers who ultimately clean up the mess themselves. For example — when
your credit card details are leaked, it's not the financial institution that takes care of
the mess but leaves you to block the old and order a fresh one.
Breakthrough
The extreme resources requirement and the reward mechanism ensure that participants do the

right thing. And, even if their intentions are not right, it ultimately benefits the overall
system.

Implication
 The internet era does not punish the offenders in any way. But imagine a troll on
blockchain social media — they can lose their reputation score for bad behaviour.
 Plus, the good performers who collaborate effectively are rewarded.

4. Security
Principle
 The use of cryptography is efficient and provides confidentiality, authenticity, and
nonrepudiation.
 Consequences of reckless behaviour are isolated to the person who behaves
recklessly.
Problem to be solved
 Hacking, identity theft, frauds, cyberbullying, phishing, spam, malware, ransomware
 The current reliance on ‘strong’ passwords because the service provider essentially is
not responsible for our safety
 If the next stage of the digital revolution involves communicating money directly
between multiple parties, then communication needs to be hackproof.
Breakthrough
 PKI — Public Key Infrastructure
 Encryption is based on two keys — one for encryption and another for decryption.
 The bitcoin blockchain runs on the very well-known and established SHA-256
published by the U.S. National Institute of Standards and Technology.
 Digital currencies like Bitcoin aren’t stored on a file; A cryptographic hash represents
them.
Implication
A secure design that is transparent and protects what happens to our data.

5. Privacy
Principle
People get to be in complete control of their data.
Problem to be solved
Double privacy offenses — Firstly, collecting and using our data without our understanding
and permission. Secondly, it does not ensure protection from hackers.

Breakthrough
On a blockchain like bitcoin, you need not provide an identity. In addition, because the
software is open-source, it is unnecessary to store data and use it for marketing.

Credit cards are a very identity-centric model, so hackers are keen to steal this data from big
companies and use it.

On a blockchain, information is available for everyone to read and digest, yet it doesn't
breach the fort of privacy.

Implication
A complete shift from ‘BIG Data’ to “LITTLE Data’

Data is private. It’s yours. You own it.

6. Rights Preserved
Principle
The author says — “Ownership rights are transparent and enforceable. Individual freedoms

are recognized and respected. We hold this truth to be self-evident — that all of us are born
with certain inalienable rights that should and can be protected.”

Problem to be solved
 Anonymous online censorship
 Authorities or software blocking privacy and online rights
 Intermediaries and the cost attached
 Piracy
Breakthrough
Proof of Existence (PoE) is a site that creates and registers cryptographic digests of deeds,

titles, receipts, or licenses on the blockchain. It doesn’t maintain a copy of any original

document; the document's hash is calculated on the user’s machine, not on the PoE site, thus
ensuring the confidentiality of content.
In addition to such a concept, smart contracts over the blockchain allow assigning usage

rights to another party. A smart contract also allows owners of assets to pool their resources
and create a corporation on the blockchain.

Implication
Clarity, enforcement, and correct usage of property/assets rights over the blockchain
economy.

7. Inclusion
Principle
The economy works best when it works for everyone. That means lowering the barriers to
participation.

Problem to be solved
A large population on our planet is still excluded from the internet and the financial system,
hence economic opportunities.

And though platforms assist or provide a solution to this problem, the costs are too high.

Consumers at the bottom of the pyramid still can’t afford minimum account balances,
minimum payment amounts, or transaction fees to use the system.

Micropayments and micro-accounts are almost unfeasible over the internet.

Breakthrough
Blockchain works over the internet, but they can work without it too. So anyone with a
simple phone can participate in the blockchain.

 No bank account is required.

 No proof of citizenship is required.
 No birth certificate is required.
 No home address is required.
 No stable currency is required.

When governments are in financial trouble, they print more money and then profit from the

difference between the cost of manufacturing and the face value of the currency. But for the
poor and the larger audience, it means a loss of savings and the value of their current
holdings.

Implication
The first era of the internet benefited many, but the overall prosperity flows to few hands.
The foundation of prosperity is inclusion, and blockchains can help.

1.4 Blockchain types – Public v/s private block chain

Public blockchain.
A public, or permission-less, blockchain network is one where anyone can participate without
restrictions. Most types of cryptocurrencies run on a public blockchain that is governed by
rules or consensus algorithms.
A public blockchain network is a blockchain network where anyone can join whenever they
want. Basically, there are no restrictions when it comes to participation. More so, anyone can
see the ledger and take part in the consensus process.
For example, Ethereum is one of the public blockchain platform examples.
Thus, if you want a fully decentralized network system, then public blockchain is the way to
go. However, it can get a bit problematic when you try to incorporate a public blockchain
network with the enterprise blockchain process.
Anyhow, the public blockchain network was the first-ever blockchain type in the revolution.
As a matter of fact, it was Bitcoin that laid the foundation of blockchain technologies.
Once people started to see the underlying technological benefits, they started developing other
blockchain variations to get rid of all the issues.
The best part about public blockchain companies is that they make sure that all the participants
have equal rights no matter what.
People can join in and participate in consensus, transact with their peers as they please.
Public blockchain companies make sure that this technology offers the highest level of security.
More so, it’s something that you won’t see in a private blockchain.
Everyone can see the ledger as well, thus maintaining transparency at all times.
However, public blockchain examples do come with their fair share of flaws as well. In reality,
these platforms are slower than usual. Furthermore, it can attract malicious people using the
platform for illegal activities because of the anonymous nature.
Public blockchains are open networks that allow anyone to participate in the network i.e.
public blockchain is permissionless. In this type of blockchain anyone can join the network
and read, write, or participate within the blockchain. A public blockchain is decentralized and
does not have a single entity which controls the network. Data on a public blockchain are
secure as it is not possible to modify or alter data once they have been validated on the
blockchain.
Some features of public blockchain are :

 High Security –
It is secure Due to Mining (51% rule).

 Open Environment –
The public blockchain is open for all.

 Anonymous Nature –
In public blockchain every one is anonymous. There is no need to use your real name,
or real identity, therefore everything would stay hidden, and no one can track you
based on that.

 No Regulations –
Public blockchain doesn’t have any regulations that the nodes have to follow. So,
there is no limit to how one can use this platform for their betterment

 Full Transparency –
Public blockchain allow you to see the ledger anytime you want. There is no scope for
any corruption or any discrepancies and everyone has to maintain the ledger and
participate in consensus.

 True Decentralization –
In this type of blockchain, there isn’t a centralized entity. Thus, the responsibility of
maintaining the network is solely on the nodes. They are updating the ledger, and it
promotes fairness with help from a consensus algorithm .

 Full User Empowerment –

Typically, in any network user has to follow a lot of rules and regulations. In many
cases, the rules might not even be a fair one. But not in public blockchain networks.
Here, all of the users are empowered as there is no central authority to look over their
every move.

 Immutable –
When something is written to the blockchain, it can not be changed.

 Distributed –
The database is not centralized like in a client-server approach, and all nodes in the
blockchain participate in the transaction validation.
Permissioned or private blockchain.
A private, or permissioned, blockchain allows organizations to set controls on who can access
blockchain data. Only users who are granted permissions can access specific sets of data.
Oracle Blockchain Platform is a permissioned blockchain.
A private blockchain is managed by a network administrator and participants need consent to
join the network i.e., a private blockchain is a permissioned blockchain. There are one or
more entities which control the network and this leads to reliance on third-parties to transact.
In this type of blockchain only entity participating in the transaction have knowledge about
the transaction performed whereas others will not able to access it i.e. transactions are
private.
Some of the features of private blockchain are :

 Full Privacy –
It focus on privacy concerns.

 Private Blockchain are more centralized.

 High Efficiency and Faster Transactions –

When you distribute the nodes locally, but also have much less nodes to participate in
the ledger, the performance is faster.

 Better Scalability –
Being able to add nodes and services on demand can provide a great advantage to the
enterprise.
 Difference between Public and Private blockchain :
S.no Basis of Comparison Public BlockChain Private BlockChain

1. Access – In this type of In this type of

blockchain anyone blockchain read and
can read, write and write is done upon
participate in a invitation, hence it is
blockchain. Hence, a permissioned
it is permissionless blockchain.
blockchain. It is
public to everyone.
2. Network Actors – Don’t know each Know each other
other
3. Decentralized Vs A public blockchain A private blockchain
Centralized – is decentralized. is more centralized.
4. Order Of Magnitude The order of The order of
– magnitude of a magnitude is more
public blockchain is as compared to the
lesser than that of a public blockchain.
private blockchain
as it is lighter and
 provides
transactional
throughput.
5. Native Token – Yes Not necessary
6. Speed – Slow Fast
7. Transactions pre Transactions per Transaction per
second – second are lesser in second is more as
a public blockchain. compared to public
blockchain.
8. Security – A public network is A private blockchain
more secure due to is more prone to
decentralization and hacks, risks, and
active participation. data breaches/
Due to the higher manipulation. It is
number of nodes in easy for bad actors
the network, it is to endanger the
nearly impossible entire network.
for ‘bad actors’ to Hence, it is less
attack the system secure.
and gain control
over the consensus
network.
9. Energy A public blockchain Private blockchains
Consumption – consumes more consume a lot less
energy than a private energy and power.
blockchain as it
requires a significant
amount of electrical
resources to function
and achieve network
consensus.
10. Consensus Some are proof of Proof of Elapsed
algorithms – work, proof of stake, Time (PoET), Raft,
proof of burn, proof and Istanbul BFT
of space etc. can be used only in
case of private
blockchains.
11. Attacks – In a public In a private
blockchain, no one blockchain, there is
knows who each no chance of minor
validator is and this collision. Each
increases the risk of validator is known
potential collision or and they have the
a 51% attack (a suitable credentials
group of miners to be a part of the
which control more network.
than 50% of the
network’s
computing power.).
 12. Effects – Potential to disrupt Reduces transaction
current business cost and data
models through redundancies and
disintermediation. replace legacy
There is lower systems, simplifying
infrastructure cost. documents handling
No need to maintain and getting rid of
servers or system semi manual
admins radically. compliance
Hence reducing the mechanisms.
cost of creating and
running
decentralized
application (dApps).
13. Examples – Bitcoin, Ethereum, R3 (Banks), EWF
Monero, Zcash, (Energy), B3i
Dash, Litecoin, (Insurance), Corda.
Stellar, Steemit etc.

1.5 Blockchain Architecture

According to some blockchain professionals, there are five layers of blockchain technology:

 Infrastructure or hardware layer

 Data layer
 Network layer
 Consensus layer
 Application and presentation layers

However, blockchain technology layers can also be categorized as:

 Layer 0
 Layer 1
 Layer 2
 Layer 3
Hardware infrastructure layer
The blockchain's content is stored on a server in a data center somewhere on this lovely
globe. Clients request content or data from application servers while browsing the web or
utilizing any apps, which is known as the client-server architecture.
Clients can now connect with peer clients and share data. A peer-to-peer (P2P) network is a
large group of computers that share data. Blockchain is a peer-to-peer network of computers
that computes, validates and records transactions in an orderly manner in a shared ledger. As
a result, a distributed database is created, storing all data, transactions and other pertinent
data. A node is a computer in a P2P network.
Data layer
A blockchain's data structure is expressed as a linked list of blocks in which transactions are
ordered. The data structure of the blockchain consists of two fundamental elements: pointers
and a linked list. A linked list is a list of chained blocks with data and pointers to the previous
block.
Pointers are variables that refer to the position of another variable, and a linked list is a list of
chained blocks with data and pointers to the previous block. The Merkle tree is a binary tree
of hashes. Each block contains the root hash of the Merkle tree and information like the
preceding block's hash, timestamp, nonce, block version number and current difficulty goal.
For blockchain systems, a Merkle tree provides security, integrity and irrefutability. The
blockchain system is built on Merkle trees, cryptography and consensus algorithms. Because
it is the first in the chain, the genesis block, i.e., the first block, does not contain the pointer.
To protect the security and integrity of the data contained in blockchain, transactions are
digitally signed. A private key is used to sign transactions, and anyone with the public key
may verify the signer. The digital signature detects information manipulation. Because the
data that is encrypted is also signed, digital signatures ensure unity. As a result, any
manipulation will render the signature invalid.
The data cannot be discovered because it is encrypted. It cannot be tampered with again, even
if it is caught. The sender's or owner's identity is also protected by a digital signature. As a
result, a signature is legally linked to its owner and cannot be disregarded.
Network layer
The network layer, commonly referred to as the P2P layer, is responsible for inter-node
communication. Discovery, transactions and block propagation are all handled by the
network layer. Propagation layer is another name for this layer.
This P2P layer ensures that nodes can find one other and interact, disseminate and
synchronize to keep the blockchain network in a legitimate state. A P2P network is a
computer network in which nodes are distributed and share the workload of the network to
achieve a common purpose. The blockchain's transactions are carried out by nodes.
Consensus layer
The consensus layer is essential for blockchain platforms to exist. The consensus layer is the
most necessary and critical layer in any blockchain, whether it is Ethereum, Hyperledger or
another. The consensus layer is in charge of validating the blocks, ordering them and
guaranteeing that everyone agrees.
Application layer
Smart contracts, chaincode and decentralized applications (DApps) make up the application
layer. The application layer protocols are further subdivided into the application and the
execution layers. The application layer comprises the programs that end-users utilize to
communicate with the blockchain network. Scripts, application programming interfaces
(APIs), user interfaces and frameworks are all part of it.
The blockchain network serves as the back-end technology for these applications, and they
communicate with it via APIs. Smart contracts, underlying rules and chaincode are all part of
the execution layer.
Although a transaction moves from the application layer to the execution layer, it is validated
and executed at the semantic layer. Applications give instructions to the execution layer,
which executes transactions and ensures the blockchain's deterministic nature.

1.6 Blockchain characteristics and advantages

Characteristics of blockchain
 Data immutability: This is the top-most feature as it ensures that no data is
corrupted. How this works is that every node on the system has a copy of the ledger.
So, to alter any data, there must be an unanimous agreement of every node. This
makes blockchain secure and transparent.
 Decentralized: Blockchain is decentralized, meaning that no authority or
government, a group of persons, or a single individual controls this technology.
Rather, it is a group of nodes that manage the whole transaction.
 Single source of truth: In a blockchain, there is only one source of truth, the
distributed ledger. So, to know who owns what, or to study a particular transaction,
you only need to go to one place.
 Transparency or provenance: Every transaction, be it tangible or non-tangible, can
be traced from the start to the finish with blockchain.
 Consensus algorithm: For a transaction to be accepted and recorded on the
blockchain, all the participants or nodes must agree to follow the same rules.
 Anonymous: It is true that every transaction is transparent and open to the public, but
the actual persons are kept anonymous through the addresses. For example, suppose a
person sends a sum of money, the receiver will know that the sender is linked to a
bitcoin address, but they will not know the actual address. There are several reasons
for this – one of them is privacy.
1.7 Advantages of Blockchain
Enhanced security
Your data is sensitive and crucial, and blockchain can significantly change how your critical
information is viewed. By creating a record that can’t be altered and is encrypted end-to-end,
blockchain helps prevent fraud and unauthorized activity. Privacy issues can also be
addressed on blockchain by anonymizing personal data and using permissions to prevent
access. Information is stored across a network of computers rather than a single server,
making it difficult for hackers to view data.
Greater transparency
Without blockchain, each organization has to keep a separate database. Because blockchain
uses a distributed ledger, transactions and data are recorded identically in multiple locations.
All network participants with permissioned access see the same information at the same time,
providing full transparency. All transactions are immutability recorded, and are time- and
date-stamped. This enables members to view the entire history of a transaction and virtually
eliminates any opportunity for fraud.
Instant traceability
Blockchain creates an audit trail that documents the provenance of an asset at every step on
its journey. In industries where consumers are concerned about environmental or human
rights issues surrounding a product — or an industry troubled by counterfeiting and fraud —
this helps provide the proof. With blockchain, it is possible to share data about provenance
directly with customers. Traceability data can also expose weaknesses in any supply chain —
where goods might sit on a loading dock awaiting transit.
Increased efficiency and speed
Traditional paper-heavy processes are time-consuming, prone to human error, and often
requires third-party mediation. By streamlining these processes with blockchain, transactions
can be completed faster and more efficiently. Documentation can be stored on the blockchain
along with transaction details, eliminating the need to exchange paper. There’s no need to
reconcile multiple ledgers, so clearing and settlement can be much faster.
Automation
Transactions can even be automated with “smart contracts,” which increase your efficiency
and speed the process even further. Once pre-specified conditions are met, the next step in
transaction or process is automatically triggered. Smart contracts reduce human intervention
as well as reliance on third parties to verify that terms of a contract have been met. In
insurance, for example, once a customer has provided all necessary documentation to file a
claim, the claim can automatically be settled and paid.

1.8 Cryptography and Data structures for BCT (Tree, Merkel Tree)

A blockchain is a database that is distributed among the nodes of a computer network. It stores
the database in a digital format. The innovation of blockchain is that it guarantees the security
of records of data and generates trust without the involvement of a third party. Blockchain is a
shared database that stores information and encrypts data in blocks and is linked with the
method of cryptography, as the new block enters the network it is chained to the previous block
and makes the data chained together.
Cryptography
Cryptography is a technique or a set of protocols that secure the information from any third
party during a process of communication. It is also made up of two Greek terms, Kryptos term
meaning “hidden” and Graphein, a term meaning “to write”. Some terminologies related to
Cryptography:
 Encryption: Conversion of normal text to a random sequence of bits.
  Key: Some amount of information is required to get the information of the
cryptographic algorithm.
 Decryption: The inverse process of encryption, conversion of Random sequence of
bits to plaintext.
 Cipher: The mathematical function, i.e. a cryptographic algorithm which is used to
convert plaintext to ciphertext(Random sequence of bits).
Types of Cryptography
The two types of cryptography are:

 Symmetric-key cryptography.
 Asymmetric-key cryptography.
1. Symmetric-key Encryption: It focuses on a similar key for encryption as well as
decryption. Most importantly, the symmetric key encryption method is also applicable to
secure website connections or encryption of data. It is also referred to as secret-key
cryptography. The only problem is that the sender and receiver exchange keys in a secure
manner. The popular symmetric-key cryptography system is Data Encryption System(DES).
The cryptographic algorithm utilizes the key in a cipher to encrypt the data and the data must
be accessed. A person entrusted with the secret key can decrypt the data. Examples: AES, DES,
etc.
Some important points:
 It is also known as – Secret key cryptography.
 Both the parties have the same key to keeping secrets.
 It is suited for bulk encryptions.
 It requires less computational power and faster transfer.

Symmetric Cryptography
2. Asymmetric-key Encryption: This cryptographic method uses different keys for the
encryption and decryption process. This encryption method uses the public and private key
methods. This public key method help completely unknown parties to share information
between them like email id. private key helps to decrypt the messages and it also helps in the
verification of the digital signature. The mathematical relation between the keys is that the
private key cannot be derived from the public key, but the public key can be derived from the
private key. Example: ECC,DSS etc.
Some important points:
 It is also known as Public-key cryptography.
 It is often used for sharing secret keys of symmetric cryptography.
 It requires a long processing time for execution.
 Plays a significant role in website server authenticity.

Asymmetric Cryptography
Cryptography Hash Function in Blockchain
One of the most notable uses of cryptography is cryptographic hashing. Hashing enables
immutability in the blockchain. The encryption in cryptographic hashing does not involve any
use of keys. When a transaction is verified hash algorithm adds the hash to the block, and a
new unique hash is added to the block from the original transaction. Hashing continues to
combine or make new hashes, but the original footprint is still accessible. The single combined
hash is called the root hash. Hash Function helps in linking the block as well as maintaining
the integrity of data inside the block and any alteration in the block data leads to a break of the
blockchain. Some commonly used hashed function is MD5 and SHA-1.
Properties of Cryptographic Hash:
 For a particular message hash function does not change.
 Every minor change in data will result in a change in a major change in the hash value.
 The input value cannot be guessed from the output hash function.
 They are fast and efficient as they largely rely on bitwise operations.
Benefits of Hash function in Blockchain:
5. Reduce the bandwidth of the transaction.
6. Prevent the modification in the data block.
 7. Make verification of the transaction easier.
Role of Cryptography in Blockchain
Blockchain is developed with a range of different cryptography concepts. The development of
cryptography technology promotes restrictions for the further development of blockchain.
 In the blockchain, cryptography is mainly used to protect user privacy and transaction
information and ensure data consistency.
 The core technologies of cryptography include symmetric encryption and asymmetric
encryption.
 Asymmetric cryptography uses digital signatures for verification purposes, every
transaction recorded to the block is signed by the sender by digital signature and ensures
that the data is not corrupted.
Cryptography plays a key role in keeping the public network secure, so making it fit to maintain
the integrity and security of blockchain.
Use of Cryptographic Hash Functions
As the blockchain is also public to everyone it is important to secure data in the blockchain and
keeps the data of the user safe from malicious hands. So, this can be achieved easily by
cryptography.
 When the transaction is verified through a hash algorithm, it is added to the blockchain,
and as the transaction becomes confirmed it is added to the network making a chain of
blocks.
 Cryptography uses mathematical codes, it ensures the users to whom the data is
intended can obtain it for reading and processing the transaction.
 Many new tools related to the application of cryptography in blockchain have emerged
over the years with diverse functionalities.
Benefits of Cryptography in Blockchain
There are a huge number of benefits of cryptography in blockchain some of them are stated
below:
 Encryption: Cryptography uses asymmetric encryption to ensure that the transaction
on their network guards the information and communication against unauthorized
revelation and access to information.
 Immutability: This feature of cryptography makes it important for blockchain and
makes it possible for blocks to get securely linked by other blocks and also to ensure
the reliability of data stored in the blockchain, it also ensures that no attacker can derive
a valid signature for unposed queries from previous queries and their corresponding
signatures.
 Security: Cryptography makes the records of transactions easier using encryption of
data, and accessing of data using public and private keys. Cryptographic hashing
tampering with data is not possible, making blockchain more secure.
 Scalability: Cryptography makes the transaction irreversible giving the assurance that
all users can rely on the accuracy of the digital ledger. It allows limitless transactions
to be recorded securely in the network.
 Non-repudiation: The digital signature provides the non-repudiation service to guard
against any denial of a message passed by the sender. This benefit can be associated
with the collision resistance i.e.; since every input value has a unique hash function so
there is no clash between the messages that are sent and one message can be easily
differentiated from the other.
 Prevent hackers: The digital signature prevents hackers from altering the data because
if the data changes, the digital signature becomes invalid. With the help of
cryptography, it protects the data from hackers and makes cryptography in blockchain
unstoppable.