Blockchain Application for Managers

Session 3

Term V, PGDM (GM) (2024-25)

XLRI: Xavier School of Management | Jamshedpur

Campus
Blockchain
 Blockchain Promise – “Trust, But Verify”

 Blockchain is a distributed ledger of the history of transactions or other successive events

that is
 Authenticated

 Consistent

 Tamper-proof

 Easily verifiable

 And can be
 Permission-less, or permissioned

 Anonymous, or named

 “Intelligent”

Blockchain Application for Managers (2024-25) | Session 3 1

 Bitcoin Blockchain
Technology Fundamentals
Blockchain

 In a blockchain

 each block not only points us to the previous block

 but also contains a digest of the previous block allowing us to verify that it has not changed

 The head of the list is stored

 which is just a regular hash‐pointer that points to the most recent data block

Blockchain Application for Managers (2024-25) | Session 3 3

Blockchain

 What happens when someone wants to tamper with any intermediate block?
 An adversary wants to tamper with the data contained in block k in the middle of the chain
 He also does not want others to detect the tampering

 Once the data in the kth block is changed, the hash in the (k + 1)th block is not going to match up
(refer to collision resistant and hiding properties)

 The adversary can continue doing this by changing the next blocks as well
 However, the strategy would fail when he reaches the head of the list

 As long as the hash pointer at the head of the list is stored in a place where the adversary cannot
change it, no previous block can be changed without being detected

 Tamper-evident log

Blockchain Application for Managers (2024-25) | Session 3 4

Making it Tamper Proof and Valid
 (Imaginary Context) Assume, just for the time being, there is a designated Central Authority
(CA) who publishes an append-only ledger of transactions

 Every transaction goes to CA, who checks, looking at the ledger,

 The bitcoin is a valid one, means the owner actually owns it

 This bitcoin has not been spent before

 The transaction is validly signed by the owner of the coin

 The CA then creates a block containing a set of transactions, and appends it to the ledger

 This append-only ledger is the Blockchain

 Each block is a collection of disparate transactions

 (triplet of signature, message, and Hash pointers), a block-id, and a hash pointer to the previous
block

 A transaction only counts if it is in the Blockchain, the header of which is signed by the CA

 Any tampering in an in-between block changes the Hash of the block which, finally, will mismatch
with the final Hash pointer that is signed by the CA

Blockchain Application for Managers (2024-25) | Session 3 5

The Blockchain

 Transactions are now tamper-proof!

 Signing a hash pointer covers the whole data structure being pointed to!

Blockchain Application for Managers (2024-25) | Session 3 6

A Quick Look at Transactions
 Every transaction is uniquely identified by its transaction id/transaction hash

 There can be multiple inputs, and multiple outputs

 Sum of outputs should be a little less than sum of inputs

 The difference goes to the miner (miner fee)

 Every input points to output of some other transaction

 Every input must consume whole of the output being pointed to

Blockchain Application for Managers (2024-25) | Session 3 7

Problem with Central Authority
 Central Authority (CA) has too much power and influence

 Since he cannot forge other people’s signatures, he cannot create fake transactions

 However, he can definitely stop endorsing transactions of some users, denying them service

 Or may just go lazy and delay updating the block

 But how to decentralize?

 Through a combination of technical methods and clever incentive engineering

 Property 3: (puzzle friendliness) helps us here

 Brute force is the only method to find x

Blockchain Application for Managers (2024-25) | Session 3 8

Decentralization: Technical Part
 Every transaction, instead of being sent to a CA, gets broadcast over the network
 Thus, every node will have a collection of outstanding transactions that are yet to be added to the
chain as a block

 Any node in the network can propose the next Block in the chain, and all other nodes need
to reach a consensus about it
 However, for that, the proposing node has to establish proof-of-work by solving a Hash puzzle

 The Hash Puzzle

 Find a number, or nonce, such that when you concatenate the nonce, the previous hash, and the list
of transactions that comprise that block and take the hash of this whole string, the hash output
should be a number that falls into a target space (that is quite small in relation to the much larger
output space of that hash function)

 H(nonce || prev_hash || tx || tx || ... || tx) < target

 Brute force being the only way to find nonce, it is highly computation intensive

 However, Why would any node take that trouble?

Blockchain Application for Managers (2024-25) | Session 3 9

Decentralization: Incentivization Part
 In Bitcoin Blockchain, the proposer of a block, the miner, is incentivized in two ways:

 Block Reward:

 The successful miner adds a transaction that creates and sends 3.125 Bitcoin (as of now) to a node of his
choice

 The reward gets halved every 210,000 blocks (Bitcoin Halving)

 This is the only way money gets minted in Bitcoin

 Every block has a transaction proposed by the miner that assigns newly minted bitcoin to herself/himself

 Transaction Fee (or Miner Fee; as of now, voluntary):

 The owner of a transaction can make the total input to be slightly more than the total output

 The difference goes to the miner

 Why should the owner of a transaction pay Transaction Fee to the miner?

Blockchain Application for Managers (2024-25) | Session 3 10

Characteristics of Proof-of-Work (PoW)
 As mentioned, given the puzzle-friendliness of the Hash function, brute force is the only
approach to find the nonce, and hence will depend on the computing power that the node
can deploy to find the nonce

 Difficulty level: At the end of 2014, the target space was 1/1020 of the size of the output space of the
hash function, and that was still a lot of computation

 Parameterizable: Every node knows the target (i.e., the size of the target space as a fraction of the
output space) and recalculates it after every 2016 blocks in such a way that the average time
between successive blocks produced in the Bitcoin network is about 10 minutes.

 Verifiability: Once the proposer publishes the nonce found, any node can calculate the H() to see that
it falls within the target

 Miners use ASIC (application specific integrated circuit) hardware to hasten the computation
to find the nonce

Blockchain Application for Managers (2024-25) | Session 3 11

So, What Do the Miners Do?
 Listen for transactions
 Maintain blockchain and listen for new blocks

 Assemble a candidate block

 Find a nonce that makes your block valid

 Abort if you notice that a new block has been proposed and that is a valid block

 Go back to assembling a candidate block

 Publish the block and hope it gets accepted

 Acceptance happens when further new blocks proposed links to your block

 Lengthier the chain containing your block, more is the assurance of acceptance

 Make profit if the block gets accepted

Blockchain Application for Managers (2024-25) | Session 3 12

Thank You