[Unit-I]Introduction

*Blockchain: Blockchain is a constantly growing ledger that keeps a permanent record of all the transactions that
have taken place in a secure, chronological, and immutable way.
It can be used for the secure transfer of money, property, contracts, etc. without requiring a third-party intermediary
such as bank or government.
Blockchain is a software protocol, but it could not be run without the Internet (like SMTP is for email).

*Characteristics of Blockchain:
• Ledger: It is a file that is constantly growing.
• Permanent: It means once the transaction goes inside a blockchain, you can put up it permanently in the
ledger.
• Secure: Blockchain placed information in a secure way. It uses very advanced cryptography to make sure that
the information is locked inside the blockchain.
• Chronological: Chronological means every transaction happens after the previous one.
• Immutable: It means as you build all the transaction onto the blockchain, this ledger can never be changed.
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.

*Who uses Blockchain?

Blockchain technology can be integrated into multiple areas. The primary use of blockchains is as a distributed ledger
for cryptocurrencies. It shows great promise across a wide range of business applications like Banking, Finance,
Government, Healthcare, Insurance, Media and Entertainment, Retail, etc.

*Advantages of Blockchain:
• Time reduction: In the financial industry, blockchain can allow the quicker settlement of trades. It does not
take a lengthy process for verification, settlement, and clearance. It is because of a single version of agreed-
upon data available between all stakeholders.
• Unchangeable transactions: Blockchain register transactions in a chronological order which certifies the
unalterability of all operations, means when a new block is added to the chain of ledgers, it cannot be
removed or modified.
• Reliability: Blockchain certifies and verifies the identities of each interested parties. This removes double
records, reducing rates and accelerates transactions.
• Security: Blockchain uses very advanced cryptography to make sure that the information is locked inside the
blockchain. It uses Distributed Ledger Technology where each party holds a copy of the original chain, so the
system remains operative, even the large number of other nodes fall.
• Collaboration: It allows each party to transact directly with each other without requiring a third-party
intermediary.
• Decentralized: It is decentralized because there is no central authority supervising anything. There are
standards rules on how every node exchanges the blockchain information. This method ensures that all
transactions are validated, and all valid transactions are added one by one.
*Bitcoin:
Satoshi Nakamoto introduced the bitcoin in the year 31st Oct. 2008.
Bitcoin is a cryptocurrency (virtual currency), or a digital currency that uses rules of cryptography for regulation and
generation of units of currency.
A Bitcoin fell under the scope of cryptocurrency and became the first and most valuable among them. It is commonly
called decentralized digital currency.
A bitcoin is a type of digital assets which can be bought, sold, and transfer between the two parties securely over the
internet.
Bitcoin can be used to store values much like fine gold, silver, and some other type of investments.
We can also use bitcoin to buy products and services as well as make payments and exchange values electronically.
A bitcoin is different from other traditional currencies such as Dollar, Pound, and Euro, which can also be used to buy
things and exchange values electronically.
There are no physical coins for bitcoins or paper bills.
When you send bitcoin to someone or used bitcoin to buy anything, you dont need to use a bank, a credit card, or any
other third-party. Instead, you can simply send bitcoin directly to another party over the internet with securely and
almost instantly.

*Smart Contracts:
Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They
typically are used to automate the execution of an agreement so that all participants can be immediately certain of
the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the
next action when conditions are met.
How smart contracts work:
Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A
network of computers executes the actions when predetermined conditions have been met and verified. These
actions could include releasing funds to the appropriate parties, registering a vehicle, sending notifications, or issuing
a ticket. The blockchain is then updated when the transaction is completed. That means the transaction cannot be
changed, and only parties who have been granted permission can see the results.
Benefits of Smart Contract:
• Speed, efficiency and accuracy:
Once a condition is met, the contract is executed immediately. Because smart contracts are digital and automated,
there’s no paperwork to process and no time spent reconciling errors that often result from manually filling in
documents.
• Trust and transparency:
Because there’s no third party involved, and because encrypted records of transactions are shared across participants,
there’s no need to question whether information has been altered for personal benefit.
• Security:
Blockchain transaction records are encrypted, which makes them very hard to hack. Moreover, because each record is
connected to the previous and subsequent records on a distributed ledger, hackers would have to alter the entire
chain to change a single record.
• Savings:
Smart contracts remove the need for intermediaries to handle transactions and, by extension, their associated time
delays and fees.
*Understanding Cryptocurrency to Blockchain:
Cryptocurrency is a type of digital asset which is used to exchange value between parties.
It uses strong cryptography to secure financial transactions and control the creation of new units of that currency and
verify the transfer of assets.
Cryptocurrency does not exist physically.
We know that the government prints the government currencies like fiat currency such as Dollar, Yen or Yuan itself.
It means there is a centralized institution exists which can create thousands or millions or billions more of that
currency.
Unlike government currencies like bitcoin, these type of currencies is created by the same mathematical formulas
that make the cryptocurrency work.
Thus, cryptocurrencies use decentralized control, which works through distributed ledger technology that serves as a
public financial transaction database.
Today, many different types of cryptocurrencies are available. Some of them are given below:
• Bitcoin
• Litecoin
• Z-cash
• Monero
• Dash

Bitcoin:
Bitcoin is generally known as the first decentralized cryptocurrencies. It is created by the network of thousands of
specific nodes called miners. The miners can process the bitcoin transactions in the blockchain network. Since the
release of bitcoin, more than 4000 alternative variants of bitcoin are available now.
Litecoin:
Litecoin cryptocurrency worked very similar to Bitcoin. We know that bitcoin wait ten minutes for a transaction block
to be processed, but Litecoin can do this in maximum two and a half minutes. Litecoin doesn't have a big market cap.
The price of Litecoin is lower than Bitcoin, but it's a very effective process and also has some variations from Bitcoin.

Z-Cash:
Z-Cash is a privacy-protecting digital currency which is built-on strong science in cryptography. It provides enhanced
privacy for its users as compared to other cryptocurrencies such as bitcoin. Here, transaction data is kept confidential,
which is made possible through zero-knowledge proofs. It allows transactions to be verified without any information
about the sender, receiver, and the amount transacted.
Z-Cash features known as viewing keys and payment disclosure makes it possible to disclose some of the user's
transaction data. It makes the transactions on Z-Cash auditable and regulation-compliant.

Monero:
Monero is an open-source cryptocurrency which focuses on untraceable, privacy and decentralization. It is fast,
private, and secure digital cash, which is operated by a network of users. We can use it to buy and sell things and can
exchange for other coins or tokens.
It uses a special kind of cryptography which ensures that the transactions remain 100% untraceable. It focuses on
anonymity, which is harder to track, whereas Bitcoin is pseudonymous, which transactions are still traceable.
Dash:
Dash is a short form of Digital Cash. It is an open-source cryptocurrency and is a form of a decentralized autonomous
organization which is run by a subset of users, called master nodes. It is one of the most promising alternative coins to
bitcoin. It permits very fast transactions, which are untraceable.

*Public Ledgers:
It is a file that is constantly growing.
The public ledger is used as a record-keeping system that maintains participants’ identities in secure and
(pseudo-)anonymous form, their respective cryptocurrency balances, and a record book of all the genuine
transactions executed between network participants .

*Block in a Blockchain:
A block is a place in a blockchain where information is stored and encrypted. Blocks are identified by long numbers
that include encrypted transaction information from previous blocks and new transaction information. Blocks and the
information within them must be verified by a network before new blocks can be created.
How does a block work?
In any cryptocurrency, there are a huge number of transactions occurring every day throughout the world. It is
important for the users to keep track of these transactions, and they can do it with the help of blocks. A block
contains the recent data and every time the block is completed, it becomes a part of the past and makes room for a
new block on the blockchain.
The completed block is a permanent record of prior transactions, and new ones are recorded in the current one. As a
result, the entire system enters into a loop that permanently saves all data.
*Types of Block:
1:Genesis Block:
Genesis means ‘origin’, genesis block is the first block of a blockchain. The first genesis block was mined by Satoshi
Nakamoto in creating bitcoin and released the idea in public in 2009.Every blockchain has a genesis block.
2:Valid blocks:
Valid blocks are all such blocks that have been mined and added to the blockchain. To get a valid block, each mined
block must get network permission and report as a block that has solved the given cryptographic puzzle.
When the network reaches consensus, the block is added to the blockchain and distributed to all nodes. As a result,
every node in the network has a new block and acts as a verification point for it. All the operations and transactions
that are happening in any cryptocurrency are allowed by these blocks.
Each valid block contains a sequence of transactions that are validated together with the block.
3:Orphan blocks:
Orphan blocks are not part of the blockchain network. These are generally generated by two miners mixing blocks at
almost the same time, but they can also be caused by an attacker with enough computational power with the
intention of reversing any transaction. The network consensus procedure is invoked at this point to determine which
blocks will be verified (included in the chain) and which will be orphaned. Usually, the longest blockchain that
contains the most amounts of transactions and information will generally be decided on. Hence, making the security
process very simple.

*Transaction:
Transactions are the most important part of the bitcoin system.
Everything else in bitcoin is designed to ensure that transactions can be created, propagated on the network, validated,
and finally added to the global ledger of transactions (the blockchain).
Transactions are data structures that encode the transfer of value between participants in the bitcoin system.
A transaction’s lifecycle starts with the transaction’s creation, also known as origination.
The transaction is then signed with one or more signatures indicating the authorization to spend the funds referenced by
the transaction.
The transaction is then broadcast on the bitcoin network, where each network node (participant) validates and
propagates the transaction until it reaches (almost) every node in the network.
Finally, the transaction is verified by a mining node and included in a block of transactions that is recorded on the
blockchain.
Once recorded on the blockchain and confirmed by sufficient subsequent blocks (confirmations), the transaction is a
permanent part of the bitcoin ledger and is accepted as valid by all participants.
The funds allocated to a new owner by the transaction can then be spent in a new transaction, extending the chain of
ownership and beginning the lifecycle of a transaction again.

*Distributed Consensus:
A number of processes in a network decide to elect a leader. Each process begins with a bid for leadership. In
traditional or conventional distributed systems, we apply consensus to ensure reliability and fault tolerance. It means,
in a decentralized environment when you have multiple individual parties, and they can make their own decision,
then it may happen that some node or some parties are working maliciously or working as a faulty individual. So in
those particular cases, it is important to come to a decision or common point of view. So having a common point of
view in an environment where people can behave maliciously or people can crash the work in a faulty way, is the
main difficulty. So under this kind of distributed environment, our objective is to ensure reliability which means to
ensure correct operation in the presence of faulty individuals.
Features :
• It ensures reliability and fault tolerance in distributed systems.
• In the presence of faulty individuals, it is Ensure correct operations.

How to achieve distributed consensus :

There are some conditions that need to be followed in order to achieve distributed consensus.
• Termination –
Every non-faulty process must eventually decide.
• Agreement –
The final decision of every non-faulty process must be identical.
• Validity –
Every non-faulty process must begin and ends with the same value.
• Integrity –
Every correct individual decides at most one value, and the decided value must be proposed by some individual.
*Public Block Chain:
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.
• 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.

*Private 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 focuses on privacy concerns.
Private Blockchain is 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:

Sr.No. Basics of Comparison Public Blockchain Private Blockchain

1 Access In this type of blockchain In this type of blockchain
anyone can read, write and read and write is done
participate in a blockchain. upon invitation, hence it is
Hence, it is permissionless
a permissioned blockchain.
blockchain. It is public to
everyone.
2 Network User Don’t know each other Know each other

3 Decentralized Vs Centralized A public blockchain is A private blockchain is

decentralized. more centralized.

4 Order Of Magnitude The order of magnitude of The order of magnitude is

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

*Permissioned Blockchain:
A permissioned blockchain is a distributed ledger that is not publicly accessible.
It can only be accessed by users with permissions.
The users can only perform specific actions granted to them by the ledger administrators and are required to identify
themselves through certificates or other digital means.
You might consider the addition of permissioned users as an extra blockchain security system.
Administrators maintain an access control layer to allow certain actions to be performed only by certain identifiable
participants.
Records are kept within the blockchain of who is involved in the transactions. This makes permissioned blockchains
different from public blockchains.
Permissioned blockchains provide an additional level of security over typical blockchain systems like Bitcoin, as they
require an access control layer.
These blockchains are favored by entities who require security, identity, and role definition within the blockchain.
Permissioned blockchains are becoming more common as businesses realize their benefits.
Understanding Permissioned Blockchains
A blockchain can be built and accessed in multiple ways. Some blockchains need special permissions to read, access,
and write information.
Others only require that you have the ability to connect and can conduct work for the network.
The intrinsic configuration of each blockchain controls the participants' transactions and defines their roles in which
each participant can access and contribute to the blockchain.
It may also include maintaining the identity of each blockchain participant on the network. Such blockchains are called
permissioned blockchains.

Difference Between Permissionless and Permissioned Blockchains

Permissioned blockchains are similar to permissionless blockchains because they use the same technologies. However,
permissioned blockchains do not allow users to access the blockchain without identification.
For example, a bank may be running a permissioned blockchain operated through a designated number of nodes
internal to the bank to track money transfers. You cannot access this blockchain because you don't have the
permissions required. In contrast, you could join a permissionless blockchain like a cryptocurrency mining network
once you have established a semi-anonymous account in that network.
Much of the inner workings of the blockchains are the same. The key differences between them are:
Enterprise vs. Public use
Decentralization
Development
Transparency
• Enterprise vs. Public Use:
Bitcoin, the most popular cryptocurrency permissionless blockchain, allows anyone to participate in the network in
the capacity of a full node or a contributing miner. Anyone can take a read-only role or make legitimate changes to
the blockchain, like adding a new block or maintaining a full copy of the entire blockchain.
As blockchain uses grow and mature, more businesses and governments have realized the cost-saving benefits the
technology introduces into an organization. As a result, permissioned blockchains have become popular among
industry-level firms and enterprises, for which security, identity, and role definition are essential.
For instance, a manufacturer producing a product may use a permissioned blockchain that ties into its supply chain
management. The transactions on this blockchain would likely involve logistics partners, financing banks, and other
vendors involved in the supply and financing processes. Each entity would have its own level of transparency and
permissions that it could use to streamline operations, track inventory, or monitor spending and invoicing.
• Decentralization:
Permissionless blockchains have a broad decentralization in that they allow for more users and can extend across a
much larger network. On the other hand, permissioned blockchains have limited decentralization as they are
generally used for enterprise and business purposes, requiring various amounts of centralization.
• Development:
Generally, permissionless blockchains are open source, which means that a community develops them; they can be
changed and used by anyone. Permissioned blockchains are generally proprietary and controlled by the developers or
the business using them.
Much of the time, businesses creating or using a "blockchain" are not using a blockchain; they build a distributed
ledger with a consensus mechanism for verifying transactions. It can be tough to distinguish the difference because
there is not yet a set definition that truly separates blockchain and DLT.
A developer building a permissioned blockchain may opt to make a few select records, like product name and
quantity involved in a transaction, available for everyone to read. However, only select participants are allowed to
view the transaction price. Other implementations may include limiting participants to act as nodes on the network,
enhancing the network's security.
All such permissioning and profile maintenance is handled by this access-control layer. These differ from the un-
permissioned or public blockchain networks, which don’t have a control layer.
• Transparency:
Permissionless blockchains are much less transparent since they provide a certain amount of anonymity for the users.
Wallet addresses cannot generally be tracked back to the blockchain users, and transactions are encrypted using
various cryptography methods.
Permissioned blockchains require more transparency at certain levels since they are used for conducting business.
Nodes, or the users and their connections, are known and their transactions are visible. Among many other benefits,
this can defend a company against double invoicing, spending, paying, or any other number of errors that can be
made using enterprise management programs.
What Is a Permissionless and a Permissioned Blockchain?
A permissioned blockchain requires user approval to join and is generally used for enterprise purposes, whereas a
permissionless blockchain is used for public purposes that require less transparency and control.
What are Permissioned Blockchains Used for?
Permissioned blockchains are generally used to manage supply chains, create contracts, verify payment between
parties, and much more.

*Blockchain Hash Function:

A hash function is a mathematical function that takes an input string of any length and converts it to a fixed-length
output string. The fixed-length output is known as the hash value. To be cryptographically secure and useful,.
A hash function should have the following properties:
• Collision resistant: Give two messages m1 and m2, it is difficult to find a hash value such that hash(k, m1) =
hash(k, m2) where k is the key value.
• Preimage resistance: Given a hash value h, it is difficult to find a message m such that h = hash(k, m).
• Second preimage resistance: Given a message m1, it is difficult to find another message m2 such that hash (k,
m1) = hash (k, m2).
• Large output space: The only way to find a hash collision is via a brute force search, which requires checking
as many inputs as the hash function has possible outputs.
• Deterministic: A hash function must be deterministic, which means that for any given input a hash function
must always give the same result.
• Avalanche Effect: This means for a small change in the input, the output will change significantly.
• Puzzle Friendliness: This means even if one gets to know the first 200 bytes, one cannot guess or determine
the next 56 bytes.
• Fixed-length Mapping: For any input of fixed length, the hash function will always generate the output of the
same length.

Markle tree:
Merkle tree is a fundamental part of blockchain technology. It is a mathematical data structure composed of hashes
of different blocks of data, and which serves as a summary of all the transactions in a block. It also allows for efficient
and secure verification of content in a large body of data. It also helps to verify the consistency and content of the
data. Both Bitcoin and Ethereum use Merkle Trees structure. Merkle Tree is also known as Hash Tree.
The concept of Merkle Tree is named after Ralph Merkle, who patented the idea in 1979. Fundamentally, it is a data
structure tree in which every leaf node labeled with the hash of a data block, and the non-leaf node labeled with the
cryptographic hash of the labels of its child nodes. The leaf nodes are the lowest node in the tree.

*How do Merkle tree works?

A Merkle tree stores all the transactions in a block by producing a digital fingerprint of the entire set of transactions. It
allows the user to verify whether a transaction can be included in a block or not.
Merkle trees are created by repeatedly calculating hashing pairs of nodes until there is only one hash left. This hash is
called the Merkle Root, or the Root Hash. The Merkle Trees are constructed in a bottom-up approach.
Every leaf node is a hash of transactional data, and the non-leaf node is a hash of its previous hashes. Merkle trees are
in a binary tree, so it requires an even number of leaf nodes. If there is an odd number of transactions, the last hash
will be duplicated once to create an even number of leaf nodes.

The above example is the most common and simple form of a Merkle tree, i.e., Binary Merkle Tree. There are four
transactions in a block: TX1, TX2, TX3, and TX4. Here you can see, there is a top hash which is the hash of the entire
tree, known as the Root Hash, or the Merkle Root. Each of these is repeatedly hashed, and stored in each leaf node,
resulting in Hash 0, 1, 2, and 3. Consecutive pairs of leaf nodes are then summarized in a parent node by hashing
Hash0 and Hash1, resulting in Hash01, and separately hashing Hash2 and Hash3, resulting in Hash23. The two hashes
(Hash01 and Hash23) are then hashed again to produce the Root Hash or the Merkle Root.
Merkle Root is stored in the block header. The block header is the part of the bitcoin block which gets hash in the
process of mining. It contains the hash of the last block, a Nonce, and the Root Hash of all the transactions in the
current block in a Merkle Tree. So having the Merkle root in block header makes the transaction tamper-proof. As this
Root Hash includes the hashes of all the transactions within the block, these transactions may result in saving the disk
space.
The Merkle Tree maintains the integrity of the data. If any single detail of transactions or order of the transaction's
changes, then these changes reflected in the hash of that transaction. This change would cascade up the Merkle Tree
to the Merkle Root, changing the value of the Merkle root and thus invalidating the block. So everyone can see that
Merkle tree allows for a quick and simple test of whether a specific transaction is included in the set or not.
Merkle trees have three benefits:
• It provides a means to maintain the integrity and validity of data.
• It helps in saving the memory or disk space as the proofs, computationally easy and fast.
• Their proofs and management require tiny amounts of information to be transmitted across networks.