Module-I Blockchain 101

Distributed systems
Understanding distributed systems is essential in order to understand blockchain because basically
blockchain at its core is a distributed system. More precisely it is a decentralized distributed system.
Distributed systems are a computing paradigm whereby two or more nodes work with each other in a
coordinated fashion in order to achieve a common outcome and it's modelled in such a way that end users
see it as a single logical platform.
A node can be defined as an individual player in a distributed system. All nodes are capable of sending and
receiving messages to and from each other. Nodes can be honest, faulty, or malicious and have their own
memory and processor. A node that can exhibit arbitrary behavior is also known as a Byzantine node. This
arbitrary behavior can be intentionally malicious, which is detrimental to the operation of the network.
Generally, any unexpected behavior of a node on the network can be categorized as Byzantine. This term
arbitrarily encompasses any behavior that is unexpected or malicious.

The Byzantine Generals Problem.

In 1982, a thought experiment was proposed by Lamport and others in their research paper, The Byzantine
Generals Problem which is available at: https://www.microsoft.com/en-us/research/publication/byzantine-generals-problem/
whereby a group of army generals who lead different parts of the Byzantine army are planning to attack or
retreat from a city. The only way of communicating among them is via a messenger. They need to agree to
strike at the same time in order to win. The issue is that one or more generals might be traitors who could
send a misleading message. Therefore, there is a need for a viable mechanism that allows for agreement
among the generals, even in the presence of the treacherous ones, so that the attack can still take place at
the same time. As an analogy to distributed systems, the generals can be considered nodes, the traitors as
Byzantine (malicious) nodes, and the messenger can be thought of as a channel of communication among
the generals.
This problem was solved in 1999 by Castro and Liskov who presented the Practical Byzantine Fault
Tolerance (PBFT) algorithm, where consensus is reached after a certain number of messages are received
containing the same signed content.
This type of inconsistent behavior of Byzantine nodes can be intentionally malicious, which is detrimental
to the operation of the network. Any unexpected behavior by a node on the network, whether malicious or
not, can be categorized as Byzantine.
A small-scale example of a distributed system is shown in the following diagram. This distributed system
has six nodes out of which one (N4) is a Byzantine node leading to possible data inconsistency. L2 is a link
that is broken or slow, and this can lead to partition in the network.

Fig: Design of a distributed system: N4 is a Byzantine node, L2 is broken or a slow network link

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

The primary challenge in distributed system design is coordination between nodes and fault tolerance. Even
if some of the nodes become faulty or network links break, the distributed system should be able to tolerate
this and continue to work to achieve the desired result. This problem has been an active area of distributed
system design research for many years, and several algorithms and mechanisms have been proposed to
overcome these issues.

CAP theorem and Blockchain

Distributed systems are so challenging to design that a hypothesis known as the CAP theorem has been
proven, which states that any distributed system cannot have consistency, availability, and partition
tolerance simultaneously:

 Consistency is a property which ensures that all nodes in a distributed system have a single, current, and
identical copy of the data.
 Availability means that the nodes in the system are up, accessible for use, and are accepting incoming
requests and responding with data without any failures as and when required. In other words, data is
available at each node and the nodes are responding to requests.
 Partition tolerance ensures that if a group of nodes is unable to communicate with other nodes due to
network failures, the distributed system continues to operate correctly. This can occur due to network
and node failures.
For Example: Imagine that there is a distributed system with two nodes. Now let us apply the three theorem
properties on this smallest of possible distributed systems only with two nodes.
Consistency is achieved if both nodes have the same shared state; that is, they have the same up-to-date
copy of the data.
Availability is achieved if both nodes are up and running and responding with the latest copy of data.
Partition tolerance is achieved if communication does not break down between two nodes (either due to
network issues, Byzantine faults, and so forth), and they are able to communicate with each other.
Now think of scenario where a partition occurs and nodes can no longer communicate with each other. If no
new updated data comes in, it can only be updated on one node only. In that case, if the node accepts the
update, then only that one node in the network is updated and therefore consistency is lost. Now, if the update
is rejected by the node that would result in loss of availability. In that case due to partition tolerance, both
availability and consistency are unachievable.
Blockchain manages to achieve all of these properties: to achieve fault tolerance, replication is used.
This is a standard and widely-used method to achieve fault tolerance. Consistency is achieved using
consensus algorithms in order to ensure that all nodes have the same copy of the data. This is also called
state machine replication.
Mining is a process that facilitates the achievement of consensus by using the PoW (Proof of Work)
consensus algorithm. At a higher level, mining can be defined as a process that is used to add more blocks
to the blockchain.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

The history of blockchain and Bitcoin

Electronic cash
The concept of electronic cash or digital currency is not new. Since the 1980s, e-cash protocols have existed
that are based on a model proposed by David Chaum. Just as understanding the concept of distributed systems
is necessary to comprehend blockchain technology, the idea of electronic cash is also essential in order to
appreciate the first and astonishingly successful application of blockchain, Bitcoin, or more broadly
cryptocurrencies in general.
Two fundamental e-cash system issues need to be addressed: accountability and anonymity. Accountability
is required to ensure that cash is spendable only once (double-spend problem) and that it can only be spent
by its rightful owner. Double spend problem arises when same money can be spent twice. As it is quite easy
to make copies of digital data, this becomes a big issue in digital currencies as you can make many copies of
same digital cash. Anonymity is required to protect users' privacy. As with physical cash, it is almost
impossible to trace back spending to the individual who actually paid the money.
In 1998 b-money was introduced by Wei Dai and proposed the idea of creating money via solving
computational puzzles such as hashcash. It's based on a peer-to-peer network where each node maintains its
own list of transactions. Another similar idea by Nick Szabo called BitGold was introduced in 2005 and also
proposed solving computational puzzles to mint digital currency. In 2005 Hal Finney introduced the concept
of cryptographic currency by combining ideas from b-money and hashcash puzzles but it still relied on a
centralized trusted authority.
In 2009, the first practical implementation of an electronic cash (e-cash) system named Bitcoin appeared.
The term cryptocurrency emerged later. For the very first time, it solved the problem of distributed consensus
in a trustless network. It used public key cryptography with a Proof of Work (PoW) mechanism to provide
a secure, controlled, and decentralized method of minting digital currency. The key innovation was the idea
of an ordered list of blocks composed of transactions and cryptographically secured by the PoW mechanism.
Looking at all the technologies mentioned earlier and their relevant history, it is easy to see how concepts
from electronic cash schemes and distributed systems were combined to create Bitcoin and what now is
known as blockchain. This concept can also be visualized with the help of the following diagram:

Fig: The various ideas that supported the invention of Bitcoin and blockchain

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

Introduction to blockchain
In 2008, a groundbreaking paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System was written on the
topic of peer-to-peer electronic cash under the pseudonym Satoshi Nakamoto. It introduced the term chain
of blocks. No one knows the actual identity of Satoshi Nakamoto. After introducing Bitcoin in 2009, he
remained active in the Bitcoin developer community until 2011. He then handed over Bitcoin development
to its core developers and simply disappeared. Since then, there has been no communication from him
whatsoever, and his existence and identity are shrouded in mystery. The term chain of blocks evolved over
the years into the word blockchain.

Layman's definition: Blockchain is an ever-growing, secure, shared record keeping system in which
each user of the data holds a copy of the records, which can only be updated if all parties involved in a
transaction agree to update.

Technical definition: Blockchain is a peer-to-peer, distributed ledger that is cryptographically-secure,

append-only, immutable (extremely hard to change), and updateable only via consensus or agreement
among peers.
We will look at all keywords in the definitions one by one.

Peer-to-peer
The first keyword in the technical definition is peer-to-peer. This means that there is no central controller in
the network, and all participants talk to each other directly. This property allows for cash transactions to be
exchanged directly among the peers without a third-party involvement, such as by a bank.

Distributed ledger
Which simply means that a ledger is spread across the network among all peers in the network, and each peer
holds a copy of the complete ledger.

Cryptographically-secure
Next, we see that this ledger is cryptographically-secure, which means that cryptography has been used to
provide security services which make this ledger secure against tampering and misuse. These services include
non-repudiation, data integrity, and data origin authentication. You will see how this is achieved later in
Chapter 3, Symmetric Cryptography which introduces the fascinating world of cryptography.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

Blockchain Architecture
Blockchain can be thought of as a layer of a distributed peer-to-peer network running on top of the internet,
as can be seen in the following diagram. It is analogous to SMTP, HTTP, or FTP running on top of TCP/IP.

Fig: The network view of a blockchain (Layered Architecture)

At the bottom layer in the preceding diagram, there is the internet, which provides a basic communication
layer for any network. In this case, a peer-to-peer network runs on top of the internet, which hosts another
layer of blockchain. That layer contains transactions, blocks, consensus mechanisms, state machines, and
blockchain smart contracts. All of these components are shown as a single logical entity in a box, representing
blockchain above the peer-to-peer network. Finally, at the top, there are users or nodes that connect to the
blockchain and perform various operations such as consensus, transaction verification, and processing. These
concepts will be discussed in detail later in this book.
From a business standpoint, a blockchain can be defined as a platform where peers can exchange value /
electronic cash using transactions without the need for a centrally-trusted arbitrator. For example, for
cash transfers, banks act as a trusted third party. In financial trading, a central clearing house acts as an
arbitrator between two trading parties. This concept is compelling, and once you absorb it, you will realize
the enormous potential of blockchain technology. This disintermediation allows blockchain to be a
decentralized consensus mechanism where no single authority is in charge of the database. Immediately,
you'll see a significant benefit of decentralization here, because if no banks or central clearing houses are
required, then it immediately leads to cost savings, faster transaction speeds, and trust.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

The structure of a block

 Block is merely a selection of transactions bundled together and organized logically.

 A transaction is a record of an event, for example, the event of transferring cash from a sender's
account to a beneficiary's account. A block is made up of transactions, and its size varies depending on
the type and design of the blockchain in use.
 A genesis block is the first block in the blockchain that is hardcoded at the time the blockchain was
first started.
 A reference to a previous block is also included in the block unless it is a genesis block.
 A nonce is a number that is generated and used only once. A nonce is used extensively in many
cryptographic operations to provide replay protection, authentication, and encryption. In blockchain,
it's used in PoW consensus algorithms and for transaction replay protection.
The structure of a block is also dependent on the type and design of a blockchain, but generally there are a
few attributes that are essential to the functionality of a block, such as the block header, pointers to previous
blocks, the time stamp, nonce, transaction counter, transactions, and other attributes.

Generic elements of a blockchain

Generic structure of a blockchain

 Addresses
Addresses are unique identifiers that are used in a transaction on the blockchain to denote senders and
recipients. An address is usually a public key or derived from a public key. While addresses can be reused
by the same user, addresses themselves are unique. In practice, however, a single user may not use the
same address again and generate a new one for each transaction. This newly generated address will be
unique. Bitcoin is in fact a pseudonymous system. End users are usually not directly identifiable but some
research in de-anonymizing bitcoin users have shown that users can be identified successfully. As a good

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

practice it is suggested that users generate a new address for each transaction in order to avoid linking
transactions to the common owner, thus avoiding identification.

 Transaction
A transaction is the fundamental unit of a blockchain. A transaction represents a transfer of value from
one address to another.

 Block
A block is composed of multiple transactions and some other elements such as the previous block hash
(hash pointer), timestamp, and nonce.

 Peer-to-peer network
As the name implies, this is a network topology whereby all peers can communicate with each other and
send and receive messages.

 Scripting or programming language

Scripts or programs perform various operations on a transaction in order to facilitate various functions.
For example, in Bitcoin, transaction scripts are predefined in a language called Script, which consist of
sets of commands that allow nodes to transfer tokens from one address to another. Bitcoin script language
cannot be called Turing complete. In simple words, Turing complete language means that it can perform
any computation. It is named after Alan Turing who developed the idea of Turing machine that can run
any algorithm however complex. Turing complete languages need loops and branching capability to
perform complex computations. Therefore, Bitcoin's scripting language is not Turing complete, whereas
Ethereum's Solidity language is.

 Virtual machine
This is an extension of a transaction script. A virtual machine allows Turing complete code to be run on
a blockchain (as smart contracts) whereas a transaction script can be limited in its operation. Virtual
machines are not available on all blockchains; however, various blockchains use virtual machines to run
programs, for example Ethereum Virtual Machine (EVM) and Chain Virtual Machine (CVM). EVM is
used in Ethereum blockchain, while CVM is a virtual machine developed for and used in an enterprise-
grade blockchain called Chain Core.

 State machine
A blockchain can be viewed as a state transition mechanism whereby a state is modified from its initial
form to the next and eventually to a final form as a result of a transaction execution and validation process
by nodes.

 Nodes
A node in a blockchain network performs various functions depending on the role it takes. A node can
propose and validate transactions and perform mining to facilitate consensus and secure the blockchain.
This is done by following a consensus protocol. (Most commonly this is PoW.) Nodes can also perform
other functions such as simple payment verification (lightweight nodes), validators, and many others
functions depending on the type of the blockchain used and the role assigned to the node.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

 Smart contracts
These programs run on top of the blockchain and encapsulate the business logic to be executed when
certain conditions are met. The smart contract feature is not available in all blockchains but is now
becoming a very desirable feature due to the flexibility and power it provides to the blockchain
applications. Smart contracts have many use cases, including but not limited to identity management,
capital markets trade finance, record management, insurance, and e-governance. Smart contracts will be
discussed in more detail in Chapter 9, Smart Contracts.

Features of a blockchain
 Distributed consensus: Distributed consensus is the primary underpinning of a blockchain. This
mechanism allows a blockchain to present a single version of the truth, which is agreed upon by all parties
without the requirement of a central authority.
 Transaction verification: Any transactions posted from the nodes on the blockchain are verified based
on a predetermined set of rules. Only valid transactions are selected for inclusion in a block.
 Platform for smart contracts: A blockchain is a platform on which programs can run to execute
business logic on behalf of the users. Not all blockchains have a mechanism to execute smart contracts;
however, this is a very desirable feature, and it is available on newer blockchain platforms such as
Ethereum and MultiChain.
 Transferring value between peers
Blockchain enables the transfer of value between its users via tokens. Tokens can be thought of as a
carrier of value.
 Generating cryptocurrency
This is an optional feature depending on the type of blockchain used. A blockchain can generate
cryptocurrency as an incentive to its miners who validate the transactions and spend resources in order
to secure the blockchain.
 Smart property
For the first time it is possible to link a digital or physical asset to the blockchain in an irrevocable manner,
such that it cannot be claimed by anyone else; you are in full control of your asset and it cannot be double
spent or double owned. Compare it with a digital music file, for example, which can be copied many
times without any control; on a blockchain, however, if you own it no one else can claim it unless you
decide to transfer it to someone. This feature has far-reaching implications especially in Digital Rights
Management (DRM) and electronic cash systems where double spend detection is a key requirement.
The double spend problem was first solved in bitcoin.

 Provider of security
Blockchain is based on proven cryptographic technology that ensures the integrity and availability of
data. Generally, confidentiality is not provided due to the requirements of transparency. This has become
a main barrier for its adaptability by financial institutions and other industries that need privacy and
confidentiality of transactions. As such it is being researched very actively and there is already some
good progress made. It could be argued that in many situations confidentiality is not really needed and
transparency is preferred instead. For example, in bitcoin confidentiality is not really required; however,
it is desirable in some scenarios. Research in this area is very ripe and already major progress has been
made towards providing confidentiality and privacy on blockchain.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

A more recent example is Zcash, which will be discussed in more detail in later chapters. Other security
services such as nonrepudiation and authentication are also provided by blockchain as all actions are
secured by using private keys and digital signatures.
 Immutability
This is another key feature of blockchain: records once added onto the blockchain are immutable. There
is the possibility of rolling back the changes but this is considered almost impossible to do as it will
require an unaffordable amount of computing resources. For example, in much desirable case of bitcoin
if a malicious user wants to alter the previous blocks then it would require computing the PoW again for
all those blocks that have already been added to the blockchain. This difficulty makes the records on a
blockchain practically immutable.
 Uniqueness
This feature of blockchain ensures that every transaction is unique and has not been spent already. This
is especially relevant in cryptocurrencies where much desirable detection and avoidance of double
spending are a key requirement.
 Smart contracts
Blockchain provides a platform to run smart contracts. These are automated autonomous programs that
reside on the blockchain and encapsulate business logic and code in order to execute a required function
when certain conditions are met. This is indeed a revolutionary feature of blockchain as it allows
flexibility, programmability, and much desirable control of actions that users of blockchain need to
perform according to their specific business requirements.

How blockchain works

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

How blockchain accumulates blocks

1. A node starts a transaction by signing it with its private key.
2. The transaction is propagated (flooded) by using much desirable Gossip protocol to peers, which
validates the transaction based on pre-set criteria. Usually, more than one node is required to validate
the transactions.
3. Once the transaction is validated, it is included in a block, which is then propagated on to the network.
At this point, the transaction is considered confirmed.
4. The newly created block now becomes part of the ledger and the next block links itself
cryptographically back to this block. This link is a hash pointer. At this stage, the transaction gets its
second confirmation and the block gets its first.
5. Transactions are then reconfirmed every time a new block is created. Usually, six confirmations in the
bitcoin network are required to consider the transaction final.
Steps 4 and 5 can be considered non-compulsory as the transaction itself is finalized in step 3; however,
block confirmation and further transaction reconfirmations, if required, are then carried out in steps 4 and 5.

Tiers of blockchain technology

Blockchain 1.0:

 BlockChain Version 1.0 was introduced in 2005 by Hall Finley, who implements DLT (Distributed
Ledger Technology) represents its first application based on Crypto currency.
 This type of Version is permission less as any participant will perform valid transaction of Bitcoin.
 This tier was introduced with the invention of Bitcoin, and it is primarily used for cryptocurrencies. Also,
as Bitcoin was the first implementation of cryptocurrencies, it makes sense to categorize this first
generation of blockchain technology to include only cryptographic currencies.
 All alternative cryptocurrencies as well as Bitcoin fall into this category. It includes core applications
such as payments and applications. This generation started in 2009 when Bitcoin was released and
ended in early 2010.
 In BlockChain 2.0, BitCoin is replaced with Ethereum. Thus, BlockChain 2.0 was successfully
processing high number of Transactions on Public network rapidly.

Blockchain 2.0:

 In this version, the BlockChain is not just limited to Cryptocurrencies but it will extend up to Smart
Contracts.
 Smart contract is a small computer programs that "live" in the blockchain. They are free computer
programs which executed automatically and checked conditions which are defined earlier like
facilitation, verification or enforcement. The big advantage of this technology that blockchain offers,
making it impossible to tamper or hack Smart Contracts. A most prominent example is the Ethereum
Blockchain, which provides a platform where the developer community can build distributed
applications for the Blockchain network.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

 This tier includes various financial assets, such as derivatives, options, swaps, and bonds.
Applications that go beyond currency, finance, and markets are incorporated at this tier.
 Ethereum, Hyperledger, and other newer blockchain platforms are considered part of Blockchain 2.0.
 This generation started when ideas related to using blockchain for other purposes started to emerge in
2010.

Blockchain 3.0:

 This third blockchain generation is used to implement applications beyond the financial services
industry and is used in government, health, media, the arts, and justice.
 This generation of blockchain emerged around 2012 when multiple applications of blockchain
technology in different industries were researched.
 After Version 2.0, new version was introduced which includes DApps which is known as
Decentralized Apps. A DApp is like a conventional app, it can have frontend written in any
language that makes calls to its backend, and its backend code is running on decentralized Peer-
To-Peer Network. It makes use of decentralized storage and communication which can be Ethereum
Swarm etc.
 There are many decentralized Applications like BitMessage, BitTorrent, Tor, Popcorn, and
Blockchain for supply chain management etc.

Blockchain X.0:

 This generation represents a vision of blockchain singularity where one day there will be a public
blockchain service available that anyone can use just like the Google search engine.
 It will provide services for all realms of society. It will be a public and open distributed ledger with
general-purpose rational agents (Machina economicus) running on a blockchain, making decisions,
and interacting with other intelligent autonomous agents on behalf of people, and regulated by code
instead of law or paper contracts. This does not mean that law and contracts will disappear, instead
law and contracts will be implementable in code.

Types of blockchain
1. Public blockchain
 Public blockchain is non-restrictive and permission less, and anyone with internet access can sign
on to a blockchain platform to become an authorized node.
 These blockchains are completely open to following the idea of decentralization.
 Its decentralized nature requires some method for verifying the authenticity of data. That method is a
consensus algorithm whereby participants in the blockchain reach agreement on the current state of
the ledger. Proof of work (PoW) and proof of stake (PoS) are two common consensus methods.
Advantages:
1. Trustable: There are algorithms to detect fraud. Participants need not worry about the other nodes in
the network.
2. Secure: This blockchain is large as it is open to the public. In a large size, there is a greater distribution
of records.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

3. Anonymous Nature: It is a secure platform to make your transaction properly at the same time, you
are not required to reveal your name and identity to participate.
4. Decentralized: There is no single platform that maintains the network, instead every user has a copy
of the ledger.

Disadvantages:
1. Processing [Low Transaction per Second-TPS]: The rate of the transaction process is very slow, due
to its large size. Verification of each node is a very time-consuming process.
2. Energy Consumption: Proof of work is highly energy-consuming. It requires good computer
hardware to participate in the network.
3. Acceptance: No central authority is there so governments are facing the issue of implementing the
technology faster.
4. Scalability: Since it’s a large distributed network which is negative impact on scalability.

Use Cases:
1. Examples of public blockchains are Bitcoin and Ethereum.
2. Raising Funds
3. Voting

2. Private Blockchain
How it works.
 A private blockchain works in a restrictive environment like a closed network or is under the control
of a single entity.
 They're also known as permissioned blockchains or enterprise blockchains.
 While it operates like a public blockchain network in the sense that it uses peer-to-peer connections and
decentralization, this type of blockchain is on a much smaller scale.
 Instead of just anyone being able to join and provide computing power, private blockchains typically
are operated on a small network inside a company or organization.

Advantages:
The controlling organization sets permission levels, security, authorizations and accessibility. For example,
an organization setting up a private blockchain network can determine which nodes can view, add or change
data. It can also prevent third parties from accessing certain information.

1. Speed: The rate of the transaction is high, due to its small size. Verification of each node is less time-
consuming.
2. Scalability: We can modify the scalability. The size of the network can be decided manually.
3. Privacy: It has increased the level of privacy for confidentiality reasons as the businesses required.
4. Balanced: It is more balanced as only some users have access to the transaction which improves the
performance of the network.

Disadvantages:
1. Security: The number of nodes in this type is limited so chances of manipulation are there. These
blockchains are more vulnerable.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

2. Centralized: Trust building is one of the main disadvantages due to its central nature. Organizations
can use this for malpractices.
3. Count: Since there are few nodes if nodes go offline the entire system of blockchain can be
endangered.

"You can think of private blockchains as being the intranet, while the public blockchains are more
like the internet,"

Use Cases:
 "For example, companies may choose to take advantage of blockchain technology while not giving
up their competitive advantage to third parties. They can use private blockchains for trade secret
management, for auditing,"
 Other use cases for private blockchain include supply chain management, asset ownership and
internal voting.
 Examples of Private Blockchain are Hyper ledger and corda .

3. Hybrid Blockchain
How it works.
 Hybrid blockchain combines elements of both private and public blockchain. It lets organizations set
up a private, permission-based system alongside a public permissionless system, allowing them to
control who can access specific data stored in the blockchain, and what data will be opened up
publicly.

 Typically, transactions and records in a hybrid blockchain are not made public but can be verified
when needed, such as by allowing access through a smart contract. Confidential information is kept
inside the network but is still verifiable. Even though a private entity may own the hybrid blockchain,
it cannot alter transactions.
 When a user joins a hybrid blockchain, they have full access to the network. The user's identity is
protected from other users, unless they engage in a transaction. Then, their identity is revealed to the
other party
 User access information via smart contracts.

Advantages. One of the big advantages of hybrid blockchain is that, because it works within a closed
ecosystem, outside hackers can't mount a 51% attack on the network. It also protects privacy but allows for
communication with third parties. Transactions are cheap and fast, and it offers better scalability than a public
blockchain network.

Disadvantages. This type of blockchain isn't completely transparent because information can be shielded.
Upgrading can also be a challenge, and there is no incentive for users to participate or contribute to the
network.
Use cases.
 Hybrid blockchain has several strong use cases, including real estate. Companies can use a hybrid
blockchain to run systems privately but show certain information, such as listings, to the public.
 Retail can also streamline its processes with hybrid blockchain, and highly regulated markets
like financial services can also see benefits from using it.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

 Medical records can be stored in a hybrid blockchain. The record can't be viewed by random
third parties, but users can access their information through a smart contract. Governments
could also use it to store citizen data privately but share the information securely between
institutions.

Note: It provides a greater solution to the healthcare industry, government, real estate, and financial
companies. It provides a remedy where data is to be accessed publicly but needs to be shielded privately.

Examples of Hybrid Blockchain are the Ripple network and XRP token.

4. Consortium Blockchain
1. How it works. The fourth type of blockchain, consortium blockchain, also known as a federated
blockchain, is similar to a hybrid blockchain in that it has private and public blockchain features. But it's
different in that multiple organizational members collaborate on a decentralized network. Essentially, a
consortium blockchain is a private blockchain with limited access to a particular group, eliminating the
risks that come with just one entity controlling the network on a private blockchain.

2. Advantages. A consortium blockchain tends to be more secure, scalable and efficient than a public
blockchain network. Like private and hybrid blockchain, it also offers access controls.

3. Disadvantages. Consortium blockchain is less transparent than public blockchain. It can still be
compromised if a member node is breached, and the blockchain's own regulations can impair the
network's functionality.
Use cases.
 Banking and payments are two uses for this type of blockchain. Different banks can band together and
form a consortium, deciding which nodes will validate the transactions. Research organizations can create
a similar model. Consortium blockchain is ideal for supply chains, particularly food and medicine
applications.
 Food tracking of the organizations frequently collaborates with their sectors making it a federated
solution ideal for their use.
 Examples of consortium Blockchain are Tendermint and Multichain.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

Consensus
Consensus is the backbone of a blockchain and, as a result, it provides decentralization of control through an
optional process known as mining. The choice of the consensus algorithm is also governed by the type of
blockchain in use; that is, not all consensus mechanisms are suitable for all types of blockchains. For
example, in public permissionless blockchains, it would make sense to use PoW instead of a simple
agreement mechanism that is perhaps based on proof of authority. Therefore, it is essential to choose an
appropriate consensus algorithm for a particular blockchain project.

Consensus is a process of agreement between distrusting nodes on the final state of data. To achieve
consensus, different algorithms are used. It is easy to reach an agreement between two nodes (in client-
server systems, for example), but when multiple nodes are participating in a distributed system and they need
to agree on a single value, it becomes quite a challenge to achieve consensus. This process of attaining
agreement common state or value among multiple nodes despite the failure of some nodes is known as
distributed consensus.
Note: Consistency is achieved using consensus algorithms in order to ensure that all nodes have the same
copy of the data. This is also called state machine replication.

Consensus mechanism
A consensus mechanism is a set of steps that are taken by most or all nodes in a blockchain to agree on a
proposed state or value. For more than three decades, this concept has been researched by computer scientists
in industry and academia. Consensus mechanisms have most recently come into the limelight and gained
considerable popularity with the advent of blockchain and Bitcoin.

There are various requirements that must be met to provide the desired results in a consensus mechanism.
The following describes these requirements:
 Agreement: All honest nodes decide on the same value
 Termination: All honest nodes terminate execution of the consensus process and eventually reach a
Decision.
 Validity: The value agreed upon by all honest nodes must be the same as the initial value proposed by
at least one honest node
 Fault tolerant: The consensus algorithm should be able to run in the presence of faulty or malicious
nodes (Byzantine nodes)
 Integrity: This is a requirement that no node can make the decision more than once in a single consensus
cycle.

Consensus in blockchain
Consensus is a distributed computing concept that has been used in blockchain in order to provide a means
of agreeing to a single version of the truth by all peers on the blockchain network. This concept was
previously discussed in the distributed systems section of this chapter. In this section, we will address
consensus in the context of blockchain technology. Some concepts presented here are still relevant to
distributed systems theory, but they are explained from a blockchain perspective.

Roughly, the following describes the two main categories of consensus mechanisms:
1. Proof-based, leader-election lottery based, or the Nakamoto consensus whereby a leader is elected
at random (using an algorithm) and proposes a final value. This category is also referred to as the fully

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

decentralized or permissionless type of consensus mechanism. This type is well used in the Bitcoin and
Ethereum blockchain in the form of a PoW mechanism.

2. BFT (Byzantine fault tolerance)-based is a more traditional approach based on rounds of votes. This
class of consensus is also known as the consortium or permissioned type of consensus mechanism.
BFT-based consensus mechanisms perform well when there are a limited number of nodes, but they do not
scale well. On the other hand, leader-election lottery based (PoW) type consensus mechanisms scale very
well but perform very slowly.

The consensus algorithms available today, or that are being researched in the context of blockchain, are
presented here. The following is not an exhaustive list, but it includes all notable algorithms.

1. Proof of Work (PoW):

 The PoW consensus algorithm involves verifying a transaction through the mining process.
 The Proof of Work consensus algorithm involves solving a computationally challenging puzzle in
order to create new blocks in the Bitcoin blockchain. The process is known as ‘mining’, and the nodes
in the network that engages in mining are known as ‘miners’.
 The incentive for mining transactions lies in economic payoffs, where competing miners are
rewarded with 6.25 bitcoins and a small transaction fee.
 This scheme is used in Bitcoin, Litecoin, and other cryptocurrency blockchains. Currently, it is
the only algorithm that has proven to be astonishingly successful against any collusion attacks
on a blockchain network, such as the Sybil attack.

2. Proof of Stake (PoS):

 Proof of stake" (PoS) is a blockchain consensus mechanism where users validate transactions and
create new blocks on a network by "staking" a certain amount of the cryptocurrency they hold,
essentially proving their ownership and financial interest in the system, allowing them to be selected
to participate in validating new blocks on the blockchain; the more coins they stake, the higher their
chance of being chosen to validate transactions and earn rewards for doing so.
 Users who stake coins are called "validators" and are responsible for verifying transaction data.
 Validators are selected randomly to confirm transactions and validate block information. This system
randomizes who gets to collect fees rather than using a competitive rewards-based mechanism like
proof-of-work.
 Compared to "proof of work" (PoW), PoS generally consumes significantly less energy as it doesn't
require intensive computational power to validate blocks.
 Another important concept in PoS is coin age, which is a criterion derived from the amount of time
and number of coins that have not been spent. In this model, the chances of proposing and signing
the next block increase with the coin age.

3. Proof of Capacity(PoC)
 The PoC mechanism heavily relies on free space available in the hard drive.
 This is because there are many solutions to a coin's hash problem that a trader needs to store. It is
highly efficient as compared to PoW and PoC mechanisms.
 Coins such as Burst, Storj, SpaceMint and Chia use these mechanisms.

4. Delegated Proof of Stake (DPoS):

 This is an innovation over standard PoS, whereby each node that has a stake in the system can delegate
the validation of a transaction to other nodes by voting.
 It is used in the BitShares blockchain.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

5. Proof of Elapsed Time (PoET):

 Introduced by Intel in 2016, PoET uses a Trusted Execution Environment (TEE) to provide
randomness and safety in the leader election process via a guaranteed wait time.
 It requires the Intel Software Guard Extensions (SGX) processor to provide the security guarantee for
it to be secure.
 It uses a lottery system to decide the next block creator. Thus, it gives a fair chance to all traders to
create the next block. It is an efficient process involving utilising lesser resources and low energy
consumption.

6. Proof of Activity (PoA):

 This scheme is a combination of PoS and PoW, which ensures that a stakeholder is selected in a
pseudorandom but uniform fashion.
 This is a comparatively more energy-efficient mechanism as compared to PoW. It utilizes a new
concept called Follow the Satoshi.
 In this scheme, PoW and PoS are combined together to achieve consensus and good level of security.
This scheme is more energy efficient as PoW is used only in the first stage of the mechanism, after
the first stage it switches to PoS which consumes negligible energy.

7. Proof of Capacity (PoC):

 This scheme uses hard disk space as a resource to mine the blocks.
 This is different from PoW, where CPU resources are used. In in PoC, hard disk space is utilized for
mining and as such is also known as hard drive mining.
 Coins such as Burst, Storj, SpaceMint and Chia use these mechanisms

8. Proof of Storage (PoS):

 This scheme allows for the outsourcing of storage capacity. This scheme is based on the concept that
a particular piece of data is probably stored by a node which serves as a means to participate in the
consensus mechanism.
 Several variations of this scheme have been proposed, such as Proof of Replication, Proof of Data
Possession, Proof of Space, and Proof of Space-Time.

9. Proof of Deposit (PoD): In this case, nodes that wish to participate in the network have to make a security
deposit before they can mine and propose blocks. This mechanism is used in the Tendermint blockchain.

10. Proof of Importance (PoI): This idea is significant and different from PoS. PoI not only relies on how
large a stake a user has in the system, but it also monitors the usage and movement of tokens by the user
in order to establish a level of trust and importance. It is used in the NEM coin blockchain. More
information about this coin is available at NEM's website https://nem.io.

Reputation-based mechanisms: As the name suggests, a leader is elected by the reputation it has built over
time on the network. It is based on the votes of other members.

PBFT (Practical Byzantine Fault Tolerance): This mechanism achieves state machine replication, which
provides tolerance against Byzantine nodes. Various other protocols including PBFT, PAXOS, RAFT, and
Federated Byzantine Agreement (FBA) are also being used or have been proposed for use in many different
implementations of distributed systems and blockchains.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

Benefits and limitations of blockchain

Benefits of blockchain technology are as follows:
 Decentralization: This is a core concept and benefit of the blockchain. There is no need for a trusted
third party or intermediary to validate transactions; instead, a consensus mechanism is used to agree on
the validity of transactions.

 Transparency and trust: Because blockchains are shared and everyone can see what is on the
blockchain, this allows the system to be transparent. As a result, trust is established. This is more relevant
in scenarios such as the disbursement of funds or benefits where personal discretion in relation to
selecting beneficiaries needs to be restricted.

 Immutability: Once the data has been written to the blockchain, it is extremely difficult to change it
back. It is not genuinely immutable, but because changing data is so challenging and nearly impossible,
this is seen as a benefit to maintaining an immutable ledger of transactions.

 High availability: As the system is based on thousands of nodes in a peer-to-peer network, and the data
is replicated and updated on every node, the system becomes highly available. Even if some nodes leave
the network or become inaccessible, the network as a whole continues to work, thus making it highly
available. This redundancy results in high availability.

 Highly secure: All transactions on a blockchain are cryptographically secured and thus provide network
integrity. Simplification of current paradigms: The current blockchain model in many industries, such as
finance or health, is somewhat disorganized. In this model, multiple entities maintain their own databases
and data sharing can become very difficult due to the disparate nature of the systems. However, as a
blockchain can serve as a single shared ledger among many interested parties, this can result in
simplifying the model by reducing the complexity of managing the separate systems maintained by each
entity.

 Faster dealings: In the financial industry, especially in post-trade settlement functions, blockchain can
play a vital role by enabling the quick settlement of trades. Blockchain does not require a lengthy process
of verification, reconciliation, and clearance because a single version of agreed-upon data is already
available on a shared ledger between financial organizations.

 Cost saving: As no trusted third party or clearing house is required in the blockchain model, this can
massively eliminate overhead costs in the form of the fees which are paid to such parties.

As with any technology, some challenges need to be addressed in order to make a system more robust, useful,
and accessible. Blockchain technology is no exception. In fact, much effort is being made in both academia
and industry to overcome the challenges posed by blockchain technology. The most sensitive blockchain
problems are as follows:
 Scalability
 Adaptability
 Regulation
 Relatively immature technology
 Privacy

All of these issues and possible solutions will be discussed in detail in Chapter 18, Scalability and Other
Challenges.

ABHISHEK K L Assistant Professor Department of AIML

Module-I Blockchain 101

Practice Questions
1. Explain the layered architecture of the generic Blockchain with the help of neat diagram.
2. Discuss the Byzantine general’s problem in detail with the help of an Example.
3. Discuss the generic structure of Block and Blockchain.
4. Explain the generic structure of a Blockchain and explain its elements.
5. Explain the benefits and limitations of Blockchain.
6. Define Consensus and explain the different consensus algorithms in detail.
7. Explain the CAP Theorem in the context of Blockchain.
8. Recommend the type of blockchain for the following cases: where (i) users are anonymous (ii) Applications
that expects high data throughput.
9. Analyse the Byzantine Generals Problem and explain Practical Byzantine Fault Tolerance solution to the
problem.

ABHISHEK K L Assistant Professor Department of AIML