UNIT 2-BLOCKCHAIN ARCHITECTURE

Operation of Bitcoin Blockchain, Blockchain Architecture – Block,

Hash, Distributer P2P, Structure of Blockchain- Consensus mechanism:
Proof of Work (PoW), Proof of Stake (PoS), Byzantine Fault Tolerance
(BFT), Proof of Authority (PoA) and Proof of Elapsed Time (PoET).
Operation of Bitcoin Blockchain
Bitcoin
Bitcoin (abbreviated BTC) is digital money that can be used to make secure peer-
to-peer transactions on the internet without the need for a third party intermediary
(like a bank) to facilitate transactions.
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.
Who created Bitcoin?
The Bitcoin whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”, was
published in an email list called the Cryptography Correspondence Group under
the pseudonym (fake name) Satoshi Nakamoto on October 31, 2008.
Bitcoin allows the user to “be their own bank” eliminating the need to get
permission from a company to complete a transaction. On the bitcoin network
there are no restrictions on who a user can send money to and how much money
can be sent, and operations run around the clock not just during business hours.

How does it work?

The Bitcoin blockchain can be accessed and managed by any computer, anywhere
in the world. The computers that run on the bitcoin blockchain are embedded with
a set of rules which makes the data (bitcoins) scarce and valuable.
What is bitcoin “mining”?
Bitcoin mining consists of two processes:
 The verification of new transactions on the blockchain
 The process by which new bitcoin enters into circulation
Bitcoin Blockchain Operations
There are two major participants in the bitcoin network...
1. The first participants are people that initiate the transfer of value by creating
a transaction.
2. The second group of participants are called miners, which provide the
computational resources needed to:
Verify transactions
Broadcast transactions
Compete for the right to create a block
Reach consensus by validating the block
Broadcast the new block
Confirm transactions
For these computational resources provided by miners, they are incentivized and
rewarded with newly minted bitcoin, which is currently set at 6.25 BTC.
The algorithm that miners use to reach consensus is called the proof-of-work
protocol, which requires the miner to provide the computational work required to
solve a puzzle and claim the right to add a new block to the chain.
Characteristics of Bitcoin
Bitcoin is a fairly new technology, but shares many of the same characteristics of
money:
 Limited supply
 Durability
 Divisibility
 Portability
 Fungibility
 Acceptability.
Blockchain Architecture:
Blockchain is a technology where multiple parties involved in communication can
perform different transactions without third-party intervention.
  Verification and validation of these transactions are carried out by special
kinds of nodes.
Benefits of Blockchain:
1. It is safer than any other technology.
2. To avoid possible legal issues, a trusted third party has to supervise the
transactions and validate the transactions.
3. There’s no one central point of attack.
4. Data cannot be changed or manipulated, it’s immutable.

Header: It is used to identify the particular block in the entire blockchain. It

handles all blocks in the blockchain. A block header is hashed periodically by
miners by changing the nonce value as part of normal mining activity, also Three
sets of block metadata are contained in the block header.
Previous Block Address/ Hash: It is used to connect the i+1th block to the
ith block using the hash. In short, it is a reference to the hash of the previous
(parent) block in the chain.
Timestamp: It is a system verify the data into the block and assigns a time or date
of creation for digital documents. The timestamp is a string of characters that
uniquely identifies the document or event and indicates when it was created.
Nonce: A nonce number which uses only once. It is a central part of the proof of
work in the block. It is compared to the live target if it is smaller or equal to the
current target. People who mine, test, and eliminate many Nonce per second until
they find that Valuable Nonce is valid.
Merkel Root: It is a type of data structure frame of different blocks of data.
A Merkle Tree stores all the transactions in a block by producing a digital
fingerprint of the entire transaction. It allows the users to verify whether a
transaction can be included in a block or not.
Key Characteristics of Blockchain Architecture
Decentralization: In centralized transaction systems, each transaction needs to be
validated in the central trusted agency (e.g., the central bank), naturally resulting in
cost and the performance jam at the central servers. In contrast to the centralized
mode, a third party is not needed in the blockchain. Consensus algorithms in
blockchain are used to maintain data stability in a decentralized network.
Persistency: Transactions can be validated quickly and invalid transactions would
not be admitted by persons or miners who mining the crypto. It is not possible to
delete or roll back transactions once they are included in the blockchain network.
Invalid transactions do not carry forward further.
Anonymity: Each user can interact with the blockchain with a generated address,
which does not disclose the real identity
of the miner. Note that blockchain cannot guarantee perfect privacy preservation
due to the permanent thing.
Auditability: Blockchain stores data of users based on the Unspent Transaction
Output (UTXO) model. Every transaction has to refer to some previous unspent
transactions. Once the current transaction is recorded into the blockchain, the
position of those referred unspent transactions switches from unspent to spent. Due
to this process, the transactions can be easily tracked and not harmed between
transactions.
Transparency: The transparency of blockchain is like cryptocurrency, in bitcoin
for tracking every transaction is done by the address. And for security, it hides the
person’s identity between and after the transaction. All the transactions are made
by the owner of the block associated with the address, this process is transparent
and there is no loss for anyone who is involved in this transaction.
Cryptography: The blockchain concept is fully based on security and for that, all
the blocks on the blockchain network want to be secure. And for security, it
implements cryptography and secures the data using the cipher text and ciphers.
Types of Blockchain Architecture
1. Public Blockchain:
  A public blockchain is a concept where anyone is free to join and take part
in the core activities of the blockchain network.
 Anyone can read, write, and audit the ongoing activities on a public
blockchain network, which helps to achieve the self-determining,
decentralized nature often authorized when blockchain is discussed.
 Data on a public blockchain is secure as it is not possible to modify once
they are validated.
 The public blockchain is fully decentralized, it has access and control over
the ledger, and its data is not restricted to persons, is always available and
the central authority manages all the blocks in the chain.
 After a node or a block settled in the chain of the blocks, all the blocks are
connected like peer-to-peer connections. If someone tries to attack the block,
then it forms a copy of that data and it is accessible only by the original
author of the block.
Advantages:
1. A public network operates on an actuate scheme that encourages new
persons to join and keep the network better.
2. There is no agreement in the public blockchain.
3. This means that a public blockchain network is immutable.
4. It has Rapid transactions.
Disadvantages:
1.Public blockchain can be costly in some manner.
2.The person need not give identity, that’s why there is a possibility of corruption
of the block if it is in under attack.
3.Processing speed is sometimes slow.
4.It has Integration issues.
2. Private Blockchain
 Miners need permission to access a private blockchain. It works based on
permissions and controls, which give limit participation in the network.
 Only the entities participating in a transaction will have knowledge about it
and the other stakeholders not able to access it.
 By it works on the basis of permissions due to this it is also called a
permission-based blockchain.
 Private blockchains are not like public blockchains it is managed by the
entity that owns the network.
 A trusted person is in charge of the running of the blockchain it will control
who can access the private blockchain and also controls the access rights of
the private chain network.
Advantages:
1. In a private blockchain, users join the network using the invitations and all
are verified.
2. Only permitted users/ persons can join the network.
3. Private Blockchain is partially immutable.
Disadvantages:
1. A private blockchain has trust issues, due to exclusive information being
difficult to access it.
 2. As the number of participants increases, there is a possibility of an attack on
the registered users.

3. Consortium Blockchain
 A consortium blockchain is a concept where it is permissioned by the
government and a group of organizations, not by one person like a private
blockchain.
 Consortium blockchains are more decentralized than private blockchains,
due to being more decentralized it increases the privacy and security of the
blocks. Consortium blockchains is lies between public and private
blockchains.
 They are designed by organizations and no one person outside of the
organizations can gain access.
 In Consortium blockchains all companies in between organizations
collaborate equally. They do not give access from outside of the
organizations/ consortium network.
Advantages:
1. Consortium blockchain providers will always try to give the fastest output as
compared to public blockchains.
2. It is scalable.
3. A consortium blockchain is low transaction costs.
Disadvantages:
1. A consortium blockchain is unstable in relationships.
2. Consortium blockchain lacks an economic model.
3. It has flexibility issues.
4.
Core Components of Blockchain Architecture
Node: Nodes are network participants and their devices permit them to keep track
of the distributed ledger and serve as communication hubs in various network
tasks. A block broadcasts all the network nodes when a miner looks to add a new
block in transactions to the blockchain.
Transactions: A transaction refers to a contract or agreement and transfers of
assets between parties. The asset is typically cash or property. The network of
computers in blockchain stores the transactional data as copy with the storage
typically referred to as a digital ledger.
Block: A block in a blockchain network is similar to a link in a chain. In the field
of cryptocurrency, blocks are like records that store transactions like a record book,
and those are encrypted into a hash tree. There are a huge number of transactions
occurring every day in the world. It is important for the users to keep track of those
transactions, and they do it with the help of a block structure. The block structure
of the blockchain is mentioned in the very first diagram in this article.
Chain: Chain is the concept where all the blocks are connected with the help of a
chain in the whole blockchain structure in the world. And those blocks are
connected with the help of the previous block hash and it indicates a chaining
structure.
Miners: Blockchain mining is a process that validates every step in the
transactions while operating all cryptocurrencies. People involved in this mining
they called miners. Blockchain mining is a process to validate each step in the
transactions while operating cryptocurrencies.
Consensus: A consensus is a fault-tolerant mechanism that is used in computer
and blockchain systems to achieve the necessary agreement on a single state of the
network among distributed processes or multi-agent systems, such as with
cryptocurrencies. It is useful in record keeping and other things.
There are different kinds of consensus mechanism algorithms, each of which
works on different principles:
Proof of Work (PoW): Proof of Work required a stakeholder node to prove that
the work is done and submitted by them certifying them to receive the right to add
new transactions in the blockchain.
Proof of Stake (PoS): The proof of Stake is also a common consensus algorithm
that evolved as a low-cost low-energy-consuming, low-energy-consuming
alternative for the PoW algorithm. For providing the responsibilities the public
ledger provides by the virtual currency token like Bitcoin and Ethereum.
Proof of Capacity (PoC): Proof of Capacity (PoC) allow sharing of memory
space of the nodes in the blockchain network.
Proof of Elapsed Time (PoET): It encrypts the passage of time cryptographically
to reach an agreement without expending many resources.
Blockchain Architecture Vs Database
Below are some of the differences between blockchain architecture and database:

Database
Parameters Blockchain Architecture

Blockchain is decentralized because

there is no single point of failure and The database is
there is no central authority to control Centralized.
Control the blockchain.

The database has Create,

Blockchain has only an Insert
Read, Update, and Delete
operation.
Operations operations.

The database is not fully

It is robust technology.
Strength robust technology.
 Database
Parameters Blockchain Architecture

The database is a fully

Blockchain is immutable technology
mutable technology, The
and we cannot change it back or we
data can be edited in the
cannot go back.
Mutability database.

Anyone with the right proof of work In the database reading

Rights can write on the blockchain. and writing can do so.

It is faster as compared to
It is slow in speed.
Speed blockchain.

Merkle tree also known as hash tree is a data structure used for data verification
and synchronization.
It is a tree data structure where each non-leaf node is a hash of it’s child nodes. All
the leaf nodes are at the same depth and are as far left as possible.
It maintains data integrity and uses hash functions for this purpose.
Hash Functions:
So before understanding how Merkle trees work, we need to understand how hash
functions work.
A hash function maps an input to a fixed output and this output is called hash. The
output is unique for every input and this enables fingerprinting of data. So, huge
amounts of data can be easily identified through their hash.
  This is a binary merkel tree, the top hash is a hash of the entire tree.
 This structure of the tree allows efficient mapping of huge data and small
changes made to the data can be easily identified.
 If we want to know where data change has occurred, then we can check if
data is consistent with root hash and we will not have to traverse the whole
structure but only a small part of the structure.
The root hash is used as the fingerprint for the entire data.
For a Binary Merkel tree
Operation Complexity

Space O(n)

Searching O(logn)

Traversal O(n)

Insertion O(logn)

Deletion O(logn)

Synchronization O(logn)
Applications:
1. Merkle trees are useful in distributed systems where same data should exist
in multiple places.
2. Merkle trees can be used to check inconsistencies.
3. Apache Cassandra uses Merkle trees to detect inconsistencies between
replicas of entire databases.
 4. It is used in bitcoin and blockchain.
Distributer P2P
Blockchain is a P2P network that acts as a decentralized ledger for one or more
digital assets, which refers to a decentralized peer-to-peer system where each
computer keeps a complete copy of the ledger and verifies its authenticity with
other nodes to guarantee the data is accurate.
Peer-to-peer network architecture
Peer-to-peer network architecture is a type of network in which there is no
segregation of operations among various sections. Every node performs the same
task and set of operations where each device serves the purpose of both the server
and the client.
Peer-to-Peer networks can be classified into two major categories:
Unstructured networks - an unstructured peer-to-peer network is in which the
network's links are established at random. Such networks are simple to construct
since any new peer can join and contribute to the network by duplicating the
existing links of another section and then forming and distributing its own links.
Structured networks - each peer is allowed to manage a specified section of the
network's content. These networks assign a certain value to each content and peer
in the network, which is then followed by a common protocol that determines
which section is responsible for which part of the content. As a result, whenever
someone contacts a peer to search for content, the network uses the common
protocol to identify the section responsible for data transfer and direct the search
query to the responsible peer.
Peer-to-peer technology is how Bitcoin operates: no administrator is required to
maintain track of user transactions on the network. Instead, the peers in the
network cooperate to handle deals and manage the currency.
Structure of Blockchain
All blockchains consist of linking blocks together to form an immutable ledger,
different block structures can be adopted depending on the application.
Permissioned and permissionless blockchains.
 The Block Size is the size of the entire block.
 The Block Header contains all the metadata of the block.
  The Transaction Counter has the count of transactions.
 The Transactions are stored in the block.

Four core building blocks of blockchain

A shared ledger: The shared ledger appends only the distributed transaction
record.
Cryptography: Cryptography in a blockchain ensures authentication and
verifiable transactions.
Trust systems or consensus: Trust systems refer to using the power
of the network to verify transactions.
Business rules or smart contracts: Smart contracts are the business terms that are
embedded in a blockchain. This is also the rules component of a blockchain
solution. It is needed to define the flow of value and state of each transaction.
Linking blocks
Blocks are linked in a blockchain using references, just like in a linked list, but
here the blocks are linked by referencing the hash value (identifier) of the previous
block.
Each full node in a blockchain network will maintain a complete blockchain and
append a new block whenever it has one to append.
Blockchain Structure
The basic structure of a blockchain.
In the Bitcoin blockchain, transactions are a basic element:
 Transactions are validated and broadcast.
 Many transactions form a single block
 Many blocks form a chain
 Blocks go through a consensus process that selects which the next block to
be added to the chain.
 The chosen block is then verified and added to the chain.
 This validation process is done by special peer nodes called miners.
Consensus mechanism:
What is a consensus algorithm?
A consensus algorithm is a process in computer science used to achieve agreement
on a single data value among distributed processes or systems. These algorithms
are designed to achieve reliability in a network involving multiple users or nodes.

The need for a consensus algorithm

The consensus algorithm is a core part of the blockchain network because it
achieves agreement, trust, and security across a decentralized network. Consensus
algorithms are also designed to prevent the 51% attack on a network. This means
that a particular validator cannot have control of the network.
Few reasons why a consensus algorithm is needed:
Unified agreement: A consensus algorithm makes it easy and secure to reach an
agreement on the activities and state of the network.
Prevent double-spending: Double spending means spending a digital currency
twice. A consensus algorithm is designed to ensure that only transactions that are
verified and valid are added to the blockchain.
Fair and equitable: Consensus algorithms align with the open-source feature of
blockchain by allowing anyone to join and participate in the network.
Reliable: Another major need for the consensus algorithm is to ensure the
reliability of the network. It also ensures the network is fault-tolerant and resistant
to threat attacks.
How consensus algorithms work?
Consensus algorithms are vital in large-scale, fault-tolerant systems because they
enable a set of distributed/replicated machines or servers to work as a coherent
group and agree on system state, even in the presence of failures or outages. To
achieve this, the algorithm sets a threshold, or the number of member machines
that must reach consensus or agreement.
However, a response is required from the available nodes. For example, an
algorithm may require that at least 51% of nodes respond to achieve consensus or
agreement on a data value or network state.
This ensures consensus is achieved with minimal resources, even if the other
resources are unavailable or even faulty. The mechanism also maintains the
integrity of decisions taken by the agreeing nodes in the fault-tolerant system.
Applications of consensus algorithms in blockchain
1. Consensus algorithms have many real-world applications in decentralized or
distributed computer networks.
2. One of the most common applications is blockchain.
3. Blockchain is the distributed ledger most associated
with bitcoin cryptocurrency.
4. Decentralized database is collectively managed by distributed computers or
nodes on a distributed peer-to-peer network.
Types of consensus algorithms
The consensus algorithm can be designed with different functionalities while
maintaining the basic objective: to reach an agreement and ensure the reliability of
the network. The following is a list of the different types of consensus algorithms:
 Proof of Work
 Proof of Stake
 Delegated Proof of Stake (DPoS)
 Proof of Authority (PoA)
 Practical Byzantine Fault Tolerance (PBFT)
 Proof of Importance (PoI)
 Proof of Capacity (PoC)
 Proof of Burn (PoB)
The two most commonly used consensus algorithms are the Proof of Work and
the Proof of Stake.
Proof of Work (PoW):
The central idea of PoW is to have nodes solve complex mathematical puzzles and
make as many guesses as possible in the fastest possible time.
The validators in this type of consensus algorithm are called miners. For a new
block of transactions to be created and added to the blockchain, the miners are
required to solve a complex mathematical puzzle that involves a lot of
computational power.
The first miner to solve the puzzle gets to create the next block and add it to the
blockchain, and this process is known as mining. In addition, a certain amount of
the network’s native coin is given to the first miner as a block reward.

In a nutshell, the mathematical puzzle acts as the consensus metric in ensuring the
network is secure, reliable, and trusted.
This is done by taking data from a block header as an input, and continuously
running this data through a cryptographic hash function. Every time this is done,
small changes are made to the input data by including an arbitrary number called
a nonce. This is the blockchain version of guesswork to find a solution.
Examples of blockchain networks: that use this consensus algorithm include
Bitcoin, Ethereum, and more.
Drawback of PoW : The large computational power and hardware requirements.

Proof of Stake (PoS):

This consensus algorithm was designed as an alternative to Proof of Work because
of the large computational power and hardware requirements of Proof of Work.
Unlike PoW, PoS requires little specialized hardware or software resources to mine
cryptocurrencies since it doesn't involve solving complex computational
problems.
Rather, crypto validators lock up or stake some of their coins in a wallet. They then
validate blocks if they discover a block that can be added to the blockchain.
Validators get a reward -- or their stake increases -- proportionate to their bets
based on the blocks added to the blockchain. Since the algorithm is incentive-
based, it consumes less computational energy than PoW.

Fig. Proof-of-stake
Here, the validators participate in the validation and verification of transactions by
locking up some of their coins in a wallet as their stake. The validator with the
highest stake is selected to create a new block and add it to the blockchain. This
validator receives transaction fees as a reward.
Examples of blockchain networks: that use Proof of Stake include Ethereum 2.0,
Cardano, Polygon, and others.
Drawback of PoS: The mining capacity of a validator depends on the number of
tokens they have, so a miner who starts with more coins gets more control over the
consensus mechanism. Additionally, a few miners can purchase many coins,
further diluting the mechanism and reducing the system's decentralization property.
Delegated Proof of Stake
Delegated Proof of Stake (DPoS) is considered a more efficient and democratic
version of PoS. This algorithm is based on a voting system in which delegates or
witnesses vote for their favorite validators to achieve consensus during the
generation and validation of blocks.
Besides validating transactions, delegates also help maintain
the integrity, reliability and transparency of the blockchain network.
The voting power of each delegate is proportional to the number of coins held.
They receive rewards for their work with transaction fees, which are shared with
their respective electors.
The DPoS algorithm's voting system, and therefore the consensus mechanism,
depends on the reputation of the delegates. It's a more scalable mechanism than
PoW or PoS since it can process more transactions per second and provide faster
confirmation times.
Proof of Authority
In Proof of Authority, the rights to create new blocks are given to participant nodes
who have proven their authority. In simple terms, Proof of Authority-based
blockchain networks is validated by approved validators who run software that
allows them to put transactions in the blockchain system.
The Proof of Authority consensus algorithm uses the value of identities, so the
block validators don’t stake coins but their reputations. As this consensus
algorithm depends on the limited number of validators, it makes the system highly
scalable. It is an effective solution for supply chains because it allows companies
to maintain their privacy and attain blockchain benefits simultaneously.
Practical Byzantine Fault Tolerance (PBFT)
PBFT is a consensus algorithm that is commonly used in permissioned blockchain
networks. It requires a set of validators to agree on the state of the blockchain, and
it uses a complex voting process to reach consensus. PBFT is known for its speed
and efficiency, but it requires a trusted set of validators and is less secure in open
networks.
Proof-of-Activity (PoA)
Proof-of-Activity is a hybrid consensus algorithm that combines the security of
Proof-of-Work with the energy efficiency of Proof-of-Stake. In a PoA system,
nodes are required to perform a certain amount of work to create a new block,
similar to PoW. However, once the block is created, the validation process is
performed by a group of randomly selected validators who have a stake in the
network. This reduces the amount of energy required to validate blocks and also
makes the network less vulnerable to 51% attacks.
Proof-of-Importance (PoI)
Proof-of-Importance is a consensus algorithm that uses a node’s importance score
to determine its chances of being selected to create a new block. The importance
score is calculated based on a node’s overall activity on the network, including the
number of transactions it has processed and the number of nodes it has referred to
the network. PoI is used in the NEM blockchain, which uses a unique harvesting
system where nodes earn transaction fees by processing transactions and validating
blocks.
Proof-of-Capacity (PoC)
Proof-of-Capacity is a consensus algorithm that requires nodes to prove that they
have allocated a certain amount of disk space to the network. In a PoC system,
nodes pre-calculate a set of solutions to a complex mathematical problem and store
them on their hard drives. When it is time to create a new block, nodes can quickly
verify their solutions and compete to create the new block. PoC is used in the Burst
coin blockchain, which allows nodes to use their unused hard drive space to mine
new coins.
Proof-of-Burn (PoB)
Proof-of-Burn is a consensus algorithm that requires nodes to burn (i.e., destroy) a
certain amount of coins to create a new block. This mechanism ensures that nodes
have a vested interest in the network and are incentivized to act in its best interest.
PoB is used in the Slimcoin blockchain, where nodes can burn coins to generate a
special transaction that allows them to mine new blocks.

Pros of Consensus Mechanisms

1. Decentralization: PoW allows anyone with the necessary hardware and
electricity to participating in the validation process, making the network
more decentralized. It can reduce the centralization of validation power that
can occur with PoW and PoS.
2. Security: PoW is considered one of the most secure consensus mechanisms
due to the computational power required to participate in the validation
process. PBFT is considered highly secure because of the pre-selected
validators who must agree on the validity of transactions.
 3. Energy-efficient: PoS is known for its energy efficiency, which can reduce
the environmental and economic impact of validation.
4. Fast transaction processing: DPoS can enable faster transaction processing
times compared to other consensus mechanisms. PBFT can enable faster
transaction processing times compared to other consensus mechanisms.

Cons of Consensus Mechanism

High energy consumption: PoW is known for its high energy consumption, which
can have environmental and economic impacts.
Centralization of mining: In some cases, mining can become centralized among a
few large mining pools, which can reduce the decentralization of the network.
Possible centralization of validators: In some cases, PoS can lead to the
centralization of validation power among a few large validators, which can reduce
the decentralization of the network.
Potential for stake-grinding attacks: There is a risk of a stake-grinding attack,
where a malicious validator can manipulate the validation process by repeatedly
selecting different chains.
Possible centralization of validation power: In some cases, DPoS can lead to the
centralization of validation power among a few large validators, which can reduce
the decentralization of the network.
Vulnerability to attacks: DPoS can be vulnerable to a 51% attack, where a single
entity controls the majority of the validation power. PBFT can be vulnerable to a
33% attack, where a single entity controls one-third of the validation power.
Centralization: PBFT is a permissioned consensus mechanism, which means that
only pre-selected validators can participate in the validation process, which can
reduce the decentralization of the network.