Fundamentals of Blockchain Technology

Module 1

Blockchain Basics

A. Chandra Shaker
Assistant Professor

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 Fundamentals of Blockchain Technology

Module 1: Blockchain Basics

• Introduction to Blockchain
• The Double-Spend Problem
• Byzantine Generals’ Computing Problem
• Public Key Cryptography
• Hashing
• Distributed Systems
• Distributed Consensus

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Introduction to Blockchain

What is Blockchain?

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What is a Blockchain?

It was a technology created to support the

famous cryptocurrency, Bitcoin.

Blockchain uses a peer-to-peer network design

and cryptographic functions to create a
distributed ledger of immutable, or tamperproof,
transactions.
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Why do we need Blockchain?

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Why do we need Blockchain?

Blockchain enables peer-to-peer transfer of

digital assets without any intermediaries, unlike
traditional methods.

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Blockchain itself has taken a life of its own and

permeated a broad range of applications across
many industries, including finance, healthcare,
government, manufacturing, and distribution.

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Blockchain paved the way to innovate and transform a

wide range of applications:
• Goods transfer, for example, supply chain.
• Digital media transfer, for example, the sale of art.
• Remote services delivery, for example, travel and
tourism.
• Platform for decentralized business logic, for
example, moving computing to data sources.
• Distributed intelligence, for example, education
credentialing.

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Additional applications of blockchain include:

• Distributed resources, for example, power generation
and distribution.
• Crowd funding, for example, startup fundraising.
• Crowd operations, for example, electronic voting.
• Identity management, for example, one ID for all
your life's functions.
• Government public records and open governing.

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• Moreover, blockchain can enable an inclusive

economy.
• It can enable a person in a remote corner of the
world to take part in a democratic process.
• Opportunities for innovative applications are
endless.
• There is more need for critical thinkers, designers,
and developers who can envision and create newer
application models on blockchain to benefit the
world.
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The Double-Spend Problem

• Double-spending is a problem that arises when

transacting digital currency that involves the same
tender being spent multiple times.
• The primary reason for double-spending is that
digital currency can be very easily reproduced.
• There are primarily two ways to combat double-
spending – central clearing counterparty and
blockchain.

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• The challenges of implementing a centralized

authority are the creation and maintenance costs.
• Assigning a bank as a centralized authority will
result in commission cuts on digital currency
transactions.
• It can be expensive, especially in cases where more
than two agents and/or banks are involved in the
transfer, processing, and authenticating of funds
being transferred.

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• Decentralized digital currencies, such as Bitcoin,

utilize consensus mechanisms that verify
transactions with certainty.
• The consensus mechanisms are alternatively known
as proof-to-work. Practically, the mechanism ensures
that each participant node verifies the transaction.
• Therefore, Bitcoin comes with a historical public
ledger facilitated through blockchain that provides
empirical verification of property rights and transfer.

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• In order for a market participant to fraudulently

double spend, they need to use a significant amount
of computing power to eliminate the previous blocks
in the chain, and effectively double-spend the
transaction.
• Additionally, as time passes, confirmations of the
block exponentially grow, further protecting the
integrity of the transaction.

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Byzantine Generals’ Computing Problem or

Byzantine Generals’ Problem

• Several divisions of the Byzantine army are camped

outside an enemy city, each division commanded by
its own general.
• The generals can communicate with one another
only by messenger.
• After observing the enemy, they must decide upon a
common plan of action.

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• Generals should reach a ATTACK

!
consensus on the plan.
• It could be an ATTACK.
ATTACK
!
ATTACK
!

ATTACK
!

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• Generals should reach a

consensus on the plan. RETREAT
!
• Or RETREAT.

RETREAT RETREAT
! !

RETREAT
!

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• But there might be

traitors. ATTACK
!
• All loyal generals should
reach a consensus.

ATTACK
ATTACK
!
!

ATTACK
!

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• But traitors can act ATTACK

!
arbitrarily.
• All loyal generals should
reach a consensus.
ATTACK
!
ATTACK
!

Let’s RETREAT!
ATTACK
!

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Opps!

???
Opps!

Haha!

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Simplified Version of Byzantine Generals’ Problem

• A commanding general sends an order to his n-1

lieutenant generals such that:
IC1. All loyal lieutenants obey the same order.
(Consistency/Agreement)
IC2. If the commanding general is loyal, then every
loyal lieutenant obeys the order he sends.
(Validity)

ICs - Interactive consistency conditions

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Public Key Cryptography

• Two techniques are predominantly used for securing

the blockchain and for efficient validation and
verification are:
 Hashing, and
 Asymmetric key encryption.

• These techniques depend on several complex proven

algorithms.

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• Blockchains have decentralized network participants,

and are not necessarily known to each other.

• Credentials cannot be checked by conventional

means such as verifying who you are with your
identity card.

• Participants can join and leave the chain as they

wish.

• They operate beyond the boundaries of trust.

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• In this context
 How to identify the peer participants?
 How to authorize and authenticate the
transactions?
 How to detect forged or faulty transactions?

• These things can be done using Public Key

Cryptography algorithm.

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• Let us start with a simple symmetric key encryption.

• The same key is used for encryption and decryption,

so it is called a symmetric key.

• For example, Ceasar encryption is the simplest one

with alphabets of a message that are shifted by a
fixed number, and this number is called the Key.

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Image Source: Coursera

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• Issues with Symmetric-Key Encryption

 Easy to derive the secret key from the encrypted data.
 How do you pass the key to the participant
transacting?

• Public Key Cryptography addresses these issues:

• Instead of a single secret key, it employs two different
keys (public and private keys) that take care of both
the issues of symmetric key encryption.
• Public-key is published, private key is kept safe and
locked. Typically using a passphrase.

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• The public-private key pair has the unique quality

that even though data is encrypted with the private
key, it can be decrypted with the corresponding
public key and vice versa.

• Let, lowercase i and uppercase I be the private-

public key pair for a participant in India.
• Let lowercase n and uppercase N be the pair of keys
for the participant in Nepal.

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• Let's say a participant in India wants to transact with

the participant in Nepal. Instead of sending just a
simple message, a participant in India will send a
transaction data encrypted by India's private key, and
then encrypted by Nepal's public key.
• Participant in Nepal will first decrypt the data using
its own private key, then use India's public key to
decrypt assigned transaction data.
• This ensures that only participant in Nepal can
decrypt and receive the data, and that only India
could have sent the data.
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• A popular implementation of public key, private key

is the Rivest Shamir Adleman (RSA) algorithm.
• Common application of RSA is password-less user
authentication.
• Though RSA is very commonly used in many
applications, blockchains need a more efficient and
stronger algorithm.
• Efficiency is a critical requirement since public key
pair is frequently used in many different operations
in blockchain protocol.

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• Elliptic Curve Cryptography, ECC family of

algorithms is used in the Bitcoin as well as Ethereum
blockchain for generating the key pair.
• ECC is stronger than RSA for a given number of
bits. 256-bit ECC key pair is equal in strength to
about 3072 bits of RSA key pair.

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Hashing

• A hash function or hashing transforms and maps an

arbitrary length of input data value to a unique fixed
length value.
• Input data can be a document, tree data, or block
data.
• Even a slight difference in the input data would
produce a totally different hash output value.

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Image Source: Coursera

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• The following are two basic requirements of a hash

function.
• Algorithm should be a one-way function
• And, it should be collision-free

• The first requirement is to make sure that no one can

derive the original items hashed from the hash value.
• The second requirement is to make sure that the hash
value uniquely represents the original items hashed.
There should be an extremely low probability that
two different datasets map onto the same hash value.

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• These requirements are achieved by choosing a

strong algorithm such as secure hash, and by using
an appropriately large number of bits in the hash
value.
• Most common hash size now is 256 bits and the
common functions are SHA-3, SHA-256 and
Keccak.
• A 256-bit hash value space is very large.
• 2^256 possible combinations of values.
• Approximately 10^77.

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• Two different approaches for hashing based on how

the constituent elements are organized.
 Simple hash
 Merkle tree hash

• In the simple hash approach, all the data items are

linearly arranged and hashed.

• In a Merkle tree-structured approach, the data is at

the leaf nodes of the tree, leaves are pairwise hash to
arrive at the same hash value as a simple hash.
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• We can illustrate simple hashing with ADD as a hash

function. We use the data 10, 4, 6, 21 and 19 and
ADD as a hash function.

Image Source: Coursera

• Actual hashing functions are quite complex and are
variations of SHA-3, and the data values are much
larger, mainly 256 to 512 bit values.
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• Considering the same example with Merkle tree

hashing.

Image Source: Coursera

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• When is a simple hash used?

• Use simple hash when:
• Fixed number of items to be hashed (e.g., block
header)
• Verifying composite block integrity (not individual
item integrity).
• When is a tree-structured hash used?
• Use Merkle tree hash when:
• When number of items differ from block to block,
• Transaction hash
• State hash
• Receipt hash
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Distributed Systems

• Let us understand centralized versus decentralized

network using a common scenario.
• Consider a scenario where customer wants to buy an
item using credit card. There are lot of intermediaries
involved in accomplishing this task.
Customer  Credit card agency  Customer bank  Credit
cards bank  Exchange  Merchant's bank  Merchant
• This is an example of a centralized system.

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• Now compare the same with a system where peers

can transact directly with each other irrespective of
where they are located.
• Functions of the intermediaries are shifted to the
periphery to the peer participant in the blockchain
infrastructure.
• Peers are not necessarily known to each other.
• This is a decentralized system.
• Public (decentralized) blockchains are built as
distributed systems and, so they do not rely on a
central authority.
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• How do we establish trust among the peers in such a

decentralized system?
• By having a process to validate, verify, and confirm
transactions.
• Record the transaction in a distributed ledger of blocks,
create a tamper-proof record of blocks, chain of blocks,
and implement a consensus protocol for agreement on the
block to be added to the chain.
• So, validation, verification, consensus, and immutable
recording lead to the trust and security of the blockchain.

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Distributed Consensus

• Distributed consensus ensures a consensus of data

among nodes in a distributed system reaches an
agreement on a proposal.
• The distributed nodes need to agree on the validity
of transactions, where consensus algorithm come
into play.
• A consensus algorithm may be defined as the
mechanism through which a blockchain network
reach consensus.

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• Consensus algorithm assures that the protocol rules

are being followed and guarantee that all
transactions occur in a trustless way, so the coins are
only able to be spent once.

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