National Institute of Electronics & Information Technology

Fundamentals, History and Applications

Introduction to BlockChain
 What is Block-Chain?
“Everything will be tokenized and connected by Blockchain one day”

– Fred Ehrsam co-founder of crypto exchange Coinbase

1. Decentralized computation and information sharing

platform that enables multiple authoritative domains, who
do not trust each other who coordinate and collaborate in
decision making process (Transaction
Processing).

2. Traditional way of Information sharing

Simultaneous edit not possible
Solution: (CENTRALISED Architecture)Something like Google docs-
Can act as single point of failure
Bandwidth

3. Shift from Centralized to Decentralized

Centralized vs Decentralized vs Distributed
CENTRALISED: Complete
Reliance on a single point-
not safe

DECENTRALISED: Multiple
points of coordination

DISTRIBUTED: Everyone
collectively executes the job.
Eg AWS, Google, Facebook

2
 Database vs Blockchain
Blockchain Database
No one is the admin or in- Databases have admins
charge & centralized control

Anyone can access Only entities with rights can

(public) blockchain access database

Anyone with right proof of Only entities entitled to read or

work can write on blockchain write can do so

Blockchains are slow Databases are fast

History of records & No history of records &
ownership of ownership
digital records of digital records
Append only CRUD(create, read, update,
delete)
Simplified Architecture of Block Chain

 Every node maintains a local copy of global data.

System ensures consistency among local data copy(Local copies

are identical)

Local copies are updated based on global information

 Simplified Architecture of Block Chain

Local copies are basically called Public/Shared Ledger; works like

a database of historical information. Everyone edits their own copy of
document.
Ledger: is the system of record for a business– records asset transfer
between participants.
Traditional Banking
Example
PUBLIC LEDGER from Banking Sector
Blockchain and Public Ledger
 Formal Definition

Blockchain is a Open Distributed Ledger that

keeps a record of all transactions taking place
in a peer-to-peer network. All information
transferred via Blockchain is verifiable, and
every occurrence is recorded(Permanent).
IMMUTABLE- Tamper
Proof
 History of Blockchain
• Everybody is talking about cryptocurrencies now - thanks to the hype
about BitCoin.
• The story of Bitcoin started with a whitepaper called
"Bitcoin: A Peer-to-Peer Electronic Cash
System" in 2008
by Satoshi Nakamoto.
• He introduced a new, revolutionary technology and
an idea.
• A decentralised electronic currency that runs on something called
the blockchain.
• The idea spread from this point and can be applied to many other
areas now.
 History of Blockchain
In 1991, Stuart Haber and W. Scott Stornetta ideated the concept of a
cryptographically secured chain of blocks. In 1992 they used Merkle
trees to create a ‘secured chain of blocks’—each connected to the
one before it. Newest record in this chain would contain the history
of the entire chain.
Note: ‘Merkle Tree’ is named after Ralph Merkle who patented them in
1979

2
 Structure Of Blockchain in BITCOIN

Block is a container Data Structure that contains a series of

transactions.
In Bitcoin a block may contain more than 500 transactions and
average size of block is 1MB
May grow upto 8MB. Presently its about 4 MB
 Structure Of Blockchain in BITCOIN

Block has 2 components

1. Block Header
• Previous Block Hash
• Mining statistics
• Merkle Tree Root
2. List of transactions
 HASH FUNCTION
• A hash function is a mathematical
function that converts a input value of
arbitrary length into another value or
output , always of fixed length

• Values returned by a hash function are

called message digest or simply hash
values

Properties of Hash Functions

1. Pre-Image Resistance or one way: Given x(message), we
can compute H(x)-Message digest, but given H(x) no
deterministic algorithm can compute x.
2. Collision Resistant :For two different x1 and x2, H(x1) and
H(x2) should be different
Avalanche effect:
Small change in the
input results in a
significant change in
the output.

Examples
MD5
Sha256
Secure Chain of Blocks-History
MERKLE TREES- Ralf Merkle 1979
USE OF MERKLE TREE
Simplified Block Structure
What is BITCOIN?
Allowing multiple parties!!! How to ensure security??
 Allowing multiple parties!!! How to ensure security??
Immutable record–
•By design, blockchains are inherently resistant to modification of data.
Once recorded, the data in any given block cannot be altered without
the alteration of all the subsequent blocks, which requires the
consensus of the network majority.

•As a result, each block strengthens the previous block and the security
of the entire blockchain because it means more blocks would need to be
changed to tamper with any information.

•As Blockchain is a series of immutable blocks, this allows companies to

track the complete life cycle of a financial transaction.
Bitcoin Transaction Life Cycle
Bitcoin Transaction Life Cycle
Bitcoin Transaction Life Cycle
 Structure of Blockchain
First block in the blockchain is called the Genesis Block and has
no Prev Block Hash value.
BLOCK MINING- Bitcoin
Validating and encoding the blockchain is referred to
as mining.

Mining involves the use of computers to run hashing

algorithms to process the most recent block, with the
information needed in mining found in the block's
header.

The cryptocurrency network sets a target value for

this hash – the target hash -- and miners try to
determine what this value is by testing out all possible
values.
 BLOCK HEADER- Bitcoin
The block header contains

1. Block version number,

2. Previous block hash
3. The hash of the Merkle
Root
4. A timestamp
6. The nonce
7. The target hash.
 BLOCK HEADER- Bitcoin
Block is generated by taking the hash of the block contents,
adding a random string of numbers (the nonce), and hashing the
block again.
BLOCK MINING- Bitcoin
 BLOCK MINING- Bitcoin
If the hash meets the requirement of the target, then the block
is added to the blockchain.

Cycling through solutions in order to guess the nonce is referred

to as proof of work (PoW), and the miner who is able to find the
value is awarded the block and paid in cryptocurrency.

The target hash for Bitcoin is a 256-bit number and can be found
in the block’s header.

Mining a block requires the miner to produce a value (a nonce)

that, after being hashed, is less than or equal to the target hash.
This number is between 0- (the smallest option) and 256-bits
(the largest option
 BLOCK MINING- Bitcoin
The hash for block for example #429818, for
example,is :
000000000000000004dd3426129639082239efd583b
5273b1bd75e8d78ff2e8d.
That block contains 2,012 transactions involving just
over 1,000 bitcoin, as well as the header of the
previous block.
If a user changed one transaction amount by 0.0001
bitcoin, the resultant hash would be unrecognizable,
and the network would reject the fraud.
 Bitcoin Mining
When someone sends bitcoin anywhere, it's called a transaction.

Transactions made in-store or online are documented by banks, point-

of-sale systems, and physical receipts.

Bitcoin miners achieve the same thing by clumping transactions

together in “blocks” and adding them to a public record called the “
blockchain.”

Nodes then maintain records of those blocks so that they can be

verified into the future.
With as many as 300,000 purchases and sales occurring in a single day,
verifying each of those transactions can be a lot of work for miners.

As compensation for their efforts, miners are awarded bitcoin

whenever they add a new block of transactions to the blockchain.
 Bitcoin Mining
The amount of new bitcoin released with each mined
block is called the "block reward." The block reward is
halved every 210,000 blocks (or roughly every 4 years).
In 2009, it was 50. In 2013, it was 25, in 2018 it was
12.5, and in May of 2020, it was halved to 6.25.
 Bitcoin Mining
Bitcoin successfully halved its mining reward—from
12.5 to 6.25—for the third time on May 11th, 2020.

This system will continue until around 2140.

At that point, miners will be rewarded with fees for

processing transactions that network users will pay.

These fees ensure that miners still have the incentive

to mine and keep the network going.

The idea is that competition for these fees will cause

them to remain low after halvings are finished.
Bitcoin equals 10,18,164.03 Indian Rupee as on Nov,
4:36 am

The size of the Bitcoin blockchain has experienced

consistently high levels of growth since its creation,
reaching approximately 302.22 gigabytes in size as of
the end of September 2020
 Unit Structure of Bitcoin
1 bitcoin (BTC) =1,000 millibitcoins (mBTC),
1,000,000 microbitcoins (μBTC),
100,000,000 satoshis.

While the exact figure is unknown, it is estimated that

Satoshi Nakamoto may possess 1 million bitcoins,
equivalent to 100,000,000,000,000 satoshis.
 Proof of Work (PoW) Consensus
Principle: A solution that is difficult to find but is
easy to verify.
The purpose of a consensus mechanism is to
bring all the nodes in agreement, that is, trust
one another, in an environment where the
nodes don’t trust each other.
All the transactions in the new block are then
validated and the new block is then added to
the blockchain.