Introduction to

Blockchain
CSEg5304
CHAPTER ONE
A DA M A S C I E N C E A N D T E C H N OLOGY U N IV E R S IT Y
C OE E C – C S E D E PA RT M E N T
Outline
INTRODUCTION TO BLOCKCHAIN TECHNOLOGY
What is Blockchain?
 Blockchain Ledgers and Distributed Ledgers
 Blockchain Architecture
Elements of Blockchain
 Advantages and Disadvantages of Blockchain
 Types of Blockchain
 History of Bitcoin & Blockchain
The Blockchain Trilemma
 Blockchain
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.
In essence, it is a chain of blocks, where each BLOCK contains a list of transactions, a
timestamp, and a reference to the previous block, forming a chronological and tamper-
proof record of data (CHAIN).
Key Characteristics
 Distributed Ledger: Blockchain operates where copies of the ledger are distributed across multiple nodes in
the network. Each node maintains an identical copy of the ledger. Changes to the ledger are synchronized and
propagated across the network through consensus mechanisms.
 Immutability: Once a transaction is recorded on the blockchain and confirmed by consensus, it becomes
virtually impossible to alter or delete. Once data is written to the blockchain, it is extremely difficult to change
it.
Peer-to-Peer: Blockchain operates on a peer-to-peer (P2P) network, where transactions are directly conducted between
participants without the need for intermediaries. P2P architecture enables direct interaction and communication between
network participants, fostering decentralization and eliminating single points of control or failure.
Decentralization: Unlike traditional centralized systems where data is stored in a single location, blockchain operates on a
decentralized network of computers (nodes). Each node maintains a copy of the blockchain, ensuring redundancy, fault
tolerance, and resilience against single points of failure making the system highly available.
Append-Only: Blockchain is append-only, meaning that once data is added to the blockchain, it cannot be modified or
deleted. New data is continuously added to the blockchain in the form of blocks.
Cryptographically Secure: Blockchain employs cryptographic techniques such as hash functions, digital signatures, and
consensus mechanisms to secure the network against fraud, manipulation, tampering and unauthorized access.
Transparency: Transactions recorded on the blockchain are visible to all participants in the network. This transparency
fosters trust and accountability, as anyone can verify the integrity and authenticity of transactions without relying on
intermediaries.
Decentralization: Unlike traditional centralized systems where data is stored in a single location, blockchain operates on a
decentralized network of computers (nodes). Each node maintains a copy of the blockchain, ensuring redundancy, fault
tolerance, and resilience against single points of failure making the system highly available.
Pseudo-anonymous: Blockchains identify owners uniquely but do not maintain or reveal their real-world identity.
The Block and The Chain
The Block - is a list of transactions that occur within a specific time frame. It
contains all the information processed on the network within the past few
minutes.
o A 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.
The Chain - is the sequence of blocks linked together in a specific order. Blocks
are linked to the block before them using cryptographic algorithms.
o Hashing connects each block to the previous block, where the hash of the entire previous block is added
to the beginning of the next block. This creates a chain of blocks, hence the name blockchain. The chain
grows longer over time as new blocks are created. The chain grows longer over time.
o A reference to a previous block is also included in the block unless it is a genesis block. A genesis block is the first
block in the blockchain that is hardcoded at the time the blockchain was first started.
Distributed vs
Centralized vs
Decentralized
In the field of computing, a distributed system is one where
processing is not done solely on one computer. Rather,
computation is shared across several computing resources. These
systems communicate with one another using some form of
messaging.
A distributed system has characteristics of decentralization, in that
the failure of a single entity (or node) does not mean the failure of
the whole network. The common goal is to use processing power
to collectively accomplish a task by distributing responsibility across
many computers. However, decentralization changes the concept
of common goals and messaging.
In a fully decentralized system, a given node does not necessarily
collaborate with every other node to achieve its objective, and
decision-making is done through some form of consensus rather
than having this responsibility rest in the hands of a single entity.
Distributed Vs Centralized Vs
Decentralized
In a centralized database, like a Bank or PayPal, all nodes connect to a single, central
node that is controlled by one entity. There is a primary server, or central servers, and
multiple clients. The servers dictate what the clients can have

In a distributed database, like multiple databases hosted on Amazon Web Services

(AWS), each node can maintain a replicated copy of the same data, each node knows
the identity of other nodes, and all nodes are controlled by one entity.

In a decentralized database, like Bitcoin’s Blockchain, each node can maintain a

replicated copy of the same data, each node may not know the identify of other
nodes, and all nodes are controlled by many entities who may be anonymous
 Distributed Ledgers
The most fundamental part of the blockchain is the ledger.
Ledgers in Blockchain: Blockchain uses ledgers to record transactions. A ledger in the blockchain replaces the
function of a ledger at a bank or other institution. For a cryptocurrency, this ledger typically contains account
numbers, transactions, and balances. When a transaction is submitted to the blockchain, information is added
to the ledger indicating where currency is coming from and going to
It should be noted that a distributed ledger is a broad term describing shared databases; hence, all blockchains
technically fall under the umbrella of shared databases or distributed ledgers. Although all blockchains are
fundamentally distributed ledgers, all distributed ledgers are not necessarily a blockchain.
Distributed Ledger Technology (DLT) is an umbrella term that has grown to be commonly used to describe
blockchain.
 DLT encourages network users to pass and update information or documents in a trusted environment.
 DLTs are often permissioned blockchains shared and used between known participants, serving as a shared database
with all participants verified.
 They do not necessarily have a cryptocurrency or require mining to secure the ledger.
Why Blockchain Ledger?
• The idea dates back to 1991 proposed in a paper by Haber and Stornetta in 1991.
• However, their proposal was a method for secure timestamping of digital documents, rather than a
digital money scheme.
 Timestamping: gives an approximate idea when a document came into existence. If the
security property is satisfied, which is the timestamping can’t be changed after the fact,
it accurately conveys the order of creation of these documents.
 Pointer: it signs the document together with a link or a pointer to the previous
document. It links to a piece of data instead of a location. That means that if the data in
question changes, the pointer automatically become invalid.
These properties ensure the integrity of the contents of the previous document. Each block
essentially fixes the entire history of documents and blocks up until that point.
 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 image (Network view of the Blockchain.)
At the bottom layer, 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.
 Generic Elements of a
Blockchain
• Transaction: A transaction is the fundamental unit of a blockchain. A transaction represents a transfer of value from one
address to another.
• Address: Addresses are unique identifiers used in a blockchain transaction to denote senders and recipients. An address is
usually a public key or derived from a public key.
• Block: A block is composed of multiple transactions and other elements, such as the previous block hash (hash pointer),
timestamp, and nonce.
• State machine: A blockchain can be viewed as a state transition mechanism whereby a state is modified from its initial form
to the next one and eventually to a final form by nodes on the blockchain network as a result of a transaction execution,
validation, and finalization process.
• 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.
• Virtual machine: A virtual machine allows Turing complete code to be run on a blockchain (as smart contracts); whereas a
transaction script is limited in its operation. However, virtual machines are not available on all blockchains. Ex. Ethereum
Virtual Machine (EVM) and Chain Virtual Machine (CVM).
• Node: A node in a blockchain network performs various functions depending on the role that it takes on. A node can
propose and validate transactions and perform mining to facilitate consensus and secure the blockchain.
Advantages and Disadvantages of Blockchain
Numerous advantages of blockchain technology have been discussed in many industries and proposed by
thought leaders around the world who are participating in the blockchain space.

1. 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.

2. Highly secure: All transactions on a blockchain are cryptographically secured and thus provide network
integrity.

3. 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.
Advantages:

4. 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.

5. 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.

6. Cost Reduction: 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.

7. Programmability: Smart contracts are self-executing contracts with the terms of the agreement directly
written into code. They automate and enforce contractual agreements, reducing the need for intermediaries.
Disadvantages:
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. The most sensitive
blockchain problems are as follows: Scalability, Adaptability, Regulation, Relatively immature
technology, Privacy.
1. Scalability: As the size of the blockchain grows, scalability becomes a challenge. Transaction
processing speed may decrease, affecting the overall efficiency.
2. Lack of Regulation: The absence of clear regulations in many jurisdictions can lead to
uncertainties and challenges, especially in legal and compliance matters.
3. Complexity: Understanding and implementing blockchain technology can be complex for
individuals and organizations. This complexity may hinder widespread adoption.
Disadvantages:
4. Interoperability: Achieving interoperability between different blockchain networks and
traditional systems is a challenge. This can hinder the seamless integration of blockchain into
existing infrastructures.
5. Limited Privacy: While transactions are secure and transparent, the level of privacy is limited.
Some blockchain networks struggle to find a balance between transparency and user privacy.
6. Energy Consumption: Some blockchain networks, particularly those using Proof of Work
(PoW) consensus mechanisms, consume significant amounts of energy. This has raised concerns
about the environmental impact.
 Tiers of Blockchain Technology
This versioning is just a logical segregation of various blockchain categories based on the way that they are
currently being used, are evolving, or predicted to evolve. This is a logical categorization of blockchain based on
its evolution and usage.
 Blockchain 1.0: 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.
 Blockchain 2.0: This second blockchain generation is used by financial services and smart contracts. 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.
 Blockchain 3.0: This third blockchain generation is used to implement applications beyond the financial services
industry and is used in government, health, media, real estate, arts, and justice.
 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 be a public and
open distributed ledger with general-purpose rational agents running on a blockchain and regulated by code
instead of law or paper contracts.
 Types of Blockchain
Different types of blockchains can be classified based on various viewpoints, including their
accessibility, model, and consensus mechanisms. Here's a classification based on these viewpoints:

Public vs. Private Blockchains

Public Blockchain: Accessible to anyone, public blockchains are decentralized networks where
anyone can participate, view transactions, and validate blocks. Examples include Bitcoin and
Ethereum.
Private Blockchain: Restricted access is granted to participants, typically controlled by a single
organization or consortium. Private blockchains offer higher privacy and control but sacrifice
decentralization. They are commonly used in enterprise settings for internal operations and
consortium-based projects. Examples include HydraChain and Quorum.
Semiprivate blockchains, part of the blockchain is private and part of it is public. Note that this is still just a concept
today, and no real world POCs have yet been developed. With a semi-private blockchain, the private part is controlled
by a group of individuals, while the public part is open for participation by anyone.
 Public Blockchain
1. Accessibility - Public blockchains are open to anyone, and anyone can join the network, participate in the
consensus process, and validate transactions. Examples include Bitcoin and Ethereum.
2. Decentralization - Public blockchains are typically decentralized, meaning no single entity or group has control
over the entire network. The consensus mechanism is often designed to prevent concentration of power.
3. Permissionless - Public blockchains are permissionless, allowing anyone to read, write, and participate in the
network without requiring approval.
4. Transparency - Transactions on public blockchains are transparent and visible to all participants.
5. Security - Security is maintained through cryptographic algorithms, consensus mechanisms, and the large
number of participants. The openness of the network allows for a high level of security through decentralization.
6. Use Cases - Public blockchains are well-suited for applications where transparency, decentralization, and
censorship resistance are essential, such as cryptocurrencies, decentralized finance (DeFi), and open-access
projects.
 Private Blockchain
1. Accessibility - Private blockchains are restricted to a specific group of participants. Access and participation
in the network are controlled, often requiring permission from a central entity or administrator.
2. Centralization - Private blockchains are typically more centralized, with a designated entity or group having
control over the network. This centralization allows for faster decision-making and coordination.
3. Permissioned - Private blockchains are permissioned, meaning participants need approval to join and
participate in the network. This provides more control over who can contribute to the consensus process.
4. Privacy - Transactions on private blockchains are often more private, with restricted visibility. Participants
may have limited access to the entire transaction history, enhancing confidentiality.
5. Security - Security is maintained through access controls, encryption, and the trust established among
known participants. The centralization allows for easier coordination and enforcement of security measures.
6. Use Cases - Private blockchains are suitable for applications where a closed and controlled environment is
required, such as within businesses, consortiums, or organizations. They are often used for supply chain
management, internal record-keeping.
Tokenized vs Tokenless
Blockchains
Tokenized Blockchains: These blockchains are standard blockchains that generate
cryptocurrency as a result of a consensus process via mining or initial distribution.
Bitcoin and Ethereum are prime examples of this type of blockchain.
Tokenless Blockchains: These blockchains are designed in such a way that they do not
have the basic unit for the transfer of value. However, they are still valuable in situations
where there is no need to transfer value between nodes and only the sharing of data
among various trusted parties is required. This is similar to full private blockchains, the
only difference being that use of tokens is not required.
Proof of Work (PoW) vs.
Proof of Stake (PoS)
Proof of Work (PoW): Consensus mechanism where miners
compete to solve complex mathematical puzzles to validate
transactions and create new blocks. PoW is energy-intensive
but provides security and decentralization. Examples include
Bitcoin.
 Proof of Stake (PoS): Consensus mechanism where
validators are chosen to create new blocks based on the
amount of cryptocurrency they hold and are willing to
"stake" as collateral. PoS is more energy-efficient but still
provides security and decentralization. Examples include
Ethereum and Cardano.
Proof of Work (PoW)
1. Consensus Mechanism:
◦ In Proof of Work, participants compete to solve complex mathematical puzzles. The first one
to solve the puzzle gets the right to add a new block to the blockchain and is rewarded with
cryptocurrency.
2. Resource Intensive:
◦ Mining in PoW is computationally intensive and requires substantial computing power.

3. Energy Consumption:
◦ PoW systems, like the one used in Bitcoin, are known for their high energy consumption.

4. Security:
◦ is considered highly secure because altering a block's information would require redoing all
the work.
Proof of Stake (PoS)
1. Consensus Mechanism:
◦ In Proof of Stake, validators are chosen to create a new block and verify transactions based on the amount of
cryptocurrency they hold and are willing to "stake" as collateral.

2. Resource Intensive:
◦ PoS is more resource-efficient compared to PoW since it doesn't require the same level of computational power.
Validators are chosen based on their stake in the network.

3. Energy Consumption:
◦ PoS is generally considered more environmentally friendly because it doesn't involve the energy-intensive mining
process seen in PoW.

4. Security:
◦ PoS relies on the economic incentive of validators not to cheat. Validators have something at stake (their
cryptocurrency holdings), making malicious behavior economically irrational.
Other Types of Blockchains
•Permissioned vs. Permissionless Blockchains:
• Permissionless blockchains grant write access to everyone, where every user or node can verify
transactions and create and add new blocks to the blockchain-data-structure.
• Permissioned blockchains grant write access only to a limited group of preselected nodes or users that
are identified as trustworthy through an on-boarding process.

•Federated (Consortium) Blockchain: are a type of private blockchain where multiple

organizations or entities collaborate to control the network. Unlike fully private
blockchains controlled by a single entity, federated blockchains involve a consortium of
trusted members who jointly manage the network's operations and governance.
•Hybrid Blockchain: Combines elements of both public and private blockchains, offering
the flexibility to tailor access permissions and scalability solutions based on specific use
cases. Hybrid blockchains can leverage the benefits of decentralization and control as
needed.
History of Bitcoin
Blockchain was introduced with the invention of Bitcoin in 2008, after the 2008 Financial Crisis. Its practical
implementation then occurred in 2009.
It is essential to refer to Bitcoin because, without it, the history of blockchain is not complete. Before that,
let’s see the concept of electronic cash or digital money.
Electronic Cash
The concept of electronic cash or digital currency is not new. Since the 1980s, e-cash protocols have existed.
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.
Bitcoin
 On August 18, 2008, >the domain bitcoin.org was registered. Then, written by some ‐ one or a group
using the pseudonym Satoshi Nakamoto, a whitepaper was published on October 31, 2008, and shared
on numerous software developer mailing lists.
 Titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” the paper provided a detailed proposal for
creating a value system that existed only on the internet.
 The aim was to create a digital currency that could operate without any connection to a bank or
central government, and to build a more transparent financial system that could prevent the
catastrophic events of the 2008 financial crisis from ever happening again.
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.
 Ideas for Bitcoin
The Bitcoin proposal featured a number of ideas pulled from
systems that preceded it. These included: Consensus
Mechanisms
•Secure digital transactions, like the smart contracts outlined by
Nick Szabo State
Asymmetric
Machine
Cryptography
•Using cryptography to secure transactions, like in DigiCash Replication

Ideas that
•The theoretical ability to send small amounts of secured value, as Supported
Bitcoin
E-gold was able to do
E-Cash HashCash
•The creation of money outside of governmental systems, as B- Schemes Computation
Money had proposed
P2P Trustless
•Using proof-of-work to verify validity of digital funds, as Networks
Hashcash was designed to do.
 Brief History of Blockchain
Stuart Haber and W. Bitcoin software is
Scott Stornetta released, marking the Blockchain technology
Ethereum goes live, continues to mature, with
propose a launch of the Bitcoin
introducing a new era increasing adoption across
cryptographically blockchain as the first
of blockchain industries beyond finance,
secured chain of implementation of
technology beyond including supply chain
blocks to timestamp blockchain
simple transactions. management, healthcare,
digital documents. technology.
and voting systems.

2008 2013 2018 Present

1991 2009 2015

2020

Satoshi Nakamoto Vitalik Buterin proposes

Ethereum, a blockchain Initial Coin Offerings Blockchain technology
introduces Bitcoin in a
platform with a built-in (ICOs) boom, evolves with advancements
whitepaper, combining
programming language Cryptocurrency in scalability, interoperability,
existing concepts of
enabling smart contracts and market experiences and sustainability, shaping
cryptography and
decentralized applications significant volatility the future of decentralized
decentralization to create
(DApps). and regulatory finance, Web3, and digital
a peer-to-peer electronic
scrutiny. economies.
cash system.
The Blockchain Trilemma
The Blockchain Trilemma refers to the challenge in simultaneously achieving three key properties of
blockchain systems: Decentralization, Security, and Scalability.
It suggests that blockchain networks must navigate a three-way trade-off problem, where
optimizing one or two properties inevitably comes at the expense of the third. Here's how each
property relates to the trade-off problem:
1.Decentralization: Achieving high levels of decentralization often requires consensus mechanisms
that involve all network participants, leading to slower transaction processing times and reduced
scalability.
2.Security: Increasing security may require sacrificing decentralization or scalability, as stronger
security measures may centralize control or impose limitations on transaction throughput.
3.Scalability: Scaling solutions, such as increasing block sizes or implementing off-chain
transactions, can improve scalability but may compromise decentralization or security. For
example, larger block sizes may increase centralization risks, while off-chain solutions may
introduce security vulnerabilities.
Stakeholders or Participants of
Blockchain
Blockchain Users: Users are individuals or entities that interact with the blockchain network by sending and receiving transactions,
accessing decentralized applications (DApps), or participating in token economies. Users may include consumers, investors, developers,
and businesses utilizing blockchain technology for various purposes.
Miners/Validators: Miners (in proof-of-work systems) or validators (in proof-of-stake systems) are responsible for verifying
transactions, creating new blocks, and maintaining the integrity of the blockchain. They contribute computational power or stake
cryptocurrency as collateral to participate in consensus mechanisms, such as mining or staking, and earn rewards for their contributions.
Developers: Developers are individuals or teams that design, build, and maintain blockchain protocols, applications, and smart
contracts. They contribute to the innovation and evolution of blockchain technology by creating new features, improving scalability, and
addressing security vulnerabilities.
Node Operators: Node operators run and maintain network nodes, which store a copy of the blockchain's ledger and validate
transactions. Full nodes participate in the consensus process by verifying blocks and broadcasting transactions, contributing to network
decentralization and resilience.
Governance Entities: Governance entities or organizations oversee the governance and decision-making processes within blockchain
networks. They may include core development teams, foundation boards, or decentralized autonomous organizations (DAOs) responsible
for proposing and implementing protocol upgrades, resolving disputes, and managing community initiatives.
Regulators and Policy Makers: Regulators and policy makers play a role in shaping the regulatory environment and legal framework
surrounding blockchain technology. They establish regulations, guidelines, and compliance requirements to ensure consumer protection,
prevent fraud, and promote innovation while mitigating risks associated with blockchain-based activities.
 Terminology
Consensus Mechanisms: Consensus mechanisms are protocols used in blockchain networks to achieve agreement
among network participants on the validity of transactions and the state of the ledger. Common consensus mechanisms
include Proof of Work (PoW), Proof of Stake (PoS), Delegated Proof of Stake (DPoS), and Practical Byzantine Fault
Tolerance (PBFT).
Smart Contracts: Smart contracts are self-executing contracts with predefined rules and conditions written in code.
These contracts automatically enforce and execute the terms of an agreement between parties without the need for
intermediaries, facilitating trustless transactions on blockchain networks.
DAOs (Decentralized Autonomous Organizations): DAOs are autonomous entities governed by smart contracts and run
on blockchain networks. They enable decentralized decision-making and management of resources, allowing members
to vote on proposals, allocate funds, and govern the organization's operations transparently and autonomously.
DApps (Decentralized Applications): DApps are applications built on blockchain networks that operate without a
central authority or single point of control. They leverage smart contracts and decentralized protocols to enable peer-
to-peer interactions, data transparency, and trustless transactions.
[THIS TOPICS WILL BE DISCUSSED IN DETAIL IN LATER CHAPTERS]