Blockchain Technology Fundamentals

1
Blockchain Technology
Fundamentals
CORE TECHNICAL UNDEPINNINGS OF MODERN BLOCKCHAIN TECHNOLOGIES

ADVANCED TECH
Blockchain Technology Fundamentals
Prabhu Eshwarla
Founder@SudhanvaTech

Prabhu Eshwarla
Founder@SudhanvaTech
• 26 Years Software Industry
Experience – Distributed Systems,
Industry solutions, IT & Cloud, Web/
Mobile, Digital and Blockchain.
• Worked for large multinationals
(Hewlett Packard, ANZ) and Global
Fortune 500 Clients.
• Deep industry experience in Banking
& Financial Services, Manufacturing,
Government & Telecom domains.
• Leadership roles- Strategic,
Technology, Business, Organization,
Industry, People and Partnerships

4
Get a strong understanding of what blockchain is about and
what makes it groundbreaking and disruptive
WHAT IS BLOCKCHAIN & WHY IS IT SO DISRUPTIVE?
A
 
Get under the hood and understand the fundamental technical principles
underlying various blockchain components and how they come together
BLOCKCHAIN INTERNALS
B
Visualize how blockchain technology can be used to transform
various industries and domains.
INDUSTRY USE CASES
D
Understand the design parameters that influence blockchain
architectures. Get an overview of teh various types of public and
private blockchain platforms. Understand teh current limitations
of blockchains and the evolving work to address these
ARCHITECTURE & LIMITATION OF BLOCKCHAINS
C
course OBJECTIVES
CRYPTO-CURRENCIES & BLOCKCHAIN IN PAYMENTS INDUSTRY

5
modules
Course Layout
What is blockchain and why is it so disruptive? Evolution of
blockchain; Fundamental characteristics of blockchains
BLOCKCHAIN OVERVIEW
01
This is the centrepiece of this course, explaining blockchain
internals.
DEEP-DIVE: TECHNICAL PRINCIPLES OF BLOCKCHAIN
02
Evolution of blockchain. Conceptual architecture. Architectural
considerations. Blockchain Limitations. Types of blockchain.
Consensus algorithms. Security. Scaling. Advances in
blockchain technologies
ARCHITECTURE & LIMITATIONS OF BLOCKCHAINS
03
Compilation of compelling industry use cases
ENVISIONING THE FUTURE WITH BLOCKCHAIN
04
Recap. Perspectives on what is needed for blockchain to
become mainstream technology.
COURSE WRAP-UP
Structure of course and objectives
INTRODUCTION TO COURSE
INTRO
WRAP-UP
Topics

7
Concept and relevance of Blockchain
WHAT IS BLOCKCHAIN?
B
How blockchain as a revolutionary technology is enabling
use cases not possible before it?
WHY IS BLOCKCHAIN DISRUPTIVE?
D
A look into the defining attributes of blockchain
FOUNDATIONAL CHARACTERISTICSF
A brief history of money and evolution to cryptocurrency
HOW BLOCKCHAIN ORIGINATED?
E
module OBJECTIVES
MODULE 1: BLOCKCHAIN OVERVIEW
Evolution from Internet of Information to Internet of
Value
EVOLUTION OF THE INTERNET
A
A typical transaction flow through blockchain
HOW DOES BLOCKCHAIN WORK?
C

8
evolution OF the internet
WEB 1.0
WEB 2.0
WEB 3.0
Distribute and share
information
Mobile, Social, Cloud,
E-commerce
1980s to early 2000 Mid 2000s to Present Future
Open Protocols Centralised Services
Decentralised Trust
Peer-to-Peer Cryptonetworks

9
what is blockchain? (1)
SOFTWARE SYSTEM THAT MANAGES &
ENFORCES OWNERSHIP OF ASSETS
01
NETWORK OF IDENTICAL DATABASES
EACH MAINTAINED BY A NODE
02
ALGORITHM TO ACHIEVE CONSENSUS ON STATE
OF DATA AMONG PEER NODES
04
EACH LEDGER STORES TRANSACTIONS
IN ‘BLOCKS’ IMMUTABLY
03
CRYPTOGRAPHY TO MAINTAIN INTEGRITY05
Layman Definition
NO ONE OWNS IT (DECENTRALIZED)
NO INTERMEDIARY NEEDED (DISINTERMEDIATED)
06

10
A SHARED PLATFORM01
PARTIES THAT DON’T KNOW OR TRUST EACH
02
JOINT OWNERSHIP OF PARTICIPANTS05
CONTROLLED ACCESS TO PARTICIPANTS03
RESPECT FOR PRIVACY & NEED TO KNOW
CRYPTOGRAPHICALLY SECURED06
Business Definition
TRANSPARENCY IN BUSINESS PROCESS07
OTHER CAN COLLABORATE
04

11
IDENTICAL DATABASES MAINTAINED BY INDIVIDUAL
NODES
01
02
CRYPTOGRAPHICALLY SECURED FOR DATA INTEGRITY
03
ALGORITHM ENABLES ALL NODES TO AGREE ON
TRANSACTIONS & THERE ORDER
06
Technical Definition
DATA INTEGRITY & DECENTRALIZED TRUST THROUGH ECONOMIC INCENTIVES FOR
MINERS
07
04
PEER-TO-PEER NETWORK PROTOCOL
SPECIAL DATA STRUCTURE THAT STORES HISTORICAL
STATES AND TRANSACTIONS

12
P2P NETWORK
CRYPTOGRAPHY
LEDGER
CONSENSUS
DECENTRALIZED P2P TRANSACTIONS
STORE TRANSACTIONS IMMUTABLY
Remove middleman with
machine consensus
TRUST BUILT INTO NETWORK
PROTECT OWNERSHIP OF ASSETS
INCENTIVES
Blockchain Components
• Ensure assets can be transferred
only by owners
• Make data tamper-proof
• Append-only distributed public ledger
• Stores asset value and ownership
securely
• Transparent and audible
• No need for intermediaries to
facilitate transactions
• Highly secure and available
system due to no centralised
server
ECONOMIC INCENTIVES
• To ensure data integrity &
distributed network trust works as
intended

13
TRANSACTION
Person A initiates transfer
of cryptocurrency to
person B (based on an
agreement between them)
PROPAGATION
Requested transaction is
broadcast to network
VALIDATION
Network of nodes
validates transaction
using known
algorithms
CONFIRMATION
One of the mining nodes
wins the competition,
and that block is
accepted by all nodes as
the next valid block in
blockchain, thus
confirming the
transaction
MINING
Mining nodes add
transaction to new block
and compete with each
other to add the new
block to blockchain
A blockchain gets its name from what it is: a chain of blocks, and every block is made up of transactions. A transaction is
simply one party sending whatever cryptocurrency their blockchain uses to another party
2 3 41
how does blockchain work?
MARKETOFY LAYOUTS
5

14
how blockchain originated?
Barter system
Gold
Metallic Coins
Currency
Payment Cards
Electronic Money
Cryptocurrency
Evolution of Money
History of Money

15
WHY IS blockchain disruptive?
Aha Moment
Solves the double spend problem. Blockchain
enables assets to be identified & owned uniquely and
transferred by rightful owner through transactions
INTRODUCES SCARCITY TO DIGITAL ASSETS
01
Practically all commercial online transactions are
fulfilled through intermediaries. Blockchain enables
peer-to-peer transactions without central
intermediaries through digital machine consensus.
ENABLES WORLD WITHOUT INTERMEDIARIES
02
“The practical consequence […is…] that for the first time, a way for one Internet user to transfer a
unique piece of digital property to another internet user, such that the transfer is guaranteed to be safe,
and secure, everyone knows the transfer has taken place, and no-one can challenge the legitimacy of
the transfer. The consequences of this breakthrough are hard to overstate.
-Marc Andreessen

16
-
BLOCKCHAIN
TECHConduct commerce without
intermediaries
Peer-to-Peer transactions
A digital identity that individuals own and
control, which cannot be taken away from
them
Self-sovereign identity
• Verify authenticity and audit data independently
• Monitor collaborative business process in real-
time
Verifiable shared data
An agreement whose execution is both automated
and enforceable by code
Self-enforcing contracts
Uniquely identify and transfer digital
assets securely and protect ownership
Digital asset ownership & provenance
Currencies that are not regulated
by any central bank or country
Cryptocurrency
• Digital autonomous organisations,
• Ownership of assets that transcend national
borders & are censorship-resistant,
• A world without intermediaries
New social & economic order
What does blockchain enable uniquely?
01
02
05
03 06
07
04

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Cryptocurrencies
Uses encryption techniques to
control the creation of monetary
units and to verify transfer of
funds.
Cryptocurrency is a medium
of exchange created and
stored electronically in the
blockchain
Does not have a physical form
and exists only in the blockchain
Has no intrinsic value
Supply not controlled or
regulated by any central bank

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Cash
(Physical token)
Paypal
(Digital token with trusted
third-party)
I sent $1 to
buy groceries
Safe to
deliver
Intermediary
Bitcoin
(Digital token in
decentralised network)
I sent $1 to
buy groceries
Safe to
deliver
Node 1
Node 2
Node 3
Node 4
01
02
03
Cryptocurrencies

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Irreversible Pseudonymous Global & fast Secure Permissionless
After a conﬁrmation, a transaction
cannot be reversed by anyone.
Transactions are connected to
public key addresses, but not
to real-world entities
Transactions are propagated
nearly instantly and
conﬁrmed in a few minutes
Transactions can be initiated
only by owner of the account/
asset.
No one’s permission is needed to
transact in cryptocurrencies. the
software is open source, and
everyone can download it for free
Cryptocurrencies

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Bank of X Bank of Y
Customer YCustomer X
Central
Bank
Centralised System
Ledger
Ledger Ledger LedgerLedger
Ledger Ledger
Ledger
Distributed Ledger System
(Blockchain)(With Intermediaries)
Peer to Peer transactions

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Digital Asset
Owner 0
Asset
Billy’s Digital Asset
Transaction 1
Asset
Joelle’s Digital Asset
Transaction 2
Asset
Bob’s Digital Asset
Transaction 3
Asset
Cindy’s Digital Asset
Digital
Signature
Digital
Signature
Digital
Signature

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Identity Proofs
Identity Proofs
Individuals
Businesses
Cumbersome KYC processes
Bank
Bank
Bank
Bank Bank Bank
Businesses
Individuals
Attesting
Institutions
Identity data access with granular control
Institutionsprovideattestedcredentials
Identity data stored on
the blockchain
Blockchain Identity solution
Self-sovereign Identity

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Transparency of data
• Verify authenticity of data
• Verify business process steps and sequence

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Org A
Org B
Org C
Auditor
Ineﬃcient business process across partners
Org A
Org B
Org C
Auditor
Identity
data hash
Previous
block hash
Block Header
Identity
data hash
Previous
block hash
Block Header
Identity
data hash
Previous
block hash
Block Header
Digitally signed encrypted transactions in blockchain
Copy of ledger Copy of ledger
Copy of ledger
Copy of ledger
Transparent, eﬃcient and secure business process across partners
Joint realtime visibility into business process

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Buyer Seller
Lawyers, Real-estate
brokers, Agents
Property
Title
Buyer SellerProperty
Title
Property Title as
Smart contract
Contract
as code
Present
Future
Self-enforcing Contracts
Traditional Contract
Smart Contract

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Decentralized Peer-to-Peer
Centralized Control
New social and economic order

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foundational characteristics of blockchain systems
Transactions & assets on blockchain
are censorship-resistant and tamper-
proof as they are not controlled by
any government or organisation
Tamper-proof
Agreements between parties are
defined , automated and
enforceable by code
Self-executing contracts
Asset ownership & transfers are
secured and restricted to owner
through digital signatures.
Security
All transactions are recorded to a
ledger and each node has a copy of
the ledger, providing transparency to
network
Transparency & auditability
Decentralised network trust and data
integrity are maintained through a system of
economic incentives for miner participants
Economic model
Despite all transactions being
public, each transaction is tied to
an arbitrary public key or address
(pseudo-anonymity)
Privacy
Digital assets can be uniquely
identified and transferred (without
being replicated) from person to
person
Digital Provenance
Once a transaction is verified, it is
permanently recorded on the network, and
is immutable through cryptographically-
secured append-only ledger
Durability & Robustness
Assets/tokens are transferable from
person to person without going through
a bank or other intermediary
Trust built into network
01

MODULE 2
Blockchain Deep-dive
Technical principles of Blockchain

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What is P2P network? How is it different from client-server model?
What are the characteristics & rules governing P2P networks?
INTRODUCTION TO PEER-TO-PEER NETWORKS
A
What is cryptography? Key concepts - Hash functions,
Encryption/decryption, Symmetric & Asymmetric cryptography,
Digital Signatures
INTRODUCTION TO CRYPTOGRAPHY
B
What are transactions? How to store transaction data?
Structure of a blockchain transaction, Transaction chains,
Transaction types, Transactions organised into blocks,
Blockchain data structure , Linking blocks
STORE AND ORDER TRANSACTION HISTORY
D
Ways to specify ownership, What does documenting ownership
with blockchain involve?
RECORD AND PROTECT OWNERSHIP OF ASSETS
C
module OBJECTIVES
MODULE 2: BLOCKCHAIN DEEP-DIVE
Merkle roots, How to prove inclusion of transactions in block?
Detecting tampering of transaction & block data - 5 scenarios
MAKING TRANSACTION DATA TAMPER-PROOF
E
How does transaction data propagate across the network?
SHARE TRANSACTION HISTORY WITH OTHERS
F
Creating a new block, Ensure only valid transactions are added
to blocks, Mining & Proof of Work (PoW), 4 different scenarios
leading to network consensus
REMOVE MIDDLEMAN WITH MACHINE CONSENSUS
G
H
What is distributed Ledger? How is it different from a distributed
database? How is it different from a traditional ledger?
INTRODUCTION TO DISTRIBUTED LEDGER
What kind of attacks can occur on blockchain? How does 51%
attack take place?
PROTECTING BLOCKCHAIN FROM CYBER ATTACKSI
Hard and Soft Forks
CHANGING CONSENSUS VALUESJ
How to incentivise miners to verify transactions and add them to
blockchain?
ECONOMIC MODEL TO MAINTAIN DECENTRALIZED TRUST
K

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A. Introduction to distributed ledger-1
Record keeping is not centralized. Control over ledger is not
with any single entity, but is with several or all network
participants
DISTRIBUTED NATURE OF LEDGER
01
Distributed nature of ledger requires participants to reach
consensus on the validity of new data entries by following a
set of rules
CONSENSUS
02
Data is recorded in ledger by forming an append-only chain of
transaction blocks. If something is on the blockchain, it exists
there for ever. This has immense potential for auditing and
transparency
IMMUTABILITY
04
Used both to prove & transfer ownership of assets.
CRYPTOGRAPHY
03
Ledgers can be public or private (based on access) or
permissionless/permissioned (based on role)
TYPES OF DLT
05
A) Introduction to Distributed Ledger

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Server1
Database1
Site 1
Centralised Database
Server1
Database1
Site 1
Server2
Database2
Site 2
Server3
Database3
Site 3
Server4
Database4
Site 4
Distributed Database
Computer Network
(with Distributed Database
management system)
Server1
Database1
Site 1
Server2
Database2
Site 2
Server3
Database3
Site 3
Server4
Database4
Site 4
Decentralised Database
Centralised vs distributed databases

32
Ledgers Bank 1 Bank 2 Cust 1 Cust 2
L1(Bank1) ($1 mil) $200K ($500K)
L2(Bank 2) $1 mil $100K ($300K)
L3(Cust 1) ($200K) ($100K)
L4(Cust 2) $500K $300K
Bank 1 Bank 2
Customer 1 Customer 2
Bank 1 Bank 1 borrows $1 million
from Bank 2
Bank 2 lends $100K
to
Custom
er 1
Bank 1 lends $200K to
Customer 1 Customer 2 deposits
$500K in Bank 1
Customer 2 deposits
$300K in Bank 2
Example transactions with 2 banks and 2 customers
Current: Separate records in each ledger
3
entries
3
entries 2
entries
2
entries
Accounting entries in conventional ledger

33
Blockchain: Distributed ledger
Debtor Creditor Amount
Bank 1 Bank 2 $1 mil
Customer 1 Bank 1 $200 K
Bank 1 Customer 2 $500 K
Bank 2 Customer 2 $300 K
Customer 1 Bank 2 $100 K
Bank 1 Bank 2
Customer 1 Customer 2
5 entries
across the
system
Accounting entries in distributed ledger

34
B. Introduction to peer-to-peer networks-1
Internet
Servers
Clients
Client-Server Network model Peer-to-Peer Network model
Client-Server vs P2P network model

35
Peer-to-Peer Network model
Each node functions as both a server and client. Each node
validates transactions and maintains database independently
NETWORK OF PEER NODES
01
Nodes communicate through messages in gossip style. Each
node received a message and forwards it to peers.
MESSAGE PASSING
02
Purpose of communications among peer nodes is for following
three purposes: to keep connections alive, establish new
connections and to distribute new information (new transactions
and blocks).
COMMUNICATION MODEL AMONG PEERS
04
There are many different types of nodes , each performing a set
of functions
DIFFERENT NODE TYPES
03
Bitcoin P2P Network

36
Used to initiate transactions, check balances and receive
incoming funds/assets to account owner.
WALLET SERVICE
01
All nodes use the routing function to participate in the network,
validate and propagate transactions and blocks, and discover
and maintain connections with peers.
ROUTING
02
Mining function compete to create new blocks by solving Proof-
of Work algorithm
MINING04
Maintain a complete and up-to-date copy of the blockchain. Full
nodes can autonomously and authoritatively verify any
transaction without external reference
FULL BLOCKCHAIN03
Wallet Routing
Full
Blockchain
Mining
Functions of Bitcoin node
Functions of a node in a P2P network

37
Contains Wallet, Miner, full
blockchain database and
network routing on P2P network
REFERENCE CLIENT (BITCOIN)
Contains a full blockchain node
and network routing on the P2P
network
FULL BLOCKCHAIN NODE LIGHTWEIGHT WALLET
SOLO MINER
Wallet Routing
Full
Blockc
hain
Mining
Reference client
Routing
Full
Blockchain
Full blockchain node
Routing
Full
Blockchain
Mining
Solo Miner
Wallet
Routing
Lightweight SPV
Contains the mining function
with a full copy of the blockchain
database and network routing
Contains a Wallet and network node,
and uses Simplified payment
verification method to verify
transactions
Different types of nodes in blockchain network

38
Routing
Full
Blockchain
Full blockchain node 1
Routing
Full
Blockchain
Full blockchain node 21. Get Blocks
2. Inventory
3. Get Data
4. Blocks
Communication between full blockchain nodes

39
c. Introduction to cryptography-1
Protecting ownership of data involves Cryptography
Cryptography is:
02
01
03
Protect data from being accessed by unauthorised people
Uses complex mathematics to hide (encrypt) and reveal (decrypt) data
Used to protect identities of users, secure transactions and control access to information

40
c. introduction to cryptography-2
5 Key concepts in Cryptography
03
01
04
Hash functions
Symmetric Cryptography Asymmetric Cryptography
02 Encryption & Decryption
05 Digital Signatures

41
01
• Software program that takes any input
data and translates it into a string of
letters and numbers.
• generates the same output for same
input every time
• is one way.
What is it?
Example of use
1. Store passwords Popular Algorithms
1. MD5- Most widely used. Produces a 16-byte hash value
2. SHA- Many variations- SHA-0, SHA-1 and SHA-2. SHA-256 or
above recommended when security is vital
Cryptographic hash function

42
01A hash is not unique. How safe is blockchain?
Odds of winning Powerball grand lottery (US) is 1 in 292,000,000
Chance of getting killed by a shark: 1 in 3,700,000
Odds of becoming a movie star: 1 in 1,190,000
Odds of dying in an airplane crash: 1 in 205,552
Odds of being hit by lightning: 1 in 300,000
Probability of collision in bitcoin hashing algorithm (SHA 256): Tiny, almost zero
Compared to this, there is more probability (45x) of a rogue asteroid rock crashing on
earth destroying all life

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• Turns data into series of unreadable
characters of variable length.
• Key difference with hashing is that
encrypted string can be reversed into
original decrypted form with the right
key.
What is it? Example of use
1. To send secure message to someone
02
Popular Algorithms
1. AES- Recommended for most use cases
2. PGP - Another popular algorithm
wcBMA98+9dNnGY6WAQf/
WFrrg4NURA0331Z+sY/
9TVfh4NFzGyRoWgAEnzy/0FPf
YAdyfmSbj15JIeVaiheeXmY+mDfFEcwZ1Cg
eXd7DTtitmJUToY42XUQ4GzAxrTtr
I love Blockchain!
Input message
I love Blockchain!Encryption
PGP
Decryption
PGP
Output message
Encryption/Decryption

44
03
WFrrg4NURA0331Z+sY/
I love Blockchain!
Input message
I love Blockchain!Encryption Decryption
Output message
• Identical key is used for both encrypting
and decrypting data
What is it?
Example of use
1. To store and secure sensitive information such as bank
accounts, Specific Codes etc.
Popular Algorithms
1. AES, 3DES
Symmetric Cryptography

45
• Uses two complementary keys- Public key and Private key.
• One is used to encrypt and another to decrypt.
• Message encrypted with one key can only be decrypted with the other
complementary key.
What is it?
Popular Algorithms
WFrrg4NURA0331Z+sY/
I love Blockchain!
Input message
I love Blockchain!
Output message
Asymmetric cryptography
Private keyPublic key
cmTVSCEw6DUOw6RWVKF69+2R2OpprJcV
62KRAYWhTlEOaheKFG1cJXNDQ0j+
wMV2XYFxl0R/
TR9wcmuDQjASvqmwoL3WTswhU7lNiwlU7
KdvEp06X38JLDjd/M6I
Public keyPrivate key
• Diffie-Hellman, RSA, DSA
04 Asymmetric Cryptography

46
Ensures only the owner can transfer asset to other accounts
Three major components of digital signature:
B
A
C
Creating a signature
Verifying data by using signature
Identifying fraud by using signature
05 Digital Signatures

47
I love Blockchain! I love Blockchain!
C840DE31FFE90
806F08D8B633B
669F83
wcBMA98+9dNn
GY6WAQf/
WFrrg4NURA033
1Z+s9TVfh4NFzG
Private key
5A Creating a signature

48
I love Blockchain!
wcBMA98+9dNn
GY6WAQf/
WFrrg4NURA033
1Z+s9TVfh4NFzG
C840DE31FFE90
806F08D8B633B
669F83
C840DE31FFE90
806F08D8B633B
669F83
Public key
Hashes match!
5B Verifying data by using signature

49
I hate Blockchain!
wcBMA98+9dNn
GY6WAQf/
WFrrg4NURA033
1Z+s9TVfh4NFzG
99433755544A
6A8AC71714B
A85BE2B73
C840DE31FFE90
806F08D8B633B
669F83
Public key
Hashes don’t match!
5C Identifying fraud signature

50
c. introduction to cryptography-summary
AWESOME LAYOUTS
One-way software program that takes an input and converts it into string of letters and numbers of fixed length
CRYPTOGRAPHIC HASH
01
Uses a digital key to translate a text input into a cipher-text variable-length string of letters and numbers.
The same key can be used reversibly to obtain the original input text from cipher text.
ENCRYPTION/DECRYPTION
02
The hash of message/text is generated. It is then encrypted with private key. This encrypted hash is called
digital signature which is appended to original message and sent to recipient.
DIGITAL SIGNATURE
05
The same or identical digital key is used both for encrypt and decryption
SYMMETRIC CRYPTOGRAPHY03
Two complementary digital keys- Public and Private, are used to encrypt and decrypt a text or message
ASYMMETRIC CRYPTOGRAPHY
04

51
d. record & protect ownership of assets-1
Describes sequence of transfers of ownership of assets.
Two ways to specify ownership of assets
Ledger balance
Transaction history
Shows current balance in account or ledger
Ledger balance can be derived by aggregating transaction data

52
d. record & protect ownership of assets-2
Documenting ownership with blockchain involves
03
01 Transaction Data: Documents transfer of ownership of asset
Transaction history: Add transaction data to the ledger to maintain history of transfers
04 Transaction Ordering: Order of addition of transactions data must be preserved
02 Transaction authorisation: How to authorise transactions and identify user accounts uniquely?

53
e. store and order transaction history -1
Answer: Blockchain data structure
How to store transaction data that make up transaction history in a secure fashion?
Transactions as double-entry book keeping
Inputs Value Outputs Value
Input 1
Input 2
Input 3
Input 4
Output 1
Output 2
Output 3
0.10 BTC
0.20 BTC
0.10 BTC
0.15 BTC
0.10 BTC
0.20 BTC
0.20 BTC
Total Inputs 0.55 BTC Total Outputs 0.50 BTC
Inputs 0.55 BTC
Outputs 0.50 BTC
Transaction Data01

54
Bitcoin Transaction record

55
Transaction 8c53a382c91d61b39a02d952283f1d9fbfd537dbf509cf3a0ae1551b32457c42
INPUTS From OUTPUTS To
From previous transactions Joe has received
Joe 0.1005 BTC
Output #0 Alice’s Address 0.1000 BTC (spent)
Transaction fees: 0.0005 BTC
Transaction a891b255b16d5a35e0144ed328b93fac7a2bab2fa6183d1ﬀd0754a37474da73
8c53a382c91d61b39a02d952283f1d9fbfd537dbf509cf3a0ae1551b32457c42
Alice 0.1000 BTC
Output #0 Bob’s Address 0.0150 BTC (spent)
Output #1 Alice’s Address (change) 0.0845 BTC (unspent)
Transaction
fe31d179a36736ea2a581d0beaa6fb47ac7f3b805535c32017a711f863b6b28f
Bob 0.0150 BTC
Output #0 Gopesh’s Address 0.0100 BTC (spent)
Output #1 Bob’s Address (change) 0.0045 BTC (unspent)
A chain of transactions, where the output of one transaction is the input of the next transaction
Transaction chains

56
Input 0 “ From
Alice, signed by
Alice”
Output 0 “ To
Bob”
Output 1 “ To
Alice”
Simple Payment transaction
Input 0
Output 0
Transaction aggregating funds
Input 1
Input 2
Input N
Input 0
Output 0
Transaction distributing funds
Output 1
Output 2
Output N
Transaction types

57
Transactions organised as blocks
timestamp blockhash
previous hash nonce
Hash of all transactions
Transaction #1
Transaction #2
Transaction #3
hash
hash
hash
…
Block #0 (Genesis block)
timestamp blockhash
previous hash nonce
Transaction #1
Transaction #2
Transaction #3
hash
hash
hash
…
Block #1
timestamp blockhash
previous hash nonce
Transaction #1
Transaction #2
Transaction #3
hash
hash
hash
…
Block #2

58
Block 315432
Transactions List
Block 315431
Block 315430
Block 315429
Block 315428
Transactions List
Transactions List
Transactions List
Transactions List
Block Height
Block Depth
Blocks forming the blockchain
Transactions organised as blocks

59
Block Size
Block Header
Transaction Counter
Transactions
Size of the block in bytes
Several ﬁelds are contained here
How many transactions are in block?
Transactions recorded in the block
Block
Previous block hash
Merkle Root
Timestamp
Diﬃculty target
Nonce
Used in mining
Block Header
Blockchain (Bitcoin) data structure

60
Linking Blocks

61
f. making transaction data tamper proof-1
Merkle Root
Hash of (ABCD)
= Hash of (Hash of AB + Hash of CD)
Hash of (AB)
= Hash of (Hash of A
+ Hash of B)
Hash of (CD)
= Hash of (Hash of C + Hash of D)
Hash of (A)
= Hash of (Transaction A)
Hash of (B)
= Hash of (Transaction B)
Hash of (C)
= Hash of (Transaction C)
Hash of (D)
= Hash of (Transaction D)
Transaction A Transaction B Transaction C Transaction D
How to prove inclusion of transaction with Merkle Root?

62
HA HB HC HD HE HF HG HH HI HJ HK HL HM HN HO HP
HAB HCD HEF HGH HIJ HKL HMN HOP
HABCD HEFGH HIJKL HMNOP
HABCDEFGH HIJKLMNOP
HABCDEFGHIJKLMNOP
How to prove inclusion of transaction with Merkle Root?

63
Block Header 1
RAB
RA RB
Transaction A Transaction B
B1
RC RD
Transaction C Transaction D
RCD
Changing transaction details invalidates hash reference
Block Header 2
B2
Block Header 1
RAB
RA RB
B1
RC RD
RCD
Changing reference in Merkle tree
Block Header 2
B2
Case 1
Case 2
Detecting changes

64
Case 3
Case 4
Block Header 1
RAB
RA RE
B1
RC RD
RCD
Replacing a transaction
Block Header 2
B2
Transaction E
Block Header 1
RAB
RA RB
B1
RC RD
RCD
Changing the Merkle Root
Block Header 2
B2
Detecting changes

65
making transaction data tamper proof-5
Case 5
Block Header 1
RAB
RA RB
B1
RC RD
RCD
Changing block header reference
Block Header 2
B2
Block Header 1
RAB
RA RB
B1
RC RD
RCD
Changing data the right way
Block Header 2
B2
The right way
Detecting changes

66
g. share transactions with peers in network
Distributed Peer-to-Peer network
B
A
C
Bob pays 0.5 BTC to Rob
Transmission across the
entire network takes a
few seconds
Nodes announce transactions to the network

67
h. REmove middleman with machine consensus- 1
Block Header 1
RAB
RA RB
B1
Transaction C
Transaction D
New transactions
Block Header 1
RAB
RA RB
B1
RC RD
RCD
Step 1: Create a new Merkle tree containing new transactions
1
Block Header 1
RAB
RA RB
B1
RC RD
RCD
Step 2: Create a new block header
Block Header 2
2
3
Block Header 1
RAB
RA RB
B1
RC RD
RCD
Step 3: Create a hash reference to new header
Block Header 2
B2
Creating a new block

68
B
A
C
D
Txn 1: Bob pays 0.5 BTC to Rob
Nodes reject invalid transactions
Txn 1
Txn 1
Validation
unsuccessful
Validation
unsuccessful
Txn 1
Txn 1
Ensure only valid transactions are added to block

69
h. rEmove middleman with machine consensus- 3
Hash of previous
block header
Root of Merkle tree
Timestamp
Diﬃculty level
Nonce
Block
Hash
Constraint
Proof of Work

70
Transaction A
Transaction B
Transaction C
Transaction D
Pending
transactions
Blockchain Node #1
Blockchain Network
Pending
transactions
Blockchain Node #2
Blockchain Node #3
A) Blockchain clients create
and sign transactions
B) Transactions are propagated
to the network
C) Miners take the list of pending
transactions , create candidate
block, and perform proof of work
D) Mined block is propagated to
network by successful miners
Confirmed
transactions
Blockchain Node #4
E) Other mining nodes in network verify the newly
mined block and verify PoW. If successful, they
abandon their own candidate blocks and adopt the
newly confirmed block as the next block in the chain
F) New transactions are added to
network and process continues
Summary of mining process

71
Before the fork: All nodes have same view of blockchain network
Step 1 Step 2
Blockchain fork event: Two blocks found simultaneously
Node X
Node Y
Two blocks found simultaneouslyInitial consensus state

72
Step 3 Step 4
Blockchain fork event: Two blocks propagate, splitting the network
Node X
Node Y
Blockchain fork event: A new block extends one fork , reconverging the network
Node X
Node Y
A new block extends one fork, reconverging the networkTwo blocks propagate, splitting the network

73
Step 5
Blockchain fork event: The network reconverges on a new longest chain
Node X
Node Y
Network reconverges on longest chain

74
i. protecting blockchain from cyberattacks
Fully converged blockchain network 51% attack scenario

75
J. changing the consensus rules
Block
1
Block
2
Block
3
Block
4a
Block
5
Block
6
Block
7b
Block
8b
Block
9
Block
10
Block
11
Block
7a
Block
8a
Block
4b
Blockchain with forks
Hard and soft forks

76
New coins created with each block
MONETARY SUPPLY MECHANISM
01
Transaction fees from all the
transactions included in the block
DECENTRALIZED CONSENSUS
02
Mining secures the blockchain system and enables
emergence of a network-wide consensus without a
central authority
THE INCENTIVE SYSTEM
k. economic model to maintain decentralized trust
Economic incentives of mining

MODULE 3
Architecture of Blockchain systems

78
High-level architecture of blockchain systems
BLOCKCHAIN CONCEPTUAL ARCHITECTURE
A
ARCHITECTURAL CONSIDERATIONS
B
TYPES OF BLOCKCHAINS
D
What are the current challenges and limitations with
blockchains?
LIMITATIONS OF BLOCKCHAINS
C
module OBJECTIVES
MODULE 3: ARCHITECTURE OF BLOCKCHAIN SYSTEMS
Different types of consensus algorithms
CONSENSUS ALGORITHMS
E
Blockchain security
SECURITY
F
Scaling options for blockchains
SCALING
G
H
How the blockchain has evolved so far?
GENERATIONS OF BLOCKCHAINS
Different types of blockchains
How do various blockchains differ from each other both
qualitatively in the design and quantitatively in their
performance?

79
generations of blockchains
Internet
Blockchain
Crypto-
currency
Assets
Contracts
1 2
2
Generations of blockchain
BITCOIN & CRYPTO_CURRENCIES
GENERATION 1
01
02
03
ASSET OWNERSHIP & SMART CONTRACTS
GENERATION 2
DOES NOT YET EXIST!
GENERATION 3
ISSUES: SCALABILITY, INTEROPERABILITY
(SIDE CHAINS), ONCHAIN-GOVERNANCE

80
blockchain- conceptual architecture
Internet
(TCP/IP)
P2P Network
DEVP2P, Enterprise P2P
Consensus
PoW, PoS
Distributed Ledger technology
Public, Private, Consortium
Distributed Applications (Dapps)
Smart Contracts
Data
Secure data access, Off-chain Access
Security
Identity management, Permissions, Encryption
Trusted external data
sources
Offchain systems
Internet Layer
Blockchain Layer
Application Layer
Scaling
On-Chain, Off-Chain

81
limitations of bitcoin blockchain
There is no way to correct human
error as transactions are immutable.
No error correction
A group of miners can theoretically take
control of more than half of network
computing capacity and ‘rewrite’
blockchain transaction history.
51% attack
It takes about 10 minutes to
confirm a transaction
Latency
Network participants have no
obligation to adopt any new version or
upgrade
All upgrades are voluntary
Size of entire bitcoin blockchain is
increasing steadily and is 170 GB*
currently.
Blockchain size
All transactions are visible to
everyone even though identity is
pseudonymous.
Privacy
Malicious users cannot be ‘kicked out’
like centralised systems
Sovereign users
Bitcoin’s energy usage is enormous due to
PoW consensus algorithm, more than
yearly consumptions of a few nations.
Energy consumption
Supports 3 to 7 transactions/second
Throughput
* As of June 2018

82
ARCHITECTURAL CONSiderations
Internet
(TCP/IP)
P2P Network
DEVP2P
Consensus
PoW, PoS,others
Distributed Ledger technology
Public, Private, Consortium
Distributed Applications (Dapps)
Smart Contracts
Data
Secure data access, Off-chain Access
Security
Identity management, Permissions, Encryption
Trusted external data
sources
Offchain systems
Internet Layer
Blockchain Layer
Application Layer
Scaling
On-Chain, Off-Chain
Integrity protection,
Access control, Privacy,
Multi-signatures
Consensus protocols
Types of blockchains,
Type of application
Tradeoffs between scalability
& Decentralization
Data storage options
Architectural considerations
Byzantine fault tolerance

83
Byzantine fault tolerance
P2P network
Coordinated attack Malicious actors disrupting plan

84
Bitcoin/Ethereum
Open to everyone. Fully
D e c e n t r a l i z e d . A l l
transactions are publicly
visible to everyone on
network..
R3/Corda
Used by a small group to
collaborate, share data and
build trust. It has greater
privacy and control than
permissionless blockchains
reduces transaction costs ,
and has higher throughput.
Hyperledger
Owned by an individual or
o r g a n i z a t i o n . I T i s
centralized, and various
rights are vested with a
central party, yet it is
cryptographically secured ,
cost-effective.
Permissionless
Consortium or
Federated
Private
Permissioned
Decentralisation
types of blockchains
MARKETOFY LAYOUTS
Privacy & control
Blockchain classification based on level of Openness & Access

85
Most successful adoption
of blockchain technology
is cryptocurrency. For this
type of blockchain, ledger
must be open and the
system maintains only one
ledger.
Unlike cryptocurrencies
which are issued by the
blockchain, digital assets
are often issued by real-
world entities. This type of
blockchain is merely a
medium to record their
existence and exchanges.
This type of blockchain
supports general, user-
defined computations (or
business-logic defined by
organisations) in smart
contracts.
Cryptocurrency Digital Assets General Applications
Blockchains characterised by their target applications
types of blockchains
MARKETOFY LAYOUTS
Blockchain classification based on type of application

86
consensus algorithms
Consensus protocol
Network
setting
Used by Description
Proof-of-Work(PoW) Public
Bitcoin, Bitcoin
Cash, Monero,
Ethereum
PoW is a piece of that that is diﬃcult to produce but easy for others
to verify.eg Find a number x, such that SHA256(text + x) has 10
leading zeros
Proof-of-Stake(PoS) Public
Tendermint,
Cardano, Stratis
PoS is designed to increase network security and reduce resource
wasting. Creator of next block is chosen in proportion to stake in
blockchain
Proof-of-Authority(PoA) Private POA network
A set of trusted nodes are assigned to process transactions and
build new blocks. High performance, throughput and fast.
Practical Byzantine Fault
Tolerance (PBFT)
Private
Hyperledger
Fabric*, NEO*,
Ripple*, Stellar*
Nodes select a leader for the next block. Leader orders transactions
and broadcasts the ordered list. Each node validates transactions
and publishes hash of new block. When 2/3 of nodes have same
hash, the new block is published
*PBFT variants
A few consensus algorithms

87
security
Security
principles
Definition Public blockchains
Federated & private
blockchains
Confidentiality
The property that sensitive information
is not disclosed to unauthorized
individuals, entities, or processes
Network Access: Public 
Data Access: Transaction data is public
but identity is pseudonymous. Digital
signatures are used to ensure only owner
is authorised to initiate transactions. Multi-
signatures can be used for added security.
Network Access: Restricted 
Data Access: Subject to access
control. Digital signatures are used
to verify ownership and for
authorization.
Integrity
Guarding against improper information
modification or destruction, and
includes ensuring information non-
repudiation and
authenticity”according to NIST
What makes system tamperproof is 3
things: Immutable ledger, Cryptographic
fingerprint unique to each block, and
Consensus protocol where nodes agree on
shared history. 
Traceability: Each transaction can be
traced back to a particular time period and
block all the way to genesis block.
Immutable ledger, cryptographic
hash , verification of participant
identity and controlled access to
nodes to create transactions/
blocks helps ensure integrity.
Availability
Ensuring timely and reliable access to
and use of information
No single point of failure 
Operationally resilient
Similar to centralised systems
How CAP principles are addressed by blockchain?

88
DATA STORAGE options
Option Remarks
Store on blockchain itself
This is default model for public blockchains. Disadvantage is that
blockchain size would grow rapidly
Peer-to-peer ﬁle system
eg IPFS. Files can be stored on client computers and downloaded only if
needed. But requirement for computer to be online to share ﬁles.
Decentralized cloud storage
eg. Storj, Ethereum Swarm. There are cloud storages like dropbox, just
that content is hosted on user’s computers who rent out the space.
Distributed databases
eg Apache cassandra. Useful for query capabilities. Drawback is that they
are not byzantine fault-tolerant (all nodes of cluster fully trust each other,
so a malicious node can destroy or corrupt database)
Some options for storing blockchain data

89
scaling
Initiatives Description
SegWit (Bitcoin only)
Digital signatures comprise about 60 to 70% of transaction data. This approach separates
(i.e.’segregates’) transaction data (i.e.’witness’) from the rest of transaction data. The
signatures are moved to a separate field in transaction data which is not included in
transaction size. So, more transaction can fit into a block, improving scalability.
2MB block
size(Bitcoin only)
Currently, Bitcoin has a block size limitation of 1MB. There is a solution proposed to
increase this limit to 2MB, thus allowing more transactions to be included in each block,
thus improving transaction throughput.
Lightning network
(off-chain payment
channels)
It is a network (Layer 2) that sits on top of bitcoin blockchain, and comprises user-
generated channels that can send payments back and forth to each other in a secure, trust
less fashion, and the final settlement alone is recorded on blockchain main nework.
Sharding
The overall state of blockchain is stored into different shards, and each each part of the
state will be stored on different nodes on the network. Transactions that occur on network
are directed to different nodes depending on which shard they affect.
Plasma(Ethereum)
Similar to lightning network, Plasma is a hierarchy of child blockchains which process a
series of contracts and run on top of the root Ethereum blockchain.
Some scaling initiatives being developed

MODULE 6
Industry use cases
Envisioning a world with blockchain

91
-
BLOCKCHAIN
TECHConduct commerce without
intermediaries
Peer-to-Peer transactions
A digital identity that individuals own and
control, which cannot be taken away from
them
Self-sovereign identity
• Verify authenticity and audit data independently
• Monitor collaborative business process in real-
time
An agreement whose execution is both automated
and enforceable by code
Self-enforcing contracts
Uniquely identify and transfer digital
assets securely and protect ownership
Currencies that are not regulated
by any central bank or country
Cryptocurrency
• Digital autonomous organisations,
• Ownership of assets that transcend national
borders & are censorship-resistant,
• A world without intermediaries
New social & economic order
What does blockchain enable uniquely?
01
02
05
03 06
07
04

92
BANKING & FINANCE
MODULE 6: INDUSTRY USE CASES
International payments: Significantly reduce transaction fees , speed up transactions and
simplify process
Regulatory compliance and audit: Creates audit trails for regulators looking to verify
a financial institution’s compliance
P2P transactions: Payment transactions between individuals can be made anywhere , anytime
without intermediaries.
Trade Finance: Blockchain can track goods and automatically release payments as they move
around the world.
Capital Markets: Move from T+3 to near-instant settlement clearance, significantly reducing cost for
the industry and settlement time.

93
LEGAL
Trademark protection: helps clients create an immutable, time-stamped and legally-defensible record
of when a trademark was first used. This can be used to apply for a traditional federal trademark, and to
resolve disputes on trademark violation
Smart contracts:Blockchain holds the promise to change the process of contracts create into a digital
process. these smart contracts could potentially be crated and executed directly between relevant parties,
with less lawyer involvement.
Intellectual property: Blockchain can be used to register intellectual property, and maintain ownership and
usage rights to the IP.
Blockchain Law: There is a need for lawyers specialising in blockchain law, if blockchain adoption
increases for smart contracts, trademark & IP protection, and property rights

94
SUPPLY CHAIN
Automotive supply chain: 
Counterfeit parts: Blockchain technology can help to trace a part through every step of the supply
chain, thus ensuring the part that shipped is the part that arrived
Recalls: With blockchain, contingencies could be codified into smart contract. If the supplier discovers
a fault, the provisions of the contract are triggered, and stakeholders are immediately notified once a
permanent record of the flaw is recorded on the blockchain
Food Safety: Blockchain can reduce the time it takes to pinpoint and eradicate the source of foodborne
illness. It enables companies to trace contaminated product to its source quickly and ensure safe removal
from store shelves and restaurants,
Pharmaceuticals:  
Keeping drugs cold: Pharmaceuticals, too, often need to be kept in a particular temperature zone.Many
medications—especially biologics—being shipped from manufacturer to warehouse to another warehouse
need to stay within a certain temperature range. With blockchain technology, this can be programmed in,
triggering an alert when the temperature gets too high — or falls too low. 
Eliminating fraud: Blockchain’s immutability provides a basis for traceability of drugs from manufacturer
to end consumer, identifying where the supply chain breaks down

95
healthcare
Patient data management: Blockchain can provide a structure for data sharing and security. Patient
data can be stored on smart contracts that specify who can access the information and under what
conditions.
Drug traceability: Manufacturers/labs can register drugs. When a drug is produced, a hash is
generated that contains all the relevant information about the product. Each time the drug moves from
an entity to another (eg: from the manufacturer to the distributor), the information is stored on the
blockchain, making it easy to track the drug. If a problem is detected and a batch has to be withdrawn
from the market, blockchain technologies make it easier for the company to find their products and
hence, avoid any complications.
Clinical trials: Blockchain can make clinical trials more reproducible, ensuring data for each step is
not falsified. Also it can record unambiguous proof of consent by participating in the survey , and re-
consent as new information from trials is made available to them.

96
GOVERNMENT
Voting: By capturing votes as transactions through blockchain, governments and voters would have a
verifiable audit trail, ensuring no votes are changed or removed and no illegitimate votes are added
Welfare payments: Using blockchain for welfare payments can reduce losses due to frauds and
official error.
Land registries: Blockchain can help make property rights available to billions of people who are
currently unable to register their property. Also saves time and cost in registration process, and reduces
fraud during sale/purchase of land or property.

98
recap of topics
MODULE 7: ROAD AHEAD FOR BLOCKCHAIN
Lecture only

99
HOW SHOULD BLOCKCHAIN EVOLVE
MODULE 7: ROAD AHEAD FOR BLOCKCHAIN
Lecture only

100
THANKS FOR WATCHING
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Blockchain Technology Fundamentals

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