Block chain introduction to the world and how we can utilise it

Introduction to Blockchain
Technology
Tanzila Nargis
Assitant Professor
NMAMIT-Nitte

Overview of Blockchain
•What is blockchain?
•A decentralized computation and information
sharing platform that enables multiple
authoritative domains, who do not trust each
other, to cooperate, coordinate and collaborate
in a rational decision making process.

Microsoft word to Google Doc-
Sharing Information
•Traditional way of sharing documents

Microsoft word to Google Doc-
Sharing Information
•Shared Google Doc- both users can use
simultaneously

Problems with Centralized System

Centralized Vs Decentralized Vs
Distributed

Blockchain-The Internet database to
Support Decentralization

A Very Simplified Look of
Blockchain

An example of Public Ledger from
Banking Sector

Blockchains and Public Ledgers

Formal definition of Blockchain

Bitcoin and Blockchain
What is Bitcoin?

The Technology behind Bitcoin-The
Blockchain

The Bitcoin Transaction Life Cycle-
The Sender

The Network

The Miners

The Receiver

Contracts in a Centralized Platform-
Crowdfunding

Crowdfunding Platform using
Smart Contracts

Smart Contracts- The Advantages

The Block in a Blockchain- Securing
data Cryptographically

Structure of a Block (Reference: Bitcoin)

Block Header(Reference: Bitcoin)

The Hashes in Block header (Reference:Bitcoin)

Transactions in a Block (Reference:
Bitcoin)

The Block in a Blockchain- The
Summary

Challenge-Response to Permission-
less Consensus
•The challenge-response protocol: The nodes in the network tries to
solve the challenge posed by the network
–The nodes or the participants do not need to reveal their identity
•The node that is able to solve the challenge first, would get to dictate
what the next set of data or state elements to be added should be
•This will continue iteratively at different rounds

Challenge-Response to Permission-
less Consensus
•Design of a good challenge – ensures that
different nodes will win the challenge at
different runs.
•This ensures that no node would be able to
control the network
•The Bitcoin Proof of Work (PoW) algorithm –
ensures consensus over a permission-less
setting based on challenge-response

The Economics Behind Blockchain
Consensus
to solve a mathematical
challenge in eacg iteration of
consensus
What is the incentive for nodes?
Only one or sometimes very few
will win in each round

Consensus
•The Digital Money
–Ensures operational efficiency
–More levels of controlling monetary policy
•1998: Wei Dai published ‘b-money’ – an
anonymous distributed cash system
•Cryptocurrency – a currency beyond the
control of banks and governments

Consensus
•The mining ensures that no node has the power
to sabotage the network and gain control
–No one can hold the control of the cryptocurrency
•The computational effort expended by the
nodes in achieving consensus would be paid for
by cryptocurrency generated and managed by
the network
•Blockchain ensures that the currency is secure
and tamper-proof

In Summary
•The Technology behind Blockchain
–The Data Structure – Distributed Ledger
–Cryptography and Digital Signatures – Ensure
security and tamper-proof architecture
–The Consensus over a Permission-less Environment
–The Economy of the Revenue Model – Encourages
participants to join in the mining procedure

Public vs Private Blockchain
The Permission-less Model (Public)
•Works in an open environment and over a large
network of participants
•The users do not need to know the identity of
the peers, and hence the users do not need to
reveal their identity to others
•Good for financial applications like banking
using cryptocurrency

Privacy and Security
•The system is tamper-proof – it is “extremely
hard” to make a change in the blockchain
–Tampering the system becomes harder as the chain
grows
•For Bitcoin, the transactions are pseudo-
anonymous
–Transactions are sent to public key addresses,-
cryptographically generated addresses, computed by
the wallet applications

Peer Adresses
•“Address” in bitcoin is synonymous to an
“Account” in a bank.
•The wallet listens for transactions addressed to
an account,
–Encrypts the transactions by the public key of the
target address
–Only the target node can decrypt the transaction
and accept it
•However, the actual transaction amount is open
to all for validation

Blockchain (at Permission-less
Model) as a Tree

The Cryptocurrency Applications
using Blockchain

The Permissioed (Private) Model –
Blockchain 2.0
•Blockchain can be applied just beyond
cryptocurrency
•The underlying notions of consensus, security
and distributed replicated ledgers can be applied
to even closed or permissioned network
settings
•Most enterprise use cases only involve a few
ten to a few hundred known participants

Permissioned Blockchain
•Can leverage the 30+ years of technical
literature to realize various benefits like
–Strict notion of security and privacy
–Greater transactional throughput based on the
traditional notions of distributed consensus
•Raft Consensus
•Paxos Consensus
•Byzantine Fault Tolerance (BFT) algorithms

Applications

Applications
•Provenance tracking - tracking the origin and
movement of high-value items across a supply
chain, such as luxury goods, pharmaceuticals,
cosmetics and electronics.
–When the high-value item is created, a
corresponding digital token is issued by a trusted
entity, which acts to authenticate its point of origin.

Every time the physical item changes hands, the digital token
is moved in parallel -> the real-world chain of custody is
precisely mirrored by a chain of transactions on the
blockchain.
The token is acting as a virtual “certificate of authenticity”,
which is far harder to steal or forge than a piece of paper.

The Blockchain Based Distributed
Web

Interplanetary file is a web architecture, combines small storage
available to users as large storage. The idea is whatever data was there
in the storage is available to all the users, who are connected to the
system.
The original data is with the user and you just give the pointer to the
other users or the replica of the data to the other users. So in this way
IPFS provides high availability of the services and avoids duplication of
the files

How IPFS Works
•Each file and all of the blocks within it are given
a unique fingerprint based on a cryptographic
hash
•IPFS removes duplications across the network
and track version history for every file
•Each network node stores only the content it is
interested in and some indexing information
that helps to figure out who is storing what

How IPFS Works
•When looking up files, you ask the network to
find nodes storing the content behind a unique
hash
•Every file can be found by human readable
names using a decentralized naming system
called IPNS

Hyperledger Fabric
•A permissioned blockchain framework that
provides an enterprise-grade foundation for
transactional applications
•A shared ledger that supports smart contracts –
ensures security and integrity of recorded
transactions
•Unlike Bitcoin and Ethereum, Hyperledger
Fabric supports privacy and confidential
transactions

Hyperledger Fabric
•Fabric supports the notion of channels, a
“subnet” of peers within the network that wants
to share information confidentially
–Gives restricted visibility - important for business
applications
•Fabric has no notion of mining, use the notion
of distributed consensus under a closed
environment

Summary
•Two models of Blockchain network –
Permission-less (an open environment) and
Permissioned (a close environment)
•Permission-less model is suitable for open
control-free financial applications like
cryptocurrency
•Permissioned model is suitable for business
applications like smart contract

Bitcoin – The Beginning
•“A decentralized digital currency enables
instant payments to anyone, anywhere in the
world” – en.bitcoin.it
•No central authority, uses peer-to-peer
technology
•Two broad operations Transaction
Management – transfer of bitcoins from one
user to another
•Money Issuance – regulate the monetary base

The Creation of Coins
•Controlled Supply: Must be limited for the
currency to have value – any maliciously
generated currency needs to be rejected by the
network
•Bitcoins are generated during the mining –
each time a user discovers a new block
•The rate of block creation is adjusted every
2016 blocks to aim for a constant two week
adjustment period

Creation of Blocks
•The number of bitcoins generated per block is set
to decrease geometrically, with a 50% reduction
for every 210,000 blocks, or approximately 4 years
•This reduces, with time, the amount of bitcoins
generated per block
•Theoretical limit for total bitcoins: Slightly less
than 21 million
•Miners will get less reward as time progresses
•How to pay the mining fee – increase the
transaction fee

Payments
•Need to ensure that Eve cannot spend Alice’s
bitcoins by creating transactions in her name.
•Bitcoin uses public key cryptography to make
and verify digital signatures.
•Each person has one or more addresses each
with an associated pair of public and private
keys (may hold in the bitcoin wallet)

Sending Payments
•Alice wish to transfer some bitcoin to Bob. Alice
can sign a transaction with her private key
•Anyone can validate the transaction with Alice’s
public key

Sending Payments
•Alice wants to send bitcoin to Bob Bob sends
his address to Alice
•Alice adds Bob’s address and the amount of
bitcoins to transfer in a “transaction” message
•Alice signs the transaction with her private key,
and announces her public key for signature
verification
•Alice broadcasts the transaction on the Bitcoin
network for all to see

Double Spending
•Same bitcoin is used for
more than one
transactions
•In a centralized system,
the bank prevents double
spending
•How can we prevent
double spending in a
decentralized network?

Handle Double Spending using
Blockchain
•Details about the transaction are sent and
forwarded to all or as many other computers as
possible
•Use Blockchain – a constantly growing chain of
blocks that contain a record of all transactions
•The blockchain is maintained by all peers in the
Bitcoin network – everyone has a copy of the
blockchain

Blockchain
•To be accepted in the chain, transaction blocks
must be valid and must include proof of work –
a computationally difficult hash generated by
the mining procedure
•Blockchain ensures that, if any of the block is
modified, all following blocks will have to be
recomputed

Blockchain
•When multiple valid continuation to this chain
appear, only the longest such branch is accepted
and it is then extended further (longest chain)
•Once a transaction is committed in the
blockchain, everyone in the network can
validate all the transactions by using Alice’s
public address
•The validation prevents double spending in
bitcoin

Bitcoin Anonymity
•Bitcoin is permission-less, you do not need to
setup any “account”, or required any e-mail
address, user name or password to login to the
wallet
•The public and the private keys do not need to
be registered, the wallet can generate them for
the users
•The bitcoin address is used for transaction, not
the user name or identity

Bitcoin Anonymity
•A bitcoin address mathematically corresponds
to a public key based on ECDSA – the digital
signature algorithm used in bitcoin
•A sample bitcoin address:
1PHYrmdJ22MKbJevpb3MBNpVckjZHt89hz
•Each person can have many such addresses,
each with its own balance Difficult to know
which person owns what amount

Bitcoin Scripts
•Alice makes a transaction of BTC 20 to Bob.
How Bob will claim those transactions?
•A transaction is characterized by two
parameters Alice sends some bitcoins: the
output (out) of the transaction
•Bob receives some bitcoins: the input (in) of
the transaction
•We need to determine that a transaction input
correctly claims a transaction output

Bitcoin Scripts
•A programming language to validate bitcoin
transactions A list of instructions recorded with
each transaction
•Describes how the next person can gain access
to the bitcoins, if that person wants to spend
them
•FORTH-like language, stack based and
processed left to write

How FORTH Works?
•A stacked based computer programming
language originally designed by Charles Moore A
procedural programming language without type
checking
•Use a stack for recursive subroutine execution
•Uses reverse Polish notation (RPN) or postfix
notation

FORTH – Sample Execution using
RPN

Bitcoin Transactions and Input and
Output

Bitcoin Scripts – A Simple Example

Bitcoin Scripts
•With every transaction Alice must provide
–A public key that, when hashed, yields the
address of Alice embedded in the script
–A signature to provide ownership of the private
key corresponding to the public key of Alice

Bitcoin Script Instructions
•Total 256 opcodes (15 disabled, 75 reserved)
•Arithmetic operations
•if-then conditions
•Logical operators
•Data handling (like OP_DUP)
•Cryptographic operations
✔Hash functions
✔Signature verification
✔Multi-signature verification

Bitcoin P2P Network
•An ad-hoc network with random topology,
Bitcoin protocol runs on TCP port 8333
•All nodes (users) in the bitcoin network are
treated equally
•New nodes can join any time, non-responding
nodes are removed after 3 hours

Joining in a Bitcoin P2P Network

Joining in a Bitcoin P2P Network
• It is a overly network with virtual links or peer to
peer links between neighbors
• The newly joining node asks for the address list.
• There are certain nodes in the network which act
as seed nodes
• The seed nodes provides the information or
address list to the newly joining node
• Once you get the address list establish the
connection with the peers

The new node then receives the
currently updated blockchain
from the neighboring peers to
maintain it as a local copy
Apply 50% rule to accept the
longest chain. i.e the same
blockchain received from the
majority of the peers

Transaction in a Bitcoin Network
•Alice joins the Bitcoin network by opening her
applet
•Alice makes a transaction to Bob: A->B: BTC 10
•Alice includes the scripts with the transactions
•Alice broadcasts this transaction in the Bitcoin
network

Transaction Flooding in a Bitcoin
Network

Which Transactions Should You
Relay?
•The transaction is valid with current blockchain
No conflict
No double spending
•The script matches with a pre-given set of
whitelist scripts – avoid unusual scripts, avoid
infinite loops
•Does not conflict with other transactions that I
have relayed after getting the blockchain
updated – avoid double spending

Block Propagation – Accept the
Longest Chain

Block Propagation – Accept One of
the Longest Chain

Which Block to Relay
•Block contains the correct hash based on the
existing blockchain
•All the transactions inside the block are valid
Check the scripts
•Validate with the existing blockchain
•The block is included in the current longest
chain Do not relay the forks

Working with consensus in
Bitcoin

Consensus
•A procedure to reach in a
common agreement in a
distributed or
decentralized multi-agent
platform
•Important for a message
passing system

Why Consensus
•Reliability and fault tolerance in a distributed
system
- Ensure correct operations in the presence of
faulty individuals
Example:
•Commit a transaction in a database
•State machine replication
•Clock synchronization

Why Consensus Can be Difficult in
Certain Scenarios
•Consider a message passing system, and a
general behaves maliciously

Distributed Consensus
•There can be various types of faults in a
distributed system.
•Crash Fault: A node suddenly crashes or
becomes unavailable in the middle of a
communication
•Network or Partitioned Faults: A network fault
occurs (say the link failure) and the network gets
partitioned
•Byzantine Faults: A node starts behaving
maliciously

Distributed Consensus - Properties
•Termination: Every correct individual decides
some value at the end of the consensus protocol
•Validity: If all the individuals proposes the same
value, then all correct individuals decide on that
value
•Integrity: Every correct individual decides at
most one value, and the decided value must be
proposed by some individuals
•Agreement: Every correct individual must agree
on the same value

Synchronous vs Asynchronous
Systems
•Synchronous Message Passing System: The
message must be received within a predefined
time interval
- Strong guarantee on message transmission
delay
•Asynchronous Message Passing System: There
is no upper bound on the message transmission
delay or the message reception time
-No timing constraint, message can be delayed
for arbitrary period of times

Correctness of a Distributed
Consensus Protocol

Why Do We Require Consensus in
Bitcoin Network

Consensus in a Bitcoin Network
•Every node has block of transactions that has
already reached into the consensus (block of
committed transactions)
•The nodes also has a list of outstanding
transactions that need to be validated against
the block of committed transactions

Consensus in a Bitcoin Network

Cryptographic Hash as the PoW
•Use the puzzle friendliness property of
cryptographic hash function as the work
- Given and , find out , such that
𝑋 𝑌 𝑘
=H( || )
𝑌 𝑋 𝑘
- It is difficult (but not infeasible) to find such 𝑘
- However, once you have a , you can easily
𝑘
verify the challenge
•Used in Hashcash, a proof of work that can be
added with an email as a “good-will” token

Hashcash PoW – Recipient Side

Attacks on PoW
•The blockchain together contain a large amount
of work
- The attacker needs to perform more work to
tamper the blockchain
-This is difficult with the current hardware
Double Spending Problem
The attack: Successful use of the same fund
twice
- A transaction is generated with BTC10 to both
Bob and Carol at the same time

•The solution: The transactions are irreversible
(computationally impractical to modify)
•Every transaction can be validated against the
existing blockchain
Sybil Attacks
•Attacker attempts to fill the network with the
clients under its control Refuse to relay valid
blocks
•Relay only attacked blocks – can lead to double
spending

•Solution: Diversify the connections – Bitcoin
allows outbound connection to one IP per /16
(a.b.0.0) IP address

Denial of Service (DoS) Attacks
•Send lot of data to a node – they will not be
able to process normal Bitcoin transactions
Solutions: No forwarding of orphaned blocks
•No forwarding of double-spend transactions
•No forwarding of same block or transactions
•Disconnect a peer that sends too many
messages
•Restrict the block size to 1 MB
•Limit the size of each script up to 10000 bytes

Breaking Bitcoin PoW
•Bitcoin PoW is computationally difficult to
break, but not impossible
•Attackers can deploy high power servers to do
more work than the total work of the blockchain

The Monopoly Problem
-Miners having more resources have more
probability to complete the work
•Monopoly can increase over time (Tragedy of
the Commons)
- Miners will get less reward over time
- Users will get discouraged to join as the miner
- Few miners with large computing resources
may get control over the network
•PoW depends on the computing resources
available to a miner

Handling Monopoly and Power
Consumption - Proof of Stake
(PoS)

Proof of Stake (PoS)
•Provides increased protection
- Executing an attack is expensive, you need
more Bitcoins
- Reduced incentive for attack – the attacker
needs to own a majority of bitcoins – an attack
will have more affect on the attacker

•Variants of “stake”
- Randomization in combination of the stake (used in Nxt and
BlackCoin)
- Coin-age: Number of coins multiplied by the number of
days the coins have been held (used in Peercoin)

Proof of Burn (PoB)
•Miners should show proof that they have
burned some coins
- Sent them to a verifiably un-spendable address
-Expensive just like PoW, but no external
resources are used other than the burned coins
•PoW vs PoB – Real resource vs virtual/digital
resource
•PoB works by burning PoW mined
cryptocurrencies

PoW vs PoS vs PoB
PoW
•Do some work to mine a new block
•Consumes physical resources, like CPU power
and time
•Power hungry
•PoS
•Acquire sufficient stake to mine a new block
•Consumes no external resource, but participate
in transactions
•Power efficient

PoW vs PoS vs PoB
PoB
•Burn some wealth to mine a new block
•Consumes virtual or digital resources, like the
coins
•Power efficient

Proof of Elapsed Time (PoET)
•Proposed by Intel, as a part of Hyperledger
Sawtooth – a blockchain platform for building
distributed ledger applications
•Basic idea:
• Each participant in the blockchain network
waits a random amount of time
•The first participant to finish becomes the
leader for the new block

PoET over Trusted Environments
•How will one verify that the proposer has really
waited for a random amount of time?
-Utilize special CPU instruction set – Intel
Software Guard Extension (SGX) – a trusted
execution platform
- The trusted code is private to the rest of the
application
- The specialized hardware provides an
attestation that the trusted code has been set up
correctly

The Life of a Miner
•Validate transactions and construct a block
•Use hash power to vote on consensus and
commit transactions with a new block
•Store and broadcast the blockchain to the peers

Mining Bitcoins
•Join the network and listen for transactions –
validate the proposed transactions
•Listen for new blocks – validate and re-
broadcast a new block when it is proposed
•Collect transactions for a predefined time and
construct a new block
•Find a nonce to make the new block valid
•Broadcast the new block – everybody accepts it
if it is a part of the main chain
•Earn the reward for participating in the mining

Mining Difficulty
•A measure of how difficult it is to find a hash
below a given target
- Bitcoin network has a global block difficulty
- Mining pools also have a pool-specific share
difficulty
•The difficulty changes for every 2016 blocks
-Desired rate – one block each 10 minutes
-Two weeks to generate 2016 blocks
- The change in difficulty is in proportion to the
amount of time over or under two weeks the

Setting the Difficulty
•Compute the following for every two weeks
current_difficulty = previous_difficulty *
(2 weeks in milliseconds)/(milliseconds to
mine last 2016 blocks)

Hash-rate versus Difficulty
•The hash is a random number between 0 and
2256-1
-To find a block, the hash must be less than a
given target
•The offset for difficulty 1 is 0xffff * 2208
•The offset for difficulty D is 0xffff * 2208
/D
•The expected number of hashes we need to
calculate to find a block with difficulty D is (D *
2256
) / (0xffff * 2208
)

Mining Hardware
Specialized hardware
- GPU
- FPGA
•ASIC
- Released in 2013
- Fast computation of
SHA256

TerraMiner IV
•ASIC based bitcoin mining
rig
•2 Terahash per second
•Cost: USD 3500 approx

Mining Pool
•Pooling of resources by
the miners
•–Share the processing
power over a network to
mine a new block
•–Split the reward
proportionally to the
amount of work they
contributed
Hash-rate Distribution:
blockchain.info

Mining Pool Methods
•Contains hundreds or thousands of miners
through special protocols
•𝐵: Block reward minus pool fee
•𝑝: Probability of finding a block in a share
attempt ( =1/ ), is the block difficulty
𝑝 𝐷 𝐷

Mining Pool Methods
•Pay per Share (PPS)
-Instant guaranteed payout to a miner
- Miners are paid from pool’s existing balance,
share of a miner is = ×
𝑅 𝐵 𝑝
- Miners get almost equal payment, risk is at the
pool operator

Mining Pool Methods
•Proportional Miners earn share until the pool
finds a block (end of mining round)
•𝑅= × / , where is amount of his own
𝐵 𝑛 𝑁 𝑛
share, and is amount of all shares in the
𝑁
round
•Payments are made once a pool finds out a
block

Mining Pool Methods
Pay per Last N Share (PPLNS)
•Similar to proportional
•Miner’s reward is calculated on the basis of N
last shares
•Miners get more profit for a short round

Mining Pools – Pros and Cons
Pros
•Small miners can participate
•Predictable mining
Cons
• Leads to centralization
•Discourages miners for running complete
mining procedure

Summary – Permissionless
Blockchain and Bitcoin
•The permissionless or open model of
blockchain – any user can join the network and
participate in transactions
-Bitcoin is developed on this principle
•The blockchain provides the backbone of the
permissionless digital currency
- Provides a decentralized architecture
- Tamper-proof through hash-chain
•Miners ensures the consensus in the system

Block chain introduction to the world and how we can utilise it

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