How Blockchain works? Notes

1. Chapter 2
How Blockchain Works?
• Understanding SHA256 Hash
• Immutable Ledger
• Distributed P2P Network
• How Mining Works? (The NONCE and Cryptographic Puzzle)
• Byzantine Fault Tolerance
• Consensus Protocols: Proof of Work, Proof of State, Défense Against Attackers,
Competing Chains
• Blockchain Demo

2. Introduction
• Blockchain first came to fame in October 2008,to light when a white paper
on “Bitcoin:A peer-to-peer electronic cash system” as part of proposal for
Bitcoin published by a person or Group of individuals name ‘Satoshi
Nakamoto’.
• Blockchain is the backbone technology of digital cryptocurrency Bitcoin.
Bitcoin is a type of digital currency that we can transfer within the Bitcoin
network without the help of mediators. We can store Bitcoin in a digital
wallet or e-wallet.
• Cryptocurrency wallet or crypto wallet like BitGo is a device or a program
or a service which stores public or private keys for cryptocurrency
transactions.
• Blockchain technology records transaction in a digital ledger which is
distributed over the network thus making it incorruptible.

3. Introduction
• People and institutions who do not know or trust each other, live in
different countries are subject to different authorities, and who have
no legally binding agreements with each other, can now interact over
the internet without the need for trusted third parties like banks,
internet platforms and other types of clearing institutions.
• Storing data across a peer-to-peer network eliminates problems
emerging from the vulnerability of centralized servers while using
different cryptographic methods to secure the network.

4. Working of Blockchain Technology

5. Hashing
• Hashing is essential to Blockchain in cryptocurrency. A hash is a
mathematical function that converts an input of arbitrary length into
encrypted output of fixed length.
• Hashing in Blockchain ensures that all blocks are well formed and
temper-free and thus the Blockchain will remain secure and virtually
un-breakable.

6. Properties of hashing
1. Collision Free: It is impossible to find two input texts that produces
the same hash value.
2. Easy to generate: It is easy to generate a hash value for a particular
input using hash function.
3. Irreversible :It is impossible to generate original text from the hash
value.
4. Commitment :It is not feasible to modify original text without
resulting a change in hash value thus enabling data integrity.

7. Process of hashing

8. Concept of Hash Function
• A hash function takes any input like numbers, words etc. and through
the use of an algorithm, produces an output of a specific length.
• A hash function maps the data of any arbitrary size to data of fixed
size. Bitcoin uses SHA-256 hash function that produces a hash of size
256 bits.
• The process of applying on the data is called hashing

9. Features of hash function
1. Pre-image Resistance: The hash function works in only one
direction i.e. we cannot deduce the input from the output.
Consequently , for two sets of input, even if the inputs only differ by
the smallest detail, the outputs should be wildly different and not
resemble one another.
2. Collision Resistance: When a hash function produces the same or
identical output for two different inputs, this is called a collision. It
is imperative that collisions are avoided in order to guarantee data
integrity.

10. Concept of hashing

11. Understanding SHA256 Hash
• The Secure Hash Algorithm(SHA) is a family of cryptographic hash functions
published by the National Institute of Standards and Technology(NIST).
• Cryptographic hash function SHA-256 takes input of any size and the
output is always a fixed size 256 bits(32 bytes).
• SHA-0 is the first version of the SHA algorithm. In 2004, several
weaknesses were exposed in the algorithm, resulting in the creation of a
new stronger version of SHA-0 called SHA-1.
• In 2005, an attack of SHA-1 reported that it would find a collision in fewer
hashing operations.SHA-2 was created to overcome SHA-1 vulnerabilities
and it could be implemented with a digest size of 224,256,284 and 512 bits.

12. Understanding SHA256 Hash
• SHA-2 is a widely used standard in modern cryptographic
applications. Bitcoin uses the SHA-256 variant as a hashing algorithm
to solve Proof-of-Work(PoW) puzzles.SHA-3 is the latest family of
hash functions with 224,256,384 and 512 bit variants.
• SHA-256 hash function commonly used in Blockchain Technology.
• SHA-256 is a popular hashing algorithm used in Bitcoin encryption, it
was introduce when the network launched in 2009.
• The top three SHA-256 Blockchain projects by market capitalization
are Bitcoin(BTC), Bitcoin Cash(BCH) and Bitcoin satoshi’s vision(BSV)

13. Process of SHA-256

14. Immutable Ledger
• Immutable ledger in blockchain refers to any records that have the
ability to remain unchanged.
• It cannot be altered and hence the data cannot be changed with ease,
thereby making sure that the security is quite tight.
• Immutability means that it is very difficult to make changes without
collusion.
• The central idea behind the blockchain ledger is the security of data
and the proof that data has not been changed or altered.

15. Understanding Blockchain
Immutability
• Immutability is defined as the ability of a blockchain ledger to remain unchanged, unaltered, and indelible.
• Each of the blocks of information like facts or transaction details is carried out with the help of a
cryptographic principle or a hash value.
• Now, this hash value has an alphanumeric string generated by each block individually.
• Each of the blocks contains a hash value or digital signature for itself and for the previous one as well.
• This, in turn, makes sure that the blocks are retroactively coupled together and unrelenting.
• It is this functionality of blockchain technology that makes sure no one is able to interfere with the system or
change the already saved data into the block.
• In this regard, it is also quite essential to know that blockchain is distributed and decentralized in nature.
• Here a consensus is made among the different storing a copy of the data.
• It is this consensus that makes sure the originality of data is righty maintained.
• Immutability is undoubtedly one of the most definitive features of blockchain technology and also brings out
the best use cases of smart contracts that can be deployed.
• The concept can simply redefine the entire process of auditing of data to make it much more efficient, and
cost-effective, along with bringing about more trust as well as integrity into the data.

16. How to Achieve Immutability?
• To understand how to achieve immutability, clarification of the concept of cryptographic hashing is essential.
• Nowadays, the generation of a cryptographic is not quite a dreadful task.
• It is because of the fact that modern programming languages come with an array of hash functions.
• With the help of these hash functions, it is just required to pass a set of bytes and the function will be
returning a checksum signature.
• These functions always generate a string of length of 64 characters and we would always be getting the fixed
string length regardless of the size of the input, which is referred to as a digital signature.
The digital signature points to the exact data that the users input.
• But hash cannot be reverse-engineered which means that the users cannot make use of this output string
for the purpose of finding the input data.
• This, in turn, results in the immutability of the blockchain ledger.
• In this system, each of the transactions is verified with the help of a blockchain network.
• It includes blocks of information embedded with timestamps and is secured by a hashing process.
• It links together and incorporates the hash of the last block. This mechanism plays a major role in developing
the chronological chain which helps in joining each of the blocks.

17. How to Achieve Immutability?
• The meta-data of the last block is always included by hashing at the time of
generating a new hash for it.
• This, in turn, helps in creating a link between the block and the chain,
thereby making it unbreakable.
• Once this is done, none can alter or delete the data of the block which is
placed in the blockchain.
• It is because whenever anyone would be attempting to make a change, the
modification is rejected by the subsequent block since the hash of the
block would not be valid anymore.
• To state in a line, it would come like this.
Immutability = Cryptography + Blockchain Hashing Process

18. Benefits of Immutable Ledger in
Blockchain
• Security is Tight in Blockchain
The immutable ledger on the blockchain is quite secure. We already know
that blockchain is distributed ledgers. It means that there is no central
point of authority that can control it. Thus, at any point in time, the hackers
try to compromise the data, it is just next to impossible to do the same at
the time when it is managed with more than two servers or nodes.
Additionally, each of the actions that are made on a digital ledger is
encrypted with a unique hash code to which the majority of the nodes
must agree upon the action. This, in turn, makes sure that there is a free as
well as a transparent flow of data along with protecting the information
from being corrupted.

19. Benefits of Immutable Ledger
in Blockchain
• Ensures Authenticity and High Quality
It is known that an immutable ledger on blockchain benefits the users with
its high level of security and traceability. These features play a significant
role in effectively dealing with the fraudulent market. Every year
counterfeit goods result in costing a huge sum of money to authorized
brands, but the use of blockchain in this regard could certainly be the
revolutionary solution. It works by registering different items on the
blockchain system where the manufacturers can very easily provide all the
required information to their customers regarding the origins of the
products, their historic records, current and previous owners. By just
tagging the items on a blockchain, the buyers would be able to understand
whether the item is authentic or not.

20. Benefits of Immutable Ledger
in Blockchain
• Readily Benefits Supply Chain Management
Supply chain management is another area where the immutable ledger on
blockchain proves to be immensely beneficial. The entire process of exchanging
goods needs to be handled with a lot of responsibility. At the time of transporting
items, there are chances of loss, stealing, misplacing, or damage. Keeping this in
mind, a number of logistics companies have already started using blockchain to
avail the benefits.
On the other hand, there are some companies that are currently experimenting
with blockchain before using the same in their mainstream. With the use of
blockchain technology, the parties are allowed to very quickly share data. Most
importantly, even the slightest inconvenience caused at the time of a shipment
would be registered. A digital ledger in this regard plays a crucial role in providing
very tight security by enhancing transparency as well as traceability of goods in
the supply chain.

21. Benefits of Immutable Ledger
in Blockchain
• Higher Level of Privacy
The information which we share or put online is always vulnerable to
outside harm, like leaks, hacks, and personal threats. We tend to treat
the data as private and try to make sure that that privacy is not easily
compromised in this regard. The use of blockchain can prove to be
quite beneficial here since it is different from the standard database
which ensures that privacy is much better for the users. Blockchain is
anonymous, and each of the users is protected with encrypted codes
which makes it next to impossible to detect the account information
of any of the users. But it is to be kept in mind that levels of privacy
depend on a specific blockchain and the security features it
possesses.

22. Immutability
It is the most desired property to maintain the atomicity of the blockchain transactions.
Once a transaction is recorded, it cannot be altered.
If the transactions are broadcast to the network, then almost everyone has a copy of it.
With time, when more and more blocks are added to the blockchain, the immutability
increases and after a certain time, it becomes completely immutable.
For someone to alter the data of so many blocks in a series is not practically feasible
because they are cryptographically secured.
So, any transaction that gets logged remains forever in the system.
Link to Video

23. Introduction to P2P Network and its Types
● Peer to peer network, commonly known as P2P is a decentralized network
communications model that consists of a group of devices (nodes) that collectively
store and share files where each node acts as an individual peer.
● In this network, P2P communication is done without any central administration or
server, which means all nodes have equal power and perform the same tasks.
● P2P architecture is suitable for various use cases and can be categorized into
structured, unstructured, and hybrid peer-to-peer networks.
● The unstructured peer-to-peer networks are formed by nodes randomly from
connection to each other, but they are inefficient than structured ones.
● In structured peer-to-peer systems, the nodes are organized, and every node can
efficiently search the network for the desired data.
● Hybrid models are actually a combination of P2P and client-server models, and when
compared to the structured and unstructured P2P systems, these networks tend to
present improved overall performance.
● Today, P2P networks are the foundation of most of the cryptocurrencies, thus,
making up a significant portion of the blockchain industry.

24. P2P vs. Traditional Client-Server Systems
● Before understanding the role of these networks in blockchain, let’s
distinguish between P2P and traditional client-server architecture.
● The critical difference between both the systems is that in Client-Server,
there is a dedicated server and specific clients whereas, in P2P, it is
maintained by a distributed network of users, where each node can act
both as a server and a client.

25. Role of P2P in Blockchain
● P2P is a technology that is based on a very simple principle, and that is the
concept of decentralization.
● The peer-to-peer architecture of blockchain allows all cryptocurrencies to be
transferred worldwide, without the need of any middle-man or intermediaries
or central server.
● With the distributed peer-to-peer network, anyone who wishes to participate
in the process of verifying and validating blocks can set up a Bitcoin node.
● Blockchain is a decentralized ledger tracking of one or more digital assets on a
peer-to-peer network.
● When we say a peer-to-peer network, it means a decentralized peer-to-peer
network where all the computers are connected in some way, and where each
maintains a complete copy of the ledger and compares it to other devices to
ensure the data is accurate.
● This is unlike a bank, where transactions are stored privately and are managed
only by the bank.

26. P2P: Advatages
• As blockchain is a decentralized system of peer to peer network, it is highly
available due to decentralization.
• Because of P2P networking capability, even if one peer gets down, the other
peers are still present. Thus nobody can take down the blockchain.
• P2P networks offer greater security compared to traditional client-server
systems.
• When you are using cloud computing to store your data, you need to trust
AWS and Google drives, but with the blockchain, because it utilizes peer to
peer network you don’t need to trust any third parties which can modify your
crucial data. These are non-resistant to censorship by central authorities.
• These networks are virtually immune to the Denial-of-Service (DoS) attacks.
• The distributed peer-to-peer network, when paired with a majority consensus
requirement, gives blockchains a relatively high degree of resistance to
malicious activity.

27. Distributed P2P Network
Peer to peer networks is defined as the group of devices that are connected together to create a network .
The network, once formed, can be used to share files and store them as well. In any of the peer-to-peer networks, all the nodes
generally have equal power and can use the same tasks.
In a P2P network, the users are themselves responsible for maintaining the distributed network.
As it is a peer to peer network, there is no need for a central authority or administrator.
This means that each node needs to act as both client and server to other nodes on the server.
Each of the nodes has a copy of the file.
By doing so, each node acts as a server and needs to either download files from other nodes or upload them to other nodes.
Link to video

28. Node to have two distinct functions.
The first function is to act as a client when downloading files from other nodes on the network
The node can act as a server when it is required to serve files to other nodes.
This sharing and receiving aspect can be done by a node simultaneously, which makes the P2P network so efficient and fast.
The network tends to become more efficient as the network grows.

29. Types of the peer to peer network
● Unstructured P2P networks
● Structured P2P networks
● Hybrid P2P networks

30. Mining
• Blockchain mining is a process to validate every step in the
transactions while operating Bitcoins or other cryptocurrencies.
• The people involved here are known as Blockchain miners, and these
miners function is to authenticate the transfer of currency from a
computer in the network to another.
• The main objective of mining is to ensure that the quality and security
of the decentralized network.
• Mining, in the context of Blockchain technology , is the process of
adding transactions to the large distributed public ledger of existing
transactions.

31. Mining
• Blockchain mining is used to secure and verify Bitcoin transactions.
Mining is the process by which new Bitcoin is added to the money
supply.
• The process of new coin generation is called mining. Bitcoin mining is
the process of creating new Bitcoin by solving a computational puzzle.
• Mining is serves to secure the Bitcoin system against transactions or
fraudulent transactions spending the same amount of Bitcoin more
than once, known as double spend.
• Miners provide processing power to the Bitcoin network in exchange
for the opportunity to be rewarded Bitcoin. Miners confirm new
transactions and record them on the global ledger.

32. Mining
• A new block, containing transactions that occurred since the last
block, is mined every ten minutes, according adding those
transactions to the Blockchain.
• Transactions that become part of a block and added to the Blockchain
are considered confirmed, which allows the new owners of Bitcoin to
spend the Bitcoin they received in those transactions.
• Miners receive two types of rewards for mining that is new coin
created with new each block, and transaction fees from all the
transactions included in the block.

33. Mining
• To earn this rewards, the miners compete to solve a difficult
mathematical problem based on a cryptographic hash algorithm.
• The solution to the problem, called the Proof of Work(PoW) , is
included in the new block and acts as proof that the miner expended
significant computing effort.
• The competition to solve the PoW algorithm to earn rewards and the
right to record transactions on the Blockchain is the basis for Bitcoins
security model.

34. Working of Mining
• Blockchain mining is a process used to validate new transactions. Mining is
an essential activity in the Blockchain network.
• It is the way the peer-to-peer network verifies transactions and reaches
common consensus without requiring central authority.
• The mining process starts when miners are trying to validate new
transactions and record them on the Blockchain.
• The miners are competing to solve a difficult mining puzzle based on
cryptographic hash algorithm.
• The solution found is called PoW. When a block is solved, all the
transactions contained in the candidate block are considered validated, and
the new block is confirmed.

35. Working of Mining
• This new block will be appended to the Blockchain. The time taken to
confirm a new block is approximately 10 minutes for Bitcoin, but for other
coins it is much faster.
• So, if we send or receive Bitcoin, it will take approximately 10 minutes for
the transaction to be confirmed.
• Miners receive a reward when they solve the complex mathematical
problem. There are two types of rewards namely, new Bitcoins and
transaction fees.
• Mining ensures that only legitimate transactions are verified in the
Blockchain of any given cryptocurrency.
• Mining uses cryptographic hash function called double SHA-256

36. Working of Mining
• If we consider a block to mine first, we need to collect the new
transactions into a block, and then we hash the block to form a 256-
bit block hash value.
• When the hash initiate, the block has been successfully mined and is
directed to the Bitcoin Blockchain network, and that has turned into
the identifier for the block.
• In many cases, the hash is not successful, so we need to alter the
block to some extent and try again and again.

37. Mining process in Blockchain

38. Nonce
• Nonce stands for number used only once.
• Nonce is a 32-bit random number which can be used one time.
• Nonce is often used on cryptographic hash functions and
authentication protocols.
• The nonce in a Bitcoin block is a 32-bit field whose value is adjusted
by miners so that the hash of the block will be less than or equal to
current target of the network.
• In the Blockchain technology, a nonce refer to a psedo-random
number that is utilized as a counter during the process of mining.

39. Nonce

40. • The miners create a block and verify it and will be rewarded for
using their CPU power to do so.
• The block which gets more than 50% consensus will be added
to the block chain.
• During the verification of Block, the miners will complete
the Proof of Work which covers all the data of the block, and
checks whether the hash value of the current block is lesser
than the target.

41. • To create a block which will be accepted by most of the network
participants, Miners compete to complete the Proof of Work at
the earliest.
• The difficulty of the work is adjusted to take at least 10 minutes
per Block, which has become a standard time to add a block to
the block chain in case of Bitcoin Network.
• Once the perfect Nonce is found, it is added to the hashed
block. Along with this number, the hash value of that block will
get rehashed and creates a difficult algorithm.

42. • It is compared to the existing target, whether it is lower or equal
to the current target.
• Miners test and discard millions of Nonce per second until they
find that Golden Nonce which is valid.
• In order to complete the verification faster than other miners,
miners compete with each other using their computer hashing
power.
• Once the Golden Nonce is found, they can complete the Block
and add it to the Block Chain and there by receive the Block
reward.

43. • In cryptography, a nonce is an arbitrary number that can be used just once
in a cryptographic communication. It is often a random number issued in
an authentication protocol to ensure that, same communication is not
reused.
• There will be some constant information, timestamp, hash value with
difficulty, and the nonce which when passed through Hash algorithm –
SHA256 will become a new block. Here nonce plays a very important role.
• As we have already discussed, millions of nonce values are tried until the
Golden Nonce is found.The target hash value is defined as the difficulty
and the iterative calculation of the hash value requires the miner’s
computer resources.
• Only with the correct Nonce value, proof of work can be created and thus
giving birth to a new Block in the Block chain.