gvdjshcA>:FI VBhvjvbfskjffweojjjjjjjjjjjjjj

1. BLOCKCHAIN
Chapter 4

2. Why do we need blockchain?

3. Issues that may arise
• High Transaction Fees: Banks may charge high transaction fees
for any transaction.
• Double Spending Problem: An error which allows you to spend
the amount twice.
• Frauds: Hackers may attack and gain unauthorised access to
secret information leading to fraudulent transactions.
• Poor Data Recovery: Retrieving lost data is difficult in
centralized system (single copy).

4. What is Blockchain?
• Blockchain is a distributed database of immutable records called
blocks, which are cryptographically secure.

5. Block
• A block is a record book which
contains all the transaction details.
• Consists of 4 major elements:-
• Transaction data
• Hash: alphanumeric value used to
identify the block
• Hash of Previous Block
• Nonce: random value used to vary
hash value

6. Blockchain
45AF
Prevents data tampering

7. example

9. Features of blockchain

10. Blockchain Overview

11. What is Bitcoin?
• Bitcoin is a digital currency which is used to send and receive money
across the world in a decentralized manner with minimum transaction
fees.
• Bitcoin is software-based online payment system described by Satoshi
Nakamoto in 2008 and introduced as open-source software in 2009.
• Payments are recorded in a public ledger using its own unit of account
(Bitcoin).
• It is a form of digital currency (physical form is absent), created and held
electronically. It can be used to buy things electronically and in that sense
it is no different than conventional dollars.
• Bitcoin is commonly referred to as cryptocurrency.

12. Bitcoin is based on
• It is based on mathematics unlike conventional currencies that had
been based on fixed quantity of metal (gold, silver…) or fiat
currencies.
• Bitcoin has several features that set it apart from fiat currencies:
1. It is decentralized
2. It is easy to set up and it is fast
3. It is anonymous
4. It is completely transparent
5. Transaction fees are very less
6. Transactions are irreversible
7. Cryptographically secure

13. Bitcoin is Decentralized
• Bitcoin is a peer-to-peer system which means that there is no
need for a third party.
• Bitcoin network is not controled by central authority (fully
decentralized monetary system).
• Bitcoins are being created by a community of people that
anyone can join.
• There is no authority (financial institution) which can tinker
with monetary policy and in that sense devalue or revalue
Bitcoin currency.

14. Bitcoin is Anonymous & Transparent
• Bitcoins are stored in wallet with digital credentials
• Wallet uses public-key cryptography
• Public key can be thought of as an account number or name and the
private key, ownership credentials.
• Bitcoin is transferred to the next owner when the next owner gives
a public key and previous owner uses his private key to publish a
record into system announcing that the ownership has changed to
the new public key.
• Bitcoin protocol stores details of every single transaction that
occurred in the network in huge version of general ledger (Block
chain).

15. Private Keys in Bitcoin
• Possession and transfer of value in bitcoin network via transactions are reliant
upon private keys, public keys and addresses. Elliptic Curve Cryptography(ECC)
is used to generate public and private key pairs
• Private keys are kept only on the owners side. They are used to digitally sign
transactions proving ownership of bitcoins.
• They are fundamentally 256-bit numbers randomly chosen in the range
specified by the SECP256K1 ECDSA curve recommendation.
• They are usually encoded using Wallet Import Format(WIF). It is a way to
represent the full-size private key in a different format.
• Consider the following private key:
AEDTEC8A03667180D01FB4251A546C2B9F2FE33507C68B7D9D41FA5714195201
• When converted into WIR format, it looks as shown here:
L2iN7umV7kbr6LuCmgM27rBnptGbDVc8g4ZBm6EbgTPQXnj1RCZP

16. Private Keys in Bitcoin
Interested readers can do some experimentation using the online tool
available at http:// gobittest.appspot.com/PrivateKey.

17. Public Key in Bitcoin
• All network participant can see public key on the blockchain
• They are derived from private keys
• They are used to verify that the transaction has been signed with
corresponding private key
• Verification proves the ownership of bitcoin.

18. CIA
• CIA stand for Confidentiality,
Integrity, and Availability. They are the three
pillars of a security architecture.
Confidentiality
• Confidentiality refers to the steps made by an
organization to keep its data private or hidden. In
practice, this involves limiting data access to prevent
unauthorized disclosure. This requires ensuring that
only authorized people have access to specified assets
and that unauthorized individuals are actively
discouraged from gaining access.
• Confidentiality might be breached accidentally as a
result of human mistakes or negligence too. For
example, failure to adequately protect passwords (by
users or IT security), failure to encrypt data (in process,
transit, and storage); physical eavesdropping (also
known as shoulder surfing), weak authentication
methods, etc.

19. CIA
Integrity
• Integrity refers to the assurance that data has
not been tampered with and can thus be
trusted. Integrity contributes to the
dependability of data by ensuring that it is in
the correct condition and free of any
unauthorized changes.
• Example − Customers who shop online
demand precise product and price
information, as well as the assurance that
quantity, pricing, availability, and other
details will not change after they make an
order. Financial consumers must have
confidence in the security of their banking
information and account balances

20. CIA
Availability
• Networks, systems, and available applications are
functioning. It ensures that authorized users get
consistent and timely access to resources when
they are needed. Systems, programs, and data
are of little utility to a business and its customers
if they are not available when authorized users
require them.
• While hardware or software failure, power
outages, natural catastrophes, and human
mistake are all potential threats to availability.
• The 'denial-of-service' attack, in which the
performance of a system, website, or web-based
application is purposely and maliciously
degraded, or the system becomes unavailable, is
perhaps the most well-known assault that
threatens availability

21. Denial-of-service

22. Digital Signature using Public Key
Cryptography

23. Reduce Signature Size using Hash

24. Cryptographically Secured Hash Functions
•Is a hash function which takes an input (or
'message') and returns a fixed-size string of
bytes.
•The string is called the 'hash value', 'message
digest', 'digital fingerprint', 'digest' or
'checksum'
•Hash Functions: Map any sized data to a fixed
size.

25. Cryptographically Secured Hash Functions
• Cryptographically Secured:
• One way, given a x, we can compute H(x), but given
a H(x), no deterministic algorithm can compute x
• For two different x1 and x2, H(x1) and H(x2) should be
different
• Hashing is a mathematical operation that is easy to perform,
but extremely difficult to reverse.
• Most widely used hashing functions are MD5, SHA1 and
SHA-256.

26. Cryptographic Hash Functions: Example
• MD5 is a cryptographic hash function algorithm that takes the
message as input of any length and changes it into a fixed-length
message of 16 bytes.
• MD5 algorithm stands for the Message-Digest Algorithm. MD5 was
developed as an improvement of MD4, with advanced security
purposes.
• The output of MD5 (Digest size) is always 128 bits.
• MD5 was developed in 1991 by Ronald Rivest.
Use Of MD5 Algorithm:
•It is used for file authentication.
•In a web application, it is used for security purposes. e.g. Secure

27. Example: MD5

28. Cryptographic Hash Functions: Example
• MD5 : 128-bit (16-byte) hash value,
typically expressed in text format as a
32 digit hexadecimal number.
• SHA1 (Secure Hash Algorithm) : 160-
bit (20-byte) hash value, typically
rendered as a hexadecimal number, 40
digits long.
• SHA256: 256-bit (32-byte) hash value,
typically rendered as a hexadecimal
number, 64 digits long.

29. Cryptographic Hash Functions
• X is called the message and
H(X) is called the message
digest
• A small change in the data
results in a significant change
in the output – called the
avalanche effect

30. Hashes are "digests", not "encryption"
• Encryption transforms data from a
clear text to ciphertext and back
(given the right keys),
• The two texts should roughly
correspond to each other in size
• Long clear text yields long
ciphertext, and so on.
• "Encryption" is a two-way
operation.

31. Hashes are "digests", not "encryption"
• Hashes compile a stream of
data into a small digest
• A one way operation.
• All hashes of the same type
have the same size no
matter how big the inputs
are

32. How are hashes used?
• Hashing passwords
• store a hash of the password
rather than the password itself.
• hashes are not reversible, there
is no way to find out for sure
“PASSWORD”

33. How are hashes used?
• Digitally Signed Documents
• "signing" a document
electronically is the digital
equivalent of placing an
autograph on paper
• sign (encrypts with one's
private key) the hash of the
document, the result of
which is a digital signature.

34. Digital Signature in Blockchain

35. Example

36. Mining
• Miner’s Role
 Join the network, listen for transactions, and Validate
the transactions
 Collect transactions for a predefined time and start the
mining process:- find the nonce value
 Construct a new block
 Add the new block to the existing blockchain
 Broadcast the new blockchain
 Earn a reward for successfully mining the block.

37. Mining Reward
 The miner who computes the new hash gets a reward.
 According to the rules of Bitcoin,
 the node that creates a block gets to include a special transaction in that
block
 the node can also choose the recipient address of this transaction
 Initially the block reward was set to 50 bitcoins
 The total number of bitcoins is 21 million.
 The block reward halves every 210,000 blocks created i.e
rate drops roughly every four years.

38. Mining Reward

39. Mining Reward
 When is the next Bitcoin Halving?
 Block #315,000 (estimated around 2024)
 Current mining reward is 3.125 BTC
 When was the last Bitcoin Halving?
 Block #630,000 (May 24th, 2020)
 Current mining reward is 6.25 BTC
 It is important to note that this is the only way in which new
bitcoins are allowed to be created.

40. Mining Reward
 With 21 million being the maximum bitcoin, New block
creation reward is actually going to run out in 2140
 The second incentive mechanism is called the transaction
fee

41. Mining Difficulty
 Hash Value is 256 bits out of which atleast 64 bits are
fixed to have zero value.
 The difficulty changes for every 2016 blocks
 Desired rate : one block each 10 minutes
 Two weeks to generate 2016 blocks
(24[hours]*60[mins])10=144*14[days]=2016
 The change in difficulty is in proportion to the amount of
time over or under two weeks the previous 2016 blocks
took to find.

42. Setting Difficulty Level
• The difficulty is computed every two weeks using the below
formula
𝒄𝒖𝒓𝒓𝒆𝒏𝒕𝒅𝒊𝒇𝒇𝒊𝒄𝒖𝒍𝒕𝒚
= 𝒑𝒓𝒆𝒗𝒅𝒊𝒇𝒇𝒊𝒄𝒖𝒍𝒕𝒚 ∗ (𝟐 𝒘𝒆𝒆𝒌𝒔 𝒊𝒏 𝒎𝒊𝒍𝒍𝒊𝒔𝒆𝒄𝒐𝒏𝒅𝒔)/(𝒎𝒊𝒍𝒍𝒊𝒔
𝒆𝒄𝒐𝒏𝒅𝒔 𝒕𝒐 𝒎𝒊𝒏𝒆 𝒍𝒂𝒔𝒕 𝟐𝟎𝟏𝟔 𝒃𝒍𝒐𝒄𝒌𝒔)

43. Fork
 A byproduct of distributed consensus, forks happen anytime
two miners find a block at nearly the same time.
 The ambiguity is resolved when subsequent blocks are
added to one, making it the longest chain, while the other
block gets “orphaned” (or abandoned) by the network.
 But forks also can be willingly introduced to the network.
This occurs when developers seek to change the rules the
software uses to decide whether a transaction is valid or
not.

44. Fork

45. Fork
• Forks represent changes to the bitcoin protocol that make
previous rules valid or invalid.
 Soft Fork
 is a rule change that is backward compatible which means
the new rules can still be interoperable with the legacy
protocol.
 Hard Fork
 enables a rule change to the software, but it does not have
backward compatibility.
 Causes a permanent split from the legacy rule-set, or version,
of the blockchain before the fork occurred.

46. Soft Fork

47. Soft Fork

48. Hard Fork

49. Hard Fork

50. Block Chain Demo
• Open the web link given below:-
• Blockchain Demo (andersbrownworth.com)
• Reference: https://andersbrownworth.com/blockchain/

51. Block Chain Demo

52. Block Chain Demo

53. Block Chain Demo

55. PROOF OF WORK

56. Proof of Work

57. Proof of Stake

58. Proof of Stake

60. The 51% Attack
• A 51% attack is a type of attack on a blockchain network where an attacker
gains control of more than 50% of the network's computing power, also
known as hash rate.
• This would allow the attacker to rewrite the blockchain history and
potentially double-spend or reverse transactions, leading to serious
problems for the network's integrity and security.
• In a blockchain network, transactions are validated and recorded by a
decentralized network of nodes that compete to solve complex
mathematical problems, and the longest valid chain of blocks is
considered the true ledger of the network.
• However, if an attacker controls more than 50% of the network's
computing power, they can create a longer chain of blocks faster than the
rest of the network, effectively invalidating previous transactions and
rewriting the blockchain history.

61. The 51% Attack
• To execute a 51% attack, the attacker needs to have a significant
amount of computing power and resources, which is not feasible for
most individual attackers.
• However, it is possible for a group of miners to collude and create a
large enough mining pool to control more than 50% of the network's
hash rate.
• To prevent a 51% attack, blockchain networks implement various
security measures, including proof-of-work algorithms, which make it
computationally expensive to execute such an attack.
• Additionally, some blockchain networks, such as proof-of-stake
networks, rely on a different mechanism to secure the network and
prevent such attacks.

62. The 51% Attack Private and public blockchains are two types of
blockchain networks that differ in terms of their
accessibility, permission, and transparency.
Public blockchains are open and
permissionless networks that allow anyone to
participate in the network and access the data
stored on the blockchain.
Examples of public blockchains include
Bitcoin, Ethereum, and Litecoin.
Private blockchains, on the other hand, are
closed and permissioned networks that restrict
access to the data stored on the blockchain.
They are typically used by organizations or
groups of organizations to facilitate private
transactions or exchange of information.
Examples of private blockchains include
Hyperledger Fabric and Corda.
In summary, public blockchains are open and transparent,
accessible to anyone, and maintained by a decentralized
network of nodes, while private blockchains are closed and
permissioned, accessible only to authorized participants,
and managed by a centralized entity or a group of entities.

63. Ethereum Virtual Machine & Feature
• The Ethereum Virtual Machine (EVM) is the runtime
environment for executing smart contracts in the Ethereum
blockchain network. It serves as the decentralized computer
that processes and executes code written in Ethereum's native
programming language, Solidity.
• Decentralised: operates on a decentralized network of nodes,
meaning no single entity has control over the network
• Cryptocurrency (Ether): Ethereum has its native cryptocurrency
called Ether (ETH), which is used as both a digital currency and a fuel
to pay for transaction fees and computational services on the network
• Immutable Ledger: Transactions on the Ethereum blockchain are
recorded on an immutable ledger, meaning they cannot be altered or
tampered with once they are confirmed and added to the blockchain.

64. Advantages of Smart Contracts:
1.Trustless Transactions: Smart contracts enable trustless transactions by
automating the execution of agreements without the need for
intermediaries. Participants can engage in transactions directly with each
other, knowing that the terms of the contract will be enforced automatically
by the blockchain.
2.Cost Efficiency: Smart contracts eliminate the need for intermediaries
such as lawyers, brokers, or escrow services, reducing transaction costs
associated with traditional contracts. This cost efficiency is particularly
beneficial for cross-border transactions and microtransactions.
3.Transparency and Security: Smart contracts operate on a transparent
and immutable blockchain, providing full visibility into the terms and
execution of the contract. This transparency enhances security and
reduces the risk of fraud or manipulation.
4.Automated Execution: Smart contracts execute automatically when
predefined conditions are met, removing the need for manual intervention
and reducing the potential for errors or delays in contract execution.

65. Bitcoin scripting Ethereum smart contracts
Bitcoin scripting is primarily designed for
transaction verification and defining
conditions for spending bitcoins. It allows
users to create custom transaction
outputs with specific spending
conditions.
Ethereum smart contracts are designed
to execute arbitrary code and automate
complex logic on the blockchain. They
enable the creation of decentralized
applications (DApps) with programmable
functionality.
Bitcoin scripting language is a stack-
based, Forth-like language that is
intentionally limited to ensure security
and prevent certain types of attacks.
Ethereum smart contracts are written in
high-level languages like Solidity, which is
specifically designed for writing smart
contracts. Solidity resembles JavaScript
and is more expressive and flexible
compared to Bitcoin scripting.
Bitcoin scripting allows for basic
conditional spending conditions, such as
multisignature wallets, time-locked
transactions (e.g., CheckLockTimeVerify),
and hash-locked transactions (e.g.,
HashTimeLock).
Ethereum smart contracts support a wide
range of functionalities, including
conditional statements, loops, data
storage, interaction with other contracts,
and even interaction with external data
sources (via oracles). This enables the
development of complex decentralized
applications and protocols.

67. Plug and Play (PnP) platform
In permissioned blockchains, Plug and Play (PnP) platform mechanisms are designed to enable easy
integration of various components or modules into the blockchain network. These mechanisms facilitate
interoperability, customization, and scalability of the blockchain infrastructure. Here's how PnP platform
mechanisms are typically distinguished:
1.Modular Architecture: Permissioned blockchains are built with a modular architecture, allowing
different components such as consensus algorithms, smart contract languages, data storage
mechanisms, and identity management systems to be plugged in or replaced easily. This modular
approach ensures flexibility and adaptability to evolving business requirements.
2.Standardized APIs: PnP platforms often provide standardized Application Programming Interfaces
(APIs) that define how external applications or modules can interact with the blockchain network.
These APIs abstract the complexity of the underlying blockchain technology, making it easier for
developers to integrate new features or functionalities.
3.Component Marketplaces: Some permissioned blockchain platforms offer component marketplaces
or repositories where developers can discover, download, and deploy pre-built modules or smart
contracts. These marketplaces foster collaboration and innovation within the blockchain ecosystem
by allowing developers to leverage existing solutions and focus on building specific features or
applications.
4.Dynamic Configuration: PnP platforms allow for dynamic configuration of blockchain networks by
enabling the addition or removal of components on-the-fly. This dynamic configuration capability
facilitates seamless upgrades, maintenance, and optimization of the blockchain infrastructure without
disrupting ongoing operations.
5.Interoperability Standards: PnP mechanisms in permissioned blockchains adhere to interoperability
standards that ensure compatibility between different modules or components. These standards
enable seamless integration with external systems, such as legacy databases or enterprise
applications, and promote interoperability across heterogeneous blockchain networks.

68. Hyperledger Fabric is a Permissioned
Blockchain
• Here's a detailed classification of its key features:
1.Permissioned Network:
Hyperledger Fabric supports permissioned networks, where participants must be
authenticated and authorized to access the blockchain network.
It provides fine-grained access control mechanisms, allowing administrators to
define roles and permissions for network participants.
2.Modular Architecture:
Fabric's modular architecture enables pluggable components, allowing
organizations to customize and configure the blockchain network according to
their specific needs.
Components such as consensus algorithms, membership services, and smart
contract engines can be swapped in and out to tailor the network's functionality.
3.Private Data Channels:
Fabric allows the creation of private data channels, enabling confidential
transactions between a subset of network participants.
Participants within a private data channel have access to a shared ledger
containing only the transactions relevant to them, enhancing privacy and

69. Turing completeness of a smart contract
• Refers to the ability of a programming language or computational system
to simulate any algorithmic process
• Turing completeness means that the programming language used to
write the smart contracts is capable of expressing any computable
function or algorithm.
• A smart contract platform that is Turing complete allows developers to
create complex and arbitrarily intricate programs within the constraints of
the platform
• Ethereum, for example, is often cited as an example of a Turing
complete blockchain platform. Its programming language, Solidity, allows
developers to create sophisticated smart contracts that can execute a
wide range of tasks, from simple token transfers to complex
decentralized applications (DApps).