Blockchain Foundation Program

What is Blockchain?

Blockchain is a decentralized, distributed digital ledger that is used to record transactions and information in a secure and transparent manner. It is essentially a database that is maintained by a network of computers, rather than a single central authority. The transfer of information in blockchain acts peer-to-peer without any middlemen or intermediaries. Blockchain uses immutable Data Structure. Bitcoin is the first application of Blockchain Technology.

Keywords: Decentralized, transparent and trustless network

How was the Blockchain named?

Blockchain got its name from the format it stores data. In blockchain, the data is packaged into blocks. The blocks later form a chain with other blocks of information, forms Blockchain.

What does a block contains?

Blocks contains information or transactions happening on a blockchain. A block contains a header and body. “Transactions” are stored in the “body” part and other details in the header.

Blocks of Blockchain

Blockchain Characteristics

Decentralized, Immutable, Secured and Edit-proof

What makes up a Blockchain?

There are three basic parts to every Blockchain:

1. The transaction: This can be any type of information recorded on the blockchain

2. The block: A bundle of different transactions

3. The chain: All the blocks are linked together

Working Of Blockchain

Step1: When a user creates a transaction over a Blockchain network, the requested transaction is broadcasted over the peer-to-peer network.

Step2: The nodes in the network then validate the transaction. Once the transaction is validated, it is grouped with other verified transactions to create a new block.

Step3: The verified block is now secured using cryptographic principles.

Step4: Now all nodes add the transaction to the block and adds block to own nodes.

Step5: Among all blocks, one block is selected based on set selection criteria.

Step6: Selected block is sent across the network and verified by all peer entities.

Step7: That selected block is added to the chain of blocks called blockchain.

Step8: The transaction is completed.

Types of Blockchain

There are three types of Blockchain:

1. Private Blockchain: Single entity governs the action. Used only when the participants of the network are known to each other. Example: Ripple.
2. Public Blockchain: Anyone can join and participate in the action. Everyone can see what’s going on. Example: Bitcoin and Ethereum.
3. Consortium Blockchain: Combines the features of public and private blockchains. It may not be accessible to the public. Multiple parties will be part of the network. Access to the network will be restricted. Example: Hyperledger and Corda.

What is the difference between Bitcoin, bitcoin and blockchain?

1. Bitcoin is a piece of software(protocol) used for communication
2. bitcoin is a digital cryptocurrency used for transactions
3. Blockchain is an underlying technology running bitcoin.

Bitcoin myth clearance

History of Blockchain

Year: 1991 Blockchain technology was announced by Stuart Haber and W. Scott Stornetta, White Paper: How to Time-Stamp a Digital Document

Satoshi Nakamoto: Bitcoin in 2008 and White Paper: A peer to peer electronic cash system

Vitalik Buterin: Ethereum 2013

Decentralization: When and Why

Under blockchain, there is a dispersion of functions, powers, people, or things.

Decentralization of authority: As no single party has control over the network.

Decentralization of location: As no single location where the network focuses its resources.

Features of Blockchain

1. Immutability: achieved by cryptography and hashing techniques
2. Decentralized: No central authority
3. Distributed peer to peer network: Distributed network enables sharing the ledger among network participant nodes
4. Better security: Blocks in blockchain are sealed with cryptographic techniques

Distributed Ledger Technology & Blockchain

Ledger is a record of transactions. The ledger’s exact copy is distributed among the group of participants.

Types of Distributive Ledger Technology

What is Bitcoin?

Bitcoin is a technology. It is also a currency. It is a decentralized international network of payments that doesn’t rely on banks or governments.

How do people acquire bitcoin?

There are 4 ways to acquire bitcoin:

1. Earn: Get BTC in exchange of work done
2. Buy: Buy BTC in its current fiat currency value
3. Trade: Get BTC in exchange of anything
4. Mining: Solve cryptographic puzzle and get BTC as reward

Components of Bitcoin Network

1. Software: Bitcoin is a piece of software. Software uses cryptography to make communication of bitcoin currency exchange between two communities.
2. Hardware: There are 4 parts of hardware:

a) Full Node: All transaction information is stored

b) Lightweight Node: Only header of transaction is stored

c) Miner Node: Responsible for validating and mining the transaction

d) RouterNode: It helps in directing requests to the appropriate device for processing transactions.

3. Cryptography: It is the technqiue used for secure communication

4. Miners: Solves cryptography puzzles and win rewards like BTC

Working of Bitcoin Network

The bitcoin’s total supply is 21 million.

Miners and the rewards

Rewards are the transacation fees associated with each transaction. Initially miners used to get 50 bitcoins which is getting halved every four years. in the current era, miners get 6.25 bitcoin as reward.

Bitcoin Transaction

A bitcoin transaction involves the transfer of bitcoin from one address to another. The sender must sign the bitcoin transaction to make it valid. The signed transaction gets sent across the network, where each mining node verifies the transaction. The miners then combine all the transactions they receive to form a block.

There will be many different transactions in each miner’s block. Bitcoin blockchain limits the size of a block by 1 MB. Therefore, each miner includes transactions till 1 MB and adds the remaining transactions to the next block.

UTXO

UTXO or Unspent Transaction Output keeps track of the transactions and account balances in the Bitcoin blockchain. If Alice got a cash note of 10 dollars and wants to buy goods priced 5 dollars, she doesn’t divide the note in half for the payment. Instead, she gives the entire note and takes a new five-dollar note as a change along with the goods. So, the amount Alice gave is called Input and the remaining amount Alice got from shop is called Output.

UTXO is only applicable to Bitcoin cryptocurrency.

UTXO

Blockchain Consensus

Consensus means an agreement

Blockchain consensus has two parts: Voting Based and Lottery Based

1. Voting Based: 51% nodes should agree to allow block to enter the blockchain. Example: PBFT and RAFT
2. Lottery Based: the one who will win the lottery will get the chance to add the block in blockchain. Example: Proof of work and Proof of stake

Bitcoin blockchain: Poof of work

Mining and puzzle solving: Proof of stake

Proof Of Work (PoW):

It is a consensus algorithm to select the leader. Each block will be different with different transactions so, all nodes should be given chance to add block to maintain consistency.

Selection of blocks is based on solving the cryptographic puzzle. Who tries to solve puzzle is called miners and the process is called mining. Miners are responsible for adding block into chain. For transaction fees for mining as a reward miners get 6.25 BTC.

Cryptographic Puzzle: Network decides the threshold value of hexadecimal value. Miners tries to generate the hash value below the threshold value. If the hash value is generated for the bigger value than threshold means the miner need to min the blocks again. The time to solve puzzle is nearly set to 10 minutes.

The Difficulty level and mining

There is a limit of 21 million bitcoins can be produces by the network.

The average time to solve puzzle is 10 minutes. After every 2016th block the time to solve puzzle is readjusted.

If the time to solve puzzle is less than 10 minutes the threshold decreases but difficulty increases.

Mining pool: More than one miner work together to solve the puzzle in the given time.

Fork Resolution

How to continue the chain and which node should be added to which branch is resolved by fork resolution. There are two types of fork: hard fork and soft fork.

1. Hard Fork: A hard fork is a permanent change. The network gets divided based on the branch they follow. If fork takes place on software upgrade, the nodes running older versions get rejected. Hard forks are not backward compatible. A hard fork is a fundamental change to the protocol that makes previously valid blocks invalid.

Hard Fork

2. Soft forks: A Soft forks are backward compatible. Soft fork takes place when two mining nodes find the solution at the same time. Both blocks will added into the chain. But there will be a dillema of which branch to extend. The solution is: To take the longest chain which means choose the branch with higher difficulty. If both branch have equal difficulty then choose the branch who have done more amount of work.

Soft Fork

After six nodes the non-extended block is dicarded called State Block. And the parent node is not accessible by state node now so that node is called orphan node.

State and Orphan node

Proof of Stake

PoS fulfills the disavnatges of PoW. PoS was introduced in the year 2011. PoW needs a high computational power but to avoid PoS brought a new concept of maximum amount of stake. The more number of stakes the more is the mining power.

In PoS mining can be done to the limit of number of stakes the particular miner holds.

Working of PoS:

Blocks are forged(forged is a framework to build DApp). The one creating new blocks are called forgers. When new currency is added the amount in fiat currency is set. If the validation gets successful the forger gets the amount set but incase of failure the forger doesn’t get any reward and doesn’t allow the transaction to be successful.

The selection criteria

1. Random block selection: Lowest hash value
2. Coin age based selection: Number of BTC * The days earned BTC not spend. For example, 3 BTC that have been possessed for 4 days would have a coin age of 12 BTC-days (3 x 4 = 12).

Advantages of PoS

Energy Efficiency

Randomization in PoS prevents centralization

No one will try to attack the network as it would vastly decrease the value of the attacker’s coins

Disadvantages of PoS

There is a problem with Decentralization

Nothing to stake problem

More the stake, more the risk

Variant of PoS

Hybrid, Liquid, Bonded and Deligated

What is PBFT?

Practical byzantine fault tolerance developed by Barbara and Michel in 1999. It is a consensus algorithm where we can achieve correct information in spite of some malicious nodes.

Advantages of PBFT:

1. Energy efficiency: Does not need to solve high computational mathematical equations.
2. Transaction finality: If the node of the network is ready to add the block, then the block doesn’t require multiple confirmation.
3. Low rewarded variance: More the number of miners, less the reward

Variations of PBFT

IBFT: used in quorum

RBFT: Solves robust problem

SBFT: zyzzyva protocol reduces the cost of BFT

Working phases of PBFT

1. Pre-prepare: Creates a node and publish it and secondary node validates it at that time the pre-pre message is sent by the primary node. Pre-prepare message contains ID, number, view number, etc.
2. Prepare: After validation, 2f+1 messages should be gained.
3. Commit: 2f+1 commit messages should be sent and later block is added to the log/blockchain.

Blockchain in Banking

Adopting blockchain in banking have following advatnages:

1. Making banking transactions extremely faster

2. Blockchain can reduce processing fees

3. Recorded data is immutable

These are called Smart Contracts.

Blockchain in HealthCare

Current medical projects are: Pharma Ledger, FarmaTrust, etc.

Challenges In Blockchain

Following described are the challenges of Blockchain:

1. Performance: 2.55 GW power and the energy about 22TWh is consumed to validate 1 bitcoin which is yearly consumption of Ireland.
2. Human Error: Data stored in the blockchain are needed to be authenticate first before storing it.
3. Network Size: Blockchain needs to have large network to have high potential.