blockchain technology -unit-3-notes.pdf for engineering students
- 1. Studocu is not sponsored or endorsed by any college or university BT unit 3 notes Blockchain Technology (Savitribai Phule Pune University) Studocu is not sponsored or endorsed by any college or university BT unit 3 notes Blockchain Technology (Savitribai Phule Pune University) Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 2. Types of Blockchain Platforms Public: It is a permissionless distributed ledger on which anybody can join and conduct transactions. - It is a non-restrictive form of the ledger in which each peer has a copy. This means that anyone with an internet connection can access the public blockchain. - The user has access to historical and contemporary records and the ability to perform mining operations. - These complex computations must be performed to verify transactions and add them to the ledger. - On the blockchain network, no valid record or transaction may be altered. - Because the source code is usually open, anybody can check the transactions, uncover problems and suggest fixes. - These blockchains are completely open to following the idea of decentralization. - It is not owned by anyone. - All the computer in the network hold the copy of other nodes or block present in the network. - Advantages: Trustable: There are algorithms to detect fraud so participants need not worry about the other nodes in the network. 1. Secure: This blockchain is large in size as it is open to the public. In a large size, there is a greater distribution of records. 2. Anonymous nature: It is a secure platform that allows you to make proper transactions without having to reveal your name and identity in order to participate. 3. Decentralized: There is no single platform that maintains the network, instead every user has a copy of the ledger. 4. Open and Transparent: The data on a public blockchain is transparent to all member nodes. Every authorized node has a copy of the blockchain records or digital ledger. 5. - Disadvantages: Processing: The rate of the transaction process is very slow, due to its large size. Verification of each node is a very time- consuming process. 1. Energy consumption: Proof of work is high energy- consuming. It requires good computer hardware to participate in the network. 2. Acceptance: No central authority is there so governments are facing the issue to implement the technology faster. 3. Lower TPS (Transactions per second): The TPS in a public blockchain is extremely low. This is because it is a large network with many nodes which take time to verify a transaction and do proof-of-work. 4. Scalability issues: The transactions are processed and completed slowly. This harms scalability. The more we try to expand the network's size, the slower it will become. 5. - Use cases of public blockchain: Voting: Governments can use a public blockchain to vote, ensuring openness and trust. 1. Fundraising: Businesses or initiatives can use the public blockchain to improve transparency and trust. 2. - Examples: Bitcoin, Ethereum. - • Private: These blockchains are not as decentralized as the public blockchain. - Only selected nodes can participate in the process, making it more secure than the others. - • Blockchain Platforms and Consensus in Blockchain 08 December 2022 19:57 Unit 3 Page 1 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 3. This blockchain network operates in a private context, such as a restricted network, or is controlled by a single identity. - While it has a similar peer-to-peer connection and decentralization to a public blockchain network, this blockchain is far smaller. - They are often run on a small network within a firm or organization rather than open to anybody who wants to contribute processing power. - They are open to some authorized users only. - Advantages: Speed: The rate of the transaction is high, due to its small size. Verification of each node is less time-consuming. 1. Scalability: We can modify the scalability. The size of the network can be decided manually. 2. Privacy: It has increased the level of privacy for confidentiality reasons as the businesses required. 3. Balanced: It is more balanced as only some users have the access to the transaction which improves the performance of the network. 4. - Disadvantages: Security: The number of nodes in this type is limited so chances of manipulation exist. These blockchains are more vulnerable. 1. Centralized: Trust building is one of the main disadvantages due to its central nature. Organizations can use this for malpractices. 2. Count: Since there are few nodes, if nodes go offline the entire system of blockchain can be endangered. 3. - Use cases of private blockchain: Supply Chain Management: A private blockchain can be used to manage a company's supply chain. 1. Asset Ownership: A private blockchain can be used to track and verify assets. 2. Internal Voting: Internal voting is also possible with a private blockchain. 3. - Examples: Hyperledger, Corda. - Hybrid: It is the mixed content of the private and public blockchain, where some part is controlled by some organization and other parts are made visible as a public blockchain. - Allows enterprises to choose who has access to certain blockchain data and what data is made public. - Transactions and records are typically not made public, but they can be validated if necessary by granting access via a smart contract. - Advantages: Ecosystem: It cannot be hacked as 51% of users don't have access to the network. 1. Cost: Transactions are cheap as only a few nodes verify the transaction. All nodes don’t carry the verification hence less computational cost. 2. Architecture: It is highly customizable and still maintains integrity, security and transparency. 3. Operations: It can choose the participants in the blockchain and decide which transaction can be made public. 4. - Disadvantages: Efficiency: Issues in terms of efficiency in maintenance. 1. Transparency: Because information can be hidden, this type of blockchain isn't completely transparent. If someone wants to get access it depends on the organization whether they will give or not. 2. Less incentive: Upgrading can be difficult and users have no incentive to participate in or contribute to the network. 3. - Use cases of hybrid blockchain: Real estate: Real estate companies can use hybrid networks to run their systems and offer information to the public. 1. Retail: The hybrid network can also help retailers streamline their processes. 2. Highly regulated markets: Hybrid blockchains are also well- suited to highly regulated areas like the banking sector. 3. - Examples: Ripple network, XRP token. - • Consortium: It is a creative approach that solves the needs of the organization. - This blockchain validates the transaction and also initiates or receives transactions. - Also known as Federated Blockchain. - Some part is public and some part is private. - In the same way that a hybrid blockchain has both private and public blockchain features, a consortium blockchain also does. - However, it differs because it involves various organizational members working together on a decentralized network. - Predetermined nodes control the consensus methods in a consortium blockchain. - It has a validator node responsible for initiating, receiving, and validating transactions. - Transactions can be initiated or received by member nodes. - • Unit 3 Page 2 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 4. Advantages: Speed: A limited number of users make verification fast. The high speed makes this more usable for organizations. 1. Authority: Multiple organizations can take part and make it decentralized at every level. Decentralized authority makes it more secure. 2. Privacy: The information of the checked blocks is unknown to the public view, but any member belonging to the blockchain can access it. 3. Flexible: There is much divergence in the flexibility of the blockchain. Since it is not a very large decision it can be taken faster. 4. Secure: A consortium blockchain is more secure, scalable, and efficient than a public blockchain network. 5. - Disadvantages: Approval: All the members approve the protocol making it less flexible. Since one or more organizations are involved there can be differences in the vision of interest. 1. Transparency: Has a lower degree of transparency. It can be hacked if the organization becomes corrupt. Organizations may hide information from the users. 2. Vulnerability: If few nodes are getting compromised there is a greater chance of vulnerability in this blockchain. 3. - Use cases of consortium blockchain: Banking and payments: A consortium can be formed by a group of banks working together. They have control over which nodes will validate transactions. 1. Research: A consortium blockchain can be employed to share research data and outcomes. 2. Food Tracking: It is also apt for food tracking. 3. - Examples: Tendermint, Multichain. - Bitcoin: Bitcoin is a cryptocurrency, which is a form of digital, private money that works independently of a bank or government. • It is a digital token, or virtual currency, as well as the network on which such tokens can be stored and moved. • Satoshi Nakamoto discovered bitcoin in 2009. • Bitcoin is electronically stored currency. It can be stored in your mobiles, computers, or any storage media as a virtual currency. • It is a virtual currency designed to act as money and outside the control of any person or group thus eliminating the need for third-party in financial transactions. • Bitcoin started as a peer-to-peer network to generate a system for electronic transactions. • Since then, there has been a rapid growth in the usage as well as the value of bitcoin which is a popular system of digital currency. • Features: Distributed: All bitcoin transactions are recorded in a public ledger known as the blockchain. There are nodes in the network that maintain copies of the ledger and contribute to the correct propagation of the transactions following the rules of the protocols making it impossible for the network to suffer downtime. - Decentralized: There is no third party who controls the bitcoin network. The network consists of willing participants who agree to the rules of a protocol and changes to the protocol are done by the consensus of its users. This makes bitcoin a quasi-political system. - Transparent: The addition of new transactions to the blockchain ledger and the state of the bitcoin network is arrived upon by consensus in a transparent manner according to the rules of the protocol. - Peer-to-peer: In bitcoin transactions, the payments go straight from one party to another party so there is no need for any third party to act as an intermediary. - Censorship resistant: As bitcoin transactions are pseudo- anonymous and users possess the keys to their bitcoin holdings, so it is difficult for the authorities to ban users from using their assets. This provides economic freedom to the users. - Public: All bitcoin transactions are available publicly for everyone to see. All the transactions are recorded, which eliminates the possibility of fraudulent transactions. - Pseudo-anonymous: Bitcoin transactions are tied to addresses that take the form of randomly generated alphanumeric strings. - • Bitcoin transactions are digitally signed for security. • Anyone can create a bitcoin wallet by downloading the bitcoin program. Each bitcoin wallet has two things: Public key: It is like an address or an account number via which any user or account can receive bitcoins. - Private key: It is like a digital signature via which anyone can send bitcoins. - • The public key can be shared with anyone but the private key must be held by the owner. If the private key gets hacked or stolen then bitcoin is lost. • A bitcoin transaction contains three pieces of information: Private key: The first part contains the bitcoin wallet address of the sender i.e., the private key. - Amount of bitcoin to be transferred: The second part contains the amount that has been sent. - Public key: The third part contains the bitcoin wallet address of the recipient i.e., the public key. - • Unit 3 Page 3 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 5. Bitcoin transactions are verified by the nodes on the network. Once the transaction is verified and executed successfully, the transaction is recorded in a distributed public ledger called a blockchain. • Bitcoins are a decentralized currency, they aren't printed, like rupees, they're produced by people, and big companies, running computers all around the world, using software that solves mathematical problems. • Bitcoins are mined using the computing power of the distributed network. This network also processes transactions made using bitcoin. • Bitcoins are mined on the basis of computing power, so they take time to be generated. • How does bitcoin mining work? The user initiates the bitcoin transaction by listing the details like the number of bitcoins to be sent, and the public address, and affixing the private key to generate a digital signature. The encrypted information to the miners present on the network. - The miners will verify the transaction to check whether there is sufficient balance to carry out the transaction. - The faster the CPU of a miner, the greater the chances of the miner to get rewarded for verifying the transaction. The miner's job is only to provide the CPU, there is no manual intervention from the miner. The bitcoin program will run automatically on the system. - Once the transaction is verified, the number of transactions is broadcasted to the network of miners who can copy or download the block. - These blocks through timestamps are stored in sequential order to form a blockchain. - Each miner in the network must have an updated copy of the blockchain ledger in order to earn bitcoins. - • Benefits: User anonymity: Bitcoin users can have multiple public keys and are identifies by numerical codes. This ensures that the transactions cannot be traced back to the user. Even if the wallet address becomes public, the user can generate a new wallet address to keep information safe. - Transparency: Bitcoin transactions are recorded on the public ledger blockchain. The transactions are permanently viewable, which gives transparency to the system but they are secure and fraud-resistant at the same time due to blockchain technology. - Accessibility: Bitcoin is a very versatile and accessible currency. It takes a few minutes to transfer bitcoins to another user, so it can be used to buy goods and services from a variety of places accepting bitcoins. This makes spending bitcoin easy in another country with little or no fees applied. - Independence from central authority: Bitcoin is decentralized currency, which means there is no dependence on any single governing authority for verifying transactions. This means that the authorities are not likely to freeze or demand back the bitcoins. - Low transaction fees: Standard wire transfers involve transaction fees and exchange costs. Since bitcoin transactions do not involve any government authority so the transaction fees are very low compared to bank transfers. - • Drawbacks: Volatility: Various factors like uncertainty about its future value, security breaches, scarcity of bitcoins contribute to the bitcoin's volatility. - No government regulations: Unlike the investments that are done through central banks, bitcoins transactions are not regulated by any central authority due to a decentralized framework. This means that bitcoin transactions don’t come with legal protection and are irreversible which makes them susceptible to crimes. - No buyer protection: If the goods are bought using bitcoins and the seller does not send the promised goods then nothing can be done to reverse the transactions and since there is no central authority so no legal protection can be provided in this case. - Not widely accepted: Bitcoins are still only accepted by a small group of online merchants. This makes it unfeasible to rely completely on bitcoin as a currency and replace it with traditional bank transactions. - Irreversible: There is a lack of security in bitcoin transactions due to the anonymous and non-regulated nature of the bitcoin transactions. If the wrong amount is sent or the amount is sent to the wrong recipient then nothing can be done to reverse the transactions. - • Ethereum Initially released in 2015. • Ethereum is a blockchain network that introduced a built-in Turing- complete programming language that can be used for creating various decentralized applications. • The Ethereum network is fuelled by its own cryptocurrency called 'ether'. • The Ethereum network is currently famous for allowing the implementation of smart contracts. • Smart contracts can be thought of as 'cryptographic bank lockers' which contain certain values. • These cryptographic lockers can only be unlocked when certain conditions are met. • Unlike bitcoin, Ethereum is a network that can be applied to various other sectors. • Unit 3 Page 4 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 6. The consensus mechanism used in Ethereum is Proof of Stakes (PoS), which is more energy efficient when compared to that used in the bitcoin network, that is Proof of Work (PoW). PoS depends on the amount of stake a node holds. • History of Ethereum: 2013: Ethereum was first described in Vitalik Buterin's white paper in 2013 with the goal of developing decentralized applications. - 2014: EVM was specified in a paper by Gavin Wood, and the formal development of the software also began. - 2015: Ethereum created its genesis block marking the official launch of the platform. - 2018: Ethereum took second place in bitcoin in terms of market capitalization. - 2021: A major network upgrade named London included Ethereum improvement proposal 1559 and introduced a mechanism for reducing transaction fee volatility. - 2022: There will be a shift from Ethereum to Ethereum 2.0 and a shift from PoW to PoS consensus model. - • Features of Ethereum: Smart contracts: Ethereum allows the creation and deployment of smart contracts. Smart contracts are created mainly using a programming language called solidity. Solidity is an Object Oriented Programming language that is comparatively easy to learn. - Ethereum Virtual Machine (EVM): It is designed to operate as a runtime environment for compiling and deploying Ethereum-based smart contracts. - Ether: Ether is the cryptocurrency of the Ethereum network. It is the only acceptable form of payment for transaction fees on the Ethereum network. - Decentralized applications (Dapps): Dapp has its backend code running on a decentralized peer-to-peer network. It can have a frontend and user interface written in any language to make calls and query data from its backend. They operate on Ethereum and perform the same function irrespective of the environment in which they get executed. - Decentralized autonomous organizations (DAOs): It is a decentralized organization that works in a democratic and decentralized fashion. DAO relies on smart contracts for decision- making or decentralized voting systems withing the organization. - • Types of Ethereum accounts: Ethereum has two types of accounts - Externally owned account (EOA): Externally owned accounts are controlled by private keys. Each EOA has a public-private key pair. The users can send messages by creating and signing transactions. - Contract account: Contract accounts are controlled by contract codes. These codes are stored with the account. Each contract account has an ether balance associated with it. The contract code of these accounts gets activated every time a transaction from an EOA or a message from another contract is received by it. When the contract code activates, it allows to read/write the message to the local storage, send messages and create contracts. - • How does Ethereum work? Ethereum implements an execution environment called Ethereum Virtual Machine (EVM). - When a transaction triggers a smart contract all the modes of the network will execute every instruction. - All the nodes will run the EVM as part of the block verification, where the nodes will go through the transactions listed in the block and run the code as triggered by the transaction in the EVM. - All the nodes on the network must perform the same calculations for keeping their ledgers in sync. - Every transaction must include - Gas limit ▪ Transaction fee that the sender is willing to pay for the transaction. ▪ - If the total amount of gas needed to process the transaction is less than or equal to the gas limit then the transaction will be processed and if the total amount of the gas needed is more than the gas limit then the transaction will not be processed the fees are still lost. - Thus it is safe to send transactions with the gas limit above the estimate to increase the chances of getting it processed. - • Real world applications: Voting: Voting systems are adopting Ethereum. The results of polls are available publicly, ensuring a transparent fair system thus eliminating voting malpractices. - Agreements: With Ethereum smart contracts, agreements and contracts can be maintained and executed without any alteration. Ethereum can be used for creating smart contracts and for digitally recording transactions based on them. - Banking systems: Due to the decentralized nature of the Ethereum blockchain it becomes challenging for hackers to gain unauthorized access to the network. It also makes payments on the Ethereum network secure, so banks are using Ethereum as a channel for making payments. - Shipping: Ethereum provides a tracking framework that helps with the tracking of cargo and prevents goods from being misplaced. - Crowdfunding: Applying Ethereum smart contracts to blockchain based crowdfunding platforms helps to increase trust and information symmetry. It creates many possibilities for start-ups by raising funds to create their own digital cryptocurrency. - Domain names: Ethereum name service allows crypto users to buy - • Unit 3 Page 5 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 7. and manage their own domain names on Ethereum, thus simplifying decentralized transactions without putting users to remember long, machine-readable addresses. Benefits of Ethereum: Availability: As the Ethereum network is decentralized so there is no downtime. Even if one node goes down other computing nodes are available. - Privacy: Users don't need to enter their personal credentials while using the network for exchanges, thus allowing them to remain anonymous. - Security: Ethereum is designed to be unhackable, as the hackers have to get control of the majority of the network nodes to exploit the network. - Less ambiguity: The smart contracts that are used as a basis for trade and agreement on Ethereum ensure stronger contracts that differ from the normal traditional contracts which require follow-through and interpretation. - Rapid deployment: On Ethereum decentralized networks, enterprises can easily deploy and manage private blockchain networks instead of coding blockchain implementation from scratch. - Network size: Ethereum network can work with hundreds of nodes and millions of users. - Data coordination: Ethereum decentralized architecture better allocated information so that the network participants don't have to rely on a central entity to manage the system and mediate transactions. - • Drawbacks of Ethereum: Complicated programming language: Learning solidity from programming smart contracts on Ethereum can be challenging and one of the main concerns is the scarcity of beginner- friendly classes. - Volatile cryptocurrency: Ethereum investing can be risky as the price of Ether is very volatile, resulting in significant gains as well as a significant loss. - Low transaction rate: Bitcoin has an average transaction rate of 7TPS and Ethereum has an average speed of 15TPS which is almost double that of bitcoin but it is still not enough. - • Ethereum is designed to be scalable, decentralized, and programmable. • Provides a flexible platform to build applications using the solidity scripting language. • Transactions are sent and received in user created Ethereum accounts. • It is a blockchain based platform with the cryptocurrency Ether (ETH). • Difference between Bitcoin and Ethereum Criteria Bitcoin Ethereum Definition Decentralized digital currency that can be transferred on the peer-to- peer bitcoin network. Decentralized global software platform powered by blockchain technology. Purpose Purpose was to replace national currencies during the financial crisis of 2008. Purpose was to utilize blockchain technology for maintaining a decentralized payment network and storing computer code. Smart contracts Has smart contract but not as flexible or complete as Ethereum smart contracts. Allows us to create smart contracts. Smart contract programming language Written in programming languages like script, clarity. Written in programming languages like Solidity, Vyper, etc. Transactions Generally bitcoin transactions are only for keeping notes. Ethereum transactions may contain some executable code. Hash algorithm Runs on the SHA-256 hash algorithm. Runs on the Keccak-256 hash algorithm. Consensus mechanism The Proof-of-Work (PoW) is the consensus mechanism used by bitcoin network. The Proof-of-Stake (PoS) is the consensus mechanism used by Ethereum. Block time Block time of bitcoin is 10 minutes. The block time of Ethereum is 14 to 15 seconds. Block limit Block limit of 1 MB. Does not have a block limit. Popularity Most popular digital currency in the market to date. Second-largest cryptocurrency after bitcoin to date. Unit 3 Page 6 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 8. Hyperledger Hyperledger is an open-source project under the Linux foundation where people can come and work on the platform to develop blockchain related use cases. • Provides the platform to create personalized blockchain services according to the need of business work. • Unlike other platforms for developing blockchain-based software, Hyperledger has the advantage of creating a secured and personalized blockchain network. • It is created to support the development of blockchain based distributed ledgers • It includes a variety of enterprise-ready permissioned blockchain platforms. • It is a global collaboration for developing high-performance and reliable blockchain and distributed ledger-based technology frameworks. • Why do we need Hyperledger? To enhance the efficiency, performance, and transactions of various business processes. - It provides the necessary infrastructure and standards for developing various blockchain-based systems and applications for industrial use. - It gets rid of the complex nature of contractual agreements, as the legal issues are taken care of. - Hyperledger offers the physical separation of sensitive data. - It decreases the need for verification and enhances trust, thus optimizing network performance and scalability. - • Hyperledger technology layers: Consensus layer: It takes care of creating an agreement on the order and confirming the correctness of the set of transactions that constitute a block. 1. Smart layer: This layer is responsible for processing transaction requests and authorizing valid transactions. 2. Communication layer: It takes care of peer-to-peer message transport. 3. Identity management services: These are important for establishing trust on the blockchain. 4. API: It enables external applications and clients to interface with the blockchain. 5. • There are four distinct Hyperledger frameworks: Hyperledger Sawtooth: Permissioned modular blockchain platform. - Led by Intel to build, run and deploy distributed ledger. - An active Hyperledger project. - Implements transaction-based updates to shared state among untrusted parties synchronized by a consensus algorithm. - Includes a novel consensus algorithm called Proof of Elapsed Time. - Features include Dynamic consensus, Transaction families, Parallel Transaction Execution (allows creation of individual chains) and Private transactions. - Software Development Kits (SDKs) for python, Go, JavaScript, Rust, Java and C++ are also available. - Sawtooth is meant for businesses need a permissioned and modular blockchain platform. - 1. Hyperledger Iroha: Led by Sora Mitsu. - Aims to provide a developing environment where mobile application and C++ developers can contribute to the Hyperledger. - It has a permissioned network developed in C++, and pre- defined commands, queries, and permissions to develop applications for mobile and desktop platform conveniently. - Has a modular design, control based access, access to many libraries, as well as asset and identity management. - Used in fields such as financial services, healthcare and education. - 2. Hyperledger Fabric: Most popular Hyperledger project. - IBM initiated it for Digital Assets. - Uses container technology to host "chain code" like smart contracts in Ethereum. - Blockchain framework allows different components like membership services and consensus to be plug-and-play. - It is a permissioned blockchain infrastructure used to build blockchain based products, software and applications. - Core of the platform is written in the Go programming language. - Its distributed ledger and smart contract platform allows for private channels. - If you have a large blockchain network, and you want to share data with only certain parties, you can create a private channel with just those participants. - Used with integration projects that need a distributed ledger.1 - 3. Hyperledger Burrow: Project is from Monax and co-sponsored by Intel. - Monax- famous for creating a permissioned blockchain on top of Ethereum framework. - Gives a blockchain client a permissioned smart contract which is somewhat developed to specification of the Ethereum Virtual Machine. - Handles transactions and smart contract code. - 4. • Unit 3 Page 7 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 9. There are four major tools initiatives, each having its distinct role in the development of the environment, applications, etc. Hyperledger Cello: Objective is to simplify the management and creation of blockchain networks. - Deploying cello provides a Blockchain-as-a-Service (BaaS) environment. - Provides an efficient way for a multi-tenant chain service on top of different infrastructure. - Toolkit used to create, terminate and manage blockchain services. - 1. Hyperledger Explorer: Web-based application where one can view all the transactions. - A dashboard utility tool that allows a user to monitor, search and maintain blockchain and related data. - Provides visibility over a running Hyperledger blockchain network. - Can view, deploy, or query blocks, network information, chain codes, transaction, and any other information stored in the ledger. - With it, an organization can check nodes, blocks, transactions and smart contracts. - Also users to make code changes. - 2. Hyperledger Composer: Used for creating and deploying business network applications like smart contracts over Hyperledger network utilizing high- level composer language. - 3. Hyperledger Quilt: Used for interoperability among multiple blockchain networks by implementing the Interledger protocol (ILP). - Protocol designed to transfer value across distributed ledgers. - 4. • IOTA IOTA is an open-source distributed ledger and cryptocurrency designed for the Internet of Things (IoT). • Uses a directed acyclic graph to store transactions on its ledger, motivated by a potentially higher scalability over blockchain based distributed ledgers. • Does not use miners to validate transactions, instead nodes that issue a new transaction on the network must approve two previous transactions. • Transactions can therefore be issued without fees, facilitating microtransactions. • The network currently achieves consensus through a coordinator node, operated by the IOTA foundation. As the coordinator is a single point of failure, the network is currently centralized. • Named after the smallest letter of the Greek alphabet, created in 2015. • As a speculative blockchain and cryptocurrency-related technology, IOTA has been the target of phishing, scamming and hacking attempts. • These attempts have resulted in the thefts of user tokens and extended periods of downtime. • Characteristics: The Tangle: Name used to describe IOTAs directed acyclic graph (DAG) transaction settlement and data integrity layer. - It is structured as a string of individual transactions that are interlinked to each other and stored through a network of node participants. - The Tangle does not have miners validating transactions, rather, network participants are jointly responsible for transaction validation, and must confirm two transactions already submitted to the network for every one transaction they issue. - Transactions can therefore be issued to the network at no cost, facilitating micropayments. - To avoid spam, every transaction requires computational resources based on Proof of Work (PoW) algorithms, to find the answer to a simple cryptographic puzzle. - IOTA supports both value and data transfers. - A second layer protocol provides encryption and authentication of messages, or data streams, transmitted and stored on the Tangle as zero-value transactions. - Each message holds a reference to the address of a follow-up message, connecting the messages in a data stream, and providing forward secrecy. - Authorized parties with the correct decryption key can therefore only follow a datastream from their point of entry. - When the owner of the datastream wants to revoke access, they can change the decryption key when publishing a new message. This provides the owner granular controls over the way in which data is exchanges to authorized parties. - 1. IOTA token: The IOTA token is a unit of value in the IOTA network. - There is a fixed supply of 2,779,530,283,277,761 IOTA tokens in circulation on the IOTA network. - IOTA tokens are stored in IOTA wallets protected by an 81- character seed, similar to password. - To access and spend the tokens, IOTA provides a cryptocurrency wallet. - A hardware wallet can be used to keep credentials offline while facilitating transactions. - 2. • Unit 3 Page 8 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 10. Fast Probabilistic Consensus (FPC): Core of cryptocurrencies is to stop double spends, the ability to spend the same money twice in two simultaneous transactions. - Bitcoin uses Proof of Work (PoW) as a solution making it a significant financial burden to have a minted block be rejected for a double spend. - IOTA has designed a voting algorithm called Fast Probabilistic Consensus to form a consensus on double spends. - 3. Markets: IOTA is traded in mega IOTA units (1,000,000 IOTA) on digital currency exchanges such as Bitfinex, and listed under the MIOTA ticker symbol. - Like other digital currencies, IOTA's token value has soared and fallen. - 4. Corda The Corda platform was created by the enterprise blockchain and software development company R3. • Corda is an open source enterprise based blockchain designed to offer interoperability. (Interoperability- Ability of blockchains to communicate with other blockchains) • Corda is a blockchain based distributed ledger technology and smart contract platform operating on a decentralized global network. • It is a platform intended to record, manage, and synchronize agreements and transfer anything valuable. • It is also designed to automate legal agreements between business partners. • Allows enterprises to communicate and transact directly while maintaining transparency and without worrying about privacy and integrating blockchain across their operations immediately and efficiently. • Corda offers timestamping services to order transactions temporarily and ignore disputes. • It has smart contract logic, which specifies constraints that ensure state transitions are valid as outlined in the contract code. • It seeks to create a digital ledger that removes the need of businesses transacting with each other to make sure their ledgers line up with each other. • Corda is available in two fully supported editions- community and enterprise- that align to where builders are in their blockchain journey. • The community edition is ideal for participants who are just getting started and offers production-ready open source code and additional support packages. • The enterprise edition is a licensed version with mission-critical features and capabilities, along with premium support and is ideally suited for production in regulated environments. • Features of Corda: Data privacy: Corda is permissioned or private blockchain as it shares data only with the parties involved in the transaction unlike public blockchains and DSL based solutions which broadcast transaction data to the entire network. - 1. Security: Each entity must be tied to a legal entity and granted access to join the network. - 2. Integration with existing systems: Applications built on top Corda work seamlessly with most business systems including Azure SQL, SQL server, Oracle and PostgreSQL and the Java Virtual Machine. - 3. Performance: Corda enables up to 20,000 transactions per second which guarantees scalability. - The consensus model also guarantees that assets have deterministic settlement finality and cannot be walked back. - 4. Sustainability: Transactions don't need to be sequential, ensuring the system is incredibly efficient and uses far less energy than a public Proof of Work or Proof of Stake blockchain. - 5. • R3 R3 is a provider of enterprise technology and services that enable direct digital collaboration in regulated industries where trust is critical. • It was founded in 2014 by nine banks including Goldman Sachs, Credit Suisse, JP Morgan and others with the goal of applying blockchain technology to commercial markets. • The company works to improve processes with banking, capital markets, global trade and insurance clients. • R3 delivers a private, distributed ledger technology (DLT) application platform and confidential computing technology. • The company maintains a DLT production ecosystem connecting over 400 institutions, including global systems integrators, cloud providers, technology firms, software vendors, corporates, regulators, and financial institutions from the public and private sectors. • R3 developed Corda, an open source distributed ledger project. • Unit 3 Page 9 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 11. Consensus in Blockchain We know that Blockchain is a distributed decentralized, self-regulating network that provides immutability, privacy, security and transparency. • There is no central authority present to validate and verify the transactions, yet every transaction in blockchain is considered to be completely secured and verified. • This is possible only because of the presence of the consensus protocol which is a core part of any blockchain network. • A consensus algorithm is a fault-tolerant mechanism through which all the peers of the blockchain network reach a common agreement about the present state of the distributed ledger. • These algorithms are designed to achieve reliability in a network involving multiple users or nodes. • Essentially, the consensus protocol makes sure that every new block that is added to the blockchain is the one and only version of the truth that is agreed upon by all the nodes in the blockchain. • The protocol consists of some specific objectives such as coming to an agreement, collaboration, cooperation, equal rights to every node, and mandatory participation of each node in the consensus process. • Consensus Approach: A consensus based decision-making process is an effort in which affected parties (stakeholders) seek to reach agreement on a course of action to address an issue or set of related issues. • In a consensus pro cess, the stakeholders work together to find a mutually acceptable solution. • Each consensus process is unique because parties design their agreement to fit their circumstances. However, successful consensus processes follow several guiding principles: Consensus decision-making: Participants make decisions by agreement rather than by majority vote. 1. Inclusiveness: To the extent possible, all necessary interests are represented or, at a minimum, approve of the decision. 2. Accountability: Participants usually represent stakeholder groups or interests. They are accountable to both their constituents and to the process. 3. Facilitation: An impartial facilitator accountable to all participants manages the process, ensures the ground rules are followed, and helps to maintain a productive climate for communication and problem solving. 4. Flexibility: Participants design a process and address the issues in a manner they determine most suitable to the situation. 5. Shared control/Ground rules: Participants share with the facilitator responsibility for setting and maintaining the ground rules for a process and for creating outcomes. 6. Commitment to implementation: All stakeholders commit to carrying out their agreement. 7. • Elements of a Consensus Based Decision: All parties agree with the proposed decision and are willing to carry it out. 1. No one will block or obstruct the decision or its implementation. 2. Everyone will support the decision and implement it. 3. • Levels of Consensus: I can say an unqualified "yes"! 1. I can accept the decision. 2. I can live with the decision. 3. I do not fully agree with the decision, however, I will not block it and will support it. 4. • Consensus Algorithms Consensus algorithms have many real-world applications in decentralized or distributed computer networks. • One of the most common applications is blockchain. • Blockchain is the distributed ledger most associated with bitcoin cryptocurrency. • This decentralized database is collectively managed by distributed computers or nodes on a distributed peer-to-peer network. • Each peer or node maintains a copy of the ledger to prevent a single point of failure. • Any updates or validations on the network reflect in all copies simultaneously. • This guarantees the fidelity and security of data records and generated trust in the system without the need for a centralized trusted third party. • Blockchain networks rely on consensus algorithms to reach agreement among various distributed nodes. • A consensus mechanism such as proof of work (PoW) or proof of stake (PoS) secures the network and prevents unauthorized users from validating bad transactions. • Proof of Work (PoW) The PoW algorithm is one of the oldest types of consensus algorithms. • First introduced in 1993, reintroduced in 2008 by Satoshi Nakamoto. • Central idea of PoW is to have nodes solve complex mathematical puzzles and make as many guesses as possible in the fastest possible time. • In cryptocurrency blockchains based on the PoW algorithm, miners or validators- also known as participant nodes- must prove that the work they've done and submitted gives them the right to add new transactions to the blockchain. • Unit 3 Page 10 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 12. They must solve a complex mathematical problem by finding a cryptographic hash of a particular block. • This is done by taking data from a block header as an input, and continuously running this data through a cryptographic hash function. • Every time this is done, small changes are made to the input data by including an arbitrary number called a nonce. • This is the blockchain version of guesswork to find a solution. • Ultimately, when the miner finds the solution that leads to consensus, they're rewarded in cryptocurrency. • However, all these actions require multiple iterations that consume a considerable amount of computational power. • That's why PoW is considered an inefficient consensus mechanism. • Nonetheless, the PoW algorithm continues to be popular because it maintains network security and is fairly resistant to cyber-attacks like DDoS attacks. • It's also the oldest consensus algorithm and is known to work well on blockchains. • Byzantine General Problem It is a game theory problem, which describes the difficulty decentralized parties have in arriving at consensus without relying on a trusted central party. • IN 1982, The Byzantine General's problem was invented by Leslie Lamport, Robert Shostak, and Marshall Pease. • It is an impossibility result which means that the solution to this problem has not been found yet. • The Byzantine army is divided into many battalions, with each division led by a general. • The generals connect via messenger in order to agree to a joint plan of action in which all battalions coordinate and attack from all sides in order to achieve success. • It is probable that traitors and enemy will try to sabotage their plan by intercepting or changing the messages. • As a result, the purpose of this challenge is for all of the faithful commanders to reach an agreement without the imposters tampering with their plans. • Only decentralized systems face the Byzantine Generals problem, as they have no reliable source of information and no way of verifying the information they receive from other members of the network. • In centralized systems, an authority is trusted to publish true information and prevent false or fraudulent information from being spread throughout the network. • For example, in the traditional financial system, banks are trusted to show clients their balances and transaction histories in an honest manner. If a bank did attempt to lie or defraud their customers, a central bank or government is trusted to rectify the breach of trust. • However, centralized systems are vulnerable to corruption by the central authority. • Money and Byzantine General's Problem Money is a prime example of the Byzantine Generals Problem. How should a society establish a money that all members of a society can trust and agree upon? • For much of history, societies have selected precious metals or other rare goods, such as shells or glass beads, as money. • In some ways, gold solved the Byzantine Generals Problem: it was trusted and recognized across decentralized systems, such as international trade. • However, its weight and purity remained unreliable, and still does to this day. • The failure of gold to completely solve the Byzantine Generals Problem resulted in trusted central parties, usually governments, taking over the establishment and issuance of money. • Governments monopolized mints in order to inspire trust in the weight and purity of the money. • Centralized systems obviously did not solve the Byzantine Generals Problem. • Governments, constantly violated that trust by seizing, debasing, or changing the money. • Centralized systems do not address the Byzantine Generals problem, which requires that truth be verified in an explicitly transparent way, yet centralized systems give no transparency, increasing the likelihood of data corruption. • They forgo transparency in order to attain efficiency easily and prefer to avoid dealing with the issue entirely. • The fundamental issue of centralized systems, however, is that they are open to corruption by the central authority, which implies that the data can be manipulated by anyone who has control of the database itself because the centralized system concentrates all power on one central decision maker. • Therefore, Bitcoin was invented to make the system of money decentralized using blockchain to make money verifiable, counterfeit- resistant, trust less, and separate from a central agency. • Nonce (number only used once): A random 32-bit number that miners use as a base for their hash calculations. Miners compete with each other, trying to guess a valid nonce as they attempt to calculate a block hash. Unit 3 Page 11 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 13. How Bitcoin solves the Byzantine General's Problem? In the Byzantine Generals Problem, the untampered agreement that all the loyal generals need to agree to is the blockchain. • Blockchain is a public, distributed ledger that contains the records of all transactions. • If all users of the Bitcoin network, known as nodes, could agree on which transactions occurred and in what order, they could verify the ownership and create a functioning, trust less money system without the need for a centralized authority. • Due to its decentralized nature, blockchain relies heavily on a consensus technique to validate transactions. • It is a peer-to-peer network that offers its users transparency as well as trust. • Its distributed ledger is what sets it apart from other systems. Blockchain technology can be applied to any system that requires proper verification. • The network would have to be provable, counterfeit-resistant, and trust- free in order to solve the Byzantine General’s Problem. • Bitcoin overcame the Byzantine General’s Problem by employing a Proof-of-Work technique to create a clear, objective regulation for the blockchain. • Proof of work (PoW) is a method of adding fresh blocks of transactions to the blockchain of a cryptocurrency. • In this scenario, the task consists of creating a hash (a long string of characters) that matches the desired hash for the current block. • In order to add information, called blocks, to the blockchain, a member of the network must publish proof that they invested considerable work into creating the block. • This work imposes large costs on the creator, and thus incentivizes them to publish honest information. • Because the rules are objective, there can be no disagreement or meddling with the information the bitcoin network. • The ruleset governing which transactions are valid and which are invalid is also objective, as is the system for determining who can mint new bitcoin. • Additionally, once a block has been added to the blockchain, it is extremely difficult to remove, making bitcoin's past immutable. • Thus, at all times, members of the Bitcoin network can agree on the state of the blockchain and all transactions therein. • Each node verifies for itself whether blocks are valid based on the Proof- of-Work requirement and whether transactions are valid based on other requirements. • If any member of the network attempts to broadcast false information, all nodes on the network will immediately recognize it as objectively invalid and ignore it. • Because each node can verify all information on the Bitcoin network itself, there is no need to trust other members of the network, making Bitcoin a trust less system. • Proof of Stake (PoS) PoS is considered as a low-cost, low-energy consuming alternative to PoW. • Ethereum has shifted from PoW to PoS consensus. • PoS required little specialized hardware or software resources to mine cryptocurrencies since it doesn't involve solving complex computational problems. • In this blockchain method, the block producers are not miners, but they act like validators. • They get the opportunity to create a block over everyone which saves energy and reduces the time. • However, for them to become a validator, they are supposed to invest some amount of money or stake. • Rather, crypto validators lock up or stake some of their coins in a wallet. • They then validate blocks if they discover a block that can be added to the blockchain. • Validators get a reward -- or their stake increases -- proportionate to their bets based on the blocks added to the blockchain. • Since the algorithm is incentive-based, it consumes less computational energy than PoW. • Despite this advantage, the PoS algorithm has a serious drawback. The mining capacity of a validator depends on the number of tokens they have, so a miner who starts with more coins gets more control over the consensus mechanism. • Additionally, a few miners can purchase many coins, further diluting the mechanism and reducing the system's decentralization property. • PoS is seen as a more sustainable and environment friendly alternative to PoW, and one that's more secure against 51% attack. • This system is secure crypto-economically because an attacker attempting to take control of the chain must destroy a massive amount of ETH. • A system of rewards, incentivizes individual stakers to behave honestly, and penalties disincentivize stakers from acting maliciously. • Proof of Elapsed Time (PoET) PoET was introduced by Intel with an intent to take over cryptographic puzzles involved in PoW mechanism by considering the fact that the CPU architecture and the quantity of mining hardware knows when and at what frequency does a miner win the block. • PoET is one of the fairest consensus algorithms which chooses the next block using fair means only. • It is based on the idea of fairly distributing and expanding the odds for a • Unit 3 Page 12 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421
- 14. bigger fraction of participants. It is widely used in permissioned Blockchain networks. • In this algorithm, every validator on the network gets a fair chance to create their own block. • Every participating node is asked to wait for a particular time to participate in the next mining process, adding a proof of their wait in the block. • At the same time, every node also comes up with their own waiting time, after which they go into sleep mode. • The created blocks are broadcasted to the network for others consideration. • The winner is the validator which has least timer value in the proof part. • The block from the winning validator node gets appended to the Blockchain. • There are additional checks in the algorithm to stop nodes from always winning the election, stop nodes from generating a lowest timer value. • Proof of Activity (PoA) Proof of activity (PoA) is a hybrid of the PoW and PoS consensus mechanisms. • It is used by the Decred (DCR) and Espers (ESP) blockchain projects. • The mining process begins like PoW, with miners competing to solve an elaborate mathematical problem using immense computing power. • Once the block is mined, however, the system switches to resemble PoS, with the successfully generated block header being broadcast to the PoA network. • A group of validators are then randomly selected to sign off on the hash, validating the new block. • Like with PoS, the more crypto the validator holds, the higher their chances of being selected. • Once every chosen validator has signed the block, it is added to the blockchain network and ready to record transactions. • The block rewards are then shared among the miner and validators. • Though the PoA system was designed with the intention of combining the very best features of PoW and PoS, while avoiding their shortcomings, it has drawn criticism for its energy-intensive mining phase and inherent partiality towards validators holding a greater number of coins. • Proof of Burn (PoB) Another mo0re sustainable alternative to Bitcoin's PoW algorithm. • In PoB, miners gain the power to mine a block by ‘burning’ (destroying) a predetermined amount of tokens in a verifiable manner – namely, sending them to an ‘eater address’ where they cannot be recovered or spent. • The more coins burned, the greater the chances of being randomly selected. • Unlike in PoS where miners are able to retrieve or sell their locked coins should they ever leave the network, burned coins are irretrievably lost. • This method of requiring miners to sacrifice short-term wealth in order to gain the lifetime privilege to create new blocks helps to encourage long- term commitment from miners. • The act of burning coins also leads to coin scarcity, limiting inflation and driving up demand. • Cryptocurrencies that use the proof of burn protocol include Slim coin (SLM), Counterparty (XCP), and Factom (FCT). • While PoB is an interesting alternative to PoW, the protocol still wastes resources needlessly. • And it is also questioned that mining power simply goes to those who are willing to burn more money. • Unit 3 Page 13 Downloaded by imran akhtar (imranakhtar351@gmail.com) lOMoARcPSD|22844421