3.

Blockchain
Introduction to Blockchain
Backstory of Blockchain
 1991:
o Stuart Haber and W. Scott Stornetta (researchers) introduced Blockchain
technology.
o They needed a way to timestamp (mark the time of) digital documents so they
couldn't be changed or backdated (made to look older).
o They created a system where documents could be stored (saved) in a chain of
blocks and secured by cryptography (using special codes for security).
 1992:
o Merkle Trees (a structure for organizing data) helped improve the system
created by Haber and Stornetta.
o This made it easier to store many documents in one block.
o Merkle made sure that multiple (more than one) data records were linked
together in a chain of blocks.
 2000:
o Stefan Konst (a researcher) published a theory about cryptographically
secured chains.
o He also gave ideas on how this could be put into practice (made into
something real).
 2004:
o Hal Finney, a cryptographic activist (someone who works with codes for
security), introduced a system called “Reusable Proof of Work”.
o This system helped solve a problem called “double spending” (where digital
money could be used more than once), by making sure that the ownership
(who owns something) of digital tokens (digital money) was safely recorded
on a trusted server.
 2008:
o Satoshi Nakamoto (an unknown person or group) created the idea of
Distributed Blockchain and called it “A Peer-to-Peer Electronic Cash System”.
o Nakamoto changed the Merkle Tree model to make it more secure and
trustworthy.
 o It used a peer-to-peer network (a system where people can directly share
information without using a central server) to timestamp (mark the time) and
became very important in cryptography.
 2009:
o The use of Blockchain continued to grow.
o A notable story (important event) happened when James Howells, an IT
worker, mined bitcoins in 2009 and later threw away the hard drive that had
those bitcoins.
o By 2013, his bitcoins were worth $127 million, but they remain unclaimed
(nobody can use them) because he lost the drive.
 2014:
o Blockchain technology split (became separate) from cryptocurrency (digital
currency), and Blockchain 2.0 was born.
o Financial institutions (banks and other money-related companies) and other
industries started focusing on developing blockchain technologies, not just
using it for digital currency.
 2015:
o The Ethereum Frontier Network was launched. It allowed developers (people
who create software) to write smart contracts and dApps (decentralized apps)
that could be used on a live network.
o In the same year, the Linux Foundation (a group supporting open-source
software) launched the Hyperledger project, which focuses on blockchain for
businesses.
 2016:
o The word Blockchain was accepted as one word instead of two, as it was in
Nakamoto's original paper.
o A bug (mistake in code) in the Ethereum DAO (a decentralized application)
led to a hard fork (split or change) in the Ethereum network.
o The Bitfinex exchange (a trading platform) was hacked (broken into), and
120,000 bitcoins were stolen.
 2017:
o Japan made Bitcoin a legal currency (money that can be used in stores).
o EOS blockchain was introduced by Block.one to support decentralized
applications for businesses.

 2018:
 o Bitcoin turned 10 years old.
o Its value dropped to $3,800 by the end of the year.
o Google, Twitter, and Facebook banned (stopped allowing) ads for
cryptocurrencies.
 2019:
o Ethereum network had more than 1 million transactions per day.
o Amazon launched a managed blockchain service for businesses.
 2020:
o Stablecoins (cryptocurrencies with stable values) became more popular
because they were less volatile (less likely to change in value).
o Ethereum launched Beacon Chain to prepare for Ethereum 2.0, a major
update.
Here is your simplified explanation of Blockchain with easy words (in brackets) beside
harder words:

What is Blockchain?
Blockchain is a shared (common) and unchangeable (unchallengeable) digital record (ledger)
that helps in saving (recording) transactions and monitoring (tracking) assets in a business
network. An asset can be physical (tangible) like a house, car, cash, land, or non-physical
(intangible) like ideas (intellectual property), patents, copyrights, and branding. Almost
everything valuable can be monitored (tracked) and exchanged (traded) using blockchain.
This reduces (decreases) risks and lowers (cuts) costs for everyone.

How Blockchain Works?

 Business works with information (data), and it is better when received quickly
(faster).
 A blockchain stores transactions as blocks (sections).
 Each new block is linked (connected) to the previous one and contains a unique
identity code (hash).
 This process continues (repeats) until many blocks form a long chain (blockchain).
 Every computer (node) in the blockchain network has the same copy (identical copy)
of the blockchain.
 Each block (section of data) has a list (collection) of transactions.

Parts of a Blockchain Block

 Every block has two important parts:
 1. Header (starting part) → Links (connects) to the previous (earlier) block and
contains its identity code (hash) to ensure security.
2. Contents (main part) → Contains the list of approved (validated) transactions,
their amounts (values), the time (timestamp), the addresses (identities) of the
people involved, and some extra details.

Why is Blockchain Important?

 Blockchain gives instant (immediate), shared (common), and fully see-through
(transparent) information.
 This information is stored in an unchangeable (immutable) digital record (ledger).
 Only people with permission (authorized access) can see it.
 Blockchain can track orders, payments, accounts, and production.
 Everyone can see the complete history (end-to-end details) of a transaction.
 This builds trust (sureness) and opens new chances (opportunities) for businesses.

Key Features of Blockchain

 Blockchain is a direct (peer-to-peer) system where values can be exchanged without
(no need for) a middleman (trusted third party).
 It is shared (common), decentralized (not controlled by one person), and open
(transparent).
 The record book (ledger database) is copied (replicated) across many computers
(nodes).
 It is append-only (cannot be erased), meaning every entry is permanent (cannot be
changed).
 Any new entry updates (reflects) on all copies of the database (ledger).
 There is no need for a middleman (trusted third party) to check or confirm
transactions.
 Blockchain is an extra (additional) technology layer (layer on top) of the Internet.
 Just like the Internet system (TCP/IP) was built for openness (open system),
blockchain was designed for true decentralization (no single control).
 The creators of Bitcoin made it open-source (available to everyone) to support many
decentralized apps (applications).
Structure of a Blockchain

 The first block is called the Genesis Block (Block 0).

 It does not have a previous (earlier) block because it is the starting block.
 The identity code (hash) of the Genesis Block is used in all new transactions to create
new blocks (sections).
 This process continues (repeats) until many blocks are added.
 Every computer (node) in the blockchain has an exact (identical) copy of the
blockchain.

Centralized vs. Decentralized System

Blockchain is built as a non-central (decentralized) system instead of a controlled
(centralized) system. Whether a system is centralized (controlled by one) or decentralized
(not controlled by one), it can still be spread (distributed) across many computers.
 A centralized distributed system has a main (master) computer (server) that controls
everything. It divides (breaks down) work and shares (distributes) it among other
computers (nodes).
 A decentralized distributed system does not (no) have a main (master) computer.
Instead, all computers work together (cooperate) without a central controller.
 Blockchain is an example of a decentralized distributed system.
Centralized System

 A centralized system (controlled network) has one main (centralized) controller with
all management rights (administrative rights).
 It is simple (easy) to design (make), maintain (take care of), enforce (apply) trust, and
manage (administrate).
 However, it has some built-in (intrinsic) problems.

Problems of a Centralized System

1) Single Point of Failure
 If the main (central) system fails (stops working), everything breaks (stops working
too).
 This makes it less reliable (less stable).
2) Weaker Security
 Since everything is in one place, it is easier (more vulnerable) for hackers (attackers)
to break in (attack).
 This makes it less safe (less secure).
3) Risk of Misuse
 Too much control (power) in one place can lead to unfair (unethical) activities.
 The system can be misused (used wrongly).
4) Scalability Issues
  When more users join, it becomes hard (difficult) to expand (scale up) the system This
makes the system slow (less efficient).

Decentralized System
A decentralized system (not controlled by one) does not (no) have a main controller
(centralized control), and every computer (node) has the same (equal) power (authority).
 These systems are hard (difficult) to make (design), take care of (maintain), manage
(govern), and trust (impose trust).
 However, they do not (no) have the problems (limitations) of normal (conventional)
centralized (controlled) systems.
Advantages of a Decentralized System
1) More Stable (Fault-Tolerant)
 No single (one) point of failure (breakdown), so the system is stronger (more stable).
2) More Secure (Attack-Resistant)
 No main (central) system to target (easily attack).
 This makes it harder (more difficult) to hack and safer (more secure).
3) Fair (Symmetric) System
 All computers (nodes) have equal (same) power (rights).
 Less chance (scope) of wrong (unethical) actions.
 Usually, it is independent (not controlled by others).
Decentralized vs. Distributed Systems
 A spread-out (distributed) system can also be non-controlled (decentralized).
 Example: Blockchain is a decentralized distributed system.
 Difference: In blockchain, the work (task) is not divided (not subdivided) and given
(delegated) to computers (nodes) like other distributed (spread-out) systems.
 This is because blockchain has no main controller (no master).
 A decentralized distributed system works as a direct connection (peer-to-peer) system,
as shown in Figure

Here is the simplified explanation of the paragraph with easy words and definitions in
brackets:

Layers of Blockchain
A blockchain is made up of many connected computers (distributed nodes) that store
permanent (immutable) transactions that are repeated again and again. The technology of
blockchain is built in different layers, and these layers are present in all the computers
(nodes) in the network.
1. Application Layer
 This is the top layer where users interact with the blockchain.
 It contains smart contracts (self-executing agreements), decentralized applications
(DApps), user interfaces (UIs), and chain code (rules and logic of the blockchain).
 This layer provides services, APIs (Application Programming Interfaces – tools that
help software communicate), and programming tools for developers.
 It is like the front-end (visible part) of the blockchain that users see and use.
2. Execution Layer
 This layer runs (executes) the instructions given by the Application Layer.
 These instructions could be simple commands or a group of commands in a smart
contract.
 Every computer (node) in the blockchain executes the same program or script (set of
coded instructions).
 Since all nodes follow the same rules, they produce the same result, avoiding errors
(inconsistencies).
3. Semantic Layer (Logical Layer)
 This layer checks (validates) transactions and blocks before they are added to the
blockchain.
 When a transaction is started, the instructions are run (executed) in the Execution
Layer and then verified in this layer.
 This layer is responsible for connecting (linking) the blocks in the network.
 Every block (except the first one) contains a hash (unique code) of the previous block
to ensure correct linking.
4. Propagation Layer (Communication Layer)
 This layer allows computers (nodes) in the blockchain to talk (communicate) with
each other.
 When a transaction is made, it is sent (broadcasted) to all other nodes.
 When a new block is created, it is shared with all other nodes in the network.
 This ensures that all computers remain updated and synchronized.
 Sometimes, there may be delays (latency issues) due to slow internet speed, but it
depends on the network’s capability.
5. Consensus Layer (Agreement Layer)
 This is the first and most important layer in a blockchain system.
  It makes sure that all computers in the blockchain agree (reach a consensus) on the
correct state of the shared record (ledger).
 It also provides security and protection to the blockchain.
 Different consensus methods (rules for agreement) exist, such as Proof-of-Work
(PoW), used by Bitcoin and Ethereum.
 In PoW, one node (computer) is randomly selected to propose a new block.
 Once a new block is created, all other nodes check (verify) if the block and
transactions inside it are correct.
 If all nodes agree, the block is added to the blockchain.

Importance of Blockchain
 Helps in checking (verification) and tracking (traceability) of complex transactions
that need to be confirmed.
 Provides secure (safe) transactions, reduces costs for following rules (compliance
costs), and makes data transfer faster.
 Useful for handling (managing) contracts and checking the starting point (origin) of a
product.
 Can be used for voting systems and managing property records (titles and deeds).
 Transactions happen instantly (immediately) and clearly (transparently) because the
record (ledger) updates automatically.
 No extra fee (intermediary fee) is needed because blockchain is not controlled by one
central authority (decentralized system).
 Every transaction is checked (verified) and approved (confirmed) by participants
before it is added to the blockchain.
  Blockchain is a permanent (immutable) digital record (public ledger), meaning that
once a transaction is recorded, it cannot be changed.

Limitations (Disadvantages) of Centralized Systems

 Trust issues – Users must trust a single authority, which can be risky.
 Security problems – Centralized systems can be hacked easily.
 Privacy issues – Personal data may be sold without permission.
 High cost and time-consuming transactions – Transactions take longer and require
fees.
 Limited growth (Can’t scale up) – The system cannot handle too many users after a
certain point.
 Slow performance (bottlenecks) – If too many people use the system at once, it can
slow down.

Advantages (Benefits) of Decentralized Systems Over Centralized Systems

 No middlemen (intermediaries) – Transactions happen directly between users.
 Easier and real (genuine) verification of transactions – Transactions are checked
automatically.
 Higher security at a lower cost – No need for third-party security checks.
 More clarity (greater transparency) – Every transaction can be viewed by all users.
 Not controlled by one group (decentralized) and permanent (immutable) – No single
company or person can change the records.

Blockchain Adoption So Far (How Blockchain is Being Used Today)

 Blockchain started with Bitcoin (a digital currency) in 2009 through an online mailing
list.
 Companies introduced different versions (Flavors) of blockchain, such as Ethereum
and Hyperledger.
 Big tech companies like Microsoft and IBM created cloud-based blockchain services
(SaaS – Software as a Service) on Azure and Bluemix platforms.
 Many new businesses (start-ups) and big companies began using blockchain to solve
problems that were difficult to fix before.
 Blockchain is used in many industries, such as:
o Banking (financial market)
 o Media and entertainment
o Energy trading (buying and selling energy)
o Prediction markets (forecasting future events)
o Retail (shopping chains)
o Customer reward programs (loyalty rewards systems)
o Insurance
o Transportation and delivery (logistics and supply chains)
o Medical records
o Government and military applications

Blockchain Uses and Use Cases

Blockchain is being used in different industries like finance, insurance, banking, healthcare,
government, supply chains, Internet of Things (IoT), and media & entertainment. Below are
some important uses of blockchain:

1. Registering (Recording) Property and Digital Assets

 Any physical (real-world) or digital (computer-based) property like laptops, mobile
phones, diamonds, cars (automobiles), houses (real estate), digital files, etc., can be
registered on a blockchain.
 Blockchain helps in transferring ownership (who owns it) from one person to another
and keeps a record (log) of all transactions.
 It can also be used for:
o Notary services (legal proof of documents)
o Proof of existence (verifying if something exists officially)
o Customized (tailored) insurance plans

2. Financial (Money-related) Uses of Blockchain

 Blockchain is used in cross-border payments (sending money between countries),
share trading (buying and selling company shares), loyalty and rewards programs, and
Know Your Customer (KYC - identity verification for banks).
 Initial Coin Offering (ICO) is a popular method where people invest (crowdsourcing)
in new businesses using digital money (cryptocurrency). It is easy to buy and trade
digital assets with blockchain.
3. Using Crowd Wisdom (Collective Knowledge) for Business and Economy
 Blockchain can help in making business and economic decisions based on group
knowledge (wisdom of crowds).

 It can be used for:

o Financial and economic forecasting (predicting the future of money and
business)
o Decentralized (not controlled by one group) prediction markets (guessing
future trends)
o Decentralized voting (safe and fair online voting systems)
o Stock market trading (buying and selling stocks using blockchain)
o

4. Managing Music Royalties (Payments to Artists)

 Deciding how much money artists get paid (royalties) for their music has always been
complicated.
 Online music streaming (listening to music on the internet) made it easier to reach
people but also made royalty payments more difficult.
 Blockchain can solve this problem by:
o Keeping a public record (ledger) of music ownership
o Managing the authorized (legal) distribution of songs and media content

5. Blockchain in IoT (Internet of Things - Smart Devices Talking to Each Other)

 IoT means that billions of devices like smart TVs, smartwatches, and home assistants
are connected to the internet.
 Since these devices have different brands (makes), models, and ways of
communication (protocols), it is hard to control them with one central system.
 Blockchain can solve this problem by:
o Creating a decentralized (peer-to-peer) network where devices talk to each
other
o IBM and Samsung created ADEPT (Autonomous Decentralized Peer-to-Peer
Telemetry) to allow IoT devices to work together without a central system
o ADEPT uses three technologies:
 BitTorrent (for sharing files)
  Ethereum (for smart contracts - automatic agreements)
 TeleHash (for direct messaging between devices)
o IOTA Foundation is another project that focuses on using blockchain for IoT.

6. Blockchain in Government and Supply Chains

 Governments are using blockchain for areas where decentralization is needed but still
under government control.
 Some important government use cases include:
o Land registration (keeping records of who owns land and property)
o Vehicle registration and management (tracking ownership of cars and
vehicles)
o e-Voting (electronic voting to prevent fraud and increase security)
 Blockchain in Supply Chains:
o A supply chain is how products move from factories to stores and customers.
o There are often disagreements (disputes) in supply chains because keeping
clear records is difficult.
o Blockchain helps maintain transparency (openness) and prevents fraud.