HEMANT CHAURASIA

(2208390100032)

CSE 3rd

BLOCKCHAIN ASSIGNMENT

ASSIGNMENT 1

Q.1: Explain the Working of Blockchain with a diagram and contrast onto their advantages and
disadvantages.

Blockchain:
Blockchain is a revolutionary digital ledger technology that allows data to be recorded across
multiple systems in a secure, transparent, and immutable way. It is best known for being the
underlying technology behind cryptocurrencies, but its applications extend far beyond digital money.

Working of Blockchain:

Blockchain works through a decentralized network of computers (nodes) that validate and record
transactions into blocks. These blocks are chained together using cryptographic hashes, ensuring
data security and integrity.

Steps in Working:

1. Transaction Initiation: A user initiates a transaction (e.g., sending cryptocurrency).

2. Broadcast to Network: The transaction is broadcast to a peer-to-peer network of nodes.

3. Validation: Nodes validate the transaction using a consensus algorithm (e.g., Proof of Work).

4. Block Creation: Validated transactions are grouped into a new block.

5. Hashing and Linking: The new block contains a cryptographic hash of the previous block.

6. Block Addition: The block is added to the blockchain, forming a secure and chronological
chain.

7. Completion: The transaction is now recorded and visible to all users.

Diagram:

[User initiates transaction] → [Transaction broadcast to network] → [Validation by nodes] → [New

block created] → [Block linked to previous block] → [Blockchain updated]

Advantages of Blockchain:

 Decentralization: No single point of control, reducing risks of corruption.

 Transparency: All transactions are visible and traceable.

 Security: Cryptographic methods ensure data integrity.

  Immutability: Once recorded, data cannot be altered.

 Efficiency: Faster transactions and reduced operational costs.

Disadvantages of Blockchain:

 Scalability Issues: Slower transaction speeds as network grows.

 Energy Consumption: Especially high in Proof of Work systems.

 Complex Integration: Requires changes in existing systems.

 Lack of Regulation: Uncertainty in legal frameworks.

 Data Privacy: Public ledgers may expose sensitive information.

Q2.Define Cryptography and its type in brief. Share some views on its features.

Cryptography and its Types and Features:

Cryptography is the science of securing information by transforming it into a secure format. It is used
to protect data from unauthorized access and ensure confidentiality, integrity, and authenticity.

Types of Cryptography:

1. Symmetric Key Cryptography:

o Same key is used for encryption and decryption.

o Fast but requires secure key sharing.

o Example: AES, DES

2. Asymmetric Key Cryptography:

o Uses a public and a private key pair.

o Public key encrypts, private key decrypts.

o Example: RSA, ECC

3. Hash Functions:

o No key is used.

o Converts data into a fixed-length hash.

o Used for data integrity.

o Example: SHA-256, MD5

Features of Cryptography:

 Confidentiality: Keeps data secret.

 Integrity: Ensures data is unchanged.

  Authentication: Confirms identity of sender.

 Non-repudiation: Prevents denial of a transaction.

 Security: Protects against unauthorized access and tampering.

Conclusion: Blockchain is a powerful and disruptive technology offering numerous advantages,

especially in enhancing trust and security. However, like all technologies, it comes with challenges
that need to be addressed for widespread adoption. Cryptography plays a crucial role in securing
blockchain transactions and maintaining trust in decentralized systems.

Q3.Discuss Crypto primitives: hash function and digital signature in detail.

Crypto Primitives: Hash Functions and Digital Signatures

1. Hash Functions: Hash functions are cryptographic algorithms that take an input and return a fixed-
length string of characters, which appears random. They are a fundamental building block of
blockchain security.

Properties:

 Deterministic: Same input gives same output.

 Fast computation.

 Pre-image resistance: Hard to reverse the output to original input.

 Collision resistance: Hard to find two different inputs with the same hash.

Applications in Blockchain:

 Ensuring data integrity.

 Linking blocks in the blockchain.

 Used in digital signatures and mining.

Common Algorithms: SHA-256, SHA-3

2. Digital Signatures: Digital signatures are cryptographic methods used to verify the authenticity
and integrity of a message, software, or digital document. They are based on asymmetric
cryptography.

How It Works:

 A sender signs data with their private key.

 The receiver verifies the signature using the sender’s public key.

Key Features:

 Authentication: Verifies the source of data.

 Integrity: Detects if the data was altered.

 Non-repudiation: The sender cannot deny sending the message.

Applications in Blockchain:

 Verifying identity of users.

 Securing transactions.

 Enabling trustless systems.

ASSIGNMENT-2

Q.1: Define Hyperledger Fabric. Mention its key features and components.

Hyperledger Fabric and Its Components

Definition: Hyperledger Fabric is a permissioned blockchain framework developed by the Linux

Foundation for enterprise-grade applications. It provides a modular architecture that allows
components like consensus and membership services to be plug-and-play.

Key Components:

1. Peers:

o Nodes that host ledgers and smart contracts (called chaincode).

o Types: Endorsing Peer, Committing Peer, and Anchor Peer.

2. Ordering Service:

o Ensures the consistency of the blockchain by ordering transactions and packaging

them into blocks.

3. Chaincode:

o Smart contracts in Hyperledger Fabric.

o Define business logic that runs on the blockchain network.

4. Ledger:

o Consists of two parts: the world state (current state) and transaction log (history).

5. Membership Service Provider (MSP):

o Manages identity and access control for participants using cryptographic certificates.

6. Channels:

o Private subnets of communication between specific network members.

o Allow data partitioning and confidentiality.

7. Endorsement Policies:

o Define which peers must validate a transaction before it is committed.

Features of Hyperledger Fabric:

 Modular architecture

 Permissioned network

 Scalability and performance

 Privacy through channels

 Pluggable consensus mechanisms

Q.2: Discuss Hyperledger Composer Tool. Mention its components & advantages.

Hyperledger Composer Tool: Advantages and Disadvantages

Definition: Hyperledger Composer is a set of collaboration tools for building blockchain business
networks. It allows developers to model business logic and deploy applications on Hyperledger Fabric
networks with ease.

Advantages:

 Rapid Development: Provides tools and frameworks to build and test blockchain applications
quickly.

 Model-Driven Approach: Uses simple modeling language to define assets, participants, and
transactions.

 Integration Friendly: Easy integration with existing systems using REST APIs.

 Business Focused: Makes it easier for business analysts and developers to collaborate.

Disadvantages:

 Deprecated Project: Hyperledger Composer is no longer actively maintained by the

Hyperledger community.

 Limited Scalability: Not suitable for highly complex or large-scale enterprise systems.

 Dependency on Fabric Version: Closely tied to specific versions of Hyperledger Fabric.

Conclusion: Blockchain is a powerful and disruptive technology offering numerous advantages,

especially in enhancing trust and security. However, like all technologies, it comes with challenges
that need to be addressed for widespread adoption. Cryptography—especially cryptographic
primitives like hash functions and digital signatures—plays a crucial role in securing blockchain
transactions and maintaining trust in decentralized systems.

Hyperledger Fabric further extends blockchain’s capabilities to enterprise applications by providing a

secure, flexible, and modular permissioned platform. Tools like Hyperledger Composer have made
development more accessible, though its deprecation has led developers to seek other modern
alternatives.
Q.3: Discuss application of Blockchain Technology with respect to:

a: KYC (Know Your Customer) b: Trade/Supply with respect to Provenance of goods

a: KYC (Know Your Customer)

Current Problems with Traditional KYC: Traditional Know Your Customer (KYC) processes, which are
mandatory for financial institutions to verify the identity of their clients, are often

cumbersome, time-consuming, expensive, and inefficient.

● Redundant Processes: Customers often have to submit the same identity documents (e.g.,
passport, utility bills) to multiple financial institutions, leading to repetitive data collection and
verification.
● High Costs: Financial institutions incur significant costs in collecting, storing, and verifying
customer data, as well as maintaining compliance with regulations.

● Data Security Risks: Centralized databases storing sensitive customer information are vulnerable to
cyberattacks and data breaches.

● Lack of Customer Control: Customers have little control over their personal data once it's
submitted to various institutions.

● Inefficiency and Delays: Manual verification processes can lead to delays in customer onboarding
and service provision.

Role of Blockchain in KYC: Blockchain technology can revolutionize KYC by creating a decentralized,
secure, and shared platform for identity management.

● Self-Sovereign Identity: Blockchain enables individuals to control their own digital identities. Users
can store their verified KYC documents (or verifiable credentials) on a blockchain, selectively granting
access to financial institutions when needed.

● One-Time Verification: Once a customer's identity is verified by one trusted entity (e.g., a bank,
government agency) and recorded on the blockchain, other authorized institutions can instantly
access and verify this information. This eliminates redundant verification processes.
● Enhanced Security: Cryptographic principles inherent in blockchain ensure the immutability and
security of identity data. Data is not stored centrally but distributed across the network, reducing the
risk of a single point of failure or mass data breaches.

● Improved Efficiency and Reduced Costs: Streamlined verification processes can significantly
reduce onboarding times and operational costs for financial institutions.

● Privacy and Consent: Blockchain-based KYC systems can be designed to give users granular control
over who can access their data and for what purpose, enhancing privacy and consent management.

● Fraud Reduction: The immutable record of verified identities makes it harder for fraudsters to
create fake identities or engage in illicit activities.

b: Trade/Supply with respect to Provenance of Goods

Current Problems with Traditional Supply Chain Provenance: Tracking the provenance (origin,
history, and location) of goods in traditional supply chains faces numerous challenges.

● Lack of Transparency: Opaque supply chains make it difficult to ascertain the true origin and
journey of products, leading to issues like counterfeiting, ethical concerns (e.g., child labor), and food
safety crises.

● Manual and Fragmented Records: Information is often recorded manually across various systems,
leading to errors, delays, and a lack of real-time visibility.

● Trust Deficit: Each participant in the supply chain maintains their own records, making it hard to
establish trust and verify claims from upstream or downstream partners.

● Difficulty in Tracing Recalls: In case of product recalls or quality issues, tracing the exact batch and
its origin can be a complex and time-consuming process.

● Inefficiency and Costs: The lack of a unified system leads to inefficiencies, increased administrative
costs, and delays.

Role of Blockchain in Provenance of Goods: Blockchain technology offers a robust solution for
tracking the provenance of goods, providing an immutable and transparent record of a product's
journey from origin to consumer.

● End-to-End Transparency: Every step in the supply chain – from raw material sourcing,
manufacturing, packaging, shipping, and distribution – can be recorded as a transaction on a
blockchain. This creates an unalterable audit trail visible to authorized participants.

● Immutable Record: Once information (e.g., origin of materials, manufacturing date, shipping
details) is recorded on the blockchain, it cannot be altered, ensuring data integrity and preventing
fraud or misrepresentation.

● Enhanced Trust: All participants in the supply chain operate on a shared, verifiable ledger, fostering
trust and reducing disputes. Consumers can also verify the authenticity and ethical sourcing of
products.

● Real-time Tracking: Real-time updates on the blockchain enable immediate visibility into the
location and status of goods, improving logistics and inventory management.

● Efficient Recall Management: In the event of a product recall, blockchain's granular traceability
allows for precise identification of affected batches and their distribution points, enabling faster and
more targeted recalls.

● Combating Counterfeiting: By verifying the origin and authenticity of products, blockchain can
significantly reduce the prevalence of counterfeit goods in the market.

● Meeting Compliance and Sustainability Goals: Provides verifiable proof of compliance with
regulations and sustainable sourcing practices, which is increasingly important for consumers and
regulators.
 ASSIGNMENT-3

Ques 1. Discuss the application of Blockchain in financial software and systems with respect to
settlements.

Current Challenges in Financial Settlements: Traditional financial settlement systems, particularly for
cross-border payments or complex transactions, face several challenges:

● Long Settlement Times: Interbank transfers, especially international ones, can take days to settle
due to multiple intermediaries, disparate systems, and different operating hours across time zones.

● High Costs: Each intermediary (e.g., correspondent banks) in the settlement process adds fees,
increasing the overall cost of transactions.

● Operational Inefficiencies: Manual reconciliation, error correction, and fragmented data across
various parties lead to operational inefficiencies and increased administrative overhead.

● Lack of Transparency: The lack of a single, shared view of transactions makes it difficult for
participants to track the real-time status of payments, leading to delays and uncertainty.

● Counterparty Risk: The time lag between payment initiation and final settlement exposes parties
to counterparty risk, where one party might default before the transaction is finalized.

● Liquidity Management: Funds are often tied up for extended periods during the settlement
process, impacting liquidity for financial institutions.

Role of Blockchain in Financial Settlements: Blockchain technology can significantly enhance the
efficiency, security, and cost-effectiveness of financial settlements by providing a shared, immutable,
and real-time ledger for transactions.

● Real-time Gross Settlement (RTGS): Blockchain enables near real-time settlement of transactions.
Funds and assets can be transferred and settled almost instantaneously between parties, bypassing
traditional clearing and settlement houses and their

associated delays.

● Reduced Intermediaries: By providing a direct peer-to-peer network for value transfer, blockchain
can eliminate or reduce the need for multiple intermediaries (e.g., correspondent banks) in cross-
border payments. This streamlines the process and reduces associated fees.

● Lower Costs: Fewer intermediaries and automated processes through smart contracts lead to
significantly reduced transaction costs.

● Enhanced Transparency and Auditability: All participants on the blockchain network (with
appropriate permissions) have a shared, immutable view of transactions. This provides end-to-end
transparency, making it easier to track the status of payments and conduct audits.

● Reduced Counterparty Risk: Instantaneous settlement eliminates the time lag where counterparty
risk exists, as assets and funds are exchanged simultaneously (atomic swaps).
● Improved Liquidity Management: Funds are not tied up for days, freeing up capital and improving
liquidity for financial institutions.

● Automation with Smart Contracts: Smart contracts can automatically execute settlement terms
when predefined conditions are met (e.g., delivery of goods, regulatory approval), reducing manual
intervention and errors.

● Fraud Prevention: The cryptographic security and immutability of blockchain transactions make
fraudulent activities significantly harder to execute and conceal.

Examples include Ripple for cross-border payments and various consortium blockchains being
developed by financial institutions for interbank settlements and securities clearing.

Ques 2. What does visibility in supply chain mean? Explain how blockchain helps in supply chain
visibility (SCV)?

What does visibility in supply chain mean? Supply Chain Visibility (SCV) refers to the ability of all
parties involved in a supply chain – from suppliers and manufacturers to distributors, retailers, and
end-consumers – to access and view relevant information about the flow of goods, services, and
related data. It means having real-time or near real-time access to accurate and comprehensive
information regarding the status, location, and condition of products as they move through the
entire supply chain. This includes knowing:

● Where products are: Real-time tracking of goods in transit or at various stages of production.

● What state they are in: Information about quality, temperature, damage, or authenticity.

● Who handled them: Details of custodians and transfers of ownership.

● When they moved: Timestamps of key events like dispatch, arrival, and delivery.

● What documents are associated: Access to invoices, customs declarations, certifications, etc..

High supply chain visibility allows stakeholders to make informed decisions, identify bottlenecks,
mitigate risks, ensure compliance, and respond quickly to disruptions.
How Blockchain helps in Supply Chain Visibility (SCV): Blockchain technology is uniquely positioned
to address the challenges of achieving comprehensive supply chain visibility by providing a shared,
immutable, and transparent ledger for all supply chain events.

1. Shared, Single Source of Truth: Instead of fragmented, siloed databases maintained by each party,
blockchain provides a decentralized, shared ledger where all authorized participants can record and
access data. This creates a single, consistent version of truth across the entire supply chain,
eliminating discrepancies and improving data accuracy.

2. Immutability and Trust: Once data is recorded on the blockchain (e.g., product origin,
manufacturing date, shipment details), it cannot be altered or deleted. This immutability builds trust
among participants, as they can be confident in the integrity and authenticity of the data, reducing
disputes and the need for intermediaries.

3. End-to-End Traceability and Provenance: Every step of a product's journey, from raw material
sourcing to final delivery, can be recorded as a transaction on the blockchain. This creates an
unalterable audit trail, enabling granular, real-time tracking of a product's origin, history, and
location. This is particularly useful for verifying ethical sourcing, combating counterfeiting, and
ensuring food safety.

4. Enhanced Transparency: While maintaining necessary privacy (e.g., using permissioned

blockchains like Hyperledger Fabric), blockchain increases transparency across the supply chain.
Relevant information can be made visible to all authorized parties, including consumers who might
want to verify product authenticity or sustainability claims.

5. Automation with Smart Contracts: Smart contracts can automate various processes and trigger
actions based on predefined conditions recorded on the blockchain. For example, payment can be
automatically released upon delivery of goods, or quality checks can be logged and trigger alerts.
This reduces manual intervention and speeds up operations.

6. Reduced Fraud and Errors: The cryptographic security and consensus mechanisms of blockchain
make it highly resistant to fraud and data manipulation. Any attempts to alter records would be
immediately detectable by other network participants.

7. Improved Collaboration and Data Sharing: Blockchain incentivizes collaboration among supply
chain partners by providing a secure and trusted platform for sharing critical data, leading to better
coordination and efficiency.

By leveraging these capabilities, blockchain transforms supply chain visibility from a fragmented,
reactive process into a transparent, proactive, and trustworthy system, ultimately leading to greater
efficiency, reduced risk, and enhanced consumer confidence.
Ques 3. What is invoice management/processing? Explain problems associated with manual
invoice processing. Describe the role of blockchain in invoice management.

What is Invoice Management/Processing? Invoice management, also known as invoice processing or

accounts payable automation, refers to the entire workflow of handling vendor invoices from their
receipt to final payment and reconciliation. It encompasses several stages:

● Invoice Receipt: Receiving invoices from suppliers, typically via email, mail, or electronic data
interchange (EDI).

● Data Capture: Extracting relevant information from the invoice, such as vendor name, invoice
number, date, line items, quantities, prices, and total amount.
● Validation and Matching: Verifying the accuracy of the invoice data and matching it against
purchase orders (POs) and goods received notes (GRNs) to ensure that ordered goods or services
were indeed received and correctly billed.

● Approval Workflow: Routing invoices to appropriate personnel for approval based on company
policies, spending limits, and departmental budgets.
● Payment Processing: Initiating and executing payments to suppliers once invoices are approved.

● Reconciliation: Matching payments with invoices and updating accounting records.

● Archiving: Storing invoices for audit purposes and record-keeping.

The goal of effective invoice management is to ensure timely and accurate payments, optimize cash
flow, maintain good vendor relationships, and comply with financial regulations.

Problems Associated with Manual Invoice Processing: Manual invoice processing is fraught with
inefficiencies, errors, and risks:

● Time-Consuming and Inefficient: Manual data entry, paper shuffling, and physical routing for
approvals are slow and resource-intensive. This leads to delays in payments and potentially strained
vendor relationships.

● High Labor Costs: Significant human effort is required for data entry, verification, matching, and
follow-ups, increasing operational expenses.

● Error Prone: Manual data entry is susceptible to human errors, leading to incorrect payments,
duplicate payments, or missed invoices. These errors require costly and time-consuming correction
processes.

● Lack of Transparency and Visibility: It's often difficult to track the real-time status of an invoice in a
manual system. Where is it in the approval process? Has it been paid? This lack of visibility leads to
frequent inquiries and delays.

● Fraud Risk: Manual systems are more vulnerable to fraudulent invoices, as it's harder to
implement robust checks and balances.
● Disputes and Discrepancies: Mismatches between invoices, purchase orders, and receiving reports
often lead to disputes with suppliers, requiring manual reconciliation and delaying payments.
● Poor Cash Flow Management: Delays in processing can make it challenging to accurately forecast
cash outflows, impacting treasury management.
● Storage and Retrieval Issues: Managing physical paper invoices or disparate digital files can be
challenging for storage, retrieval, and auditing purposes.

Role of Blockchain in Invoice Management: Blockchain technology can significantly transform

invoice management by providing a transparent, immutable, and automated platform for invoice
processing.

1. Shared, Immutable Ledger: Invoices can be recorded as transactions on a blockchain, creating a

shared, immutable ledger accessible to all authorized parties (buyer, seller, banks). This single source
of truth eliminates discrepancies and ensures data integrity.

2. Automated Matching and Validation (Smart Contracts): Smart contracts can automate the
matching of invoices against purchase orders and goods received notes. Once the criteria are met,
the smart contract can trigger the next step in the workflow, such as approval routing or payment
initiation.

3. Enhanced Transparency and Real-time Status: All parties can view the real-time status of an
invoice on the blockchain, from submission to approval and payment. This eliminates inquiries,
provides full visibility, and improves trust among trading partners.

4. Reduced Fraud and Errors: The cryptographic security and immutability of blockchain make it
extremely difficult to tamper with invoices or introduce fraudulent ones. Any unauthorized alteration
would be immediately detectable.

5. Streamlined Approval Workflows: Smart contracts can define and enforce approval rules,
automatically routing invoices to the correct approvers based on predefined conditions and
accelerating the approval process.

6. Faster Payments and Improved Cash Flow: Automation and real-time visibility lead to faster
invoice processing and payment cycles. This improves cash flow for both buyers and suppliers.

7. Easier Auditing and Compliance: The immutable audit trail on the blockchain simplifies auditing
processes and helps organizations demonstrate compliance with financial regulations.

8. Facilitating Invoice Discounting/Factoring: By providing verifiable and trustworthy invoices,

blockchain can reduce the risk associated with invoice discounting, making it more accessible and
efficient (as discussed in Q4).

By leveraging blockchain, businesses can move towards a more efficient, secure, and transparent
invoice management system, reducing costs, minimizing errors, and strengthening relationships with
suppliers.

Ques 4. What is invoice discounting? Describe the role of blockchain in invoice discounting.

What is Invoice Discounting? Invoice discounting is a form of short-term borrowing where a business
sells its unpaid invoices to a third-party financial institution (the discounter or financier) at a
discount, in exchange for immediate cash. It allows businesses to access working capital tied up in
their accounts receivable without having to wait for customers to pay their invoices.

Here's how it typically works:

1. Invoice Generation: A business (the seller) issues an invoice to its customer (the debtor) for goods
or services provided, with payment terms (e.g., 30, 60, or 90 days).

2. Invoice Submission: The seller then submits this invoice to an invoice discounter.

3. Cash Advance: The discounter pays the seller an agreed-upon percentage of the invoice's value
upfront (e.g., 80-95%). This advance provides immediate liquidity to the seller.
4. Customer Payment: The customer pays the full invoice amount directly to the discounter on the
due date.

5. Final Payment (Rebate): Once the discounter receives the full payment from the customer, they
release the remaining balance to the seller, minus their fees and interest.
Invoice discounting is typically "confidential," meaning the customer is usually unaware that the
invoice has been sold to a discounter. The seller retains responsibility for collecting payments from
their customers.

Role of Blockchain in Invoice Discounting: Blockchain technology can significantly enhance the
efficiency, security, transparency, and accessibility of invoice discounting by addressing several
inherent challenges and risks.

1. Enhanced Trust and Verification:

○ Immutable Invoice Records: Invoices recorded on a blockchain are immutable and transparent to
authorized participants. This provides financiers with a high degree of confidence in the authenticity
and validity of the invoice, reducing the risk of fraudulent or duplicate invoices.

○ Verifiable Transaction History: The blockchain can hold a verifiable history of goods or services
delivered, linked directly to the invoice, ensuring that the underlying transaction is legitimate.

2. Reduced Fraud and Duplication:

○ One of the biggest risks in invoice discounting is the submission of fraudulent or duplicate invoices.
Blockchain's distributed and immutable nature makes it nearly impossible to submit the same
invoice twice or to alter an existing invoice without detection.

○ Smart contracts can automatically check for invoice uniqueness on the ledger before processing
any discounting requests.

3. Streamlined Verification and Due Diligence:

○ Currently, financiers spend considerable time and resources on due diligence, verifying the
authenticity of invoices and the creditworthiness of debtors.

○ Blockchain can provide financiers with immediate access to verified invoice data and potentially
the payment history of the debtor (if permitted), significantly speeding up the due diligence process
and reducing operational costs.

4. Automated Execution with Smart Contracts:

○ Smart contracts can automate key steps in the invoice discounting process. For example:

■ Automatically release the initial advance payment to the seller upon verification of the invoice and
its associated terms.

■ Automatically trigger the final payment (rebate) to the seller once the customer's payment is
received on the blockchain network.

■ Enforce terms and conditions agreed upon by all parties.

5. Improved Liquidity and Accessibility:

○ The increased trust and automation can attract more financiers to the market, increasing
competition and potentially leading to better rates for businesses.

○ Faster verification and processing mean businesses can access working capital more quickly.

○ It can potentially open up invoice discounting to a wider range of businesses, including SMEs, who
might find it difficult to access traditional financing due to lack of collateral or credit history.

6. Greater Transparency for All Parties:

○ While the core transaction can remain confidential to the customer, the seller and the discounter
have complete transparency over the invoice status and payment flows on the blockchain.

By creating a transparent, secure, and automated environment for invoice management, blockchain
can mitigate the risks associated with invoice discounting, making it a more efficient and accessible
financing option for businesses.

ASSIGNMENT-4

Ques 1. What are the problems associated with existing digital identity management system? How
blockchain helps in overcoming those problems?

Problems Associated with Existing Digital Identity Management Systems: Current digital identity
management systems, largely centralized, face significant challenges:
● Centralized Vulnerability (Honey Pot): Most digital identities are stored in centralized databases
(e.g., by social media companies, government agencies, banks). These "honey pots" are prime
targets for cyberattacks, leading to massive data breaches and identity theft.

● Lack of User Control (Vendor Lock-in): Users have little to no control over their digital identities
and personal data once it's submitted to various online services. They cannot easily revoke access or
transfer their data between platforms.

● Redundant Verification Processes: Users repeatedly have to submit the same identity documents
and undergo verification processes for every new service or account they create. This is inefficient
and frustrating.
● Privacy Concerns: Personal data is often collected, stored, and shared by third parties without the
explicit and granular consent of the user. Users often don't know who has access to their data or how
it's being used.

● Identity Silos and Fragmentation: Digital identities are fragmented across numerous platforms,
each with its own login credentials and data. This creates a complex and disjointed user experience.

● Difficulty in Verification for Businesses: Businesses face challenges in reliably verifying user
identities, leading to higher operational costs and increased risk of fraud.

● Censorship and Exclusion: Centralized authorities can control access to digital

identities, potentially leading to censorship or exclusion for certain individuals or groups.

● Phishing and Password Fatigue: Relying on usernames and passwords makes users susceptible to
phishing attacks and leads to "password fatigue," where users reuse weak passwords, increasing
security risks.

How Blockchain Helps in Overcoming Those Problems: Blockchain technology, particularly through
the concept of Self-Sovereign Identity (SSI), offers a paradigm shift in digital identity management.

1. Decentralization and Reduced "Honey Pots": Instead of storing identities in central databases,
blockchain-based identity systems distribute identity attributes across a decentralized network. This
eliminates single points of failure and reduces the attractiveness of data breaches, as there's no
central honeypot to attack.

2. Self-Sovereign Identity (User Control): Blockchain empowers individuals with control over their
own digital identities. Users can store their verified credentials (e.g., an attested date of birth,
academic degree, or professional license) in a secure digital wallet (often on their device) and
selectively share specific attributes with third parties, rather than their entire identity.

3. Verifiable Credentials and One-Time Verification: Trusted issuers (e.g., governments, universities,
banks) can issue cryptographically verifiable credentials (VCs) to individuals. Once a credential is
issued and recorded on the blockchain, it can be repeatedly verified by any relying party without
needing to go back to the issuer every time. This streamlines verification and eliminates redundant
processes.
4. Enhanced Privacy and Selective Disclosure: Users can choose exactly which pieces of information
to share. For example, instead of sharing their full date of birth, they might just prove they are over
18, using zero-knowledge proofs. This minimizes data exposure and maximizes privacy.

5. Interoperability and Portability: Blockchain identity solutions aim for interoperability, allowing
users to seamlessly use their digital identities across different platforms and services. This breaks
down identity silos.

6. Increased Security (Cryptography and Immutability): Cryptographic signatures ensure the

authenticity and integrity of credentials, making them tamper-proof. The immutability of the
blockchain ledger means that once a credential is recorded, it cannot be altered or revoked without
being evident.

7. Reduced Fraud: The verifiable and immutable nature of blockchain identities makes it much
harder for fraudsters to create fake identities or impersonate others.

8. Consent Management: Blockchain systems can explicitly record and manage user consent for data
sharing, providing an auditable trail of how data is accessed and used.

By shifting the control of identity from centralized entities to individuals, blockchain offers a more
secure, private, efficient, and user-centric approach to digital identity management.

Ques 2. What type of records can be kept in a blockchain? Is there any restriction on same?

What Type of Records Can Be Kept in a Blockchain? A blockchain is essentially a distributed,

immutable ledger, and as such, it can store virtually any type of digital record or data that benefits
from immutability, transparency (to authorized parties), and decentralization. The data stored on a
blockchain can range from simple transactional data to complex digital assets.

Common types of records that can be kept in a blockchain include:

● Transactional Data:

○ Financial Transactions: Cryptocurrency transfers (e.g., Bitcoin, Ethereum), interbank settlements,

cross-border payments.

○ Supply Chain Transactions: Records of goods moving through a supply chain (origin,
manufacturing, shipping, delivery), inventory updates, quality checks.

○ Real Estate Transactions: Property titles, transfers of ownership, mortgage details.

○ Healthcare Records: Patient data, medical prescriptions, consent forms, clinical trial data (often in
a de-identified or hashed format).

● Digital Assets:

○ Cryptocurrencies and Tokens: Records of ownership and transfers of digital currencies (like Bitcoin)
and various types of tokens (utility tokens, security tokens, NFTs).
○ Intellectual Property: Copyrights, patents, trademarks, proof of creation timestamps for digital
content (art, music, documents).

● Identity and Credentials:

○ Digital Identities: Verifiable credentials, identity attributes (e.g., date of birth, educational degrees,
professional certifications).

○ KYC/AML Data: Records related to customer identity verification for financial compliance.

● Legal Documents and Contracts:

○ Smart Contracts: The code itself that defines the terms and conditions of agreements, and records
of their execution.

○ Legal Agreements: Records of legal contracts, wills, power of attorney (often as hashes of the
actual documents).

● Voting Records: Secure and transparent records of votes in elections or polls, ensuring integrity
and auditability.

● Gaming Assets: Ownership of in-game items, virtual real estate, and other digital collectibles.

● IoT Data: Data streams from IoT devices (e.g., sensor readings from a cold chain logistics,
environmental data) to ensure data integrity and auditability.

Is There Any Restriction on Same? Yes, there are several practical and design-related restrictions and
considerations when deciding what type of records to keep on a blockchain:

1. Size of Data: Blockchains are not ideal for storing large amounts of raw data (e.g., entire high-
resolution images, videos, large databases) directly on the chain.

○ Reason: Every node in the network stores a copy of the entire blockchain, so storing massive
amounts of data would lead to immense storage requirements and slow down network
synchronization.

○ Solution: For large data, it's common practice to store a hash of the data on the blockchain, while
the actual data resides off-chain (e.g., in decentralized storage like IPFS or traditional databases). The
hash provides proof of data integrity and existence on the blockchain.

2. Privacy and Confidentiality: Public, permissionless blockchains offer transparency, meaning all
transactions are visible to everyone. This isn't suitable for highly sensitive or private data (e.g.,
personal health records, trade secrets) that requires strict confidentiality.

○ Solution:

■ Permissioned Blockchains: Networks like Hyperledger Fabric allow for restricted access, channels,
and private data collections, limiting visibility to authorized participants.

■ Hashing and Encryption: Sensitive data can be encrypted off-chain, and

only the encrypted hash or a cryptographic proof (like zero-knowledge proof) is stored on the
blockchain.

■ Private Data Chains: Some architectures involve a public chain for general transactions and private
side-chains for confidential data.

3. Regulatory Compliance: Depending on the jurisdiction and the type of data (e.g., GDPR, HIPAA),
there might be legal requirements for data erasure ("right to be forgotten") or specific data residency
rules.

○ Challenge: The immutability of blockchain conflicts with the "right to be forgotten."

○ Solution: Data that might need to be erased should typically be stored off-chain, with only its hash
on the blockchain. If the off-chain data is deleted, the hash remains as a permanent record of what
was there, but the content itself is gone.

4. Transaction Throughput and Latency: Some blockchain networks (especially public ones) have
limitations on the number of transactions they can process per second and can have high latency.

○ Restriction: Not suitable for applications requiring extremely high transaction volumes or real-time
processing (e.g., high-frequency trading in traditional finance, IoT streaming millions of data points
per second).

○ Solution: Permissioned blockchains are often designed for higher throughput, or off-chain scaling
solutions can be utilized.

5. Complexity of Data Models: While flexible, highly complex or frequently changing data models
might be cumbersome to implement directly on a blockchain due to the need for rigid
schemdefinitions in smart contracts and the cost of on-chain data updates.

In summary, while blockchain offers strong advantages for data integrity and transparency, it's crucial
to select the right type of blockchain and data storage strategy based on the specific use case's
requirements for privacy, scalability, and data size.

Ques 3. What are the key principles in blockchain that are helpful in eliminating the security
threats that needs to be followed?

Blockchain's inherent design principles contribute significantly to its security and help mitigate many
traditional security threats. To fully leverage these, certain best practices and principles must be
followed during implementation and operation:

1. Decentralization:

○ Principle: The network is distributed across many independent nodes, with no central authority.

○ Security Benefit: Eliminates single points of failure, making the network highly resilient to attacks,
censorship, and systemic collapse. An attacker would need to control a majority of the network to
compromise it, which is extremely difficult and costly.

○ To Follow: Ensure sufficient decentralization by encouraging diverse node participation and

avoiding reliance on a few dominant entities, especially in permissioned networks.
2. Cryptography:

○ Principle: Uses strong cryptographic algorithms (hashing, public-key cryptography) to secure

transactions and link blocks.

○ Security Benefit:

■ Data Integrity (Hashing): Cryptographic hashes ensure that data within a block and the link
between blocks cannot be tampered with without detection.

■ Authentication & Non-repudiation (Digital Signatures): Digital signatures verify the sender's
identity and prove their authorization for a transaction, preventing denial.

○ To Follow: Employ robust, industry-standard cryptographic primitives. Securely manage private

keys; compromise of a private key compromises the associated assets/identity.

3. Immutability:

○ Principle: Once data (a transaction) is recorded in a block and added to the chain, it cannot be
altered or deleted.

○ Security Benefit: Provides an unalterable audit trail, preventing fraud, double-spending, and
retroactive data manipulation. This builds trust and transparency.

○ To Follow: Understand that errors or malicious transactions, once confirmed, are extremely
difficult to reverse. Robust validation and testing of smart contracts are crucial before deployment.

4. Consensus Mechanisms:

○ Principle: A mechanism (e.g., Proof-of-Work, Proof-of-Stake, Raft) by which all participating nodes
agree on the validity of transactions and the state of the ledger.

○ Security Benefit: Ensures that all honest nodes maintain an identical and correct copy of the
ledger, preventing malicious actors from unilaterally adding invalid blocks or reversing transactions.

○ To Follow: Choose a consensus mechanism appropriate for the network's security, scalability, and
energy requirements. For public blockchains, ensure sufficient network hash power (PoW) or stake
(PoS) to prevent 51% attacks.

5. Transparency (Selective):

○ Principle: In public blockchains, all transactions are visible to everyone. In permissioned

blockchains, transparency is restricted to authorized participants via channels or private data.

○ Security Benefit: Public transparency allows for scrutiny and detection of fraudulent activities by
the community. Selective transparency in permissioned networks maintains business confidentiality
while ensuring trust among members.
○ To Follow: Design privacy layers (e.g., zero-knowledge proofs, private transactions, or permissioned
networks) for sensitive data while maintaining the benefits of a shared ledger.

6. Distributed Ledger Technology (DLT):

○ Principle: The ledger is replicated across multiple nodes, each holding an identical copy.

○ Security Benefit: If one node fails or is compromised, the network continues to operate, as other
nodes maintain the full record. Data redundancy ensures availability and integrity.
○ To Follow: Ensure a robust network of nodes and proper synchronization mechanisms to maintain
data consistency across the distributed ledger.

7. Smart Contract Security:

○ Principle: Automated, self-executing agreements whose terms are directly written into code.

○ Security Benefit: Reduces reliance on intermediaries, minimizes human error, and ensures
deterministic execution of agreements.

○ To Follow: This is a critical area. Smart contracts must be rigorously audited for vulnerabilities (e.g.,
reentrancy attacks, integer overflows, access control issues). Formal verification methods should be
employed where possible. Use battle-tested libraries and design patterns.

By adhering to these core principles and implementing them carefully, blockchain technology can
provide a highly secure and resilient foundation for various applications, mitigating many of the
security threats prevalent in centralized systems.

Ques 4. What is the application of merkle trees? Write use of merkle trees in blockchain?

What is the Application of Merkle Trees? A Merkle tree, also known as a hash tree, is a data
structure in computer science that allows for efficient and secure verification of large amounts of
data. It's a tree-like structure where every leaf node is labeled with the cryptographic hash of a data
block, and every non-leaf node is labeled with the cryptographic hash of the labels of its child nodes.
The topmost hash of the entire tree is called the Merkle Root.

Key Applications of Merkle Trees (Beyond Blockchain):

● Efficient Data Verification: Merkle trees allow a user to verify if a specific data block is part of a
larger set of data without needing to download the entire dataset. You only need the Merkle root
and a small number of hashes (the "Merkle path") to verify inclusion.

● Data Integrity Checks: Any alteration to a single data block will change its hash, which will then
change the hash of its parent, and so on, propagating up to the Merkle root. This makes it easy to
detect even minute data corruption.

● Peer-to-Peer Networks (e.g., BitTorrent): Used to ensure the integrity of downloaded files. Users
can verify pieces of a file against a Merkle root without downloading the entire file.

● Distributed Database Synchronization: Helps in efficiently verifying and synchronizing data across
distributed databases.

Use of Merkle Trees in Blockchain: Merkle trees are fundamental to the efficient and secure
operation of most major blockchains, including Bitcoin and Ethereum. Their primary use in
blockchain is to efficiently summarize all the transactions within a block and verify their integrity.

Here's how they are used:

1. Summarizing Transactions in a Block:

○ Each block in a blockchain contains numerous transactions. Instead of including every single
transaction's raw data directly in the block header, a Merkle tree is constructed from all the
transactions in that block.

○ The hash of each individual transaction forms a leaf node in the Merkle tree.
○ These transaction hashes are then paired and hashed together to form parent nodes, and this
process continues upwards until a single hash, the Merkle Root, is produced at the top.

2. Inclusion in the Block Header:

○ The crucial aspect is that this final Merkle Root is included in the block header. The block header is
then hashed to form the block's unique identifier (the block hash), which links it to the next block in
the chain.

3. Efficient Verification of Transactions (SPV Clients):

○ Lightweight Clients (SPV - Simplified Payment Verification): Full blockchain nodes store the entire
blockchain and verify every transaction. However, lightweight clients (like many mobile
cryptocurrency wallets) cannot store the entire blockchain.

○ Merkle trees allow these light clients to verify if a specific transaction is included in a block without
downloading all transactions in that block. They only need a copy of the block header (which
contains the Merkle Root) and a "Merkle path" for the transaction in question.

○ The Merkle path consists of a small set of intermediate hashes required to recompute the Merkle
Root from the transaction's hash. If the recomputed Merkle
Root matches the one in the block header, the transaction's inclusion and integrity are verified. This
significantly reduces the data required for verification, making light clients feasible.

4. Tamper Detection: ○ If even a single transaction within a block is altered, its original hash will
change. This change will propagate up the Merkle tree, causing the Merkle Root to change.

○ Since the Merkle Root is included in the block header and subsequently used to hash the block, any
alteration to a transaction would invalidate the block's hash and, by extension, all subsequent blocks
in the chain. This reinforces the immutability and security of the blockchain.