Block Chain Fundamentals

Blockchain Introduction
Tracing Blockchain’s Origin
• The shortcomings of current transaction systems (During 2000’s financial crisis)
• Commerce on the Internet has come to rely almost exclusively on financial
institutions serving as trusted third parties to process electronic payments.
• While the system works well enough for most transactions, it still suffers
from the inherent weaknesses of the trust based model.
• Completely non-reversible transactions are not really possible, since financial
institutions cannot avoid mediating disputes. This impacts on
• The cost of mediation increases transaction costs,
• Limiting the minimum practical transaction size
• Cutting off the possibility for small casual transactions,
• There is a broader cost in the loss of ability to make non-reversible
payments for nonreversible services.
• While the possibility of reversal, impacts on the building the trust among the
parties.
 Another wary of the merchants (due to Third Party Mitigation)
Merchants must be wary (attentive) of their customers,
• Hassling them for more information than they would otherwise
need.
• A certain percentage of fraud is accepted as unavoidable.
• These costs and payment uncertainties can be avoided in
person by using physical currency, but no mechanism exists to
make payments over a communications channel without a
trusted party.
 Bitcoin Whitepaper: 10/31/2008
Bitcoin: A Peer-to-Peer Electronic Cash System
Satoshi Nakamoto
satoshin@gmx.com
www.bitcoin.org
Abstract. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly
from one party to another without going through a financial institution. Digital signatures provide part
of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-
spending. We propose a solution to the double-spending problem using a peer-to-peer network. The
network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work,
forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only
serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU
power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the
network, they'll generate the longest chain and outpace attackers. The network itself requires minimal
structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at
will, accepting the longest proof-of-work chain as proof of what happened while they were gone.
 Solution Summary: Transacting Digital Currency

• The electronic payment system based on cryptographic proof

instead of trust, allowing any two willing parties to transact
directly with each other without the need for a trusted third
party.
• Transactions that are computationally impractical to reverse
would protect sellers from fraud, and routine escrow
mechanisms could easily be implemented to protect buyers.
 Digital Currency
• The most successful among lot of efforts: Bitcoin
• Replace cash with numbers and codes
• Advantages
– Fast
– International
– Easy accounting
– Weighs nothing
– Cheap
• Problems to be solved ?
 Problems of Digital Currency
• Perfect Copy
– Just like downloading attachment from
email
– How to distinguish counterfeits
– Ownership Problem
• Double Spending
– Networks are noisy and transmission
across networks is far from instantaneous:
delay
– A hacker can capitalize
– Fraudster Detection Problem
 The Long Road to Bitcoin
• Centralized Banking: not robust
• Satoshi determined to find the centralized part of banks
– The ledger
– “What if I could turn a bank inside out? Instead of one central party controlling
the ledger, what if every user were recruited to maintain a constantly updated
copy?”
• The strength of the digital was perfect copies, so copy the ledger,
everywhere, instantly.
– Any ledgers with even one common not agreeing with the masses would be
discarded, leaving fraudsters powerless
• Replace cash with Ledger!
Ledger
Decentralization (Replace cash with Ledger)
 The decentralized ledger (Blockchain)
• Decentralization: get rid of the Third Party
• Satoshi paired two main technologies
– Proof of Work: to solve the double spending problem
– Elliptic Curves: to solve unique access to the ledger
• Nothing was newer than 2001
1. 2001: SHA-256 finalized
2. 1999-present: Byzantine fault tolerance
3. 1999-present: P2P networks
4. 1998: Wei Dai, B-money
5. 1998: Nick Szabo, Bit Gold
6. 1997: HashCash
7. 1992-1993: Proof-of-work for spam
8. 1991: cryptographic timestamp
9. 1980: public key crypto algorithm
 What is Blockchain Technology

• Bitcoin stores all its transactions onto a public database called

as Blockchain
Highlights
 Blockchain Structure

Source: https://www.edureka.co/blog/blockchain-tutorial/
What does a block look like?
4 Key Concepts of Blockchain

Source: IBM, A new disruption in financial services

 Blockchain Architecture
• Revolutionary Technology
– Protocol
– TCP/IP, HTTP, Cloud Computation, Big Data, IoT, FinTech…
• Melanie Swan: Blockchain: Blueprint for A New Economy, Jan 2015
– Blockchain 1.0
• Bitcoin
• Programmable Money
– Blockchain 2.0
• Ethereum
• Smart Contract
– Blockchain 3.0…
• Non-Financial Uses
• Applications
 Bitcoin System vs. Current Banking System
• Decentralized System
– The Blockchain system follows a decentralized approach when
compared to banks and financial organizations which are controlled
and governed by Central or Federal Authorities.
– Here, everyone who is involved with the system holds some power.
• Public Ledgers
– The ledger which holds the details of all transactions which happen
on the Blockchain, is open and completely accessible to everyone
who is associated with the system.
– Even though the complete ledger is publicly accessible, the details of
the people involved in the transactions remains completely
anonymous.
• Verification of Every Individual Transaction
– Every single transaction is verified by cross-checking the ledger and the
validation signal of the transaction is sent after a few minutes.
– Through the usage of several complex encryption and hashing
algorithm, the issue of double spending is eliminated.
• Low or No Transaction Fees
– These transaction fees are however relatively quite less when compared
to the fees implied by banks and other financial organizations.
– If a transaction needs to be completed on priority then an additional
transaction fees can be added by the user so as to have the transaction
verified on priority.
 The key business benefits
• Time savings
• Cost savings
• Tighter security
• Enhanced privacy
• Improved auditability
• Increased operational efficiency
 Building trust with blockchain
• Distributed and sustainable
• Secure, private, and indelible
• Transparent and auditable
• Consensus-based and transactional
• Orchestrated and flexible
Why It’s Called “Blockchain”
 Different Players in Implementation
• Blockchain user
• Regulator
• Blockchain developer
• Blockchain network operator
• Traditional processing platforms
• Traditional data sources
• Certificate authority
HyperLedger Introduction
 Hyperledger Fabric
• The Linux Foundation founded Hyperledger in 2015
• Hyperledger Fabric is a platform for distributed ledger solutions in
industrial level.
• A modular architecture - Delivers high degrees of confidentiality,
resiliency, flexibility and scalability.
• It is designed to support pluggable implementations of different
components, and accommodate the complexity and intricacies that
exist across the economic ecosystem.
• Breaks from some other blockchain systems is that it
is private and permissioned
 Hyperledger Fabric - Cont.
• Like other blockchain technologies, it has a ledger, uses smart contracts,
and is a system by which participants manage their transactions.
• Ledger data can be stored in multiple formats, consensus mechanisms
can be switched in and out.
• Offers the ability to create channels, allowing a group of participants to
create a separate ledger of transactions.
• Hyperledger is based on blockchain but its not a crypto currency.
• There is no mining, just order system do it.
• Operational power: 0.5 million operations per minute where as other
blockchain does only 1000.
 Advantages of Hyperledger Fabric
• Permissioned membership
• Performance, scalability, and levels of trust
• Data on a need-to-know basis
• Rich queries over an immutable distributed ledger
• Modular architecture supporting plug-in components
• Protection of digital keys and sensitive data
 Hyperledger Components
• Fabric CA,
• Peer
• Ordering service
• Channel
• Chaincode
 Fabric CA
The Hyperledger Fabric CA is a Certificate Authority (CA) for
Hyperledger Fabric.
It provides features such as:
• registration of identities, or connects to Lightweight Directory
Access Protocol (LDAP) as the user registry
• issuance of Enrollment Certificates (ECerts)
• certificate renewal and revocation
• consists of both a server and a client component.
CA – WorkFlow
 CA cont.
• Every single operation that is executed inside hyperledger
fabric must be cryptographically signed with this certificate.
• You can add attributes, roles
• Certificates are X.509 standards.
• Certificates can be remove if it does not needed.
• Chaincodes read this data and make business decisions.
 Peer
• Peer is the place where the ledger and the blockchain data is
stored.
• You must have more than one peer in production.
• One peer may be part of many channels.
• Every single channel is inside the peer.
• It endorse any update of the ledger.
• You can create backup of the ledger from the peer
 Ordering Service
• Ordering service is actually the heart of consensus algorithm
and the heart of hyper ledger fabric.
• Main role is to provide the order of operations.
• Before committing anything to ledger it must pass through the
ordering service.
• It is responsible for verification, security, policy verification etc.
 Channel
• Channel is a private “subnet” of communication between two
or more specific network members.
• A channel is defined by members (organizations), anchor peers
per member, the shared ledger, chaincode application(s) and
the ordering service node(s).
• Each peer that joins a channel, has its own identity given by a
membership services provider (MSP).
 Channel cont.
• channels are completely isolated,
• they have different ledgers, different height of blocks, policies,
stories, rules.
• completely isolated instance of hyper ledger fabric.
• never exchange data.
• outside of a channel , one can’t even see that there is a channel.
• you can make a policy who can see the data in the channel and who
can make an operation.
• every single party inside a channel must agree about other parties.
 Channel configuration properties
• Versioned: All elements of the configuration have an associated version
which is advanced with every modification. Further, every committed
configuration receives a sequence number.
• Permissioned: Each element of the configuration has an associated policy
which governs whether or not modification to that element is permitted.
Anyone with a copy of the previous configtx (and no additional info) may
verify the validity of a new config based on these policies.
• Hierarchical: A root configuration group contains sub-groups, and each
group of the hierarchy has associated values and policies. These policies can
take advantage of the hierarchy to derive policies at one level from policies
of lower levels.
 Chaincode
• A chaincode typically handles business logic agreed to by
members of the network, so it similar to a “smart contract”.
• All your business logic is inside the chaincode.
• Its written in Go. Implementation of java and javascript are on
the way.
• Chaincode me installed in every peer and channel.
• Policy must be provided.
 Hyperledger Composer
• Hyperledger Composer is a set of collaboration tools for
building blockchain business networks that make it simple and
fast for business owners and developers to create smart
contracts and blockchain applications to solve business
problems

• Extensive
• Open development toolset and
• Framework to make developing Blockchain applications easier.
 Bitcoin Transactions
• Electronic coin as a chain of digital signatures.
• Each owner transfers the coin to the next by digitally signing a
hash of the previous transaction and the public key of the next
owner and adding these to the end of the coin.
• A payee can verify the signatures to verify the chain of
ownership.
The problem of course is the payee can't verify that one of the
owners did not double-spend the coin.
• A common solution is to introduce a trusted central authority, or mint,
that checks every transaction for double spending.
• After each transaction, the coin must be returned to the mint to issue a
new coin, and only coins issued directly from the mint are trusted not
to be double-spent.
• The problem with this solution is that the fate of the entire money
system depends on the company running the mint, with every
transaction having to go through them, just like a bank.
• We need a way for the payee to know that the previous owners did
not sign any earlier transactions.
• For our purposes, the earliest transaction is the one that counts, so we
don't care about later attempts to double-spend.
• The only way to confirm the absence of a transaction is to be
aware of all transactions.
• In the mint based model, the mint was aware of all
transactions and decided which arrived first.
• To accomplish this without a trusted party, transactions must
be publicly announced, and we need a system for participants
to agree on a single history of the order in which they were
received.
• The payee needs proof that at the time of each transaction, the
majority of nodes agreed it was the first received.
 Timestamp Server
• The solution begins with a timestamp server.
• A timestamp server works by taking a hash of a block of
items to be timestamped and widely publishing the hash,
such as in a newspaper or Usenet post .
• The timestamp proves that the data must have existed at the
time, obviously, in order to get into the hash.
• Each timestamp includes the previous timestamp in its hash,
forming a chain, with each additional timestamp reinforcing
the ones before it.
 Proof-of-Work (1 of 4)
• To implement a distributed timestamp server on a peer-to-peer
basis, we will need to use a proof-of-work system similar to
Adam Back's Hashcash [6], rather than newspaper or Usenet
posts.
• The proof-of-work involves scanning for a value that when
hashed, such as with SHA-256, the hash begins with a number
of zero bits. The average work required is exponential in the
number of zero bits required and can be verified by executing a
single hash.
• The proof-of-work is implemented by incrementing a nonce in the
block until a value is found that gives the block's hash the required
zero bits.
• Once the CPU effort is made to satisfy the proof-of-work, the block
cannot be changed without redoing the work.
• If later blocks are chained after it, the work to change the block
would include redoing all the blocks after it.
 Proof-of-Work (3 of 4)

• The proof-of-work also solves the problem of determining

representation in majority decision making.
• If the majority were based on one-IP-address-one-vote, it could
be subverted by anyone able to allocate many IPs.
• Proof-of-work is essentially one-CPU-one-vote.
• The majority decision is represented by the longest chain,
which has the greatest proof-of-work effort invested in it.
 Proof-of-Work (4 of 4)
• If a majority of CPU power is controlled by honest nodes, the honest
chain will grow the fastest and outpace any competing chains.
• To modify a past block, an attacker would have to redo the proof-of-
work of the block and all blocks after it and then catch up with and
surpass the work of the honest nodes.
• To compensate for increasing hardware speed and varying interest in
running nodes over time, the proof-of-work difficulty is determined by
a moving average targeting an average number of blocks per hour.
• If they're generated too fast, the difficulty increases.
 Network ( 1 of 3)
The steps to run the network are as follows:
1. New transactions are broadcast to all nodes.
2. Each node collects new transactions into a block.
3. Each node works on finding a difficult proof-of-work for its block.
4. When a node finds a proof-of-work, it broadcasts the block to all nodes.
5. Nodes accept the block only if all transactions in it are valid and not already
spent.
6. Nodes express their acceptance of the block by working on creating the next
block in the chain, using the hash of the accepted block as the previous hash.
 Network ( 2 of 3)
• New transaction broadcasts do not necessarily need to reach
all nodes.
• As long as they reach many nodes, they will get into a block
before long. Block broadcasts are also tolerant of dropped
messages.
• If a node does not receive a block, it will request it when it
receives the next block and realizes it missed one
 Network ( 3 of 3)
• Nodes always consider the longest chain to be the correct one and will
keep working on extending it.
• If two nodes broadcast different versions of the next block
simultaneously, some nodes may receive one or the other first.
• In that case, they work on the first one they received, but save the other
branch in case it becomes longer.
• The tie will be broken when the next proofof-work is found and one
branch becomes longer; the nodes that were working on the other
branch will then switch to the longer one.
 Incentive (1 of 2)
• By convention, the first transaction in a block is a special transaction that
starts a new coin owned by the creator of the block.
• This adds an incentive for nodes to support the network, and provides a
way to initially distribute coins into circulation, since there is no central
authority to issue them.
• The steady addition of a constant of amount of new coins is analogous to
gold miners expending resources to add gold to circulation.
• In this case, it is CPU time and electricity that is expended. The incentive
can also be funded with transaction fees.
• If the output value of a transaction is less than its input value, the
difference is a transaction fee that is added to the incentive value of the
block containing the transaction.
 Incentive (2 of 2)
• Once a predetermined number of coins have entered circulation, the
incentive can transition entirely to transaction fees and be completely
inflation free. The incentive may help encourage nodes to stay honest.
• If a greedy attacker is able to assemble more CPU power than all the
honest nodes, he would have to choose between using it to defraud
people by stealing back his payments, or using it to generate new coins.
• He ought to find it more profitable to play by the rules, such rules that
favour him with more new coins than everyone else combined, than to
undermine the system and the validity of his own wealth.
 Reclaiming Disk Space
• Once the latest transaction in a coin is buried under enough
blocks, the spent transactions before it can be discarded to
save disk space.
• To facilitate this without breaking the block's hash,
transactions are hashed in a Merkle Tree [7][2][5], with only
the root included in the block's hash.
• Old blocks can then be compacted by stubbing off branches of
the tree.
• The interior hashes do not need to be stored.
A block header with no transactions would be about 80 bytes. If we suppose blocks are generated every 10
minutes, 80 bytes * 6 * 24 * 365 = 4.2MB per year. With computer systems typically selling with 2GB of RAM as
of 2008, and Moore's Law predicting current growth of 1.2GB per year, storage should not be a problem even if
the block headers must be kept in memory.
 Simplified Payment Verification (1 of 3)
• It is possible to verify payments without running a full network node.
• A user only needs to keep a copy of the block headers of the longest
proof-of-work chain, which he can get by querying network nodes
until he's convinced he has the longest chain, and obtain the
Merkle branch
• linking the transaction to the block it's timestamped in.
• He can't check the transaction for himself, but by linking it to a place
in the chain, he can see that a network node has accepted it, and
blocks added after it further confirm the network has accepted it.
 Simplified Payment Verification (3 of 3)
• As such, the verification is reliable as long as honest nodes control the network,
but is more vulnerable if the network is overpowered by an attacker.
• While network nodes can verify transactions for themselves, the simplified
method can be fooled by an attacker's fabricated transactions for as long as the
attacker can continue to overpower the network.
• One strategy to protect against this would be to accept alerts from network
nodes when they detect an invalid block, prompting the user's software to
download the full block and alerted transactions to confirm the inconsistency.
• Businesses that receive frequent payments will probably still want to run their
own nodes for more independent security and quicker verification.
 Combining and Splitting Value
• Although it would be possible to handle coins individually, it would be unwieldy to
make a separate transaction for every cent in a transfer.
• To allow value to be split and combined, transactions contain multiple inputs and
outputs.
• Normally there will be either a single input from a larger previous transaction or
multiple inputs combining smaller amounts, and at most two outputs: one for the
payment, and one returning the change, if any, back to the sender.

• It should be noted that fan-out, where a transaction

depends on several transactions, and those transactions
depend on many more, is not a problem here.
• There is never the need to extract a complete standalone
copy of a transaction's history.
 Privacy
• The traditional banking model achieves a level of privacy by limiting
access to information to the parties involved and the trusted third party.

• The necessity to announce all transactions publicly precludes this

method, but privacy can still be maintained by breaking the flow of
information in another place: by keeping public keys anonymous.
• The public can see that someone is sending an amount to someone else,
but without information linking the transaction to anyone.
• This is similar to the level of information released by stock exchanges,
where the time and size of individual trades, the "tape", is made public,
but without telling who the parties were.
• As an additional firewall, a new key pair should be used for each
transaction to keep them from being linked to a common owner.
• Some linking is still unavoidable with multi-input transactions, which
necessarily reveal that their inputs were owned by the same owner.
• The risk is that if the owner of a key is revealed, linking could reveal
other transactions that belonged to the same owner.
 Calculations: A Case
• We consider the scenario of an attacker trying to generate an alternate chain faster
than the honest chain. Even if this is accomplished, it does not throw the system
open to arbitrary changes, such as creating value out of thin air or taking money
that never belonged to the attacker.
• Nodes are not going to accept an invalid transaction as payment, and honest nodes
will never accept a block containing them.
• An attacker can only try to change one of his own transactions to take back money
he recently spent.
• The race between the honest chain and an attacker chain can be characterized as a
Binomial Random Walk. The success event is the honest chain being extended by
one block, increasing its lead by +1, and the failure event is the attacker's chain
being extended by one block, reducing the gap by -1.
• The probability of an attacker catching up from a given deficit is
analogous to a Gambler‘s Ruin problem.
• Suppose a gambler with unlimited credit starts at a deficit and plays
potentially an infinite number of trials to try to reach breakeven.
• We can calculate the probability he ever reaches breakeven, or that an
attacker ever catches up with the honest chain, as follows [8]:
• Given our assumption that p > q, the probability drops exponentially as the number of
blocks the attacker has to catch up with increases. With the odds against him, if he
doesn't make a lucky lunge forward early on, his chances become vanishingly small as he
falls further behind.
• We now consider how long the recipient of a new transaction needs to wait before
being sufficiently certain the sender can't change the transaction. We assume the sender
is an attacker who wants to make the recipient believe he paid him for a while, then
switch it to pay back to himself after some time has passed. The receiver will be alerted
when that happens, but the sender hopes it will be too late.
• The receiver generates a new key pair and gives the public key to the sender shortly
before signing. This prevents the sender from preparing a chain of blocks ahead of time
by working on it continuously until he is lucky enough to get far enough ahead, then
executing the transaction at that moment.
• Once the transaction is sent, the dishonest sender starts working in secret on a parallel
chain containing an alternate version of his transaction.
• The recipient waits until the transaction has been added to a block and z blocks have
been linked after it.
• He doesn't know the exact amount of progress the attacker has made, but
assuming the honest blocks took the average expected time per block, the
attacker's potential progress will be a Poisson distribution with expected value: