BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT.

OF IT/SMVEC

Blockchain is a buzzword in today’s technology and this technology is described as the most disruptive
technology of the decade. Thus, Blockchain is used for the secure transference of items like money,
contracts, property rights, stocks, and even networks without any requirement of Third Party
Intermediaries like Governments, banks, etc. Once the data is stored in the Blockchain it becomes very
difficult to manipulate the stored data. A Blockchain is a Network Protocol like SMTP. However,
Blockchain cannot be run without the Internet. BlockChain is useful in many areas like Banking, Finance,
Healthcare, Insurance, etc.
A blockchain is an open, distributed ledger that can record transactions between two parties efficiently and
in averifiable and permanent way without the need for a central authority.

Key Characteristics:
 Open: Anyone can access blockchain.
 Distributed or Decentralised: Not under the control of any single authority.
 Efficient: Fast and Scalable.
 Verifiable: Everyone can check the validity of information because each node maintains a copy of
thetransactions.
 Permanent: Once a transaction is done, it is persistent and can’t be altered.

Blockchain can be defined as the Chain of Blocks that contain some specific Information. Thus, a
Blockchain is a ledger i.e file that constantly grows and keeps the record of all transactions
permanently. This process takes place in a secure, chronological (Chronological means every
transaction happens after the previous one) and immutable way. Each time when a block is completed
in storing information, a new block is generated.

Benefits and limitations of blockchain:

Numerous benefits of blockchain technology are being discussed in the industry and proposed
by thought leadersaround the world in blockchain space. The top 10 benefits are listed and discussed
as follows.

Decentralization:

This is a core concept and benefit of blockchain. There is no need for a trusted third party or
intermediary tovalidate transactions; instead a consensus mechanism is used to agree on the validity
of transactions.

Transparency and trust:

As blockchains are shared and everyone can see what is on the blockchain, this allows the
system to be transparent and as a result trust is established. This is more relevant in scenarios such
as the disbursement of funds or benefits where personal discretion should be restricted.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Immutability:

Once the data has been written to the blockchain, it is extremely difficult to change it back.
It is not truly immutable but, due to the fact that changing data is extremely difficult and almost
impossible, this is seen as a benefit to maintaining an immutable ledger of transactions.

High availability:

As the system is based on thousands of nodes in a peer-to-peer network, and the data is
replicated and updated oneach and every node, the system becomes highly available. Even if nodes
leave the network or become inaccessible, the network as a whole continues to work, thus making it
highly available.

Highly secure:

All transactions on a blockchain are cryptographically secured and provide integrity.

Simplification of current paradigms:

The current model in many industries such as finance or health is rather disorganized, wherein
multiple entities maintain their own databases and data sharing can become very difficult due to the
disparate nature of the systems. But as a blockchain can serve as a single shared ledger among
interested parties, this can result in simplifying this model by reducing the complexity of managing
the separate systems maintained by each entity.

Faster dealings:

In the financial industry, especially in post-trade settlement functions, blockchain can play a vital
role by allowing the quicker settlement of trades as it does not require a lengthy process of
verification, reconciliation, and clearance because a single version of agreed upon data is already
available on a shared ledger between financial organizations.

Cost saving:

As no third party or clearing houses are required in the blockchain model, this can massively
eliminate overheadcosts in the form of fees that are paid to clearing houses or trusted third parties.

Distributed Systems:

Understanding distributed systems is essential to our understanding blockchain, as blockchain

was a distributed system at its core. It is a distributed ledger that can be centralized or decentralized.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

A blockchain is originally intended to be and is usually used as a decentralized platform. It can

be thought of as a system that has propertiesof the both decentralized and distributed paradigms. It is
a decentralized-distributed system.

Distributed systems are a computing paradigm whereby two or more nodes work with each other in
a coordinated fashion to achieve a common outcome. It is modeled in such a way that end users see
it as a single logical platform. For example, Google's search engine is based on a large distributed
system; however, to a user, it looks like a single, coherent platform

A node can be defined as an individual player in a distributed system. All nodes are capable of
sending and receiving messages to and from each other. There is no Central Server or System which
keeps the data of Blockchain. The data is distributed over Millions of Computers around the world
which are connected with the Blockchain. This system allows Notarization of Data as it is present on
every Node and is publicly verifiable.A node can be defined as an individual player in a distributed
system. All nodes are capable of sending and receiving messages to and from each other.

Nodes can be honest, faulty, or malicious and have their own memory and processor. A node that
can exhibit arbitrary behavior is also known as a Byzantine node. This arbitrary behavior can be
intentionally malicious, which is detrimental to the operation of the network. Generally, any
unexpected behavior of a node on the network can be categorized as Byzantine. This term arbitrarily
encompasses any behavior that is unexpected or malicious.

The main challenge in distributed system design is coordination between nodes and fault tolerance.
Even if some of the nodes become faulty or network links break, the distributed system should
tolerate this and should continue to work flawlessly in order to achieve the desired result. This has
been an area of active research for many years and several algorithms and mechanisms has been
proposed to overcome these issues.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

A network of nodes: A node is a computer connected to the Blockchain Network. Node gets
connected with Blockchain using the client. Client helps in validating and propagates transaction
on to the Blockchain. When a computer connects to the Blockchain, a copy of the Blockchain data
gets downloaded into the system and the node comes in sync with the latest block of data on
Blockchain. The Node connected to the Blockchain which helps in the execution of a Transaction in
return for an incentive is called Miners.

Disadvantages of current transaction system:

 Cash can only be used in low amount transaction locally.

 Huge waiting time in the processing of transactions.
 Need to third party for verification and execution of Transaction make the process complex
 If the Central Server like Banks is compromised, whole System is affected including the
participants.
 Organization doing validation charge high process thus making the process expensive.

Building trust with Blockchain:

Blockchain enhances trust across a business network. It’s not that you can’t trust those who you
conductbusiness with its that you don’t need to when operating on a Blockchain network.

Blockchain builts trust through the following five attributes:

Distributed: The distributed ledger is shared and updated with every incoming transaction
among the nodes connected to the Blockchain. All this is done in real-time as there is no central
server controlling thedata.
Secure: There is no unauthorized access to Blockchain made possible through
Permissions andCryptography.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Transparent: Because every node or participant in Blockchain has a copy of the Blockchain
data, theyhave access to all transaction data. They themselves can verify the identities without
the need for mediators.

Consensus-based: All relevant network participants must agree that a transaction is valid.
This isachieved through the use of consensus algorithms.

Flexible: Smart Contracts which are executed based on certain conditions can be written
into theplatform. Blockchain Network can evolve in pace with business processes.

HISTORY OF BLOCKCHAIN:

In 1991, researcher scientists named Stuart Haber and W. Scott Stornetta introduce
Blockchain Technology. These scientists wanted some Computational practical Solution for time-
stamping the digital documents so that they couldn’t be tempered or misdated. So both scientists
together developed a system with the help of Cryptography. In this System, the time-stamped
documents are stored in a Chain of Blocks.

After that in 1992, Merkle Trees formed a legal corporation by using a system
developed by Stuart Haber and W. Scott Stornetta with some more features. Hence, Blockchain
Technology became efficient to store several documents to be collected into one block. Merkle
used a Secured Chain of Block which storesmultiple data records in a sequence. However, this
Technology became unused when Patent came into existence in 2004.

However, in the same year 2004, Cryptographic activist Hal Finney introduced a system
for digital cash known as “Reusable Proof of Work”. This step was the game-changer in the history
of Blockchainand Cryptography. This System helps others to solve the Double Spending Problem by
keeping the ownership of tokens registered on a trusted server.

After that in 2008, Satoshi Nakamoto conceptualized the concept of “Distributed

Blockchain” under his white paper:”A Peer to Peer Electronic Cash System”. He modified the model
of Merkle Tree and created a system that is more secure and contains the secure history of data
exchange. His System follows a peer- to-peer network of time stamping. His system became so useful
that Blockchain become the backbone of Cryptography.
After that, the evolution of Blockchain is steady and promising and became a need in
various fields. Blockchain technology is so secure that the following surprising news will give proof
about that. A person named, James Howells was an IT worker in the United Kingdom, he starts mining
bitcoins which are part of Blockchain in 2009 and stopped this in 2013. He spends $17,000 on it and
after he stopped he sells the parts of his laptop on eBay and keep the drive with him so that when he
needs to work again on bitcoin he will utilize it but while cleaning his house in 2013, he thrashed his
drive with garbage and now his bitcoins cost nearly $127 million. This money now remains unclaimed
in the Bitcoin system.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

The blockchain is the public ledger of all Bitcoin transactions that have ever been exe‐
cuted. It is constantly growing as miners add new blocks to it (every 10 minutes) to record the most
recent transactions. The blocks are added to the blockchain in a lin‐ ear, chronological order. Each full
node (i.e., every computer connected to the Bitcoin network using a client that performs the task of
validating and relaying transactions) has a copy of the blockchain, which is downloaded automatically
when the miner joins the Bitcoin network. The blockchain has complete information about addresses
and balances from the genesis block (the very first transactions ever executed) to the most recently
completed block.

Blockchain is the backbone Technology of Digital CryptoCurrency BitCoin. The

blockchain is a distributed database of records of all transactions or digital event that have been
executed and shared among participating parties. Each transaction verified by the majority of
participants of the system. It contains every single record of each transaction. BitCoin is the most
popular cryptocurrency an example of the blockchain. Blockchain Technology Records Transaction in
Digital Ledger which is distributed over the Network thus making it incorruptible. Anything of value
like Land Assets, Cars, etc. can be recorded on Blockchain as a Transaction.

One of the famous use of Blockchain is Bitcoin. The bitcoin is a cryptocurrency and is used
to exchange digital assets online. Bitcoin uses cryptographic proof instead of third-party trust for two
parties to execute transactions over the internet. Each transaction protects through digital signature.

TYPES OF BLOCKCHAIN

There are 4 types of blockchain:

 Public Blockchain.
 Private Blockchain.
 Hybrid Blockchain.
 Consortium Blockchain.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

1. Public Blockchain

These blockchains are completely open to following the idea of decentralization. They don’t have any
restrictions, anyone having a computer and internet can participate in the network.

 As the name is public this blockchain is open to the public, which means it is not owned by
anyone.
 Anyone having internet and a computer with good hardware can participate in this public
blockchain.
 All the computer in the network hold the copy of other nodes or block present in the network
 In this public blockchain, we can also perform verification of transactions or records

Advantages:
 Trustable: There are algorithms to detect no fraud. Participants need not worry about the other
nodes in the network
 Secure: This blockchain is large in size as it is open to the public. In a large size, there is
greater distribution of records
 Anonymous Nature: It is a secure platform to make your transaction properly at the same
time, you are not required to reveal your name and identity in order to participate.
 Decentralized: There is no single platform that maintains the network, instead every user has
a copy of the ledger.

Disadvantages:
 Processing: The rate of the transaction process is very slow, due to its large size. Verification
of each node is a very time-consuming process.
 Energy Consumption: Proof of work is high energy-consuming. It requires good computer
hardware to participate in the network
 Acceptance: No central authority is there so governments are facing the issue to implement
the technology faster.

Use Cases: Public Blockchain is secured with proof of work or proof of stake they can be used to
displace traditional financial systems. The more advanced side of this blockchain is the smart contract
that enabled this blockchain to support decentralization. Examples of public blockchain are Bitcoin,
Ethereum.

2. Private Blockchain

These blockchains are not as decentralized as the public blockchain only selected nodes can participate
in the process, making it more secure than the others.

 These are not as open as a public blockchain.

 They are open to some authorized users only.
 These blockchains are operated in a closed network.
 In this few people are allowed to participate in a network within a company/organization.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Advantages:

 Speed: The rate of the transaction is high, due to its small size. Verification of each node is
less time-consuming.
 Scalability: We can modify the scalability. The size of the network can be decided manually.
 Privacy: It has increased the level of privacy for confidentiality reasons as the businesses
required.
 Balanced: It is more balanced as only some user has the access to the transaction which
improves the performance of the network.

Disadvantages:

 Security- The number of nodes in this type is limited so chances of manipulation are there.
These blockchains are more vulnerable.
 Centralized- Trust building is one of the main disadvantages due to its central nature.
Organizations can use this for malpractices.

 Count- Since there are few nodes if nodes go offline the entire system of blockchain can be
endangered.

Use Cases: With proper security and maintenance, this blockchain is a great asset to secure
information without exposing it to the public eye. Therefore companies use them for internal auditing,
voting, and asset management. An example of private blockchains is Hyperledger, Corda.

3. Hybrid Blockchain
It is the mixed content of the private and public blockchain, where some part is controlled by some
organization and other makes are made visible as a public blockchain.

 It is a combination of both public and private blockchain.

 Permission-based and permissionless systems are used.
 User access information via smart contracts
 Even a primary entity owns a hybrid blockchain it cannot alter the transaction

Advantages:

 Ecosystem: Most advantageous thing about this blockchain is its hybrid nature. It cannot be
hacked as 51% of users don’t have access to the network
 Cost: Transactions are cheap as only a few nodes verify the transaction. All the nodes don’t
carry the verification hence less computational cost.
 Architecture: It is highly customizable and still maintains integrity, security, and
transparency.
 Operations: It can choose the participants in the blockchain and decide which transaction can
be made public.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Disadvantages:

 Efficiency: Not everyone is in the position to implement a hybrid Blockchain. The organization
also faces some difficulty in terms of efficiency in maintenance.
 Transparency: There is a possibility that someone can hide information from the user. If someone
wants to get access through a hybrid blockchain it depends on the organization whether they will
give or not.
 Ecosystem: Due to its closed ecosystem this blockchain lacks the incentives for network
participation.

Use Case: It provides a greater solution to the health care industry, government, real estate, and
financial companies. It provides a remedy where data is to be accessed publicly but needs to be
shielded privately. Examples of Hybrid Blockchain are Ripple network and XRP token.

4. Consortium Blockchain

It is a creative approach that solves the needs of the organization. This blockchain validates the
transaction and also initiates or receives transactions.

 Also known as Federated Blockchain.

 This is an innovative method to solve the organization’s needs.
 Some part is public and some part is private.
 In this type, more than one organization manages the blockchain.

Advantages:

 Speed: A limited number of users make verification fast. The high speed makes this more
usable for organizations.
 Authority: Multiple organizations can take part and make it decentralized at every level.
Decentralized authority, makes it more secure.
 Privacy: The information of the checked blocks is unknown to the public view. but any
member belonging to the blockchain can access it.
 Flexible: There is much divergence in the flexibility of the blockchain. Since it is not a very
large decision can be taken faster.

Disadvantages:

 Approval: All the members approve the protocol making it less flexible. Since one or more
organizations are involved there can be differences in the vision of interest.
 Transparency: It can be hacked if the organization becomes corrupt. Organizations may hide
information from the users.
 Vulnerability: If few nodes are getting compromised there is a greater chance of vulnerability
in this blockchain
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Use Cases: It has high potential in businesses, banks, and other payment processors. Food tracking of
the organizations frequently collaborates with their sectors making it a federated solution ideal for
their use. Examples of consortium Blockchain are Tendermint and Multichain.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

CONSENSUS

Consensus plays a key role in building trust among crypto coin traders worldwide. Due to the
decentralised nature of the crypto world, it is essential to have complete transparency while trading a
particular coin. This minimises the chances of a buyer becoming a victim of fraud.

If you are a beginner in crypto trading, you must know the vital details about consensus regarding
blockchain.

What Is the Meaning of Consensus: Generally, consensus means that the majority of a group has
agreed in favour of a decision. When it comes to blockchain, reaching a consensus is important. At
least 51% of the traders and miners associated with a particular coin must agree to finalise the next
global status of the coin.

What Is a Consensus Mechanism: In the blockchain, a consensus mechanism is a system that validates
a transaction and marks it as authentic. This mechanism lists all valid transactions of a coin in a
blockchain to build trust in the coin among traders. Several currencies, such as Bitcoin, Ethereum etc.,
use this system for security purposes.

How Does the Consensus Mechanism Work: It achieves the agreement of most users on a single
network.The consensus mechanism maintains the security of the blockchain by keeping a record of all
legitimate transactions. Since crypto trading is a decentralised process, this becomes important to stop
sellers from deliberately cheating a buyer.

To build trust for a blockchain, the consensus mechanism ensures that a transaction is reflected in the
blockchain as soon as it gets validated. There are a variety of methodologies that are essential to ensure
security and trust and achieve agreement across a blockchain network. Consensus mechanisms also
ensure that all the transactions for a coin are rightly listed in the blockchain.

What Are the Types of Consensus Mechanisms: Several mechanisms are used as a consensus
mechanism during coin trading. These mechanisms are as follows:

Proof of Work: This consensus algorithm is used to select a miner for the next block generation.
Bitcoin uses this PoW consensus algorithm.

The central idea behind this algorithm is to solve a complex mathematical puzzle and easily give out
a solution. This mathematical puzzle requires a lot of computational power and thus, the node who
solves the puzzle as soon as possible gets to mine the next block.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Proof of Stake: This is the most common alternative to PoW. Ethereum has shifted from PoW to PoS
consensus. In this type of consensus algorithm, instead of investing in expensive hardware to solve a
complex puzzle, validators invest in the coins of the system by locking up some of their coins as
stakes. After that, all the validators will start validating the blocks. Validators will validate blocks by
placing a bet on them if they discover a block that they think can be added to the chain. Based on the
actual blocks added in the Blockchain, all the validators get a reward proportionate to their bets, and
their stake increase accordingly. In the end, a validator is chosen to generate a new block based on its
economic stake in the network. Thus, PoS encourages validators through an incentive mechanism to
reach to an agreement.

Delegated Proof of Stake (DPoS): This is another type of Proof of Stake consensus algorithm. This
type of consensus mechanism depends on the basis of the delegation of votes. The users delegate their
votes to other users. Whichever user then mines the block will distribute the rewards to the users who
delegated to that particular vote.

Byzantine Fault Tolerance (BFT): is the feature of a distributed network to reach consensus
(agreement on the same value) even when some of the nodes in the network fail to respond or respond
with incorrect information. The objective of a BFT mechanism is to safeguard against the system
failures by employing collective decision making (both – correct and faulty nodes) which aims to
reduce to influence of the faulty nodes. BFT is derived from Byzantine Generals’ Problem.

Proof of Capacity: The PoC mechanism heavily relies on free space available in the hard drive. This is
because there are many solutions to a coin's hash problem that a trader needs to store. It is highly efficient
as compared to PoW and PoC mechanisms. Coins such as Burst, Storj, SpaceMint and Chia use these
mechanisms.

Proof of Activity: This mechanism is a combination of both Proof of Work and Proof of Stake. It has
been designed to combine the best features of PoW and PoS. In the beginning, the Proof-of-Activity
mechanism functions like PoW. Once a new block is completed, it starts to function like a Proof-Of-
Stake mechanism. Coins such as DCR (Decred) use this mechanism.

Proof of Authority: Different organisations and private companies created this unique mechanism.
There are validators with approved accounts which authorise transactions and the creation of new
blocks. These validators must disclose their true identity to get the right to validate a transaction.

Proof of Burn: PoB aims to improve the quality of blockchain so that it can be used easily and
extensively as a tool for faster and more secured transactions. After PoW and PoS, PoB is designed to
prevent fraud activities on a blockchain network. Cryptocurrencies such as Bitcoin use this mechanism
to offer secure transactions to traders.

Proof of Elapsed Time : Intel Corporation created this mechanism to permit blockchain to decide the
person who will create the next block. It uses a lottery system to decide the next block creator. Thus, it
gives a fair chance to all traders to create the next block. It is an efficient process involving utilising
lesser resources and low energy consumption.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

What are the advantages of the consensus mechanism?

No barriers to participation

Any crypto trader or miner across the globe can participate in a consensus mechanism. There are few
barriers to participation in a consensus for any crypto coin.

Builds trust among users

Traders and miners of a particular coin across the globe must agree to approve a decision. This, in turn,
builds trust among the users.

Establishes security

Consensus mechanisms maintain the transparency of trading for all coins. Thus, traders can ensure that
no fraud occurs during a transaction.

What are the disadvantages of the consensus mechanism?

Severe chances of hacking

There lies a chance of hacking known as 51% hack, which stands out as a potential attack on a consensus
mechanism.

Excessive use of electricity

There is a heavy requirement for electricity for the PoW mechanism to function.

With very few associated disadvantages, the consensus mechanism is a great security tool for a
decentralised form of trade. This allows traders and miners across the globe to establish a connection
and trust among themselves and benefit from the mechanism.

The benefits in the case of traders are trade security and faster transactions. On the other hand, miners
get several rewards for solving complex problems faster and gaining authority to validate a trade.

CAP THEOREM:

The CAP theorem, also known as Brewer's theorem, was introduced by Eric Brewer in 1998 as a
conjecture. In 2002, it was proven as a theorem by Seth Gilbert and Nancy Lynch. The theorem states
that any distributed system cannot have consistency, availability, and partition tolerance
simultaneously:

 Consistency is a property that ensures that all nodes in a distributed system have a single,
current, and identical copy of the data.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Consistency is achieved using consensus algorithms in order to ensure that all nodes have the
same copy of the data. This is also called state machine replication. The blockchain is a
means for achieving state machine replication.

 Availability means that the nodes in the system are up, accessible for use, and are accepting
incoming requests and responding with data without any failures as and when required. In
other words, data is available at each node and the nodes are responding...

The CAP theorem states that a distributed database system has to make a tradeoff between
Consistency andAvailability when a Partition occurs. A distributed database system is bound
to have partitions in a real-worldsystem due to network failure or some other reason.

The CAP Theorem is comprised of three components (hence its name) as they relate to
distributed datastores:
 Consistency. All reads receive the most recent write or an error.
 Availability. All reads contain data, but it might not be the most recent.Partition
tolerance.

The CAP Theorem is comprised of three components (hence its name) as they relate to distributed
data stores:

 Consistency. All reads receive the most recent write or an error.

 Availability. All reads contain data, but it might not be the most recent.
 Partition tolerance. The system continues to operate despite network failures (ie;
dropped partitions,slow network connections, or unavailable network connections
between nodes.)

In normal operations, your data store provides all three functions. But the CAP theorem maintains
that when adistributed database experiences a network failure, you can provide either consistency
or availability.
It’s a tradeoff. All other times, all three can be provided. But, in the event of a network failure, a
choice must be made.In the theorem, partition tolerance is a must. The assumption is that the
system operates on a distributed data store so the system, by nature, operates with network
partitions. Network failures will happen, so to offer any kind of reliable service, partition
tolerance is necessary—the P of CAP.

That leaves a decision between the other two, C and A. When a network failure happens, one can
choose to guarantee consistency or availability:

 High consistency comes at the cost of lower availability.

 High availability comes at the cost of lower consistency.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

DECENTRALIZATION:
Decentralization is a core benefit and service provided by blockchain technology. By design,
blockchain is a perfect vehicle for providing a platform that does not need any intermediaries
and that can function with many different leaders chosen via consensus mechanisms. This model
allows anyone to compete to become the decision-making authority. A consensus mechanism
governs this competition, and the most famous method is known as Proof of Work (PoW).

Decentralization is applied in varying degrees from a semi-decentralized model to a fully

decentralized one depending on the requirements and circumstances. Decentralization can be
viewed from a blockchain perspectiveas a mechanism that provides a way to remodel existing
applications and paradigms, or to build new applications, to give full control to users.

Information and communication technology (ICT) has conventionally been based on a

centralized paradigm whereby database or application servers are under the control of a central
authority, such as a system administrator. With Bitcoin and the advent of blockchain technology,
this model has changed, and now the technology exists to allow anyone to start a decentralized
system and operate it with no single point of failure or single trusted authority. It can either be
run autonomously or by requiring some human intervention, depending on the type and model
of governance used in the decentralized application running on the blockchain.

The following diagram shows the different types of systems that currently exist: central,
distributed, anddecentralized.
Different types of networks/systems

Centralized systems are conventional (client-server) IT systems in which there is a single

authority that controlsthe system, and who is solely in charge of all operations on the system.
All users of a centralized system are dependent on a single source of service. The majority of
online service providers, including Google, Amazon, eBay, and Apple's App Store, use this
conventional model to deliver services.

In a distributed system, data and computation are spread across multiple nodes in the network.
Sometimes, this term is confused with parallel computing. While there is some overlap in the
definition, the main difference between these systems is that in a parallel computing system,
computation is performed by all nodes simultaneously in order to achieve the result; for example,
parallel computing platforms are used in weather research and forecasting, simulation, and
financial modeling. On the other hand, in a distributed system, computation may not happen
in parallel and data is replicated across multiple nodes that users view as a single, coherent
system. Variations of both of these models are used to achieve fault tolerance and speed. In the
parallel system model, there is still a central authority that has control over all nodes and governs
processing. This meansthat the system is still centralized in nature.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

The critical difference between a decentralized system and distributed system is that in a
distributed system, there is still a central authority that governs the entire system, whereas in a
decentralized system, no such authority exists.

A decentralized system is a type of network where nodes are not dependent on a single master
node; instead, control is distributed among many nodes. This is analogous to a model where each
department in an organizationis in charge of its own database server, thus taking away the power
from the central server and distributing it to the sub-departments, who manage their own
databases.

A significant innovation in the decentralized paradigm that has given rise to this new era of
decentralization of applications is decentralized consensus. This mechanism came into play
with Bitcoin, and it enables a user toagree on something via a consensus algorithm without the
need for a central, trusted third party, intermediary, or service provider.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Methods of Decentralization:
Two methods can be used to achieve decentralization: disintermediation and competition. These
methods will bediscussed in detail in the sections that follow.

The concept of disintermediation can be explained with the aid of an example. Imagine
that you wat to send money to a friend in another country. You go to a bank, which, for a fee, will
transfer your money to the bank in that country. In this case, the bank maintains a central database
that is updated, confirming that you have sent the money. With blockchain technology, it is possible
to send this money directly to your friend without the need for a bank. All you need is the address
of your friend on the blockchain. This way, the intermediary (that is, the bank) is no longer required,
and decentralization is achieved by disintermediation. It is debatable, however, how practical
decentralization through disintermediation is in the financial sector due to the massive regulatory
and compliance requirements.

Nevertheless, this model can be used not only in finance but in many other industries as
well, such as health, law, and the public sector. In the health industry, where patients, instead of
relying on a trusted third party (such as the hospital record system) can be in full control of their
own identity and their data that they can share directly with only those entities that they trust.

As a general solution, blockchain can serve asa decentralized health record management
system where health records can be exchanged securely and directly between different entities
(hospitals, pharmaceutical companies, patients) globally without any central authority.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Contest-driven decentralization:

In the method involving competition, different service providers compete with each other in
order to be selected for the provision of services by the system. This paradigm does not achieve
complete decentralization. However, to a certain degree, it ensures that an intermediary or service
provider is not monopolizing the service. In the context of blockchain technology, a system can
be envisioned in which smart contracts can choose an external data provider from a large number
of providers based on their reputation, previous score, reviews, and quality of service.

This method will not result in full decentralization, but it allows smart contracts to make a free
choice based on the criteria just mentioned. This way, an environment of competition is
cultivated among service providers where they compete with each other to become the data
provider of choice.

In the following diagram, varying levels of decentralization are shown. On the left side, the
conventional approach is shown where a central system is in control; on the right side, complete
disintermediation is achieved,as intermediaries are entirely removed. Competing intermediaries
or service providers are shown in the center. At that level, intermediaries or service providers are
selected based on reputation or voting, thus achieving partialdecentralization:
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

PLATFORMS FOR DECENTRALIZATION

Ethereum: Ethereum is a decentralized platform that enables the creation of smart

contracts and decentralized applications (DApps). It uses a blockchain -based platform to
enable peer-to-peer transactions without the need for intermediaries.

Binance Smart Chain: Binance Smart Chain is a blockchain-based platform that

enables the creation of smart contracts and decentralized applications. It is designed to be
fast and cheap, making it ideal for high-frequency transactions and applications.

Polkadot: Polkadot is a platform that enables the interoperability of different

blockchains. It allows for the creation of specialized blockchains that can communicate with
each other, enabling greater flexibility and scalability for decentralized applications.

Filecoin: Filecoin is a decentralized storage platform that enables users to store and
retrieve data in a secure and decentralized manner. It uses a blockchain -based platform to
incentivize users to provide storage space and network bandwidth in exchange for
cryptocurrency rewards.

Arweave: Arweave is a decentralized storage platform that enables permanent, tamper -

proof storage of data. It uses a blockchain-based platform to store data on a network of
nodes, ensuring that it is available and secure for long-term storage.

These are just a few examples of platforms for decentralization, and there are many
more emerging every day. Each platform has its own unique strengths and weaknesses, and
the choice of platform will depend on the specific use case and requirements of the
application being developed.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

BLOCKCHAIN ECOSYSTEM
Components of Block Chain

A blockchain network consists of nodes, a distributed ledger, an asset, and a consensus algorithm.
Sometimes, it also includes a virtual machine and a state database.

Nodes

Nodes form the structure of the blockchain network. Nodes on the network are tasked with different
responsibilities, such as a miner and a validator. Nodes are devices with computational power and
a node application installed. Different blockchains have different node applications containing the
data and the rules to act as nodes on the respective blockchain.

Distributed ledger

The distributed ledger is also known as the database of the blockchain. Every node on the
network has a copy of the ledger to provide fault tolerance to the network. A ledger is
immutable and visible to everyone on the blockchain network. It is made up of sequentially
linked blocks containing assets. Blocks are linked together using the previous block’s hash.

Asset

An asset can be virtually anything, either physical or non-physical, having a value recognized by
the nodes in the network. Some examples of assets are as follows:

 Financial transactions: Blockchains like Bitcoin and Dogecoin use a ledger to store the
data of transactions of their cryptocurrencies.
 Code blocks: Blockchains like Ethereum use it to store code in the form of smart contracts,
which serves as the basis of the concept of Dapps.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

 Medical records: Private blockchains usually store patients’ medical records to maintain
integrity in an untrustworthy environment.
 Business transactions: Businesses can use private blockchains while performing
transactions involving other businesses to ensure the integrity of the product and that certain
conditions are met, leading to more security and accountability.

Consensus algorithm

A consensus algorithm is what makes blockchain a successful alternative for centralized

applications. In the case of centralized applications, the central authority is trusted by all users
to execute the transactions reliably. However, in the absence of a central authority, this
responsibility falls upon the nodes in the network. Blockchains use consensus algorithms like
Proof of Work (POW) and Proof of Stake (POS) to reach consensus in an untrustworthy
environment. The consensus algorithm sends the transaction performed by the miner to the
validator nodes to reach a consensus. If consensus is reached, the transaction is added to the
ledger, or else it is discarded.

Virtual machine

Blockchains like Ethereum run virtual machines on their nodes. They are used to execute code
written in smart contracts. This is done to ensure that if the code being executed on the nodes
contains malware, it will not affect the node executing the code. Instead, it will j ust affect the
virtual machine running on top of the actual hardware saving the node.

State Database
It is a key-value database that represents the current state of the network. It is calculated by
traversing the ledger. It is used to save time during transactions, as during every transaction, the
updated state of the network is required, and the traversal of the whole ledger in every transaction
will slow down the network.

BLOCKCHAIN AND FULL ECOSYSTEM DECENTRALIZATION

Storage
Data can be stored directly in a blockchain, and with this fact it achieves decentralization.
However, a significant disadvantage of this approach is that a blockchain is not suitable for
storing large amounts of data by design. It can store simple transactions and some arbitrary data,
but it is certainly not suitable for storing images or large blobs of data, as is the case with
traditional database systems.A better alternative for storing data is to use distributed hash
tables (DHTs). DHTs were used initially in peer- to-peer file sharing software, such as
BitTorrent, Napster, Kazaa, and Gnutella. DHT research was made popularby the CAN, Chord,
Pastry, and Tapestry projects. BitTorrent is the most scalable and fastest network, but the issue
with BitTorrent and the others is that there is no incentive for users to keep the files indefinitely
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Users generally don't keep files permanently, and if nodes that have data still required by
someone leave the network, there is no way to retrieve it except by having the required nodes
rejoin the network so that the files once again become available.

Two primary requirements here are high availability and link stability, which means that data
should be availablewhen required and network links also should always be accessible. Inter-
Planetary File System (IPFS) by JuanBenet possesses both of these properties, and its vision
is to provide a decentralized World Wide Web by replacing the HTTP protocol. IPFS uses
Kademlia DHT and Merkle Directed Acyclic Graphs (DAGs) to provide storage and searching
functionality, respectively.

The incentive mechanism for storing data is based on a protocol known as Filecoin, which pays
incentives to nodes that store data using the Bitswap mechanism. The Bitswap mechanism lets
nodes keep a simple ledger ofbytes sent or bytes received in a one-to-one relationship. Also, a
Git-based version control mechanism is used inIPFS to provide structure and control over the
versioning of data.

There are other alternatives for data storage, such as Ethereum Swarm, Storj, and MaidSafe.
Ethereum has its own decentralized and distributed ecosystem that uses Swarm for storage and
the Whisper protocol for communication. MaidSafe aims to provide a decentralized World Wide
Web. All of these projects are discussedlater in this book in greater detail.

BigChainDB is another storage layer decentralization project aimed at providing a scalable,

fast, and linearly scalable decentralized database as opposed to a traditional filesystem.
BigChainDB complements decentralized processing platforms and filesystems such as
Ethereum and IPFS.

Communication

The Internet (the communication layer in blockchain) is considered to be decentralized. This

belief is correct to some extent, as the original vision of the Internet was to develop a
decentralized communications system. Services such as email and online storage are now all
based on a paradigm where the service provider is in control, and users trust such providers to
grant them access to the service as requested. This model is based on the unconditional trust of
a central authority (the service provider) where users are not in control of their data. Even user
passwords are stored on trusted third-party systems.

Thus, there is a need to provide control to individual users in such a way that access to their data
is guaranteedand is not dependent on a single third party.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Access to the Internet (the communication layer) is based on Internet Service Providers (ISPs)
who act as a central hub for Internet users. If the ISP is shut down for any reason, then no
communication is possible with thismodel.

An alternative is to use mesh networks. Even though they are limited in functionality when
compared to theInternet, they still provide a decentralized alternative where nodes can talk
directly to each other without a central hub such as an ISP.

Now imagine a network that allows users to be in control of their communication; no one can
shut it down for any reason. This could be the next step toward decentralizing communication
networks in the blockchain ecosystem. It must be noted that this model may only be vital in a
jurisdiction where the Internet is censored andcontrolled by the government.

As mentioned earlier, the original vision of the Internet was to build a decentralized network;
however, over the years, with the advent of large-scale service providers such as Google,
Amazon, and eBay, control is shifting toward these big players. For example, email is a
decentralized system at its core; that is, anyone can run an email server with minimal effort and
can start sending and receiving emails. There are better alternatives available. For example,
Gmail and Outlook already provide managed services for end users, so there is a natural
inclination toward selecting one of these large centralized services as they are more convenient
and free to use. This is one example that shows how the Internet has moved toward
centralization.

Free services, however, are offered at the cost of exposing valuable personal data, and many users
are unaware ofthis fact. Blockchain has revived the vision of decentralization across the world,
and now concerted efforts are being made to harness this technology and take advantage of the
benefits that it can provide.

Computing power and decentralization:

Decentralization of computing or processing power is achieved by a blockchain technology such

as Ethereum, where smart contracts with embedded business logic can run on the blockchain
network. Other blockchain technologies also provide similar processing-layer platforms, where
business logic can run over the network in a decentralized manner.

The following diagram shows an overview of a decentralized ecosystem. In the bottom layer,
the Internet or mesh networks provide a decentralized communication layer. In the next layer
up, a storage layer uses technologies such as IPFS and BigChainDB to enable decentralization.
Finally, in the next level up, you can see that the blockchain serves as a decentralized processing
(computation) layer. Blockchain can, in a limited way, provide a storage layer too, but that
severely hampers the speed and capacity of the system.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC

Therefore, other solutions such as IPFS and BigChainDB are more suitable for storing large
amounts of data in a decentralized way. The Identity and Wealth layers are shown at the top
level. Identity on the Internet is a vast topic, and systems such as bitAuth and OpenID provide
authentication and identification services with varying degrees of decentralization and security
assumptions:

Decentralized ecosystem

The blockchain is capable of providing solutions to various issues relating to decentralization. A

concept relevantto identity known as Zooko's Triangle requires that the naming system in a
network protocol is secure,decentralized, and able to provide human-meaningful and memorable
names to the users. Conjecture has it that a system can have only two of these properties
simultaneously.

Nevertheless, with the advent of blockchain in the form of Namecoin, this problem was resolved.
It is now possible to achieve security, decentralization, and human-meaningful names with the
Namecoin blockchain. However, this is not a panacea, and it comes with many challenges, such
as reliance on users to store and maintain private keys securely. This opens up other general
questions about the suitability of decentralization toa particular problem.

Decentralization may not be appropriate for every scenario. Centralized systems with well-
established reputations tend to work better in many cases. For example, email platforms from
reputable companies such as Google or Microsoft would provide a better service than a scenario
where individual email servers are hosted by users on the Internet.

There are many projects underway that are developing solutions for a more comprehensive
distributed blockchain system. For example, Swarm and Whisper are developed to provide
decentralized storage and communication for Ethereum.
BLOCKCHAIN TECHNOLOGY – U20ITT616 DEPT. OF IT/SMVEC