1
Module-1
Chapter 2: Introducing Blockchain
Mastering Blockchain 2
Third Edition
.
Outline 3
• Describing the fundamentals of distributed systems
• Defining blockchain technology
• Understanding how blockchain technology was developed
• Detailing the elements of a blockchain
• Identifying the benefits and limitations of blockchain technology
Defining ‘Blockchain’ 4
Layman's definition: A blockchain is a decentralized, distributed ledger that records transactions
in a secure, transparent, and immutable way. It consists of a chain of blocks, where each block
contains a list of transactions and is linked to the previous block using cryptographic hashes.
Technical definition: Blockchain is a peer-to-peer distributed ledger that is cryptographically-
secure, append-only, immutable (extremely hard to change), and updateable only via consensus
or agreement among peers.
5
Block chain definition
• Peer-to-peer
• Distributed ledger
• Cryptographically secure
• Append only
• Updateable via consensus (consensus-driven)
Block chain definition 6
Block chain definition 7
History of Blockchain 11
How did block chain technology develop?
• 1950s – Hash functions
• 1991 – Secure timestamping of digital documents.
• 1970s – Merkle trees - hashes in a tree structure
• 1992 – Hashcash idea to combat junk emails
• 1970s continued – Research in distributed systems, consensus,
state machine replication • 1994 – S/KEY application for Unix login.
• 1980s – Hash chains for secure logins • 1997/2002 – Hashcash
• 1990s – e-Cash for e-payments • 2008/2009 – Bitcoin (the first blockchain)
Blockchain was introduced with the
invention of Bitcoin in 2008. Its
practical implementation then
occurred in 2009.
History of Blockchain 11
How did block chain technology develop?
Architectural view of Blockchain(1) 12
Architectural view of Blockchain(2) 11
• In the preceding diagram, the lowest layer is the Network, which is usually the internet and provides a
base communication layer for any blockchain.
• A peer-to-peer network runs on top of the Network layer, which consists of information propagation
protocols such as gossip or flooding protocols.
• After this comes the Cryptography layer, which contains crucial cryptographic protocols that ensure the
security of the blockchain. These cryptographic protocols play a vital role in the integrity of blockchain
processes, secure information dissemination, and blockchain consensus mechanisms. This layer consists of
public key cryptography and relevant components such as digital signatures and cryptographic hash functions.
Sometimes, this layer is abstracted away, but it has been included in the diagram because it plays a
fundamental role in blockchain operations.
PTO
Architectural view of Blockchain(3) 12
• Next comes the Consensus layer, which is concerned with the usage of various consensus mechanisms to
ensure agreement among different participants of the blockchain. This is another crucial part of the blockchain
architecture, which consists of various techniques such as SMR, proof-based consensus mechanisms, or
traditional (from traditional distributed systems research) Byzantine fault-tolerant consensus protocols.
• Further to this, we have the Execution layer, which can consist of virtual machines, blocks, transaction,
and smart contracts. This layer, as the name suggests, provides executions services on the blockchain and
performs operations such as value transfer, smart contract execution, and block generation. Virtual machines
such as Ethereum Virtual Machine (EVM) provide an execution environment for smart contracts to execute.
• Finally, we have the Applications layer, which is composed of smart contracts, decentralized applications,
DAOs, and autonomous agents. This layer can effectively contain all sorts of various user level agents and
programs that operate on the blockchain. Users interact with the blockchain via decentralized applications.
13
Generic Elements of a blockchain
Consists of:
• Addresses
• Accounts
• Transactions
• Blocks
• Peer-to-peer network
• Scripting or programming language
• Virtual machine
• State machine
• Nodes
• Smart contracts
14
Generic Elements of a blockchain
Consists of: Continued.. Block chain Accounts from prev slide ..
• Addresses
• Accounts
• Transactions
• Blocks
• Peer-to-peer network
• Scripting or programming language
• Virtual machine
• State machine
• Nodes
• Smart contracts
15
Generic Elements of a blockchain
Consists of: Continued.. Block chain Accounts from prev slide ..
• Addresses
• Accounts
• Transactions
• Blocks
• Peer-to-peer network
• Scripting or programming language
• Virtual machine
• State machine
• Nodes
• Smart contracts
Generic Elements of a blockchain 16
Consists of:
• Addresses
• Accounts
• Transactions
• Blocks
• Peer-to-peer network
• Scripting or programming language
• Virtual machine
• State machine
• Nodes
• Smart contracts
17
Generic Elements of a blockchain
Consists of:
• Addresses
• Accounts
• Transactions
• Blocks
• Peer-to-peer network
• Scripting or programming language
• Virtual machine
• State machine
• Nodes
• Smart contracts
18
Generic Elements of a blockchain
Consists of:
• Addresses
• Accounts
• Transactions
• Blocks
• Peer-to-peer network
• Scripting or programming language
• Virtual machine
• State machine
• Nodes
• Smart contracts
19
Generic Elements of a blockchain
Consists of:
• Addresses
• Accounts
• Transactions
• Blocks
• Peer-to-peer network
• Scripting or programming language
• Virtual machine
• State machine
• Nodes
• Smart contracts
Generic structure of a blockchain(1) 13
Previous hash Previous hash
Previous
hash
Genesis block Block N
Block 1 Block 2
Transactions &
Transactions & Transactions & .....
other data other data Transactions
other data & other data
The generic structure of a block in Blockchain 12
A blockchain consists of several fundamental elements that
ensure its security, decentralization, and immutability. These
elements include:
1. Blocks
Each block in a blockchain contains:
•Block Header (Metadata):
• Block Number – The unique identifier of the block.
• Previous Block Hash – Links the block to the previous
one, ensuring continuity.
• Merkle Root – A hash of all transactions in the block.
• Timestamp – The time the block was created.
• Nonce – A number used for mining (in Proof of Work
systems).
• Difficulty Target – The level of complexity for mining
the block.
•Block Body:
• Transactions – A list of validated transactions.
• Smart Contracts – Optional self-executing contracts
with predefined rules.
Generic structure of a blockchain
22
Network view of Blockchain 12
How BlockChain works(1) 24
1. User X transacts with User Y 2. Transaction broadcast 3. Find new block (mining) 4. New block found (mined)
Smart contract or transfer of value
5. Add new block to
the blockchain
How BlockChain works(2) 25
Step 1: Transaction Creation
• A user initiates a transaction (e.g., sending Bitcoin to another user).
• The transaction includes details like sender, receiver, amount, and digital signature.
• Example: Alice sends 1 BTC to Bob.
Step 2: Transaction Broadcast to Network
• The transaction is broadcasted to all nodes in the P2P network.
• Nodes verify the transaction's authenticity (checking the sender’s balance & signature)
How BlockChain works(3) 26
Step 3: Find new block:
When the transaction is received and validated by special participants called miners on the blockchain
network, it is included in a block, and the process of mining starts. This process is also sometimes referred to
as "finding a new block." Here, nodes called miners race to finalize the block they've created by a process
known as mining.
4. New block found(Mined):
Once a miner solves a mathematical puzzle (or fulfills the requirements of the consensus mechanism
implemented in a blockchain), the block is considered "found" and finalized. At this point, the transaction is
considered confirmed. Usually, the miner who solves the mathematical puzzle is rewarded with a certain
number of coins as an incentive for his effort and the resources he spent in the mining process.
How BlockChain works(4) 27
Step 5: Block Is Added to Blockchain
• Once validated, the new block is added to the blockchain.
• Each block is cryptographically linked to the previous block, forming a chain.
• The blockchain updates across all nodes, ensuring consistency & security.
• Example: Bitcoin’s latest block is added every ~10 minutes.
Step 6: Transaction Is Confirmed
• The transaction becomes officially recorded and immutable.
• The more confirmations a transaction has (blocks added after it), the more secure it becomes.
• Example: Bitcoin transactions typically require 6 confirmations for full security.
Features of a blockchain(1) 19
• Distributed consensus
• Transaction verification
• Platform for smart contracts
• Transferring value between peers
• Generation of cryptocurrency
• Provider of security
• Immutability
• Uniqueness
Features of a blockchain(2) 19
• Distributed consensus
• Transaction verification
• Platform for smart contracts Blockchain as provider of security enhances security by
leveraging decentralization, cryptographic encryption, and
• Transferring value between peers consensus mechanisms. It provides tamper-proof transactions,
data integrity making it ideal for financial systems, identity
• Generation of cryptocurrency verification, and data protection.
Immutability in blockchain means that once data is recorded, it
• Provider of security cannot be altered, deleted, or tampered with. This ensures
trust, security, and transparency, making blockchain ideal for
• Immutability financial transactions, legal records, and supply chain
management.
• Uniqueness
Uniqueness in blockchain ensures that each transaction, asset,
or identity is distinct and cannot be duplicated, preventing
issues like double-spending, data manipulation, or counterfeit
assets. This property is essential for maintaining trust, security,
and transparency in decentralized systems.
Benefits of blockchain 30
Decentralization & No Intermediaries
• Decentralization • No central authority – Power is distributed across multiple nodes.
• Reduces dependency on banks, governments, or intermediaries.
• Transparency • Ensures censorship resistance and trustless transactions.
• Example: Bitcoin (BTC) enables peer-to-peer transactions without
• Trust banks.
Transparency & Trust
• Immutability • All transactions are publicly recorded on the blockchain, ensuring
accountability.
• High availability • Eliminates hidden fees and manipulation in financial transactions.
• Enables auditable and verifiable supply chain tracking.
• Example: Walmart & IBM Blockchain track food supply chains to
• Highly secure detect contamination sources.
• Cost saving Immutability in blockchain means that once a transaction or
data is recorded, it cannot be altered, deleted, or tampered
with. This property ensures data integrity, security, and
trustworthiness, making blockchain an ideal solution for
financial transactions, legal records, and supply chain
management.
Benefits of blockchain 31
High Security & Fraud Prevention
• Decentralization • Immutable Ledger – Once data is recorded, it cannot be altered,
preventing fraud.
• Transparency • Cryptographic Encryption – Uses hashing (SHA-256, Keccak) for
data security.
• Trust • Decentralization – Eliminates a single point of failure, reducing
hacking risks.
• Example: Bitcoin prevents double-spending by ensuring
• Immutability transactions are immutable.
• High availability
Cost Efficiency/Saving & Speed
• Highly secure • Removes middlemen (banks, brokers, payment processors).
• Reduces transaction fees and processing costs.
• Cost saving
• Enables instant cross-border payments without delays.
• Example: Ripple (XRP) settles transactions in seconds,
compared to SWIFT (days).
Benefits of blockchain 32
• Decentralization High availability in blockchain means that the network remains
accessible, operational, and resilient even in the face of failures, attacks,
• Transparency or node downtimes. Blockchain achieves this through decentralization,
• Trust redundancy, and consensus mechanisms, ensuring continuous and fault-
tolerant operations.
• Immutability
Enhanced Traceability & Supply Chain Management
• High availability • Tracks origin and movement of products from manufacturer to
consumer.
• Highly secure
• Prevents counterfeit goods and ensures authenticity.
• Cost saving • Used in logistics, healthcare, agriculture, and luxury goods.
• Example: VeChain (VET) tracks real-time supply chain data for luxury
brands.
Limitations of blockchain 33
Scalability Issues
• Scalability Problem: Traditional blockchains (like Bitcoin and Ethereum)
process a limited number of transactions per second (TPS) due
• Adaptability to block size and consensus constraints.
• Regulation Adaptability
The challenge here is to allow blockchain networks to be easier
• Relatively immature technology to use so that adoption can increase. In addition, several other
challenges such as scalability, energy consumption and other
• Privacy issues exists, which must be solved in order to increase
adoption.
Regulation Problems
• Due to its decentralized nature, regulation is almost
impossible on blockchain. This is sometimes seen as a barrier
toward adoption.
• Problem: Many governments are still developing laws for
blockchain, crypto, and smart contracts.
• Example: China banned cryptocurrency mining.
Limitations of blockchain 34
Privacy Issues
• Scalability Problem: Public blockchains record all transactions transparently,
risking data exposure.
• Adaptability Example: Anyone can view Bitcoin and Ethereum transactions.
• Regulation Relatively immature technology:
As compared to traditional IT systems that have benefited from
• Relatively immature technology decades of research, blockchain is still a new technology and
requires a lot of research to achieve maturity.
• Privacy
Tiers of Blockchain Technology 35
Tier 1: BlockChain 1.0 (Cryptocurrency) –
• BlockChain Version 1.0 was introduced in 2005 by Hall Finley, who implements DLT (Distributed
Ledger Technology) represents its first application based on Crypto currency. This allows Financial
Transaction based on BlockChain technology or DTL which is executed with the help of BitCoin.
• This type of Version is permissionless as any participant will perform valid transaction of Bitcoin.
This type is mainly used in Currency and Payments. Blockchain 1.0 or Blockchain Version 1.0 aimed
to introduce a transparent, publicly accessible, completely decentralised, immutable ledger and
distributed system of transactions in the global financial market.
• Blockchain 1.0 is developed over the idea and structure of Bitcoin. It primarily focused on the
development and creation of new cryptocurrencies. Blockchain 1.0 is often termed a digital,
decentralised, distributed ledger that records transactions in a database shared by all nodes, updated
by blockchain miners and maintained and monitored by everyone with no individual ownership.
Tiers of Blockchain Technology 36
Tier 2: BlockChain 2.0 ( Smart Contracts) –
• The new Version of BlockChain come because there is a problem in version 1.0 which was
Mining of BitCoin was Wasteful and there was also lack of Scalability of Network in it. So
problem is improved in Version 2.0. In this version, the BlockChain is not just limited to
Cryptocurrencies but it will extend up to Smart Contracts.
• Thus, Small Contracts are Small Computer’s which live in the Chains of Blocks. These Small
Computers are free computer programs that executed automatically, and check the condition
defined earlier like facilitation, verification or enforcement and reduce transactions cost
efficiency.
• In BlockChain 2.0, BitCoin is replaced with Ethereum. Thus, BlockChain 2.0 was
successfully processing high number of Transactions on Public network rapidly.
Tiers of Blockchain Technology 37
Tier 3: BlockChain 3.0 (DApps) –
• After Version 2.0, new version was introduced which includes DApps which is known as
Decentralized Apps. A DApp is like a conventional app, it can have frontend written in any
language that makes calls to its backend, and its backend code is running on decentralized
Peer-To-Peer Network. DApps makes use of decentralized storage and communication
which can be Ethereum Swarm etc.
• DApps is decentralised, i.e. no single owner/authority that ensures transparency, improved
security, data accessible to all, no censorship and flexible development.
• DApps brings many benefits such as zero downtime, ensuring privacy, data integrity and
trustless yet secure communication (business, transaction, etc.).
• There are many Decentralized Applications like BitMessage, BitTorrent, Tor, Popcorn, etc.
Additional Topic – 1 : Types of Blockchain 38
Blockchain technology is a decentralized and immutable ledger that can store and order data
and transactions securely. There are four main types of blockchains, each with distinct
characteristics and use cases: Public, Private, Hybrid, and Consortium blockchains.
Additional Topic – 1 : Types of Blockchain 39
1.
. Public Blockchain
Public blockchains are permissionless and open to anyone with an internet connection. They are
decentralized, meaning no single entity controls the network. Examples include Bitcoin and Ethereum.
Advantages:
•Decentralization: No central authority, making it secure and trustable.
•Transparency: All transactions are visible to anyone.
•Open Access: Anyone can participate and validate transactions.
Disadvantages:
•Scalability Issues: Slow transaction processing due to the large number of nodes.
•High Energy Consumption: Proof-of-work consensus requires significant computational power.
Use Cases: Cryptocurrency transactions, decentralized finance (DeFi), and digital assets.
Additional Topic – 1 : Types of Blockchain 40
2. Private Blockchain
..
Private blockchains are permissioned and restricted to specific users or organizations. They offer
controlled access and are often used within a single organization.
Advantages:
•Speed: Faster transaction processing due to fewer nodes.
•Scalability: Can be tailored to specific requirements.
•Privacy: Enhanced privacy and confidentiality.
Disadvantages:
•Centralization: Controlled by a single entity, which may lead to trust issues.
•Security Risks: Fewer nodes make it more vulnerable to attacks.
Use Cases: Internal auditing, asset management, and secure data storage
Additional Topic – 1 : Types of Blockchain 41
3. Hybrid Blockchain
.
Hybrid blockchains combine elements of both public and private blockchains. They allow selective
transparency and controlled access.
Advantages:
•Flexibility: Can choose which data to make public and which to keep private.
•Cost-Effective: Lower transaction costs due to fewer nodes involved in verification.
•Security: Operates in a closed environment, reducing the risk of attacks.
Disadvantages:
•Complexity: More challenging to implement and maintain.
•Transparency Issues: Potential for hiding information from users.
Use Cases: Healthcare, supply chain management, and government applications.
Additional Topic – 1 : Types of Blockchain 42
4. Consortium Blockchain
.
Consortium blockchains, also known as federated blockchains, are managed by a group of
organizations. They offer shared control and are well-suited for industry collaborations.
Advantages:
•Shared Control: Multiple organizations manage the network, enhancing security and decentralization.
•Efficiency: Faster transaction processing due to fewer nodes.
•Privacy: Controlled access to sensitive data.
Disadvantages:
•Complexity: More complex to build and administer.
•Cooperation Issues: Differences in vision among participating organizations can lead to conflicts.
Use Cases: Banking, supply chain tracking, and industry collaborations.
Additional Topic – 2 : Types of Ledgers in Blockchain 43
.
Additional Topic – 2 : Types of Ledgers in Blockchain 44
.
Additional Topic – 2 : Types of Ledgers in Blockchain 45
.
Additional Topic – 2 : Types of Ledgers in Blockchain 46