Module 1.

Introduction to BC

Components of blockchain
1. Node

2. Ledger

3. Wallet

4. Nonce

5. Hash

6. Mining

7. Consensus Protocol

1. Node:
Any device such as computer, mobile device that is connected to the blockchain network is
called as node. These interconnected nodes have copy of blockchain [Link] Blockchain
technology peer-to-peer architecture,every node maintain complete updated copy of
blockchain ledger or database. Node maintain copy of blockchain and preserve integrity of
the Blockchain.

It is of two types – Full Node and Partial Node.

● Full Node –
It maintains a full copy of all the transactions. It has the capacity to validate, accept and
reject the transactions.

● Partial Node –
It is also called a Lightweight/Light Node because it doesn‟t maintain the whole copy of
the blockchain ledger. It maintains only the hash value of the transaction. The whole
transaction is accessed using this hash value only. These nodes have low storage and low
computational power.

2. Ledger:
It is a digital database of information. Here, we have used the term „digital‟ because the
currency exchanged between different nodes is digital i.e cryptocurrency. There are three
types of ledger. They are :

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1. Public Ledger –
It is open and transparent to all. Anyone in the blockchain network can read or write
something.

2. Distributed Ledger –
In this ledger, all nodes have a local copy of the database. Here, a group of nodes
collectively execute the job i.e verify transactions, add blocks in the blockchain.

3. Decentralized Ledger –
In this ledger, no one node or group of nodes has a central control. Every node
participates in the execution of the job.

3. Wallets:
It is a digital wallet that allows user to store their cryptocurrency. Every node in the
blockchain network has a Wallet. Privacy of a wallet in a blockchain network is maintained
using public and private key pairs. In a wallet, there is no need for currency conversion as
the currency in the wallet is universally acceptable. Cryptocurrency wallets are mainly of
two types –

1. Hot Wallet

2. Cold Wallet

Hot Wallet –

These wallets are used for online day-to-day transactions connected to the internet. Hackers can
attack this wallet as it is connected to the internet. Hot wallets are further classified into two
types –

a. Online/ Web wallets –

These wallets run on the cloud platform. Examples – MyEther Wallet, MetaMask Wallet.

b. Software wallets –

It consists of desktop wallets and mobile wallets.

i) Desktop wallets

Desktop wallets can be downloaded on a desktop and the user has full control of the wallet.
An example of a desktop wallet is Electrum.

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ii) Mobile wallets –

They are designed to operate on smartphone devices. Example – mycelium.

Cold Wallet –
These wallets are not connected to the internet. It is very safe and hackers cannot attack it. These
wallets are purchased by the user. Example – Paper wallet, hardware wallet.
a. Paper wallet –
They are offline wallets in which a piece of paper is used that contains the crypto address. The
private key is printed in QR code format. QR code is scanned for cryptocurrency transactions.
b. Hardware wallet –
It is a physical electronic device that uses a random number generator that is associated with the
wallet.

The focus of wallets is on these three things –

1. Privacy

2. Transactions should be secure

3. Easy to use

4. Currency Conversion

Privacy of a wallet is maintained using public and private key pairs. Transactions are made
secure as a private key is used both to send fund and to open the encrypted message.

4. Nonce :
A nonce is an abbreviation for “number only used once,” which is a number added to a
hashed or encrypted block in a blockchain. It is the 32-bit number generated randomly
only one time that assists to create a new block or validate a transaction. It is used to
make the transaction more secure.

It is hard to select the number which can be used as the nonce. It requires a vital amount
of trial-and-error. First, a miner guesses a nonce. Then, it appends the guessed nonce to
the hash of the current header. After that, it rehashes the value and compares this to the
target hash. Now it checks that whether the resulting hash value meets the requirements
or not. If all the conditions are met, it means that the miner has created an answer and is
granted the block.

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5. Hash:
A Hash function can take data of any size, perform an operation on it and return a hash
that is a data of a fixed size.

Following are the important features of hashing.

 Hashing creates identifier (hash) which is unique. In blockchain, these identifiers are used
for block, transactions and addresses. In bitcoin, hashes are of 256 bits or 64 characters
and Blockchain uses Secured Hash Algorithm that generates 256-bit hash (SHA-256).
 It is one directional. It is not possible to generate original input data from generated hash.
 Sligh change in input data generates different hash. Hence, hashing function supports
better security.
 As hashes are of small fixed sizes, its database is also of small size with compare to
database storing the original data.

6. Mining:
Mining is the process of validating new transactions and adding a new block to the
blockchain. It is performed by special computers called miners (in Bitcoin) or
validators/forgers (in some other blockchain systems).

Mining ensures that:

 Transactions are genuine.

 Double spending is prevented.
 The blockchain remains secure and tamper-proof.
 New cryptocurrency coins are created as rewards.

The mining process begins when miners collect valid pending transactions from the
blockchain network and create a proposed block. The miner then prepares the block
header, which contains the previous block hash, Merkle root, timestamp, difficulty target,
and a nonce. Using the SHA-256 cryptographic hash function, the miner generates a hash
for the block header. If the generated hash is less than or equal to the target value, the
mathematical puzzle is solved, and the block is accepted. If the hash is greater than the
target value, the miner increments the nonce and repeats the hashing process until a valid
hash is found. Once a valid hash is obtained, the new block is added to the blockchain, and
the successful miner receives a block reward along with the transaction fees.

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7. Consensus Protocol:
A Consensus Protocol is a set of rules that enables all nodes in a blockchain network to agree on
the validity of transactions and the current state of the blockchain. Since blockchain is
decentralized, there is no central authority to verify transactions, so all participating nodes must
reach a common agreement before a block is added. Consensus protocols ensure that only valid
transactions are recorded and prevent problems such as double spending. They distribute control
among all nodes, preventing any single entity from controlling the network. Consensus
mechanisms also require significant computational power, time, or stake to keep the network
secure and honest.

Common consensus algorithms include Proof of Work (PoW), used by Bitcoin, and Proof of
Stake (PoS), used by Ethereum.

Block in Blockchain
Block in Blockchain contains many transactions and following are the details that block
comprises :

1. Hash of block
2. Hash of previous block
3. Timestamp
4. Nonce
5. Merkle root
6. Transaction data, containing details of transactions in block.

Figure: Block Representation

 Genesis block is very first block which does not contain data hash of previous
block. Hence, previous hash value in Genesis block is set to zero. This block
includes transactions that are combined and validated to generate unique hash.

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The hash of genesis block is added to all new transactions in a new block. This
combination is used to create its unique hash. This process is repeated until all the
new blocks are added to a blockchain.
 For example, In general Blockn hash is created with the hash of block n-1 and
another set of new transactions. Hence, each block is linked with previous block
via its hash, From any block, there is continuous linkage in reverse direction till
genesis block. Hence, it is not possible for attacker to alter the data or to insert
block between two existing blocks. If many number of blocks are present in
blockchain then more blocks needs to be altered for tampering the data.

Let us look at all the high-level steps involved in a blockchain transaction.

 Blockchain is a digital ledger or digital database

 The blockchain ledger is distributed to all the nodes in the network, i.e., all the
nodes have the same copy of the ledger.
 Blockchain is decentralized, i.e., there is no central control. All the nodes in the
network can participate in the processing and creation of a block.
 A unique cryptographic key secures every record on the blockchain.
 Example- Joe‟s plan to send 0.5 BT to Ann through the blockchain.

The following step gives a step-by-step representation of the transaction between Joe and
Ann in the blockchain.
Step 1: Joe requests the proposed transaction , Joe sends 0.5 BT from his Wallet app.

Step 2: The proposed transaction is broadcast to the network

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Step 3: Miners verify the transaction and bundle it into a block along with other
transactions.
– The miner will validate the authenticity of the transaction, i.e., the status of Joe, his
balance, etc.
Note: Miners validate all the transactions they wish to include in the block they plan to
mine.

Step 4: Miners compete to solve the complex mathematical puzzle.

– The puzzle requires much computational power to solve.
–This protects the blockchain against hackers as it would be difficult and expensive to
attack the network.

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Step 5: The nodes verify the miner‟s work.

– The miner who finds the correct hash broadcasts the block to the network.
– Majority of the nodes/miners need to approve/verify the block for it to be accepted into
the blockchain.
– Once approved, the winning miner can collect his reward.

Step 6: Block is added to the blockchain.

– Once the block is verified, the winning miner adds his block to the existing blockchain.
Note: Joe‟s transaction is added to the blockchain along with the other transactions.

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Step 7: The updated copy of the blockchain is circulated throughout the network.

Step 8: Transaction completion Ann receives 0.5 BT in her wallet. The transaction is
complete.

So , the process of blockchain transaction consists of:

 A node in the blockchain (P2P network) requests a transaction via a wallet.

 The transaction is broadcasted to all the nodes in the network.
 The transaction is validated/verified by the network using consensus algorithms, i.e.,
preset rules set by the specific blockchain.
 The transaction is either accepted or rejected. If accepted, the transaction is added in a
chronological order along with other transactions to create a new block of data that is
sealed (hash).
 The transaction is now part of the blockchain and is permanent and immutable.

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Double-spending
When we deal with transactions with digital currency, the double-spending problem is more
common to arise. Double-spending means just spending the money more than once. It happens
just by duplicating the token or crypto coin and reusing it. This double spending leads to increase
of duplicate, fraudulent currency in network. Every transaction has a timestamp. The first
transaction is time-stamped and linked to previous block and then broadcasted to all the nodes.
When the second duplicate (fraudulent) transaction is proposed, it will fail in verification and
will not be accepted. It is nearly impossible to double spend the transaction once it confirms.

Types of Blockchain
Blockchain network contain many numbers of nodes which are computers or any other hardware
devices which are used by people. Hence, node is the user ,member or participant in the
blockchain network .blockchains are classified on basis of user authentication and authorization.

 Public Blockchain (or Public Permissionless Blockchain)

 Private Blockchain (or Private Permissioned Blockchain)
 Consortium Blockchain (or Public/ Private Permissioned Blockchain)
 Hybrid Blockchain (Interconnected Public/ Private Blockchain)

Public Blockchain
This is also known as public permissionless Blockchain. Bitcoin is public permissionless
Blockchain. This Blockchain is fuly decentralized distributed network. In this blockchain,
everyone is anonymous. It is not necessary to use your real name, or real identity. Anyone can
access the copy of ledger and can read, write, participate within the Blockchain. There is no need
to obtain permission for accessing or initiating the transaction. Also, to create a block,
permission to participate in consensus process is not necessary. Following are the key features of
public Blockchain.

 The public blockchain is open for all and anyone can be the participant in the network.
 it is immutable.
 Anyone can read or send transaction without any permission.
 In Proof-of-Work, standard consensus algorithm is used. Miner obtains hash and sends
the block to other members for getting the consensus.
 All the nodes in the blockchain participate in the transaction validation. Hence, no single
point of failure in the network.
 Highly secured with the use of cryptographic methods.
 Truly decentralized as no centralized entity present.
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 Highly secured due to mining (51% rule).

 It offers transparency as it permits you to see the ledger anytime you want.

Limitations:

 It is having poor scalability.

 Speed of transaction processing is slow. It takes 10 minutes to create a new block.
 Huge amount of energy and computation power is involved in consensus process.

Examples of public Blockchain: Bitcoin, Litecoin, Ethereum, Monero, Zcash, Dash etc.

Private Blockchain
This is also known as private permissioned Blockchain. Blockchain network is only open to the
particioante ku access permissions. In this Blockchain, permissions are controlled by few nodes
in the organization. Hence, prívate Blockchain is not fully decentralized, but it is more
centralized. In this blockchain, members participating in the transaction only know about the
transaction carried out whereas others wIlI not able to access it i.e., transactione are private.

Following are the key features of private Blockchain.

 It gives assurance about the trust as participants are known to each other.
 All the participants in private blockchain are first approved by organization. Ledger and
access are distributed within this network of pre-approved participants.
 Provides better Scalability as supports to add nodes and services on demand can offer a
great advantage to the enterprise.
 In private Blockchain, consensus process is controlled by central authority.
 Highly secured with the use of cryptographic methods.
 High transaction processing speed. It requires only seconds to create block.
 Low energy consumption and highly efficient.

Limitations :

 Private Blockchain are more centralized.

 Due to presence of central authority, chances of single point of failure.
 Controlled by central authority, hence inherent doubt of immutability and trust of
transaction. Central autho rity is decided by organization.

Examples of private Blockchain: R3 (Banks), EWF (Energy), B3i (Gnsurance), Multichain and
Monax etc.

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Consortium Blockchain
This is also known as federated Blockchain which is hybrid between the public and private
Blockchain. It is also permissioned Blockchain having security features just like the features in
public Blockchain but it maintains fair amount of control over the network. Anyone can access
and down load this distributed ledger. Here, consensus process is carried out by previously
decided group of organizations or representative individuals. It is not controlled by single
organization just like in private Blockchain. Anyone cannot take pat in validation process to
create the block. This right is only assigned to predetermined group. In case of supply chain, this
group can be impoter, exporter, bank, customs, shipping company or inspectors.

Depending on business requirements, smart contracts and other protocols together limit the user
access. Following are the key features of consortium Blockchain.

 Consortium Blockchain has few numbers of nodes as compared to public blockchain, but
it is more secure and scalable in nature. .
 It is like semi-decentralized network where any node can initiate and receive the
transactions.
 In this Blockchain members are granted to pre-determined group of individuals.
 Permission to audit or write the ledger is determined by group of pre-approved
consortium.
 Highly secured with the use of cryptographic methods.

Limitations:

 These Blockchains are not fully decentralized.

 Consensus on standard set of rules is challenging due to varying requirements of different
organizations.

Examples of consortium Blockchain are Hyperledger Fabric, Corda, Ripple etc.

Hybrid Blockchain
This type of Blockchain is mostly used in government organizations and regulated enterprises. It
includes best practices and benefits of both private and public Blockchains. The hashed data
block created in private network is then shared in public network without compromising the
privacy od data. In this Blockchain, public network members are anonymous whereas, private
network members are known within private network. Here access is offered through centralized
control which ensures privacy and confidentiality.

There is no single point of failure and operations are customizable. It is the role of central
authority to make transactions public or private. The verification of block is carried out by public
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network. Security is ensured with hashing in private network and with consensus process in
public network. Transaction speed is high with low energy consumption. It is highly scalable.

Consensus Protocol
As per Webster dictionary, a consensus is a general agreement or opinion shared by all the
people in a group. A protocol is a system of standard rules that are acceptable by all parties to
control the exchange of information in a network. Thus, a consensus protocol in blockchain can
be defined as a set of rules and procedures for attaining a unified agreement (consensus) between
the participating nodes on the status of the network.

Blockchain technology uses a decentralized network architecture where anyone can be a node.
All nodes are equal in the hierarchy, with no individual node having more access or advantage
over the other. Nodes accept decisions collectively for the good of the whole network. The
consensus protocol enables this trustless nature of blockchain.

Consensus protocols are the rules that define how the different actors in a distributed ledger
authenticate and validate the transactions added to it to prevent different versions of the ledger
from being created or previous transactions from being edited.

The consensus protocol aims to overcome the classic problem of a distributed computing system
known as the Byzantine Generals Problem.

Byzantine Generals Problem

Originally coined as the “Two-generals Problem,” the Byzantine Generals Problem is a thought
experiment introduced in computer networking classes, especially concerning TCP
(Transmission Control Protocol), to highlight that there is no guarantee that failure will not occur
when it applies to a two-party communication.

The Problem: Two Byzantine (Roman) armies led by different generals are preparing to attack a
fortified city. They are based on either side of the city. The city is strong enough to withstand an
individual attack of either army, but not strong enough to defend itself from a coordinated attack
by the two armies at the same time. In other words, the two armies must attack the city at the
same time to win the battle (refer Fig. a).

The two generals, say General A and General B need to agree on the time of the attack. The only
way of communication is by sending messengers through the city. The simplest way to send the
message will be for one general to take the leadership role and send a messenger through the

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enemy lines with a proposed day and time. The second general, on receiving the message, sends
back the acknowledgment or agreement message back to the first general.

Figure a : Byzantine generals problem

Here are the issues that may hamper victory:

– General A will hesitate to attack at the appointed time if he does not get the acknowledgment
from General B.

– The enemies could capture General A‟s messenger and the intercept the message.

– General A‟s message could be intercepted and replaced with a fake message. General B may
hesitate to attack as he cannot verify the authenticity of the message.

– General B may send an acknowledgment message, but there is no assurance that General B‟s
messenger will not be caught by the enemies and the message intercepted and/or replaced.

– One of the Generals could potentially be a traitor.

– The lack of confidence or doubt between the Generals may trickle down to the soldiers in the
army leading to some deserters, thus compromising the strength of the army. The desertion can
lead to defeat even if there is a coordinated attack.

Hence, there is no way for either of the generals to guarantee that their counterparts have
received their message. Here, the dilemma is between two generals or two participants. In a
distributed network, the dilemma is between all the participants or nodes. All the participants
need to verify and reach agreements neutralizing corrupt parties and disseminating false and
unreliable information.

Blockchain‟s key feature of consensus mechanism or consensus algorithms is seen as a solution

to the Byzantine Generals Problem. The consensus mechanism of blockchain aims to overcome
the trust risks attributed to a distributed network system, namely,

a) Authenticity: The message should be easily verifiable to guarantee that it is genuine and not
tampered with.

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b) Unity: There should be a collective agreement by all parties (nodes) on action to be taken

c) Fault-tolerane: A few traitors or hackers should not be able to compromise the process.

Objectives of Consensus Protocol

A consensus mechanism is a fault-tolerant mechanism that is used in blockchain systems to
achieve the necessary agreement amongst members of the network on the transactions that are
valid and can be updated on to the ledger.

Figure b : Objectives of consensus mechanism

The main objectives of a consensus mechanism (refer Fig. b) are

a) Unified Agreement
There should be a unified agreement on which data is valid and accurate. Protocol rules
embedded in the network ensure this.
b) Fault-tolerant
In a blockchain, every node acts as both a client and a server. In a blockchain network,
there are thousands of such nodes that lead to high fault tolerance. ven if some of the
nodes are unresponsive, there are still a considerable number of nodes communicating to
keep the system functional.
c) Collaborative and Participatory
The consensus mechanism should ensure that all nodes participate in the overall process,
in the best interests of the group as opposed to the interest of a single or a few nodes. The
features of blockchain P2P network architecture enable constant communication between
nodes. It also allows for any node to inspect and verify that the underlying process is fair
to all participants in the network.
d) Egalitarian

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There should be no discrimination between nodes. Blockchain runs on a peer-to-peer

network architecture where every node should be considered equal to every other node.
very node should have equal weightage.
e) Incentivization
Validating new transactions and securing them on the blockchain requires “miners” to
solve complex mathematical problems based on cryptographic hash algorithms requiring
vast amounts of computational resources, including electricity. Rules are built into the
consensus mechanism to incentivize the miners to work for the system, making it more
secure.
f) Prevent Double-spend
Double-spending refers to the possibility of digital currency or token being spent more
than once by falsification or duplication. Protocol rules embedded in the blockchain
consensus mechanism ensure valid and authentic transactions. Additionally, substantial
computational resources are extended by miners to secure transactions, making it difficult
to double spend or alter transactions.

There are different kinds of consensus algorithms that work on different principles. Proof-of-
Work (PoW) and Proof-of-Stake (PoS) are the most commonly used consensus mechanisms
in blockchain for public distributed ledgers. In contrast, Proof-of-Authority (PoA) and Proof-
of- Elapsed Time (PoET) algorithms are applied in private blockchains.

Consensus Algorithms
1. Proof of Work
Founded by Satoshi Nakamoto, Proof-of-Work is the most well-known consensus
mechanism used by the first blockchain Bitcoin in 2009. Here, several nodes of the
distributed ledger called miners compete to solve a complicated mathematical problem based
on a cryptographic hash algorithm. The solution found is called Proof of Work or PoW.
Without proof of work, adding blocks to the blockchain would be too easy and could make it
vulnerable to hackers.

The mining node releases the proof of work to the other nodes for verification to reach
consensus.

The solution to the problem is difficult to produce but easy for the network to verify. The
process of mining is extremely computation-intensive. So the first miner who manages to
produce the PoW will be rewarded either in the form of bitcoins or digital currency.

Disadvantages of the PoW consensus mechanism are

1) Time-consuming: Miners have to iterate over many nonces before finding the right
solution, which is a time-consuming process.

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2) High energy consumption: Miners conduct significant work in terms of processing power
and electricity to find the nonce for creating the winning hash. As only one miner can be
successful, for all other miners who competed, it is wasted energy.

3) 51% risk: To counteract the high time and energy consumption in transaction validation,
some miners group the mining pools together to combine their mining resources for more
efficiency and savings. Mining pool goes against the basic principle of distributed ledgers as
a person or group gaining control of over 50% of the network‟s computing power can control
the validation process. This is usually referred to as a 51% attack.

Bitcoin, Litecoin, ash, Monero, and thereum use PoW as the underlying consensus
mechanism.

2. Proof of Elapsed Time

Proof of elapsed time (PoET) was conceived in 2016 by Intel. It is commonly used in
permissioned blockchain networks to decide on the mining rights or the block winners on the
network.

PoET mechanism is based on the principle of a fair lottery system where every single node is
equally likely to be a winner. ach miner node in the blockchain network is provided with a
randomized timer object from a trusted code that generates a random wait time. This method
of randomization aims to circumvent any attempt by a miner to get a timer with a shorter
period. The miner who completes the designated waiting time commits a new block to the
blockchain and broadcasts the relevant information across the blockchain network. The
process is then repeated for the discovery of the next block.

The PoET mechanism is similar to the PoW consensus mechanism except that instead of
being resource-intensive, it allows a miner‟s processor to sleep and switch to other tasks for
the specified time, thereby increasing its efficiency and reducing power consumption. Also,
in PoET, the identity of the miners is known unlike in PoW, where it remains anonymous.

Disadvantage attributed to PoET consensus mechanism:

1) Vulnerability – It relies heavily on the use of a Trusted Execution Environment (TEEs),

i.e., Intel SGX-enabled PUs. Though the protocol prevents nodes from running multiple
instances of “wait time” to boost their chances of success, it is vulnerable to various other
security attacks such as “Foreshadow”, which attacks the secure enclave of SGX.
Hyperledger Sawtooth architecture, developed by Intel, uses PoET consensus.

3. Proof of Stake
The Proof of Stake (PoS) was implemented as a consensus algorithm for Peercoin in 2012.
The more stake one has in the validating node, the less chance one will be tempted to corrupt
the validating process. In other words, the users with the highest stake in a cryptocurrency
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will have the most interest in maintaining and securing the network because any attacks
would diminish the reputation and price of the cryptocurrency that they hold.

In PoS, the mining nodes are called validators or forgers or delegates. A forger has to
commit some of his/her stake (cryptocurrency) in the network as collateral to be in the
running for a chance to validate the transaction. An algorithm will randomly select a forger
based on the percentage stake or collateral he or she has put forward. Validating nodes can
forge or create new blocks proportional to the amount they have staked; i.e., a node with a
10% stake in the network can validate 10% of transactions.

Energy consumption is less here as compared to PoW consensus. Also, the forgers are paid a
transaction fee as against the block reward of PoW consensus.
PoS addresses all the disadvantages of PoW with low time and energy consumption and a
reduced threat of 51% attack. It also incentivizes forgers to validate legitimately as their
staked amount will be forfeited in case of fraudulent behaviour.

Disadvantages of the PoS consensus mechanism are:

1) Cheaper to attack:
A PoS based network is cheaper to attack as the perpetrator would just need to spend
some money and not invest in the combined set of money, time, hardware, electricity,
and other resources.
2) Centralization risk:
The richest forger can control the consensus mechanism and get even richer.

Examples of Blockchain using the PoS mechanism are Peercoin, NXT, and Blackchoin.
thereum uses PoS over an existing PoW blockchain, resulting in a hybrid PoW/PoS system
called asper Friendly Finality Gadget (FFG).

4. Delegated Proof of Stake

Delegated Proof of Stake (DPoS) is a variation of the PoS consensus mechanism. Here, the
network participants or nodes use their cryptocurrency or tokens to vote for the delegates.
Just as in PoS, the delegates are responsible for validating transactions and maintaining the
blockchain ledger. These elected delegates are called witnesses. The more the crypto-coins or
tokens, the more the voting power.

In addition to the PoS benefits, DPoS enables better security and even distribution of wealth.
Any fraudulent activity by the witnesses can be easily detected by the voters and penalized.
As it is a democratic system, it is not only the rich, but all users have a chance to be elected
as witnesses and earn rewards. This makes DPoS more decentralized than either PoS or PoW.

Disadvantages of DPoS consensus mechanism are:

1) 51% risk: Since fewer people are in charge of maintaining the network, it is easier to
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organize a 51% attack

2) Potential centralized power: Sufficient decentralization cannot be achieved without
compromising the scalability of the network. The more the validators, the more is the risk of
slowing the network down. Hence there is a risk of power getting concentrated in the hands
of a few.
Bitshare, Lisk and EOS are examples of blockchains that use the DPoS consensus
mechanism.

5. Proof of Authority
Proof of Authority (PoA) consensus mechanism proposed in 2017 is used in private
blockchains. It is similar to PoS and DPoS in the sense that only a group of pre-selected
authorities called validators secure the blockchain and can produce new blocks. However,
instead of staking coins or tokens, the validators stake their identity.

The identities of the validators are public and verifiable by a reliable third party, such as a
public notary database. This incentivizes the validators to act in the best interest of the
network, for otherwise, their reputation is ruined. The validators are ideally limited to 25 or
less to ensure the efficiency and security of the network. In addition to low energy
consumption, PoA also benefits from zero node-to-node data transfer requirements. Once the
nodes are verified and approved as validators, re-verification is not done unless required.

The following conditions must be met to identify validators:

– Validators must have a valid identity in the public domain that must match the records found
in the public notary database.
– The authority needs to be uniform and unbiased for all validators.
– Eligibility criteria for staking identity must be stringent to ensure the trustworthiness of the
validator.
Some of the issues attributed to PoA are:

1) Semi-centralized: Blockchains with PoA consensus mechanism lean more towards a

centralized system in the form of an authority node as the validators are predetermined.
However, this mechanism works well with private or consortium blockchain, enabling
better scalability, such as a network of banks where each bank acts as a validator for the
others.
2) Reputational indifference: If the payoff is strong enough, validator(s) may sacrifice their
reputation. However, this issue is a high risk only if the validators are limited in number. If
they fall to the influence of third parties with malicious interests, the network could fail.
VChainThor blockchain, Ethereums‟ Kovan and Rinkeby testnets use the PoA consensus
mechanism algorithm. Hyperledger and Ripple also use optimized versions of PoA.

6. Practical Byzantine Fault Tolerance

Practical Byzantine Fault Tolerance (pBFT) was introduced by Miguel Castro and Barbara
Liskov at the MIT Laboratory for Computer Science in 1999. It is considered as one of the
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potential solutions to the Byzantine Generals problem. Here, the goal is to decide whether to
accept a piece of information submitted to the blockchain or not. It tolerates “Byzantine faults”
based on the assumption that the number of malicious nodes in the network cannot
simultaneously be equal to or exceed one-third of the overall nodes in the system in a given
window of vulnerability.

It works on the format of the Byzantine Generals Problem, where all “generals” (nodes) are
considered equal and take their work instruction from the leader node. The leader node is the
primary node, and all other nodes are called secondary or backup nodes. The leader is selected
at random in a round-robin fashion. A node client sends a transaction request to the leader who
then broadcasts it to all the backup nodes. The leader and backup nodes will use the message
with their internal state to run computation and transmit the decision result to all the client
nodes. The final decision is arrived at based on the agreement of the majority.

A high hash rate is not required as pBFT relies on the minimum number of backup nodes to
confirm trust, namely (f+1), where f represents the maximum number of faulty nodes. Hence, it
is not computationally intensive and as a result, there is substantial energy saving.

The disadvantages of the pBFT protocol are:

1) Small group sizes – Due to the amount of communication required between all the nodes,
this model works best with small-group networks for better response times.
2) Sybil Attacks – A single party can assume several identities or nodes and manipulate the
network. This is mitigated with larger network sizes, but scalability and throughput will be
compromised.
Stellar, Ripple, and Hyperledger Iroha are some blockchains that use variants of the pBFT
consensus mechanism algorithm.

Other Consensus Mechanisms

Some other variations and evolving consensus mechanisms are listed below:

a. Proof of Stake Anonymous (PoSA)

A variation of PoS consensus mechanism, PoSA was first introduced in Cloakcoin in 2014.
Here, nodes are incentivized for “cloaking” the transaction. There are no master nodes, making
it a truly decentralized and secure network.

The cloaking nodes provide the transaction with inputs and outputs, rendering it close-to-
impossible to establish the identity of the receiver or the sender of a transaction and ensuring
anonymity.

b. Leased Proof of Stake (LPoS)

LPoS is another variation of the PoS mechanism. In PoS, one needs a large stake to get a
chance to validate a block. Hence many users with low balances do not get a chance to
generate a block. The LPoS mechanism enables users to sublet their balances to staking nodes.

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This allows for small holders also to forge a block of transaction in the blockchain. Any reward
received is shared proportionally.

c. Proof of Importance (PoI)

First established with the NEM cryptocurrency platform, the PoI consensus mechanism works on
the principle that users with the highest balance as also users who provide maximum value to the
network should be incentivized. Thus, the chance of forging a block depends on many factors,
including coin balance and authority.
d. Proof of Storage
Proof-of-Storage consensus mechanism is implemented in the Storj system. Here, the network
uses a block tree. Instead of going through every single transaction listed on the blockchain, the
user can only see the transactions that are of particular importance to him.

e. Proof of Burn
Iain Stewart created a Proof-of-Burn consensus. When coins are destroyed on the blockchain, it
is referred to as being burned. Technically, the coins in circulation are sent to an unspendable
address, known as an eater address. Just like in PoW consensus where the more that is invested
in supercomputers and electricity, the more the chances of mining, in Proof of Burn, more the
coins one burns, the more chance one gets to mine blocks. Proof of Burn is used in
Counterparty and Slimcoin.

f. Proof of Activity
It is a hybrid of PoW and PoS consensus mechanisms. It starts with miners vying to be the first
to solve the cryptographic puzzle and claim their reward. However, the blocks being mined are
not transactions but templates with header information and the mining reward address. Once
the template block is mined, the PoS selects a random group of validators to sign the block.
Once all validators sign the block, it becomes part of the blockchain. If the block remains
unsigned by a few, it is discarded, and the next winning block template is used. Proof of
Activity reduces the risk of a 51% attack to zero. However, the energy consumption issue is
not eased.

g. Proof of Capacity (PoC)

PoC consensus algorithm is currently used only in Burstcoin. It was built to circumvent the
high energy consumption of PoW and coin hoarding risks of PoS. Here, mining nodes can use
the space available on their hard drive to mine crypto-coins instead of using the mining
device‟s computing power.

In the PoC mechanism, the miners will first “plot” their hard drives, i.e., they will create a
list of all possible nonce values through repeated hashing of data, including a miner‟s account.
In other words, the miners will compute the solutions and store them ahead of time. Once the
actual mining starts, the miner with the fastest solution wins the block.

Using hard drives is said to be 30 times more energy-efficient than ASIC (application-specific
integrated circuit)-based mining. It is also more decentralized as anyone can own a basic hard
drive.

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h. Directed Acyclic Graph (DAG)

DAG was created to circumvent the inefficiencies of PoW. In PoW consensus, it takes around
10 minutes or more to create a block, and blocks cannot be created simultaneously. With DAG,
transactions can run on different chains simultaneously. ITC (IoT Chain), built on DAG
consensus protocol, is said to process over 10,000 transactions per second.

Consensus protocol algorithms are continuously evolving with multiple variants of PoW and
PoS and hybrids.

Limitations and Challenges of Blockchain

Following are the limitations and Challenges of blockchain.

1. Complexity of Technology and Lack of Awareness

 Blockchain technology is increasing its popularity day by day but there is a lack of
awareness and knowledge about it. There is lack of specialized expertise in
blockchain technology. Hence, the lack of developers is a difficulty for developing
anything on the blockchain in different situations. Overall, this is a very complicated
industry that will not be soaked in and applied overnight.

 Blockchain technology understanding involves learning of an entirely new

vocabulary or terrinologles. Singy blockchain application cannot be easily duplicated
across operations and use-cases. Each application needs deeper knowledge of the
business needs and blockchain can be drastically different for applications such
insurance contracts and for land records. The traditional IT systems are benefited
from decades of [Link] blockchain is still a new technology and needs a lot of
research to attain maturity

2. Limited Privacy
Privacy of transactions is a very important feature of blockchains. However,
especially in public blockchain everything is transparent, thus constraining its usage
in various industries where privacy is of main importance such as finance, health,
and many others. Several protocols and techniques address privacy issue buy they
have their advantages and disadvantages There are more chances of 51% attack.
Anyone can create the new anonymously and transact through that wallet.

3. Limited Scalability
Consensus mechanisms in bitcoin requires every participant to verify the
transaction. It bounds on the number transactions a blockchain network can process.
The financial networks are currently more scalable than blockchain network. At
present, if we compare the largest centralised payments system (for example, Visa)
and largest crypto payments system (for example, Bitcoin) then there is a huge
difference. Visa processes 65,000 transactions per second with compare to 7
transactions per second by bitcoin. This is because the of the control of centralizes
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authority in Visa. In block chain process, the validation involves several minutes as
majority of nodes has to authorise the transaction.

4. Security Concerns and Flaws

If more than 50 percent

people in the network are corrupt and they agree on manipulated information then truth
will be considered as lie. This will be leading to failure of whole network. There are
more chances of 51% attack when network size increases.
Following are the security challenges of blockchain.
 Spoofing of payment information : Malware can replace crypto wallet address
with another one at time of money transfer.

 Phishing: Exchange users can be falsely directed to phishing sites through which
their crypto wallet credit can be stolen.

 Crypto Wallet Theft: As users store their wallet on their computer, which can be
vulnerable to malware attack.

5. High Energy Consumption

Blockchain requires constant computational power in many locations leading to the on-
going extensive electricity consumption worldwide. In 2009, Blockchain technology got
introduced with bitcoin. Bitcoin blockchain uses the Proof-of-Work (PoS) consensus
mechanism that relied on the miners to solve complex mathematical problem for which
they get incentivized. Solving complex mathematical problem consumes lot of energy.
Every time the ledge is updated with a new transaction, the miners need to solve the
problems which means spending a lot of energy Some other consensus mechanisms
address this problem and attempts for the low energy consumption.

6. Increased transaction cost

In the beginning, blockchain transaction cost was almost free, With growing network,
this cost is now changing. There is no any fixed regulation to decide transaction fee and
this is up to the transacting parties to decide. Hence, miners may choose to process the
transactions based on who are highest paying members. This will either mean higher
transaction cost, or slowly processing of your transaction.

7. Consensus Mechanism

In the blockchain, a block can be created in either 10 minutes or in seconds as per type
of blockchain network, The transaction performed must ensure that, every block in the
blockchain network must reach a common consensus. Depending on the network size
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and the number of blocks or nodes involved in a blockchain, the huge communication
involved to reach a consensus can consume a significant amount of time and resources.

8. Immutability

With this feature in blockchain, we can not modify or change any record. It helps to
keep integrity of the record. It is not possible to tamper the records. The drawback of the
immutability is that, we cannot make revisions, go back and make any reversals. If
payment is already processed and need to go back and make an alteration to change that
payment then it is not possible.

9. Adoption

The blockchain is seen as an emerging technology. Although this viewpoint is rapidly

changing, there is still a long way to go before the mass adoption of this technology. The
challenge here is to permit blockchain networks easy to use so that adoption can
increase. Furthermore, several other challenges such as scalability exist, which must be
solved in order to increase adoption.

[Link]

 The requlation is almost impossible on the blockchain. This is due to its

decentralized [Link] can be the hurdle in its adoption. When regulatory
authorities exist, customers have a certain level of confidence that,they can hold
someone accountable in case of any problem.
 However, in blockchain networks no such regulatory authority and control exists,
which is an constraining factor for many customers.

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