Subject: Blockchain Fundamentals (7KS05)

Prof. Pratik S. Deshmukh

UNIT 1 Blockchain Fundamentals

Introduction to Blockchain, History,

Centralized versus Decentralized systems,
Layers of blockchain,
Importance of blockchain,
Blockchain uses and use cases.
 Introduction to Block chain

Blockchain is a peer-to-peer system of transacting values with no trusted third parties in between.
It is a shared, decentralized, and open ledger of transactions. This ledger database is replicated across
a large number of nodes.

This ledger database is an append-only database and cannot be changed or altered. It means that
every entry is a permanent entry. Any new entry on it gets reflected on all copies of the databases
hosted on different nodes.

There is no need for trusted third parties to serve as intermediaries to verify, secure, and settle the
transactions.
Just the way TCP/IP was designed to achieve an open system, blockchain technology was designed to
enable true decentralization. In an effort to do so, the creators of Bitcoin open-sourced it so it could
inspire many decentralized applications.
Centralized vs. Decentralized Systems
(Distributed)

Please note that whether a system is centralized or decentralized, it can still be distributed
Technical Architecture: A system can be centralized or decentralized from a technical architecture point of
view. What we consider is how many physical computers (or nodes) are used to design a system, how many
node failures it can sustain before the whole system goes down, etc.

Political perspective: This perspective indicates the control that an individual, or a group of people, or an
organization as a whole has on a system. If the computers of the system are controlled by them, then the
system is naturally centralized. However, if no specific individual or groups control the system and everyone
has equal rights on the system, then it is a decentralized system in a political sense!

Logical perspective: A system can be logically centralized or decentralized based on how it appears to be,
irrespective of whether it is centralized or decentralized technically or politically. An alternative analogy could
be that if you vertically cut a system (say of computing devices) in half with every half having service providers
and consumers, if they can operate as independent units they are decentralized and centralized otherwise.
Example
• The torrent systems such as BitTorrent are also decentralized from every
perspective. Any node can be a provider or a consumer, so even if you cut the
system into halves, it still sustains.

• The Content Delivery Network on the other hand is architecturally decentralized,

logically also decentralized, but is politically centralized because it is owned by
corporates. An example is Amazon CloudFront.
Centralized vs. Decentralized Systems
• A centralized approach involves a single entity or authority controlling
all aspects
• Centralization allows for quick decision-making

• Blockchain technology facilitates decentralization

• A decentralized approach involves the consensus of network
participants
• Decentralization provides transparency, increased security, and the
ability to operate without a central authority
• They do not have a central point of failure, so more stable and fault tolerant
• Attack resistant, as no central point to easily attack and hence more secured
• Symmetric system with equal authority to all, so less scope of unethical operations and
usually democratic in nature
• The limitations and challenges of decentralization
include scalability, energy consumption, and regulatory
concerns
Layers of Blockchain
blockchain is never just a piece of technology, but a combination of business principles,
economics, game theory, cryptography, and computer science engineering. Birds eye view
on BTC with TCP/IP analogy
• Application layer: This is the layer where you code up the desired functionalities and make an
application out of it for the end user
• It usually involves a traditional tech stack for software development such as client-side
programming constructs, scripting, APIs, development frameworks, etc.
• For the applications that treat blockchain as a backend, those applications might need to be
hosted on some web servers and that might require web application development, server-side
programming, and APIs, etc.

• The Execution Layer is where the executions of instructions ordered by the Application Layer take
place on all the nodes in a blockchain network. The instructions could be simple instructions or a
set of multiple instructions in the form of a smart contract.

• The Semantic Layer is a logical layer because there is an orderliness in the transactions and
blocks. A transaction, whether valid or invalid, has a set of instructions that gets through the
Execution Layer but gets validated in the Semantic Layer. In this layer, the rules of the system can
be defined, such as data models and structures
• The Propagation Layer is the peer-to-peer communication / coordination layer that allows the nodes to
discover each other, and talk and sync with each other with respect to the current state of the network.
• When a transaction is made, we know that it gets broadcast to the entire network. Similarly, when a node
wants to propose a valid block, it gets immediately propagated to the entire network so that other nodes
could build on it, considering it as the latest block. So, transaction/block propagation in the network is
defined in this layer, which ensures stability of the whole network.

• The Consensus Layer is usually the base layer for most of the blockchain systems. The primary purpose of
this layer is to get all the nodes to agree on one consistent state of the ledger. There could be different
ways of achieving consensus among the nodes, depending on the use case.
• Safety and security of the blockchain is accertained in this layer. In Bitcoin or Ethereum, the consensus is
achieved through proper incentive techniques called “mining.” For a public blockchain to be self-
sustainable, there has to be some sort of incentivization mechanisms that not only helps in keeping the
network alive, but also enforces consensus.
Structure of Blockchain
Structure of Blockchain
• Header: It is used to identify the particular block in the entire blockchain. It handles all blocks in
the blockchain, or block metadata are contained in the block header
• Previous Block Address/ Hash: it is a reference to the hash of the previous (parent) block in the
chain
• Timestamp: It is a system verify the data into the block and assigns a time or date of creation for
digital documents. Also uniquely identifies the document or event and indicates when it was
created
• Nonce: a nonce is a number that is used only once in a cryptographic operation. In the context of
blockchain, a nonce is a random number that is generated by a miner and included in a block of
transactions
• Cryptographic hash algorithms and authentication protocols frequently employ nonces. An
artificially generated number used as a counter during the mining process is known as a nonce in
the context of blockchain technology.
• Merkel Root: It is a type of data structure frame of different blocks of data. A Merkle Tree stores
all the transactions in a block by producing a digital fingerprint of the entire transaction
Why is Blockchain Important?

Let us quickly learn a few downsides of a conventional centralized system:

• Trust issues Security issue
• Privacy issue
• data sale privacy is being undermined
• Cost and time factor for transactions

Some of the advantages of decentralized systems over centralized systems could be:
• Elimination of intermediaries
• Easier and genuine verification of transactions
• Increased security with lower cost
• Greater transparency
• Decentralized and immutable
Blockchain Uses and Use Cases

• Any type of property or asset, whether physical or digital, such as laptops, mobile
phones, diamonds, automobiles, real estate, e-registrations, digital files, etc. can be
registered on blockchain. This can enable these asset transactions from one person
to another, maintain the transaction log, and check validity or ownerships. Also,
notary services, proof of existence, tailored insurance schemes, and many more
such use cases can be developed.

• There are many financial use cases being developed on blockchain such as cross-
border payments, share trading, loyalty and rewards system, Know Your Customer
(KYC) among banks, etc. Initial Coin Offering (ICO) is one of the most trending use
cases as of this writing. ICO is the best way of crowdsourcing today by using
cryptocurrency as digital assets. A coin in an ICO can be thought of as a digital stock
in an enterprise, which is very easy to buy and trade
Blockchain Uses and Use Cases

• Blockchain can be used to enable “The Wisdom of Crowds” to take the lead and
shape businesses, economies, and various other national phenomena by using
collective wisdom! Financial and economic forecasts based on the wisdom of
crowds, decentralized prediction markets, decentralized voting, as well as stocks
trading can be possible on blockchain

• The process of determining music royalties has always been convoluted. The
Internet-enabled music streaming services facilitated higher market penetration,
but made the royalty determination more complex. This concern can pretty much
be addressed by blockchain by maintaining a public ledger of music rights
ownership information as well as authorised distribution of media content.
Blockchain Uses and Use Cases
• In IoT era, with billions of IoT devices everywhere and many more to join the pool. A
whole bunch of different makes, models, and communication protocols makes it
difficult to have a centralized system to control the devices and provide a common
data exchange platform.
• This is also an area where blockchain can be used to build a decentralized peer-to-
peer system for the IoT devices to communicate with each other.

• ADEPT (Autonomous Decentralized Peer-To-Peer Telemetry) is a joint initiative from

IBM and Samsung that has developed a platform that uses elements of the Bitcoin’s
underlying design to build a distributed network of devices—a decentralized IOT.
ADEPT uses three protocols: BitTorrent for file sharing, Ethereum for smart contracts,
and TeleHash for peer-to-peer messaging in the platform.
Blockchain Uses and Use Cases

• In the government sectors as well, blockchain has gained momentum. There are
use cases where technical decentralization is necessary, but politically should be
governed by governments: land registration, vehicle registration and
management, e-Voting, etc. are some of the active use cases.
• Supply chains are another area where there are some great use cases of
blockchain. Supply chains have always been prone to disputes across the globe,
as it was always difficult to maintain transparency in these systems.
How Blockchain Works

Laying the Blockchain Foundation

It is the computer science engineering techniques that incorporate cryptography and game
theoretic concepts into an application, enabling decentralized and distributed computing among the
nodes with data structure and network communication components
• Game theory
game theory, branch of applied mathematics that provides tools for analyzing situations in which
parties, called players, (even machines) make decisions that are interdependent. This
interdependence causes each player to consider the other player's possible decisions, or strategies,
in formulating strategy.
Game theory

• Game theory is a study of strategies involved in complex games

• It is the art of making the best move, or opting for a best strategy in a given situation
based on the objective.
• Game theory seeks to predict the outcomes of these interactions by considering the
strategies and payoffs of all participants.

• To do so, one must understand the strategy of the opponent and also what the opponent
thinks your move is going to be.
• a “game” can be defined as a situation involving a “correlated rational choice”
• Example: situations where two or more parties are involved with some strategic behavior.
• Discuss examples
• In network congestion control, game theory can be used to model the behavior of
multiple users sharing a network.
• Each user aims to maximize their data transmission rate while minimizing
congestion.
• By analyzing the game, designers can create protocols that lead to an equilibrium
where the network is used efficiently without excessive congestion.

• In summary, game theory provides a powerful set of tools for analyzing and
optimizing complex interactions in various fields of computer science
engineering, from network design to machine learning.
Game Theory in Computer Science Engineering
• Game theory has numerous applications in computer science engineering. Here are some key areas where it is used:
1. Network Design and Protocols: Game theory helps in designing efficient and robust network protocols. For example, it can
be used to analyze and optimize resource allocation, routing, and congestion control in communication networks.
2. Algorithm Design: Algorithms can be designed using game-theoretic principles to ensure fairness and optimality. This
includes algorithms for load balancing, scheduling, and distributed computing.
3. Security: Game theory is applied in cybersecurity to model and analyze interactions between attackers and defenders. It
helps in developing strategies for intrusion detection, defense mechanisms, and security protocols.
4. Auctions and Market Design: Game theory is used to design and analyze auctions, including online auctions like those
used by e-commerce platforms. It helps in creating mechanisms that ensure fair and efficient resource allocation.
5. Multi-Agent Systems: In systems where multiple autonomous agents interact, game theory provides a framework for
modeling and analyzing their behavior. This is relevant in fields like robotics, artificial intelligence, and economics.
6. Machine Learning: Game theory can be used in adversarial machine learning, where models are trained to be robust
against malicious inputs. It is also used in reinforcement learning, where agents learn optimal strategies through
interactions with the environment.
Cryptography
• Cryptography plays a foundational role in blockchain technology,
ensuring security, integrity, and trustworthiness of the data stored on
the blockchain.
• By leveraging cryptographic techniques like hashing, public-key
cryptography, encryption, blockchain technology can offer secure and
transparent systems for a wide range of applications.
• If the same key is used for both encryption and decryption, it is called symmetric key
cryptography. This means that both Alice and Bob have to agree on a key (k) called “shared
secret” before they exchange the ciphertext.
• Public-key cryptography, or asymmetric cryptography, is a cryptographic system that uses pairs of
keys. Each pair consists of a public key and a private key. The generation of such key pairs
depends on cryptographic algorithms which are based on mathematical problems termed one-
way functions. (RSA, Deffie Hellman key exchange etc)
Question Bank
1. Differentiate between centralized and decentralized system.
2. What is Blockchain and explain its advantages.
3. What is Blockchain? Explain Blockchain Data structure.
4. What are the limitations of centralized system? Explain in detail.
5. State and explain different use and use cases of Blockchain.
6. Why is Blockchain Important? Explain.
7. List and explain the layers of Blockchain.