Unit I: Blockchain Fundamentals

Blockchain Fundamentals

Introduction to Blockchain, History, Centralised versus Decentralised systems, Layers of blockchain, Importance of blockchain, Blockchain uses and use cases.

Que 1. What is Block Chain and explain its importance/Advantages ?

Why is Blockchain Important? Explain.

Blockchain defined: Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding).

• It is a digital ledger that keeps a record of all transactions taking place in a peer-to-peer network. All information transferred via Blockchain is encrypted and every occurrence is recorded, meaning that the information.
• It is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network.
• An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding).
• Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.
• As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions.

Example: One popular example of blockchain technology is the cryptocurrency Bitcoin. Bitcoin was the first successful implementation of a decentralized, peer-to-peer digital currency, and it relies on blockchain as its underlying technology.

Importance:

1. Decentralization: This is a core concept and benefit of blockchain. There is no need for a trusted third party or intermediary to validate transactions; instead, a consensus mechanism is used to agree on the validity of transactions.
2. Transparency and trust: As blockchains are shared and everyone can see what is on the blockchain, this allows the system to be transparent. As a result, trust is established.
3. Immutability: Once the data has been written to the blockchain, it is extremely difficult to change it back. It is not genuinely immutable, but because changing data is so challenging and nearly impossible, this is seen as a benefit to maintaining an immutable ledger of transactions.
4. High availability: As the system is based on thousands of nodes in a peer-to-peer network, and the data is replicated and updated on every node, the system becomes highly available.
5. Faster dealings: In the financial industry, especially in post-trade settlement functions, blockchain can play a vital role by enabling the quick settlement of trades. Blockchain does not require a lengthy process of verification, reconciliation, and clearance.
6. Cost-saving: As no trusted third party or clearing house is required in the blockchain model, this can massively eliminate overhead costs in the form of the fees, which are paid to such parties.
7. Platform for smart contracts: A blockchain is a platform on which programs can run that execute business logic on behalf of the users. This is a very useful feature but not all blockchains have a mechanism to execute smart contract.
8. Smart property: It is possible to link a digital or physical asset to the blockchain in such a secure and precise manner that it cannot be claimed by anyone else. You are in full control of your asset, and it cannot be double-spent or double-owned.

Also Read: Unit II: Basic Cryptographic primitives used in Block chain

Que 2. Differentiate between centralized and decentralized system OR
What are the limitations of centralized system?

Centralized system

As the name suggests, a centralized system has a centralized control with all administrative authority. Such systems are easy to design, maintain, impose trust, and govern, but suffer from many inherent limitations, as follows:

• They have a central point of failure, so are less stable.
• They are more vulnerable to attack and hence less secured.
• Centralization of power can lead to unethical operations.
• Scalability is difficult most of the time.

Advantages of Centralized System

• Reduced Costs: One of the biggest advantages of centralization is the cost associated with it. Any centralized network or infrastructure requires less support and cost.
• Simpler implementation: In a centralized hierarchy, it’s much easier to implement change in the system as a whole. Decisions can be made quickly, and tasks are easily delegated, avoiding confusion and chaos.
• Command chain: With centralized, the command chain is clearly defined. If an organization utilizes centralization, they know the chain of command.

Disadvantages of Centralized System

• Trust: Even though centralized organizations are secure and trustable, they are not 100% secure or trustable. The trust is an agreement that is set by the service provider and the user
• Single point of failure: Centralization also means that the whole network is dependent on a single point of failure.
• Scalability Limitation: As a single server is used in most cases, it leads to scalability limitation

Decentralized system

As the name suggests, a decentralized system does not have a centralized control and every node has equal authority. Such systems are difficult to design, maintain, govern, or impose trust. However, they do not suffer from the limitations of conventional centralized systems. Decentralized systems offer the following advantages:

• They do not have a central point of failure, so more stable and fault toleran 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

• In decentralized systems, every node makes its own decision.
• The final behavior of the system is the aggregate of the decisions of the
  individual nodes

Advantages of Decentralized System

• Full Control: One of the most significant advantages of decentralization is that the users are in full control of their transactions.
• Data cannot be altered or deleted: Blockchain technology’s data structure is append-only. This means that there is no chance for anyone to modify or alter the data once it is stored.
• Secure: Decentralized networks are secure because of how they handle data and transactions. They use cryptography to ensure that the data ledgers are secure.

Disadvantages of Decentralized System

• Anonymous crime: While blockchain technology is mostly secure, it does open the door for anonymity in a way that centralized systems don’t
• Volatility: Anyone who follows the price trajectory of cryptocurrencies knows how volatile they can be.
• Authentication issues: A fully decentralized network can authenticate the history of an NFT, but it can’t necessarily verify the original artist of a work, only who minted it

Que 3. Explain Blockchain Data structure

• The blockchain data structure is a back-linked list of blocks of transactions, which is ordered.
• It can be stored as a flat file or in a simple database.
• Each block is identifiable by a hash, generated using the SHA256 cryptographic hash algorithm on the header of the block.
• Each block references a previous block, also known as the parent block, in the “previous block hash” field, in the block header.

• The “header” part links back to the previous block in the chain.
• What it means is that every block header contains the hash of the previous block so that no one can alter any transaction in the previous block.
• Let us consider a practical example and see how the transactions take place and the ledger gets updated across the network, to see how this system works:
• Assume that there are three candidates—Alice, Bob, and Charlie—who are doing some monetary transactions among each other on a blockchain network. Let us go through the transactions step by step to understand blockchain’s open and decentralized features

Step-1: Let us assume that Alice had $50 with her, which is the genesis of all transactions and every node is aware of it, as shown in Figure 1-5

Step-2: Alice makes a transaction by paying $20 to Bob. Observe how the blockchain gets updated at each node, as shown in Figure 1-6

Step-3: Bob makes another transaction by paying $10 to Charlie and the blockchain gets updated as shown in Figure 1-7

• Please note that the transaction data in the blocks is immutable. All transactions are fully irreversible.
• Any change would result in a new transaction, which would get validated by all contributing nodes. Every node has its own copy of blockchain

Que 4. List and explain the layers of Blockchain.

There are five layers of blockchain:

Application Layer

• Because of the characteristics of blockchain, such as immutability of data, transparency among participants, resilience against adversarial attacks etc., there are multiple applications being built.
• Certain applications are just built in the application layer and some applications are built in the application layer and are interwoven with
  other layers in blockchain.
• This is the layer where you code up the desired functionalities and make an application out of it for the end users.
• It usually involves a traditional tech stack for software development such as client-side programming constructs, scripting, APIs, development frameworks, etc.
• This concept is to ensure that the heavy lifting is done at the application layer, so that the core blockchain is light and effective and
  the network traffic is not too much

Execution Layer

• 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 . In either case, a
  program or a script needs to be executed to ensure the correct execution of the transaction.
• All the nodes in a blockchain network have to execute the programs/scripts independently.
• Deterministic execution of programs/scripts on the same set of inputs and conditions always produces the same output on all the nodes, which helps avoid inconsistencies.

Semantic Layer

• This layer also called as logical layer of blockchain layer suit.
• This layer deals in validation of the transactions performed in the blockchain network and also validating the blocks being generated in the network.
• When a transaction comes up from a node, the set of instruction are executed on the execution layer and gets validated on the semantic layer.
• It is also responsible for the linking of the blocks created in the network. As we already know each block in the blockchain contains the hash of the previous block except the Genesis block.
• This linking of block needs to be defined on this layer.

Propagation Layer

• It deals with the peer-to-peer communications between the nodes that allow them to discover each other and get synced with another node in a network.
• When a transaction is carried out, it gets broadcasted to all other nodes in the network.
• Also, when a node proposes a block, it will immediately get broadcast in the entire network so that other nodes can use this newly created block and work upon it.
• Hence, the propagation of the block or a transaction in the network is defined in this layer and ensures the stability of the complete network.
• However, depending upon the network capacity or network bandwidth sometimes the propagation could occur instantly sometimes it may take a longer.

Consensus Layer

• This layer is the base layer for most of the blockchain systems a common state of the shared ledger.
• The main purpose of this layer is to make sure that all the nodes must get agree on a common state of the shared ledger.
• The layer also deals with the safety and security of the blockchain.
• 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.”

Que 5. State and explain different use and use cases of Blockchain.

• Cryptocurrencies:
  • Blockchain gained popularity with the introduction of Bitcoin, the first decentralized cryptocurrency.
  • It enables secure and transparent peer-to-peer transactions without the need for intermediaries like banks.

• Smart Contracts:
  • Blockchain platforms like Ethereum allow the creation and execution of self-executing contracts, known as smart contracts.
  • These contracts automatically execute predefined actions when specific conditions are met.
  • providing a decentralized and tamper-proof way of enforcing agreements.

• Supply Chain Management:
  • Blockchain can enhance supply chain transparency and traceability.
  • By recording every transaction and movement of goods on the blockchain, stakeholders can easily track and verify the origin, authenticity, and location of products, ensuring trust and reducing fraud.

• Healthcare:
  • Blockchain can streamline healthcare data management by securely storing and sharing patient records, medical history, and other sensitive information.
  • It ensures data integrity, accessibility, and privacy while enabling interoperability between different healthcare providers.

• Identity Management:
  • Blockchain can provide a secure and decentralized system for managing digital identities.
  • It allows individuals to control their personal information, granting access to specific parties as needed,
  • while reducing the risk of identity theft and unauthorized access.

• Voting Systems: Blockchain-based voting systems can enhance the integrity and transparency of elections. Each vote is recorded on the blockchain, making it tamper-proof and providing a verifiable audit trail, thereby increasing trust and reducing fraud in the voting process.

• Intellectual Property Protection:
  • Blockchain can be used to establish proof of ownership and protect intellectual property rights.
  • Artists, writers, and inventors can timestamp their work on the blockchain, creating a transparent and immutable record of their creations.

• Decentralized Finance (DeFi):
  • Blockchain-based DeFi applications provide traditional financial services such as lending, borrowing, and trading without the need for intermediaries.
  • By leveraging smart contracts and decentralized protocols, DeFi offers greater accessibility, transparency, and control to users.

• Internet of Things (IoT):
  • The Internet of Things (IoT) industry is growing rapidly with billions of connected devices.
  • The latest forecasts suggest that by 2030, there’ll be 50 billion devices in use globally.
  • As this number continues to grow, it will increase vulnerabilities as hackers can easily breach your data through a single connected device.

• Supply Chain Finance:
  • Blockchain can facilitate supply chain finance by providing a decentralized and secure platform for verifying and settling transactions between suppliers, manufacturers, and financiers.
  • It improves transparency and reduces the risk of fraud in supply chain financing.