Blockchain - Foundations

The power that the third party firms have in centralized financial system is highly dangerous, the loss of money during transactions or in transaction fees, loss or complete removal of information and even the possibility of third party freezing your account can occur in this system. Hence, Blockchain plays a crucial role in human advancement.

Who Invented the concepts of Blockchain and Bitcoin?

Innovation 1-Blockchain

The Birth step for blockchain was introduced in 1991 by Dr. Scott Stornetta and Dr. Stuart Haber who introduced Blockchain as “ A decentralised, cryptic database on which digital transactions take place.” The paper was titled as “How to Time-Stamp a Digital Document”

The paper mentioned two important methods of time-stamping digital document:

(1)   – Client sends the document

(2)   –Server receives the document and the document is signed with the current timestamp.

(3)   –In addition the server links document to previous document.

(4)   –The process is done without relying on the characteristics of medium and location

(5)   -Hence it is impossible to stamp a document with a different time and date from the actual one, making it impossible to change any part of the document.

Innovation 2-Bitcoin

The paper titled “Bitcoin: A Peer to Peer Electronic Cash System” was published by Satoshi Nakamoto. The paper mentioned alternatives and peer to peer digital currency building idea which would not involve any financial firm or third party to interrupt in between. The bitcoin code was made open and permitterd anyone chance to learn, build and expand the technology. It intended to remove Third-Party verification and intended to create a trustless payment platform with transactions that cannot be reversed. So basically, bitcoin is a digital currency!

Blockchain Generations

First Generation:

With the use of blockchain technology, Bitcoin became the first successful digital currency in the whole world. This was achieved through the 1st Generation blockchain technology.

Second Generation (Aim : Improving end to end efficiency) : Example - Ethereum

Ethereum is actually a platform that uses the currency Ether. The purpose of its platform is to draw up “smart contract” (smart contract - coded contract that is subsequently uploaded to a blockchain. Whenever a contract is executed in a blockchain, every network node runs it and then uploads it to the blockchain, or simply, the smart contract is a coded ‘If-Then’ statement. That is, if certain requirements are met, the terms of the contract will be carried out. This process is not trust-based; it can never be tampered with by any party, nor can any party cheat and fail on its end of the deal. .) and conduct transactions, and these processes are fueled by the currency ether (ETH).

Third Generation (Aim : Securing the blockchain and never slowing it down or compromising its performance) : Example – Steem

The blockchains in this generation have self governance at their hands. Hence agreement and information flow can be managed in secured way. eg. An insurance contract having an agreement of regular payments can end up the agreements on its own if the participant misses the regular payments.

This Generation blockchains can be executed in layers too:

(1)  Layer 1 Handle contracts

(2)  Layer 2 Handles transactions

(3)  Layer 3 passes secure data among blockchains.

So now,

What is Blockchain ?

Answer : Blockchain is a decentralized distributed database of immutable records, that is, a chain of blocks that contains information where transactions are protected by strong cryptographic algorithms and the network status is maintained by the Consensus algorithm. It is the algorithm for Distributed Ledger Technology (DLT ).

Where do we use Blockchains?

Answer : The list is endless and expands daily. Yet, some of the application sectors are Real estate, logistics, Banking and Financial Sector, Fintechs, elections and surveys.

Why do we need blockchain and what are the benefits of it?

(a) The power that the third party firms have in centralized financial system is highly dangerous, the loss of money during transactions or in transaction fees, loss or complete removal of information and even the possibility of third party freezing your account can occur in this system. in place of this centralized system, Satoshi Nakamoto proposed a decentralized peer-to-peer financial system involving a crypto currency called Bitcoin and Blockchain was the basic technology behind Bitcoin which makes storing valuables possible.

(b) Benefits : Transparency, Reduced transaction costs, Faster transaction settlements, Decentralization, User controlled network, Efficiency, Auditability.

How does Blockchain work?

Blockchain stores data in a distributed ledger which can be potentially accessed and updated in a secure way by billions of people. 

Features of blockchain.

(1)  Decentralized technology gives you the opportunity to store your token based assets

(document/contracts etc.) in a network that can be further accessed through internet. the owner has a direct control over his account through the use of a key linked to his account, giving the owner a power to securely transfer his assets to anyone he wants, because all entries in a decentralized ledger are immutable and irreversible.

(2)  Mining : it is carried out by a “miner” ( miners are nodes that generate blocks by solving proof of work problems ) who solves a complex mathematical computation by using large amount of computational materials. It is the process of creating new blocks and pushing them up to the blockchain. Miner who solves the puzzle (Proof-of-work) gets the prizes. As of October 2017, Bitcoin miners get 12.5 Bitcoins per block. This set of procedures that the network has to follow to create the next block is known as “the consensus model”.

(3)  Security : Every node in the network is rewarded for participating in the network. This way, these specific nodes are “mining” for the blocks that contain all the transaction details.

(4)  Increased Capacity.

Difference between Blockchain and Database.

What are Permissioned and permissionless Blockchains.

 Permissioned Blockchains-

(1)   Closed community

(2)   Each participant is well defined

(3)   Allows Organization to exchange information and record transactions efficiently.

(4)   Run by the members of certain group, only pre-approved entities can run the nodes that make transaction blocks valid and carry out smart contracts on the blockchain.

(5)   Make it easy to share trusted information in secure form.

(6)   Confidentiality is provided for business to effectively operate.

Permission less Blockchains-

(1)   Allow anyone to take interest.

(2)   Exchanges are approved and handled by votes or agreement.

(3)   Vote does not depend on having previous character in the record.

(4)   No previous trust is expected.

(5)  Allows anybody to create an address and start interacting with the blockchain network, creating an address on the network allows any person, thing, or entity to interact with other members or parties. Eg. Internet.

(6)   Each party can choose to run a node for the blockchain and help to verify transactions (using mining method), and create smart contracts on the network. This is the essence of Bitcoin and Ethereum Blockchain networks. These networks make use of a crypto-economic model (pushed by proof-of-work consensus method) that rewards people to run network nodes. All network participants get tokens as reward for their contributions.

(7)   Considered very efficient for Business firms and start-ups.

What is Cryptography and encryption and Hashing?

(1)  Cryptography is a method of hiding information to keep its content safe and secret. 

(2)  The encrypted message can be read only by the sender and the recipient.

(3)  A cryptographic key is simply a string of numbers and letters which are made by key generators also known as keygens.

(4)  These keygens make use of a very advanced mathematics involving prime numbers to create these keys.

(5)  A hash is a string of numbers and letters, produced by hash functions.

(6)  A hash function is a mathematical function that takes a variable number of characters and converts it into a set A with a fixed number of characters.

(7)  Even a small change in a set creates a totally new hash.

(8)  Transactions are entered in the order in which they occurred. Order is very important.

(9)  The hash depends not only on the transaction but the previous transaction's hash.

What is Merkle Tree?

(1)  A Merkle tree summarizes all the transactions in a block by producing a digital fingerprint of the entire set of transactions enabling a user to verify whether or not a transaction is included in a block.

(2)  Merkle trees are created by repeatedly hashing pairs of nodes until there is only one hash left.

(3)  This hash is called Root hash or Merkle Root.

(4)  They are constructed from bottom up from hashes of individual transaction IDs.

(5)  Each leaf node is a hash of transactional data, and each non-leaf node is a hash of its previous hashes.

(6)  Merkle trees are binary and therefore require an even number of leaf nodes.

(7)  If the number of transactions is odd, the last hash will be duplicated once to create an even number of leaf nodes.

Nonce

A Number is added after each record such that it should be chosen so that the generated hash ends in two zeros. Moreover it is difficult even for the computer to figure out nonce quickly!

Node and Block

Node :

(1)   A widespread network of computers has the copy of digital ledger or Blockchain.

(2)  Each node(computer) checks the validity of each transaction.

(3)  Hence, simply, the nodes check to make sure a transaction has not been changed by inspecting the hash.

(4)   If a majority of nodes say that a transaction is valid then it is written into a block.

(5)  Hence if anybody tries to change the data from any node, other nodes won’t allow it as they have the original hash.

(6)  And finally, if a transaction is approved by a majority of the nodes then it is written into a block.

Block :

(1)   Each block refers to the previous block and together make the Blockchain.

(2)  A block is a one spreadsheet/ledger/registry but the whole family of blocks is the Blockchain. Blockchain is a diary containing information about transactions.

(3)  Every node has a copy of the Blockchain. (Consider a network of hundreds of computers, each computer is called a node and each node contains blockchain!)

(4)  Once a block reaches a certain number of approved transactions, then a new block is formed.

(5)  The Blockchain automatically updates itself every ten minutes and it can no longer be altered.

(6)  Thus it is impossible to forge but can only add new entries to it.

(7)  No master or central computer is needed to instruct the computers to do this.

Wallet and Digital Signature

(1)   A wallet is a string of numbers and letters,such as 18c177926650e5550973303c300e136f22673b74.

(2)  It is an address that will appear in different blocks within the Blockchain as transactions take place.

(3)  There will be no visible records of who did the transaction or with whom it was done, only the number of a wallet is displayed. Also the address of individual wallet is a public key.

Digital Signature:

(1)   To carry out a transaction, you need 1. A wallet( which is mainly a address) and

 2. A private key which is kept private unlike address.

     (2) When someone decides to send coins to anybody, they must sign the message   containing the transaction with their private key.

Transaction process

(1)  Once the message is sent it is broadcast to the Blockchain network.

(2)  The network of nodes then works on the message to make sure that the transaction it contains is valid.

(3)   If it confirms the validity, the transaction is placed in a block by miners who are special nodes and after that no information about it can be altered.

(4)  The placing of a transaction in a block is known as a successful conclusion to a proof of work challenge, and is carried out by special nodes called miners.

(5)   After miners successfully 'seal off' a block of transaction, they receive a reward, which currently stands at 12.5 BTC, and they also get to keep a transaction fees Bitcoin holders pay.

(6)  Interaction is carried out on a Blockchain using rules built into the program of the Blockchain called protocols.

Blockchain technology has made life easier with improvement in transaction speeds as well as making record keeping more efficient and reliable by accepting the need to keep paper-based records that can be altered or lost.

Thank you for your patient reading, constructive suggestions are always welcome! - Kanchan Vinayak Bhale.