Blockchain and Cryptocurrencies

What is Blockchain?

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Introduction
• IBM says
• “Blockchain is a shared, immutable ledger that facilitates the
process of recording transactions and tracking assets in a
business network.”

• Also called as Distributed Ledger Technology

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 A ledger has traditionally resided with
only one person/entity

That entity is responsible for making

entries in the ledger, maintaining it and
ensuring its correctness

Blockchain allows each person/entity

to have their own copy of the ledger.

The ledger is now distributed instead

of being centralized
This is a ledger
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Centralized, Decentralized and Distributed
Systems

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Centralized, Decentralized and Distributed
Systems
• Centralized systems
• One or few key parties carry out all the intermediation tasks
• credit card transaction or transferring money by UPI
• Decentralized and Distributed systems
• Most of the users carry out all the tasks

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Building a distributed Ledger
Advantages
• No single point of failure (unlike
centralized system)
• No need to trust the entity running
the centralized system
• Copies of the entire ledger can be
with everyone leading to higher trust
Key Features needed
• Over time, entries in the ledger should
not be tampered with (Immutability)
• At the time of adding an item the
entry must be accepted by
decentralized system
• My transactions should not be visible
to “third party” (anonymity)
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How are these features achieved?

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Solving the Byzantine
General’s Problem

Allows

us to run a completely
open system

In which the transactions

can be verified

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 What does a block contain?

Data Hash of the block Hash of previous block

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What is a Hash/Hash Function

• Nilesh Kumar Gupta -

515F5CA071F69F8FFB9473748467D31A6035677B4644EAF0C20ACD9209804074

• Nilesh Gupta – 300BEDF6DFBC0071B07FA2D27ED38475782D3636D0CCF6CF16A683852A5CC804

• Nilesh - 01D8BB58E2315BCECD28924944D701D001FF02507FE01F2B822D2C4FC4522A80

• NILESH - 283DC3BD8C1421976177731207A2B937EDF3D7E4E8A233E3C9FB93B134E374FD

• IIM Nagpur - 676D6ED7622F2A02893DC4ED8A4384C35F80AD820F000A15C00DF7A7720424C4

https://passwordsgenerator.net/sha256-hash-generator/

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What is a Hash/Hash Function
• What is a hash function (SHA256)
• Mathematical function that gives an output for an input
• Takes an input string of any length and gives out an output of a fixed length

• Properties
• Collision Free {If x ≠ 𝑦𝑦, 𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝐻𝐻 𝑥𝑥 ≠ 𝐻𝐻 𝑦𝑦 }

• Consider it like a 256 word summary of your transactions

• Also used in password verification

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Why is it called as Blockchain?

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What types of data can be uploaded to a
Blockchain?
• Data types
• Ledgers (who paid whom how much) – Crypto-Currencies
• Ledgers + programs/code – Smart Contracts (Ethereum)
• Programmable ledger + centralization = Suitable for enterprises (Ripple)
• Utility /Security Tokens - Access right to few blockchain apps (ICOs)
• Stablecoins – mirroring assets in the real world .

• Coins (use their own BLC)- First three

• Tokens (use other BLC) – Last three

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How does Blockchain Work ?

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Consensus Protocols
• Rules to build consensus on the transactions in the ledger
• Why is it needed ?
• Since the system is distributed, over public (blockchain), there has to be an
agreement/consensus
• Types of Consensus Protocols
• Random Consensus
• Proof of Work (Mining)
• Proof of Stake

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Proof of Work - Concept
• Basic Philosophy
• Nodes which have higher computing power are given higher
preference to WRITE the blockchain
• Difficult to fake computing power
• Acts as economic deterrents for easy consensus attacks

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Proof of Work - Implementation
• Nodes need to compete to solve a simple hashing puzzle which can be
solved only by brute force
• The higher your computing power, the quicker it takes you to solve this.
• The procedure adjusts the difficulty of the puzzle dynamically, depending on
the nodes in the network
• Reward for this effort
• Award of new bitcoins – Total bitcoins are limited (21 million)
• Transaction fees (high, around 2% historically, are likely to rise in future)
• Mining builds skin in the game

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Proof of Stake
• Used as a consensus protocol on Ethereum
• Proof of work favors nodes with higher computing power, which
requires investments
• Instead of checking computer power, we can ask nodes to bid for
building the block
• Highest bidder wins the right to build the block for a given period of
time
• Reward - Transaction fees

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Public Key Cryptography
Assymetric Encryption

https://www.youtube.com/watch?v=AQDCe585Lnc
Ensures that the transaction in the block can be read/understood only by the
two parties and no one else
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Applications of Blockchain/DLT

• Any application where we are dependent on a third party to verify

a transaction
• Financial Services examples
• Insurance - Claims Processing
• Asset Management Services – Trade processing
• Payments – Cross Border payment systems

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Types of Blockchain
• Based on Data – Already discussed
• Based on Accessibility
• Completely Public or Permissionless Blockchain (Bitcoin)
• Private Blockchain
• Permissioned Blockchain
• Completely Public (Bitcoin)
• Anyone can participate and access [https://etherscan.io/]
• High anonymity (hiding the nodes by using anonymous identities)
• All nodes have equal access/write rights
• Distributed consensus mechanisms used to keep consensus chain of records

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Types of Blockchain
• Private Blockchain
• Data sharing tools between trusted parties
• Participants are known, trusted and vetted
• No need for complex consensus mechanisms
• No limit on block size or number of transactions
• No need for currencies
• Permissioned blockchain
• Controlled access
• Participants are known but not necessarily vetted
• Data can be made publicly available if needed
• Enterprise focused cryptos like Ripple use permissioned blockchains

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Limitations/Challenges in Blockchain
• Ledgers is highly inefficient
• Ledgers + program/codes is also inefficient. Also code cannot be too complex. Code
is called as smart contracts
• Adding a little centralization to it leads to Ripple
• Utility Tokens – Right to access some blockchain apps – ICOs
• Identity in Blockchain
• Private key- Public key combo
• Weaker than traditional centralized channels such as banking
• Threats – Loss of private key etc.

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To Summarise

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Blockchain
• The technologies are not new, they have been tied together in a novel way.
• Most people hear about blockchain through bitcoin
• Blockchain is essentially a decentralized database
• What is different ?
• Storing and arranging the data is unique
• Consensus algos have to be deployed so that there are no conflicts in the database
across so many users

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Blockchain
• Difference between different blockchain systems is mostly on
• What is the data that can be uploaded
• How is consensus handled ?
• Goal of Blockchain
• achieve some level of trust and a system integrity in some type
of financial or physical transactions without involving a central
intermediary like a bank

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Bitcoin
• First decentralized ledger
• Starting vision
• Low cost online payment system for large and micro payments
• Digital replacement of national fiat currencies
• No central control, total anonymity
• Reality
• Low transaction throughput, high processing fees > low payment adoption
• Inefficient and energy hogging consensus protocol
• Significant node centralization

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Ethereum (ETH)

• Second generation Blockchain application

• Objective – Build a general purpose decentralized computer
• Own Programming language - Solidity
• The nodes execute the program
• Smart Contracts
• Computer code running on a decentralized nodes
• As of now, simple scripts only are executed because of the design limits
of decentralization

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Questions(?) for you to explore
• Why are total bitcoins limited
• What is the impact this may have on transaction costs
• What is the business model of miners ?
• Which entity makes the most money from this operation ?
• What is the electricity usage needed to maintain the bitcoin network ?
• Can the Proof-of-work algorithm be scaled infinitely ?
• Is bitcoin/public blockchain the sole answer to cross-border payment
systems?

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THANK YOU

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