Blockchain…….. is future🤔😮!!

Distributed Ledger Technology

A distributed ledger technology is a fancy way of saying “It is a database that is spread across several sites”. DLT is the umbrella term to describe any system that distributes data across multiple computers. There are several types of DLT’s like Blockchain, Tempo, DAG [Directed Acyclic Graph] etc. All blockchains are DLT’s but all DLT’s are not Blockchain.

Benifits of DLT :-

Distributed Ledger Technologies have the following potential :-

1. Faster Transactions
2. Remove middlemen
3. Reduce costs
4. More secure
5. Transport

How DLT affect Business ?

DLT creates a permanent, decentralized, global, trustless ledger of records. It is accessible anywhere in the world and do not require trusted 3rd parties to carry-out the transactions.

Lets divide the effects of DLT’s over businesses into 3 major components :

• Transforming Internal Processer and Operations :-

This include the DLT’s potential along internal processes and interactions within the business value network. It can be in the form of :

a) Payments

b) Asset Tracking

c) Data Sharing

d) Identify Management

• Transforming Business Models

This includes looking beyond the technology and including the value potential related to new types o customer interactions and innovative ideas for business models :

a) Customer engagement

b) Micro Transactions

c) Creating new markets

• New Opportunities

DLT’s might create new opportunities which are neither part of the core value chain nor the core business model :

a) Funding

b) Access to Data

c) Crowd Collaberation

d) Self Governed Organizations.

Blockchain :-

“Blockchain is the technology. Bitcoin is merely the first mainstream manifestation of its potential”.

• Blockchain is a digitalized, distributed ledger for all the records.
• A distributed database recording transaction in Chronological order.
• Devised initially to power Bitcoin.
• Blockchain is built with 3 technologies :-

1. Private Key Cryptography → a) ECC b)RSA
2. P2P Network → a) Torrent Networks b)System of Records
3. Program ( The Network Protocol) → a) Hashing Algorithm b) Handshake Algorithms

Real World Analogy For Blockchain

Blockchain Analogies to Real World :-

• Transport Bank Vaults.
• Bank Account Statements.
• A Spreadsheet which is duplicated hundreds of times across the network of computers.
• A large size notebook distributed across all the readers.
• A google doc shared between multiple parties.
• A street soccer game.

Blockchain Analogy :-

• Imagine a massive vault system from a bank.
• The vault is filled with rows of deposit boxes.
• Each deposit box is made up of glass, allowing everyone to visualize the content of the deposit box, but only have access to their vault.
• When a person opens a new deposit box, he/she get a key that is unique to the box.
• This is the fundamental concept of cryptocurrencies based on Blockchain. Anyone can see the contents of all other addresses.

Why Blockchain is Web 3.0 ?

• No central point of control.
• Ownership of data
• Reduction in Hacks and Data breaches
• Uninterrupted Service

Peek inside Blockchain

Blockchain Characteristics

• Each Block is built on top of the previous block and uses the block’s hash to form a chain.
• Validating and Confirming blocks over the chain is handled by miners.
• Blocks created are cryptographically sealed over the blockchain which means that it is nearly impossible to delete and modify data over the Blockchain.
• Consensus algorithms make sure that all the transactions are validated and only added once over the Blockchain.
• Miners receives a reward for running the consensus algorithms in the current reward is 12.5 BTC in case of Bitcoin Blockchain and 2ETH in case of Ethereum Blockchain.
• All the Blocks added are in Chronological order and time-stamped.

History of Blockchain

Bitcoin Beginnings -

• The Blockchain technique was initially described in 1991 with the intent to timestamp digital documents to avoid tampering. It was adapted by Satoshi Nakamoto in 2008 to create the digital Cryptocurrency called Bitcoin.
• The concept of the Blockchain technology was introduced ten years back.
• The first use case of Blockchain technology was Bitcoin.
• In 2008, Satoshi published the white paper of Bitcoin entitled “Bitcoin ; A peer-to-peer Electronic Cash System”. It stated that the transaction could take place without involving any third party. This lead to the introduction of the Blockchain technology.
• A few months later a new protocol was released that began the concept of genesis block with 50 coins. It was an open source program and later become a part of the Bitcoin peer-to-peer network.

Satoshi Nakamoto

Rise of Smart Contracts :-

Vitalik Buterin, an initial contributor to the Bitcoin codebase became frustrated around 2013 with the programming limitations of Bitcoin and set out to build the second public blockchain called Ethereum.

• Ethereum can record assets such as funds, boats, cars, or contracts, not just currency.
• Ethereum was launched in 2015 with the functionality of smart contracts that can automatically perform logical operations based on a set of criteria established in the blockchain.

Wallets :-

• A blockchain wallet is similar to a digital wallet that allows participants to manage their cryptocurrencies.
• A wallet lets the users generate the private key and public address.
• The private key is used to send the transactions and public address is used to receive the transaction.
• No visible records of identity about who did what transaction with whom, only the address of a wallet is visible in the transactions.
• Types of Blockchain wallets are :-

1. Paper wallet :- Private keys stored on a piece of paper
2. Web wallet :- Present on internet; can be accessed through URL.
3. Mobile wallet :- Application on mobile device
4. Desktop wallet :- Software application
5. Hardware wallet :- Hardware device used for storing the private keys
6. Physical wallet :- In the form of a Smart Card

Digital Signatures :-

• Digital Signatures similar to real signatures are a way to prove that somebody is who they say they are
• Digital Signatures use cryptography which is more secure than handwritten signatures.
• The private key is used to sign messages directly.
• The recipient can verify using the sender’s public key.
• Every transaction that is executed on the blockchain is digitally signed by the sender using their private key.
• SSL is an example of a digital signature.

Protocols :-

• Every Blockchain consists of behavior specifications that are programmed into it.
• Protocols define the Blockchain.
• The private key is used to send the transaction and public address is used to receive the transactions.

Examples of protocols :-

→ Input information for every hash number has to include the previous block’s hash number.

→ The reward for successfully mining a block decreases by half after every 2,10,000 blocks are sealed-off.

→ To keep the amount of time needed to mine one block at approximately 10 minutes, mining difficulty is adjusted every 2,016 blocks.

KEYS AND ITS CONCEPTS

Private Keys :-

• Private key is used to generate a signature for each transaction over the blockchain.
• The generated signature is used to confirm that the transaction has come from a specific user and also prevents the transaction from being alteered by any malign entity.
• In simple words -“Private keys are used to sign the cryptocurrencies you send to others”.
• If someone obtains you private key, they would be able to send your cryptocurrencies to themselves, which has happened in most of the hacks around the world.
• Example :- L34EXrFCuxQCofE66sxQe8………….Tw

Public keys :-

• The private key is used to derive the public key mathematically.
• Public keys are practically irreversible, i.e., you can easily derive public key from private key, but it would take millions of years to do vice versa.
• Public keys can be distributed to everyone.
• Example :- 0237F49F4CCF……………8FD

Addresses :-

• A cryptocurrency address in a core is a representation of the public key.
• One-way cryptographic hash functions are used to derive address from the public key.
• For example in Bitcoin, the algorithms that are being used to generate a bitcoin address from the public key are the secure hash Algorithm 256(SHA-256) and the RACE integrity primitives Evaluation Message Digest 160 (RIPEMD-160)
• The address appears typically in a transaction between two parties, with the address signifying the recipient of the funds.
• Examples :- LJPgML…………..dPV3a

Private key → large, randomly generated number

Public key → Generated from private key

Address → Generated from public key

Transactions :-

• Transactions are records of data in chronological order.
• Transactions are stored in a Merkle tree inside the block.
• The transactions, when submitted, are picked up by the blockchain network and is inserted into a ‘Pool of unconfirmed transactions’. The transactions pool is a collection of all the transactions on that network that have not been confirmed yet.
• Miners on the network select transactions from this pool and add them to their ‘block’.
• Transactions also contain metadata information which can be utilized to store data over the Blockchain.

Simplified digitally signed transaction on blockchain

What are Blocks ?

• A block is a container data structure which contains a set of confirmed transactions.
• A Block could contain different information and a chain of these blocks evolves into a blockchain as long as it links one and the other.
• The Blocks are stored on the hard drives of many miners spread across the globe on a peer to peer network.
• In the Bitcoin algorithm, a block is created every 10 minutes. All the transactions happening over the network within 10 minutes interval are crunched into the block and added to the chain.

Structure of Blocks :-

All Blocks in the Blockchain are composed of a header, identifiers and a long list of transactions. The structure of a block is as follows :-

Block header :-

The header contains metadata about a block. There are 3 different sets of metadata :-

• The previous block hash. In a blockhain, every block is inherited from the last block because we use the previous block’s hash to create the new block’s hash.
• Mining competition for the network. For every block to be part of the blockchain, it needs to be given a valid hash. This contains the value for the timestamp, the nonce and the difficulty.
• Merkle free root. This is a data structure to summarize the transactions inside the block.

Block identifiers :-

• To identify a block, we need to have a cryptographic hash, a digital signature. This is created by hashing the block header twice with the SHA256 Algorithm in case of Bitcoin Blockchain. You can use different hash functions for your Blockchain.
• Every Block was the last block’s hash to construct its hash.
• Another way to identify a specific block is the block height. This is the position of the Block in the blockchain.
• For Example, if we say the block is in the 7312 position. This means that there are 7311 blocks before this one.

structure of blocks

Merkle Tree :-

• A Merkle tree summaries all the transactions in a block by producing a digital fingerprint of the entire set of transactions.
• The user can verify whether (or) not a transaction is included in a block.
• Merkle trees are created by repeatedly hashing pairs of nodes untill there is only one hash left which is called the root hash.
• Each leaf node is hash of transactional data and each non-leaf node is a hash of its previous hashes.
• Merkle trees are binary and therefore require an even number of leaf nodes.
• If a single detail in any of the transactions or the order of the transaction’s changes, so does the Merkle root.

HD Private Key :-

• Hierarchical determinate is a type of deterministic cryptocurrency wallet derived from a known seed, which allows for the generation of child keys from the parent key.
• The child key is generated from a known seed. There is a relationship between the child and parent key that is invisible to anyone without that seed.
• The BIP 32 protocol can generate a nearly infinite number of child keys from a deterministically generate seed from its parent.
• You can recreate those same child keys as long as you have the seed.
• The child key can operate independently and the parent key can monitor and control each child key.

Mnemonic Seed :-

• A Mnemonic seed is used to substitute either a 12,18 or 24 word phase for the private keys which can easily be memorized by human mind compared to hex encoded format.
• Mnemonic word phase are tied with the private keys and support wallet restoration
• This provides additional security for the user as well as a convenient solution to recover a wallet.
• BIP39 introduced the mnemonic wallet implementation.
• The English wordlist for BIP39 contains 2048 words, so to create a 12-word phrase, it would require figuring out 2048¹²=2¹³² possible combinations under a shield of 128-bit security

Mnemonic Phrase

Smart Contracts :-

• Smart contracts are the digital contracts signed between two parties and stored over the immutable ledger.
• Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.
• Contracts can be encoded on any Blockchain, but Ethereum is mostly used since it given unlimited processing capability.
• Hyper ledger is also providing chain codes which are very similar to smart contracts.

Consensus Mechanisms :-

Blockchains are decentralized systems which consists of different participants who act depending on incentives they receive and the information that is available to them.
When a new transaction gets broadcasted on the network, nodes connected to the network have the option to either include that transaction to their copy of ledger or to ignore it. When the majority of the nodes which comprise the network decide on a single state, the consensus is achieved.

Top 5 Consensus Mechanisms :-

1. Proof of Work
2. Proof of Stake
3. Delegated Proof of Stake
4. Proof of Authority
5. Proof of Weight

Proof of work :-
Proof of work is the consensus algorithm where miners compete to solve a difficult mathematical problem based on a cryptographic hash algorithm. This proof proves that a miner spends a lot of time and resources to solve the problem. When a block is ‘solved’, the transactions contained are considered confirmed.

→ By Mathematical problem use mean :-
Hash function — how to find the input knowing the output
Integer factorization- how to present a number as a multiplication of two other numbers.
Guided tour puzzle protocol — if the server suspects a DOS attack, it requires a calculation of hash functions, for some nodes in a defined order. In this case, it’s a how to find a chain of hash function values problem.
Miners receive a reward when they solve the complex mathematical problem.
For example in Bitcoin miners receive 12.5 bitcoins for solving the puzzle.
Miners can also receive transaction fee in addition to rewards.

→ Example Bitcoin :-
In Bitcoin, a block is being mined very 10 minutes. The difficulty is adjusted that it never deviates much from this limit, if the difficulty stays the same, while the computer power increases gradually, it will take less and less time to mine a block.
To make sure this doesn’t happen over blockchain, the POW target is a dynamic parameter. In the Bitcoin blockchain, the target gets adjusted every 2016 blocks. Computing the amount of time it took to mine 2016 blocks. It should take 20160 mins (201⁶¹⁰min=14days). The difficulty is adjusted depending on the time it took to mine those blocks.

Difficulty in Bitcoin = Hashing Rate for Blockchain / hashing rate for the target block coming through the miner’s calculations.

Proof of Stake :-
PoS is a different algorithm to validate transactions and achieve the distributed consensus.
PoW Algorithm rewards miners who solve complex mathematical problems with the end goal of validating transactions and creating new blocks. On the other hand, in the PoS Algorithm, the creator of a new block is chosen in a deterministic way, depending on its wealth/stake the blockchain.
No Block reward
All the digital currencies are created at the start of the chain and their number never changes. Miners only take the transaction fees. That s why in the PoS System miners are also called forges.

→ Proof of stake, the creator of a new Block is chosen in a deterministic way, depending on its wealth, also defined as stake.

Proof of stake Example :-

Example NEO:-
→ NEO is a smart contract development platform often referred to as “China’s Ethereum”. The network aims to be the center of a creative economy where digital assets can be securely traded with little overhead.
→ Staking NEO lets, you generate GAS, the platform’s internal currency. The more NEO you have staked, the more GAS you’ll earn with each payment. NEO rewards with an annual return of 4–6%.

Delegated Proof of Stake :-

People in a particular blockchain ecosystem vote for witnesses to safeguard their Computer Network.
Let’s imagine a reward system where only the top 100 witnesses are paid for their service and only top 20 earn a regular salary. As it creates a healthy competition, many wants to become a witness thus providing hundreds of backup witness
The vote strength of a person is determined by how many token they hold. People who have more token will influence the network more than people who have less tokens.
If a witness starts acting like a Schmuck or stops doing a quality work in securing the network, people in the blockchain community can remove their votes, essentially firing the lousy actor. Voting is always ongoing.
Delegates are elected as witnesses. A delegate becomes a co-singer on an individual account that has the privilege of proposing certain changes to the network parameters. This account is known as the Genesis account. These parameters include everything from transaction fee to block size, witness pay and block intervals.

Delegated Proof of Stake Example :-
Example lisk :-
→ Lisk is a decentralized network similar to Bitcoin, Ethereum or Bitshares. Lisk uses a simplified implementation of the Delegated PoS Consensus Algorithm.
→ Lisk token can vote for mainchain delegates who secure the network. There is a maximum of 101 active mainchain delegates whosever got the most votes of the whole network and they can earn block generation rewards. Every other delegate is on standby waiting to be elected, or securing a lisk sidechain.

Proof of Authority :-
The proof-of-authority consensus is essentially an optimized proof of stake model that leverages identity as the form of stake rather than staking tokens.
The Group of Validators is usually supposed to remain relatively small (~25 or less) to ensure efficiency and manageable security of the network.
Individuals under PoA earns the right to become a validator, that’s why there is no incentive to retain the position that they hold.
Validators are required to formally verify identity either on the chain or some public domain.
The eligibility to become a validator is difficult to obtain and the individuals need to go through many steps to become a validator.

Proof of Authority Example :-
Example PoA Network:-
→ PoA Network (PoA Network) is a blockchain platform founded on the core principle of implementing PoA Consensus in their blockchain. PoA Network is a public platform for smart contracts that exists as an Ethereum sidechain with their nodes consisting of independent validators.
→ To make eligibility for staking identity its very hard to obtain, candidates for validators have to overcome the handle of passing notary exams. Not only do the exams attest to no criminal records and good moral standing of a candidate, but they also filter out those who are not committed.

Proof of Weight :-
Proof-of-weight is a broad consensus classification based on the algorand Algorithm which in turn specifies a new protocol known as Byzantine Agreement.
Byzantine Agreement is highly scalable and secure.
PoW Consensus model runs a committee where participants keep on changing and the committee achieves the consensus for the network.
Every user over the network has a weight attached to them which is determined by the money they hold in their account.

Proof of Weight Example :-
Example filecoin :-
→ Filecoin is using proof-of-spacetime as a weighted consensus on how much IPFS data you’re storing. The weight is based on different parameters if the overall weight fraction of honest users is higher than two-thirds of the total weight than the network will remain secure. This method also helps in protecting the network from double-spend attacks.
→ It is based on Algorand while some may see similarities between Algorand and PoS, they are not the same. In a PoS environment, the number of tokens held at any given time determines the amount of additional rewards users earn. PoW uses an entirely different weighted value.

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