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README.html
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<title>Blockchain - Technical and business perspective</title>
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<body class="article">
<div id="header">
<h1>Blockchain - Technical and business perspective</h1>
<div id="toc">
<div id="toctitle">Table of contents</div>
<noscript><p><b>JavaScript must be enabled in your browser to display the table of contents.</b></p></noscript>
</div>
</div>
<div id="content">
<div class="sect1">
<h2 id="_introduction">Introduction</h2>
<div class="sectionbody">
<div class="paragraph"><p>Blockchain, the keyword itself implied series of blocks and assumed that blocks would have some information added to them. Distributed Ledger Technology
The blockchain is not a strange keyword anymore in this era; everyone talks about it in their daily life.
However, not everyone can understand blockchain clearly and explain the whole concept, so in a line, it is - "Series of blocks with linked cryptographic hashes in a chronological way."</p></div>
<div class="paragraph"><p>Most of the people think - center Blockchain and Bitcoin are same! Yes, they feel like that. Well, it’s not the case they different, blockchain is an underlying concept of Bitcoin.
Bitcoin made debut in 2009 and got attention from every tech-savvy over the globe as it was a system using blockchain and p2p network, and proposing a solution to resolve double spending problem[2] and enable borderless electronic payment transactions. It was a classic peer to peer transaction system owned and supported by the developer community and public. After 2009, when Bitcoin was struggling yet rising in the market, other incubator projects were in progress which could overcome potential problems faced in bitcoin system and provide faster transactions for electronic payment transactions. Also, tech pioneers started implementing blockchain in other fields such as real estate, healthcare, and education, etc. I will explain all these as we go through this document.</p></div>
</div>
</div>
<div class="sect1">
<h2 id="_blockchain_origins">Blockchain origins</h2>
<div class="sectionbody">
<div class="paragraph"><p>The origins of blockchain technology can be traced to 1991 when Stuart Haber and W. Scott Stornetta represented the initial effort on a cryptographically secured series of blocks. In 1992, they took advantage of Merkle trees (explained in the later section) and combined it into the design resulting in a new enhanced system which allowed to collect several documents in a block, and several blocks are linked together building a chain.</p></div>
<div class="paragraph"><p>Well, that was long ago. At present, it wouldn’t be wrong to say that the blockchain technology gained significance in 2008 when a mysterious person named "Satoshi Nakamoto" came up with the Bitcoin white paper. Satoshi Nakamoto proposed a practical approach to solving the problem of double spending using same blockchain technology. Another fact which still amazes people is that nobody knows who Satoshi Nakamoto was and its still a mystery.</p></div>
<div class="paragraph"><p>In 1991, Stuart Haber and W. Scott Stornetta did the first work on a cryptographically secured chain of blocks. To improve the efficiency of collecting several documents into one block, Bayer, Haber, and Stornetta in 1992, integrated Merkle trees (explained in the later section) to the blockchain. In the year 1998, Nick Szabo presented bit gold as an instrument for decentralized digital currency and smart contracts. Stefan Konst in the year 2000, introduced a general cryptographic theory of secured chain. An anonymous person or group was known as Satoshi Nakamoto (2008) in 2008 visualized the first distributed blockchain. In the year 2009, executed the distributed blockchain as the core element for digital currency bitcoin where it serves as an open ledger for all transactions. A blockchain database is handled autonomously with the help of peer-to-peer network and a distributed timestamping server. The double spending problem has resolved with the help of bitcoin implementation, without needing a trusted organization or an administrator. The bitcoin design has been a model and inspiration for other applications. The bitcoin blockchain file size reached 20 gigabytes in August 2014. The volume had grown to 30 gigabytes on January 2015, and from January 2016 to January 2017, the proportion has increased from 50 to 100 gigabytes. To refer to new applications of the distributed blockchain database, Blockchain 2.0 is used. The Blockchain 2.0 technologies go beyond transactions. They allow the value exchange without any influential intermediaries acting as arbiters of money and information. As of 2016, the implementations of Blockchain 2.0 requires an off-chain oracle to access any data which is external or to access any events based on the time or market conditions that need to interact with the blockchain. To investigate blockchain-based automated voting systems, the central securities depository of the Russian Federation(NSD) proclaimed a pilot project based on Nxt Blockchain 2.0 platform in 2016. IBM has opened a blockchain research center in Singapore in July 2016. The World Economic Forum met to discuss the development of governance models related to blockchain in November 2016 and also a Global Blockchain Forum is created by the industry trade groups which was an initiative of the Chamber of Digital Commerce.</p></div>
<div class="sect2">
<h3 id="_the_concept">The concept</h3>
<div class="sect3">
<h4 id="_distributed_ledger_technology_dlt">Distributed Ledger Technology (DLT)</h4>
<div class="paragraph"><p>The key term is distributed ledger technology (DLT), which includes <strong>blockchain</strong> and <strong>smart contracts</strong>. Distributed ledger is a type of data structure within a block.</p></div>
</div>
<div class="sect3">
<h4 id="_blockchain">Blockchain</h4>
<div class="paragraph"><p>The blockchain is a chronological chain of blocks, in which each block had a set of multiple transactions and added to the chain including timestamp and cryptographic hash, ultimately providing immutable records for all the transactions.</p></div>
<div class="imageblock" style="text-align:center;">
<div class="content">
<img src="./imgs/https://upload.wikimedia.org/wikipedia/commons/a/ab/Blockchain_landscape.svg" alt="caption="Figure 1: "" />
</div>
<div class="title">Figure 1. Blockchain (licensed under Creative Commons Attribution-Share-Alike 3.0 Unported, retrieved from Wikipedia)"Blockchain formation. The main chain (black) consists of the longest series of blocks from the genesis block (green) to the current block. Orphan blocks (purple) exist outside of the main chain."[Wikipedia]</div>
</div>
</div>
<div class="sect3">
<h4 id="_blockchain_block_and_datastorage">Blockchain - Block and DataStorage</h4>
<div class="paragraph"><p>The block contains <strong>bundled transaction records</strong>, a reference to the <strong>previous block</strong>, <strong>proof of work</strong> and <strong>timestamp</strong>. The blockchain can reside across multiple computing devices (<em>generally referred as nodes in the network</em>), generally spread across locations or regions to form a distributed peer to peer network and it uses consensus algorithm to provide immutability.</p></div>
<div class="paragraph"><p>We will have a look at blockchain and block data depiction as below -</p></div>
<div class="imageblock" style="text-align:center;">
<div class="content">
<img src="./imgs/https://upload.wikimedia.org/wikipedia/commons/thumb/5/55/Bitcoin_Block_Data.svg/900px-Bitcoin_Block_Data.svg.png" alt="caption="Figure 2: "" />
</div>
<div class="title">Figure 2. Bitcoin Block Data (licensed under Creative Commons Attribution-Share-Alike 3.0 Unported, retrieved from Wikipedia)</div>
</div>
<div class="paragraph"><p>The block data gives us an overview of all the things inside a block. As you can see that block 11 contains transactions that are hashed and bundled called <strong>tx_root</strong>, previous hash to block 10, a <strong>timestamp</strong> and <strong>nonce</strong> (<em>proof of work</em>). <strong>Tx_root</strong> is a <strong>Merkle tree</strong>, which contains hashes of all the transactions.</p></div>
<div class="admonitionblock">
<table><tr>
<td class="icon">
<img src="./images/icons/note.png" alt="Note" />
</td>
<td class="content">According to Andreas M. Antonopoulos, in the Bitcoin protocol, "<strong>Merkle trees</strong> are used to summarize all the transactions in a block, producing an overall digital fingerprint of the entire set of transactions, providing a very efficient process to verify whether a transaction is included in a block."</td>
</tr></table>
</div>
</div>
<div class="sect3">
<h4 id="_blockchain_data_distribution">Blockchain - Data Distribution</h4>
<div class="paragraph"><p>Distributed ledger technologies like blockchain work on the peer to peer (p2p) network models, meaning every peer has same data and updates will be applied to all of them.</p></div>
<div class="paragraph"><p>Aforementioned is more efficient than client-server architecture and no central control over changing states of the ledger.</p></div>
<div class="imageblock">
<div class="content">
<img src="./imgs/https://upload.wikimedia.org/wikipedia/commons/thumb/3/3f/P2P-network.svg/119px-P2P-network.svg.png" alt="align="center"" />
</div>
<div class="title">Figure 3. A peer-to-peer (P2P) network in which interconnected nodes ("peers") share resources amongst each other without the use of a centralized administrative system(licensed under Creative Commons Attribution-Share-Alike 3.0 Unported, retrieved from Wikipedia)</div>
</div>
</div>
<div class="sect3">
<h4 id="_blockchain_consensus">Blockchain - Consensus</h4>
<div class="paragraph"><p>The consensus is the process of achieving agreement among the network participants as to the correct <strong>state of data on the system</strong>, and it has been studied for many years from the distributed system’s perspective.</p></div>
<div class="paragraph"><p>In the blockchain, as multiple participants are adding blocks, it may be you see different versions of the same block. For resolving these conflicts, the consensus algorithm varies with varying implementations of the blockchain. In Bitcoin, its determined by using the <strong>most extended chain rule</strong>, i.e., Proof of Work. There are others, like the <strong>Proof of Burn</strong>, <strong>Proof of Stake</strong>, <strong>Proof of Capacity</strong>, <strong>Proof of Elapsed Time</strong>, and many others, it all depends on the unique requirements of that blockchain system. Let’s have an in-depth look into all of them -</p></div>
<div class="paragraph"><p>Before we start looking at the different algorithm, we need to understand few terms as follows -</p></div>
<div class="paragraph"><p>====== Network & Nodes</p></div>
<div class="paragraph"><p>Blockchain network (follows classic p2p network approach) is group computers directly connected to each other via the Internet and does not have any central server.</p></div>
<div class="paragraph"><p>Peers also known as nodes in the network, provide the computing power and storage that is needed for the upkeep of the whole network. Such network is considered to be more secure than centralized networks because they do not have a single point of attack.</p></div>
<div class="imageblock">
<div class="content">
<img src="./imgs/https://upload.wikimedia.org/wikipedia/commons/b/b2/Distributed-networks.svg" alt="align="center"" />
</div>
<div class="title">Figure 4. Communication on distributed netwokrs(licensed under Creative Commons Attribution-Share-Alike 3.0 Unported, retrieved from Wikipedia)</div>
</div>
<div class="paragraph"><p>====== Hashing power</p></div>
<div class="paragraph"><p>Hashing power or hash rate directly refers to the computing power of a node in the network, which is used to calculate and solve the math problem for creating and verifying a block in the blockchain. A higher hash power is better when mining(explained in the later section) as it increases the individual peers' opportunity of finding the next block and receiving the reward.</p></div>
<div class="paragraph"><p>====== Mining</p></div>
<div class="paragraph"><p>Mining is the backbone of the entire blockchain network. The mining process creates new blocks and verifies all transactions in blockchain network. Peers in the network compete for creating new blocks in blockchain and verifying the transactions and collect a reward. This reward is a "newly mined" coin or part of the coin which was never issued before, thus its also a way to produce new coins in the network. Also, the mining process helps in maintaining security.</p></div>
<div class="paragraph"><p>====== Accounting rights</p></div>
<div class="paragraph"><p>Blockchain uses various consensus algorithms to distribute accounting rights to peers. Miners (nodes or peers in the network) with better hashing power and performance gets the accounting rights to solve the cryptographic hash problem easily and entitled for reward (New coin or part of the coin). However, accounting rights are allocated using a different algorithm in another consensus algorithms, such as for Proof of Stake, priority is given to nodes which own more coins in the network and retain them for a long time.</p></div>
<div class="paragraph"><p>====== Reward</p></div>
<div class="paragraph"><p>The reward is new coin or part of a coin issued to miners as the result of the mining process.</p></div>
<div class="sect4">
<h5 id="_proof_of_work_pow">Proof of work (PoW)</h5>
<div class="paragraph"><p>PoW is used in bitcoin, and the core design is to share the <strong>accounting rights</strong> and rewards through the <strong>hashing power rivalry</strong> (hash rate) between the nodes in the peer network.
Based on the data of the prior block, the various nodes calculate the explicit solution of a mathematical problem. It’s challenging to solve the math problem. The first node that solves this math problem can produce the following block and get a specific amount of
Bitcoin reward.</p></div>
<div class="paragraph"><p>Satoshi Nakamoto studied HashCash and designed
this mathematics problem in bitcoin. Steps in this process are as follows -</p></div>
<div class="ulist"><ul>
<li>
<p>
Get the difficulty: Mining algorithm will see the hash rate of the whole network and adjust difficulty value accordingly.
</p>
</li>
<li>
<p>
Collect transactions: Bundle all pending transactions and calculate the Merkle Root of these transactions. And put this in a new block with the 256-bit hash value of the preceding block, the current target hash value, Nonce arbitrary number and other required information.
</p>
</li>
<li>
<p>
Calculating: Produce double SHA 256 in collect transactions steps by traversing the nonce number between 0 to 232 in step 2. The block can be announced if the calculated hash is less than or equal to the target value. Later verification with others nodes take place, and accounting is done.
</p>
</li>
<li>
<p>
Restarting: Restarting is the way to calculate the hash again by previous step(collect transactions) if node can’t do it in given time. If any other node does this already, a process begins from the first step(Get difficulty) then.
</p>
</li>
</ul></div>
<div class="paragraph"><p>Proof of work requires a lot of energy, and the possible threat to the blockchain system, because it can alter blockchain if some peers in the network own 51% of the ledger as all nodes trust the most extended chain in the network.</p></div>
<div class="imageblock">
<div class="content">
<img src="./imgs//imgs/pow.jpeg" alt="align="center"" />
</div>
</div>
</div>
<div class="sect4">
<h5 id="_proof_of_stake_pos">Proof of Stake (PoS)</h5>
<div class="paragraph"><p>PoS was mentioned in the first bitcoin project, but it
wasn’t used because of the robustness and other reasons.
The initial application of PoS is PPCoin. The concept of this PoS algorithm is based on the age of coin. The coin age is calculated by multiplying its value by the period after it was produced.
The longer any node keeps the coins, the more advantages it can get in the peer network. Coin holders will also receive a specific reward according to the how long they hold these coins.</p></div>
<div class="paragraph"><p>PoS promotes the coins dwellers to increase the holding time. With the idea of coin age, the blockchain is no longer entirely relying on the PoW and efficiently solves problems of PoW. Ultimately, PoS improves the security of blockchain with the increasing value in the blockchain. The hackers or malicious peers need to acquire a massive number of coins and hold them long enough to attack.</p></div>
<div class="imageblock">
<div class="content">
<img src="./imgs//imgs/pos.png" alt="align="center"" />
</div>
</div>
</div>
<div class="sect4">
<h5 id="_delegated_proof_of_stake_dpos">Delegated proof of stake (DPOS )</h5>
<div class="paragraph"><p>Satoshi Nakamoto initially designed bitcoin in such a way that participants could use the CPU power to mine and hashing power could match the peer nodes in the network. The idea behind this was to give each node equal opportunity to participate in the decision-making of the blockchain. As the technology evolved and bitcoin is rising, people came up with special mining machines. Owning multiple of such machine gives you more hashing power, and ordinary miners can rarely create any new blocks.</p></div>
<div class="paragraph"><p>Top N nodes are elected in the network which has higher stakes and hashing power(At least 50% stakeholders would believe that enough decentralization is there)to have accounting rights and create blocks.
The DPoS seems to be more power-saving and efficient than PoS and PoW.</p></div>
<div class="imageblock">
<div class="content">
<img src="./imgs//imgs/dpos.png" alt="align="center"" />
</div>
</div>
</div>
<div class="sect4">
<h5 id="_practical_byzantine_fault_tolerance_pbft">Practical Byzantine Fault Tolerance (PBFT)</h5>
<div class="paragraph"><p>Practical Byzantine Fault Tolerance could be an excellent method to resolve the transmission errors. This consensus algorithm works on communication between the master node and client node, and has five stages as below -</p></div>
<div class="ulist"><ul>
<li>
<p>
Request
</p>
</li>
</ul></div>
<div class="paragraph"><p>The master node creates a timestamp for the request coming from the client node.</p></div>
<div class="ulist"><ul>
<li>
<p>
Pre-Prepare
</p>
</li>
</ul></div>
<div class="paragraph"><p>The master node registers the request message came from the client node, assign an order number and broadcasts a pre-prepared message to other server nodes. They determine whether to accept or reject the request.</p></div>
<div class="ulist"><ul>
<li>
<p>
Prepare
</p>
</li>
</ul></div>
<div class="paragraph"><p>If any node accepts the request, it broadcasts a prepare message to all the other nodes and receives the prepare messages from the other nodes. If the majority of nodes accept the invitation, they will move to commit stage.</p></div>
<div class="ulist"><ul>
<li>
<p>
Commit
</p>
</li>
</ul></div>
<div class="paragraph"><p>All nodes in commit state will send commit message to each other. In the meantime, if a server node receives 2f+1 commit messages, it could consider that maximum nodes agree to accept the request, and executes the instructions within request message.</p></div>
<div class="ulist"><ul>
<li>
<p>
Reply
</p>
</li>
</ul></div>
<div class="paragraph"><p>Once instructions are executed, server node needs to respond to the client node. If the client could not get the reply due to network delay server nodes will have the request held, or if instructions have been executed already, server nodes only need to transmit the reply message repeatedly.</p></div>
<div class="imageblock">
<div class="content">
<img src="./imgs//imgs/pbft.png" alt="align="center"" />
</div>
</div>
</div>
<div class="sect4">
<h5 id="_raft">Raft</h5>
<div class="paragraph"><p>Raft algorithm was proposed in 2013 by Standford’s Ongaro and others. Raft attains the same effect as Paxos(which was hard to understand in 90’s) and is more suitable for engineering implementation.</p></div>
<div class="paragraph"><p>Raft cluster contains five server nodes, and each node will have three states, i.e., leader, follower, and candidate. The leader handles all requests from clients. Out of five, maximum two nodes can crash at the same time, and three will work in the cluster.</p></div>
<div class="imageblock">
<div class="content">
<img src="./imgs//imgs/raft.png" alt="#pow" />
</div>
</div>
</div>
</div>
<div class="sect3">
<h4 id="_blockchain_read_write">Blockchain - Read/Write</h4>
<div class="paragraph"><p>As its a distributed ledger, everyone, who owns a decent computer with enough power, is allowed to use the source code and read-write ledger state.</p></div>
<div class="paragraph"><p>However, these can be controlled based on what kind of blockchain you are using, i.e., permissioned or permissionless. Bitcoin is a permissionless blockchain technology; anyone can download and start using it.</p></div>
<div class="sect4">
<h5 id="_permissionless_blockchain">Permissionless blockchain</h5>
<div class="paragraph"><p>The permissionless blockchain is publicly owned blockchain network, where anyone and can join the network without any signup process or verification and start contributing to reading/writing process of the ledger. Bitcoin is widely known case for such blockchain, and there are more.</p></div>
</div>
<div class="sect4">
<h5 id="_permissioned_blockchain">Permissioned blockchain</h5>
<div class="paragraph"><p>The permissioned blockchain is private blockchain where membership is required in some form. To use permissioned blockchain network, we need to meet some predefined criteria.
Permissioned blockchains are generally company owned.</p></div>
</div>
<div class="sect4">
<h5 id="_public_vs_private">Public vs Private</h5>
<div class="paragraph"><p>Now we know that two kinds of blockchains are there already. These can be further categorized based on the access provided to users in the network. A Permissionless blockchain may be public or private. Similarly, a permissioned blockchain can be public or private.</p></div>
</div>
</div>
</div>
</div>
</div>
<div class="sect1">
<h2 id="_bitcoin">Bitcoin</h2>
<div class="sectionbody">
<div class="paragraph"><p><span class="image">
<img src="./imgs/https://use.fontawesome.com/releases/v5.0.13/svgs/brands/bitcoin.svg" alt="eth" />
</span></p></div>
<div class="sect2">
<h3 id="_history">History</h3>
<div class="paragraph"><p>Bitcoin, the name is well suited and catch attention from tech-savvy people. I have already discussed a little bitcoin earlier in this paper.</p></div>
<div class="paragraph"><p>Bitcoin tales started in 2008 when Satoshi Nakamoto, proposed a solution to solve double spending problem and ditch central authorities those who take over the transaction from our very hands and take much time to process along with a fee.</p></div>
</div>
<div class="sect2">
<h3 id="_why_did_we_need_it_or_not">Why did we need it? or not</h3>
<div class="paragraph"><p>Earlier when we did not have any currency, people used to trade stuff like crops, goods, etc. and fulfill their daily needs. But later on, the concept of currency was developed. It evolved and led to paper money in exchange for gold with world bank. Later on, keeping gold was not an option anymore, and government can print currency whenever in need. Printing money wasn’t a problem, but it caused to inflection and became invaluable over time. What we could purchase with 1 Unit is way costly nowadays.</p></div>
<div class="paragraph"><p>Another problem was that people were stacking money in banks and banks could lend the same money up to 90% back to people. These financial institutions were acting as a central authority to circulate cash within society, and all the transactions, going through the are chargeable. This ultimate business model was efficient for financial institutions but not good for people who need privacy and security.
Satoshi Nakamoto, rescued us by proving a practical approach to solve these problems.</p></div>
<div class="paragraph"><p>In the financial sector, Bitcoin is the very first application to demonstrate tremendous potential. However, it also attracts government authorities to utilize such powerful technology and implement blockchain in a centralized manner. It may be for currency or maintaining other government affairs. Similarly, other tech giants and financial institutes are also exploring blockchain.</p></div>
<div class="paragraph"><p>Bitcoin solves two problems - Double spending and Byzantine Generals problem. Double spending refers to idea where people or any institute reuses the currency in more than one transaction at the same time. When using the traditional money, double spending isn’t happening but if financial institutions maintain their ledgers and can produce this scenario all the time. Double spending can also be solved by internet transactions where centralized trusted institutions are used.</p></div>
<div class="paragraph"><p>The other problem - Byzantine generals problem is related to distributed systems. In a distributed network, data amongst nodes can be distributed in peer to peer network, but there are chances that data could be attacked by hackers or malicious users to alter contents of data, compromising data consistency on nodes in the peer network. Normal nodes would have to validate this data across other nodes to identify tempered information, resulting in the need for corresponding consensus algorithm.</p></div>
<div class="ulist"><div class="title">Other things to consider -</div><ul>
<li>
<p>
<strong>Privacy?</strong>
</p>
</li>
</ul></div>
<div class="paragraph"><p>Its okay to trade with cash as you don’t need to tell anybody how much or less you are paying. But with if you want to pay the more significant amount, you would probably need to use banks or any other institution to make that transaction. Suppose I want to pay $2000 to my friend, using bank and banks will know how much I have paid to whom.</p></div>
<div class="paragraph"><p><strong>No privacy at all…</strong></p></div>
<div class="paragraph"><p><em>But, bitcoin others provides pseudonymous privacy making it hard to figure out anything except two parties involved in the exchange.</em></p></div>
<div class="ulist"><ul>
<li>