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BCSE9007 Module 1 - Lecture notes 1-28

Block Chain (Galgotias University)

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Module 1
Overview of Blockchain
Blockchain is an emerging technology platform for developing decentralized
applications and data storage, over and beyond its role as the technology underlying the
cryptocurrencies. The basic tenet of this platform is that it allows one to create a distributed
and replicated ledger of events, transactions, and data generated through various IT processes
with strong cryptographic guarantees of tamper resistance, immutability, and verifiability.
Public blockchain platforms allow us to guarantee these properties with overwhelming
probabilities even when untrusted users are participants of distributed applications with ability
to transact on the platform. Even though, blockchain technology has become popularly known
because of its use in the implementation of Cryptocurrencies such as BitCoin, Ethereum, etc.,
the technology itself holds much more promise in various areas such as time stamping, logging
of critical events in a system, recording of transactions, trustworthy e-governance etc. Many
researchers are working on many such use cases such as decentralized public key infrastructure,
self-sovereign identity management, registry maintenance, health record management,
decentralized authentication, decentralized DNS, etc. Also, corporations such as IBM and
Microsoft are developing their own applications in diverse fields such as the Internet of Things
(IoT), etc., even enabling blockchain platforms on the cloud. Considering the need to
disseminate the emerging concepts for students, we decided to prepare a new course on
blockchain technology platforms and applications.

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How is it built?

• Periodically wraps up transactions as a block (similar to a page in a paper ledger

• Each block depends on the previous block making a chain from the origin
• To edit a transaction in a block would require recalculation of all blocks after it
• Normally uses a distributed ledger with a consensus system and public/private key
cryptography

Public Ledger

A public ledger derives its name from the age-old record-keeping system that
was used to record information like agriculture commodity prices, news and analysis.
It was available for general public viewing as well as for verification.

As cryptocurrency-based blockchain systems emerged, which also relied on a

similar record keeping and public verification mechanism, the use of public ledger term
gained popularity in the world of cryptocurrency. This article explores cryptocurrency
public ledgers, their working, and the challenges they face.

Public Ledgers - Where Everything Gets Stored

A cryptocurrency is an encrypted, decentralized digital currency that facilitates the
exchange of value by transfer of cryptotokens between network participants. The public
ledger is used as a record keeping system that maintains participants’ identities in secure

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and (pseudo-)anonymous form, their respective cryptocurrency balances, and a record

book of all the genuine transactions executed between network participants.

To draw a parallel, think about writing a check to a friend, or making an online

transfer to his bank account, say for $100.

In both the cases, the details of the transaction will be updated in the bank's
records – the sender’s account is debited with $100, while receiver’s account is credited
by the same amount. The bank’s accounting systems keeps the record of balances, and
also ensures that the sender’s account has sufficient funds, otherwise the check bounces
or the online transfer is not allowed. If the sender has only $100 in his account and he
issues two $100 checks, the order in which the checks are presented determines who
receives the money, and whose check bounces.

The transaction's details in the bank's records can be queried and verified by the
two parties between whom the transaction took place. Additionally, the bank record is
accessible only by the designated bank officials and the concerned (central) authorities
like the tax department or the government on need basis. No one else can have access
to those details.

Public ledgers work the same way as bank records, though with a few differences.

Similar to the bank records, the transaction details on a cryptocurrency public

ledger can be verified and queried by the two transacting participants. However, no
central authority and other network participants can know the identity of the
participants. Transactions are allowed and recorded only after suitable verification of
the sender’s liquidity, otherwise, they are discarded.

Since no central authority controls or maintains the ledger records, how is

fairness regulated on cryptocurrency ledgers?

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How Does Public Ledger Work?

Physically, a public ledger can be viewed as a data management or storage
system, similar to a database system of bank records. A blockchain is a form of public
ledger, which is a series (or chain) of blocks on which transaction details are recorded
after suitable authentication and verification by the designated network participants.
The recording and storage of all confirmed transactions on such public ledgers start
right from the creation and start of a cryptocurrency’s working. As a block is filled to
capacity with transaction details, new ones are mined and are added to the blockchain
by the network participants called miners.

Select network participants, often called full nodes, maintain a copy of the whole
ledger on their devices that are connected to the cryptocurrency network. Depending on
the participants’ interest and their spread across the globe, the public ledger becomes
distributed, as they connect and contribute to the blockchain network activities to keep
it agile and functional.

Since hundreds and thousands of such participants maintain a copy of the ledger,
everyone knows the true state of the network in terms of who holds how many
cryptotokens, what transactions are authentic to be recorded, and prevent any misuse
like double spending. A combination of the various intrinsic features of the public
ledger, like consensus algorithm, encryption, and reward mechanism, ensures that the
participants’ identities are protected, and only genuine transactions are carried on the
network.

Disadvantages of Public Ledger-based Cryptocurrencies

Beyond the numerous advantages offered by public ledgers, there has been rising
concern about the use of public ledgers in cryptocurrencies.

every single transaction that has ever occurred on its network. Balancing the
maintenance of this long-running detailed history with the required need for scaling its
future capacity for processing the growing number of transactions will pose a big
challenge to keep bitcoin sustainable in the long run.

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Bitcoin
Bitcoin is a digital currency created in January 2009. It follows the ideas set out in
a whitepaper by the mysterious and pseudonymous developer Satoshi Nakamoto, whose true
identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than
traditional online payment mechanisms and is operated by a decentralized authority, unlike
government-issued currencies.

There are no physical bitcoins, only balances kept on a public ledger in the cloud, that
– along with all Bitcoin transactions – is verified by a massive amount of computing power.
Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins
valuable as a commodity.

Understanding Bitcoin
Bitcoin is a type of cryptocurrency. Balances of Bitcoin tokens are kept using public
and private "keys," which are long strings of numbers and letters linked through the
mathematical encryption algorithm that was used to create them. The public key (comparable
to a bank account number) serves as the address which is published to the world and to which
others may send bitcoins. The private key (comparable to an ATM PIN) is meant to be a
guarded secret and only used to authorize Bitcoin transmissions. Bitcoin keys should not be
confused with a Bitcoin wallet, which is a physical or digital device which facilitates the trading
of Bitcoin and allows users to track ownership of coins. The term "wallet" is a bit misleading,
as Bitcoin's decentralized nature means that it is never stored "in" a wallet, but rather
decentrally on a blockchain.

How Bitcoin Works

Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate
instant payments. The independent individuals and companies who own the governing
computing power and participate in the Bitcoin network, also known as "miners," are motivated
by rewards (the release of new bitcoin) and transaction fees paid in bitcoin. These miners can
be thought of as the decentralized authority enforcing the credibility of the Bitcoin network.
New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that
the total supply of bitcoins approaches 21 million. Currently, there are roughly 3 million
bitcoins which have yet to be mined. In this way, Bitcoin (and any cryptocurrency generated

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through a similar process) operates differently from fiat currency; in centralized banking
systems, currency is released at a rate matching the growth in goods in an attempt to maintain
price stability, while a decentralized system like Bitcoin sets the release rate ahead of time and
according to an algorithm.

Bitcoin mining is the process by which bitcoins are released into circulation. Generally,
mining requires the solving of computationally difficult puzzles in order to discover a
new block, which is added to the blockchain. In contributing to the blockchain, mining adds
and verifies transaction records across the network.

Smart Contract
A smart contract is a self-executing contract with the terms of the agreement between
buyer and seller being directly written into lines of code. The code and the agreements
contained therein exist across a distributed, decentralized blockchain network. The code
controls the execution, and transactions are trackable and irreversible.
Smart contracts permit trusted transactions and agreements to be carried out among disparate,
anonymous parties without the need for a central authority, legal system, or external
enforcement mechanism.

While blockchain technology has come to be thought of primarily as the foundation for
bitcoin, it has evolved far beyond underpinning the virtual currency.

How Smart Contracts Work

Smart contracts were first proposed in 1994 by Nick Szabo, an American computer
scientist who invented a virtual currency called "Bit Gold" in 1998, fully 10 years before the
invention of bitcoin. In fact, Szabo is often rumored to be the real Satoshi Nakamoto, the
anonymous inventor of bitcoin, which he has denied.

Szabo defined smart contracts as computerized transaction protocols that execute terms
of a contract. He wanted to extend the functionality of electronic transaction methods, such as
POS (point of sale), to the digital realm.

In his paper, Szabo also proposed the execution of a contract for synthetic assets, such
as derivatives and bonds. Szabo wrote: "These new securities are formed by combining
securities (such as bonds) and derivatives (options and futures) in a wide variety of ways. Very

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complex term structures for payments can now be built into standardized contracts and traded
with low transaction costs, due to computerized analysis of these complex term structures."

Blocks in blockchain
Blocks are files where data pertaining to the Bitcoin network are permanently recorded.
A block records some or all of the most recent Bitcoin transactions that have not yet entered
any prior blocks. Thus, a block is like a page of a ledger or record book. Each time a block is
‘completed’, it gives way to the next block in the blockchain. A block is thus a permanent store
of records which, once written, cannot be altered or removed.

Blocks hold batches of valid transactions that are hashed and encoded into a Merkle
tree. Each block includes the cryptographic hash of the prior block in the blockchain, linking
the two. The linked blocks form a chain. This iterative process confirms the integrity of the
[1]

previous block, all the way back to the original genesis block.

Sometimes separate blocks can be produced concurrently, creating a temporary fork. In

addition to a secure hash-based history, any blockchain has a specified algorithm for scoring
different versions of the history so that one with a higher score can be selected over others.
Blocks not selected for inclusion in the chain are called orphan blocks. Peers supporting the
[20]

database have different versions of the history from time to time. They keep only the highest-
scoring version of the database known to them. Whenever a peer receives a higher-scoring
version (usually the old version with a single new block added) they extend or overwrite their
own database and retransmit the improvement to their peers. There is never an absolute
guarantee that any particular entry will remain in the best version of the history forever.
Blockchains are typically built to add the score of new blocks onto old blocks and are given
incentives to extend with new blocks rather than overwrite old blocks. Therefore, the
probability of an entry becoming superseded decreases exponentially as more blocks are built
on top of it, eventually becoming very low.

Block time

The block time is the average time it takes for the network to generate one extra block
in the blockchain. Some blockchains create a new block as frequently as every five seconds.
By the time of block completion, the included data becomes verifiable. In cryptocurrency, this
is practically when the transaction takes place, so a shorter block time means faster

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transactions. The block time for Ethereum is set to between 14 and 15 seconds, while for
bitcoin it is on average 10 minutes.

Transaction
An transaction is a transfer of Bitcoin value that is broadcast to the network and
collected into blocks. A transaction typically references previous transaction outputs as new
transaction inputs and dedicates all input Bitcoin values to new outputs. Transactions are not
encrypted, so it is possible to browse and view every transaction ever collected into a block.
Once transactions are buried under enough confirmations they can be considered irreversible.
Standard transaction outputs nominate addresses, and the redemption of any future inputs
requires a relevant signature.

All transactions are visible in the block chain, and can be viewed with a hex editor.
A block chain browser is a site where every transaction included within the block chain can be
viewed in human-readable terms. This is useful for seeing the technical details of transactions
in action and for verifying payments.

Distributed Consensus

A distributed consensus ensures a consensus of data among nodes in a distributed

system or reaches an agreement on a proposal. This topic may be very familiar to any
technicians that work with distributed systems such as HDFS, MQ, ZooKeeper, Kafka, Redis,
and Elasticsearch. With the rapid development and the increasing complexity of distributed

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networks, developers have always been exploring possible solutions to solve this persistent
problem in both theory and practice.

Next, with the rise of blockchain technology, especially public blockchains in open networks
and private blockchains in permissioned networks, this consensus problem has once again
received much attention and needs to be considered from a new perspective.

Problems and Challenges of Distributed Consensus

To fully understand distributed consensus, we need to first build an understanding of

the features of a distributed network. What are the main features and characteristics of a
distributed network? Or what are some possible problems involved with a distributed network?
Let's look into some of these questions in this section of this article.

Crash Fault

First, let's consider cash faults. A crash fault in a distributed network often may be related to
one of the following issues:

• Nodes or replicas may experience downtime at any time, stop running for a short time
and recover later.
• The network may be interrupted at any time.
• A sent message may be lost during delivery and cannot be received.
• A sent message may be delayed and received after a long time.
• Messages may experience the out-of-order problem during the delivery process.

• The network may be divided. For example, due to poor communication between
clusters in China and the US, the entire network may be divided into two sub-networks
for the China clusters and US clusters, for instance.

The Byzantine Fault

The crash faults are based on a simple assumption: Either nodes do not work or respond
normally, or although they work and respond normally, they cannot implement inconsistency,
that is to say, being idle is okay for them, but they cannot commit some errors. Malicious nodes
in networks may change and forge data at any time, making it harder to solve the consensus

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problem. These troublemaking problems that may change and forge data or response
information are often refer Byzantine faults. The crash fault is called a non-Byzantine fault.

Byzantine originated from Lamport's paper. It is no exaggeration to say that Byzantine

fault tolerance (BFT) is the most complex and rigorous tolerance model. By analogy, some
number of generals plan an attack on a castle together and each general can choose to start the
attack or retreat. However, to successfully take the castle, all the generals must act
synchronously. Next, given that the generals are too far from each other to use direct
communication, messengers are used to carry messages. However, messages are not reliable.
They may successfully delivery messages after a very long time, fail to deliver messages or
even change with messages. The generals may not be reliable, either, for example, one of them
may be a traitor who does not act in accordance with the plan. The messengers in this story
represent communication channels in distributed networks and the generals represent nodes.

Public Vs. Private Blockchain

Ever wondered what would be the most fundamental reason for people adopting
blockchain technology? The very fact that it creates a high level of trust for people to secure
their data and processes over a secure network. Right from the advent of the Bitcoin in 2008
by Satoshi Nakamoto, blockchain technology is disrupting each and every industry as it
is adopted at a massive rate by enterprises of every nature: small, medium, and
large. More and more companies are realizing the revolutionary potential of this technology
and are looking to leverage it for their daily operations, thereby making it less of a buzz word
and transforming it into a forward-thinking mantra.

Understanding Blockchain
It is a distributed, decentralized public ledger which is a continuously growing list of
records which are stored in the form of blocks. These blocks in a blockchain are connected to
each other through cryptography, which keeps the confidentiality of the transactions intact. A
blockchain is a time-stamped series of immutable (tamper-proof) record of data which is not
managed by a central authority but managed by a cluster of computers. Each and every data
shared on this network is visible to all participants and each and every one of them are
accountable for their actions. A blockchain perfectly defines a democratized system.

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What Is A Public Blockchain?

A public blockchain is permission less. Anyone can join the network and read, write,
or participate within the blockchain. A public blockchain is decentralized and does not have
a single entity which controls the network. Data on a public blockchain are secure as it is not
possible to modify or alter data once they have been validated on the
blockchain. Bitcoin and Ethereum are well-known examples of a public blockchain.

What Is A Private Blockchain?

A private blockchain is a permissioned blockchain. Private blockchains work based
on access controls which restrict the people who can participate in the network. There are one
or more entities which control the network and this leads to reliance on third-parties to transact.
In a private blockchain, only the entities participating in a transaction will have knowledge
about it, whereas the others will not be able to access it. Hyperledger Fabric of Linux
Foundation is a perfect example of a private blockchain.

Similarities Of Public And Private Blockchains

• Both function as an append-only ledger where the records can be added but cannot be altered
or deleted. Hence, these are called immutable records.
• Each network node in both these blockchains has a complete replica of the ledger. Both
are decentralized and distributed over a peer-to-peer network of computers.
• In both, the validity of a record is verified, thus providing a considerable level of
immutability, until the majority of the participants agree that it is a valid record and reach
consensus. This helps prevent tampering with the records.
• Both blockchains rely on numerous users to authenticate edits to the distributed ledger thus
helping in the creation of a new master copy which can be accessed by everyone at all times.
Differences Between Public And Private Blockchains
• The order of magnitude of a public blockchain is lesser than that of a private
blockchain as it is lighter and provides transactional throughput.
• Level of access granted to participants- In a public blockchain, anyone can take part by
verifying and adding data to the blockchain. In private blockchains, only authorized
entities can participate and control the network. Examples are Bitcoin and Ethereum.
• A public blockchain is decentralized, whereas a private blockchain is more centralized.
Examples- Hyperledger and Ripple.

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• Consensus algorithms such as Proof of Elapsed Time (PoET), Raft, and Istanbul BFT can be
used only in case of private blockchains.
• Transactions per second are lesser in a public blockchain when compared to private
blockchains. As the number of authorized participants is less in a private blockchain, it can
process hundreds or even thousands of transactions per second.
• A public blockchain cannot compete with a private blockchain in terms of scalability
issues as it is slow and hence can process transactions only at a slow pace. In a private
blockchain, as only a few nodes need to manage data, transactions can be supported and
processed at a much higher pace.
• Public blockchains are trustless, and in a private blockchain setup, participants must not trust
one another. In a private blockchain, the validity of records cannot be independently verified
as the integrity of a private network relies on the credibility of the authorized nodes.
• A public network is more secure due to decentralization and active participation. Due to the
higher number of nodes in the network, it is nearly impossible for ‘bad actors’ to attack the
system and gain control over the consensus network. A private blockchain is more prone to
hacks, risks, and data breaches/ manipulation. It is easy for bad actors to endanger the entire
network.
• A public blockchain consumes more energy than a private blockchain as it requires a
significant amount of electrical resources to function and achieve network consensus. Private
blockchains consume a lot less energy and power.
• In a public blockchain, it is necessary to grant access to a centralized authority to oversee the
entire network, thus making it a private blockchain at this point. In a private blockchain, anyone
who is overseeing the network can alter or modify any transactions according to their needs.
• In a private blockchain, there is no chance of minor collision. Each validator is known and
they have the suitable credentials to be a part of the network. But in a public blockchain, no
one knows who each validator is and this increases the risk of potential collusion or a 51%
attack (a group of miners which control more than 50% of the network’s computing power).

Understanding Cryptocurrency to Block chain

Blockchain As a Technology
When Bitcoin was the only blockchain, there wasn’t much of a distinction between the
terms and they were used interchangeably. As the technology matured and a variety
of blockchains bloomed, the uses quickly diverged from the pure money aspect. Instead,

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technologists experimented with ideas like decentralized name registry. Other uses utilized the
peer-to-peer aspect to deliver messages in a discrete way. In the end, many of these projects
failed to find a good use of the technology. The projects left standing helped demonstrate what
was possible with beyond buzzwords.
A blockchain is a distributed ledger technology that forms a “chain of blocks.” Each
block includes information and data that are bundled together and verified. These blocks are
then validated and strung onto the chain of transactions and information in previous blocks.
These blocks of transactions are permanently recorded in the distributed ledger that is the
blockchain. Learn more about blockchain technology here.

Cryptocurrency As an Asset Class

Contrasted with blockchain, cryptocurrency has to do with the use of tokens based on
the distributed ledger technology. Cryptocurrency can be seen as a tool or resource on a
blockchain network. Anything dealing with buying, selling, investing, trading, microtipping,
or other monetary aspects deals with a blockchain native token or subtoken.

It is a token based on the distributed ledger that is a blockchain. Cryptocurrency is a

digital currency formed on the basis of cryptography, or by definition, “the art of solving or
writing codes.” Although all are considered cryptocurrencies, these tokens can serve different
purposes on these networks.

Referring to the token as the technology can be right in the case of Bitcoin, but is very
different when dealing with other blockchain projects like Ethereum. In this case, the
technology is known as Ethereum, but the native token is Ether, and transactions are paid
in gas.

Difference between cryptocurrency and blockchain & how they work together

Blockchain is the platform which brings cryptocurrencies into play. The blockchain is
the technology that is serves as the distributed ledger that forms the network. This network
creates the means for transacting, and enables transferring of value and information.

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Cryptocurrencies are the tokens used within these networks to send value and pay for
these transactions. Furthermore, you can see them as tool on blockchain, in some cases serving
as a resource or utility function. Other times they are used to digitize value of an asset.

Blockchains serve as the basis technology, in which cryptocurrencies are a part of the
ecosystem. They go hand in hand, and crypto is often necessary to transact on a blockchain.
But without the blockchain, we would not have a means for these transactions to be recorded
and transferred.

First Things First

Mathematics alone form the basis of cryptocurrency, a form of virtual currency.
Cryptography is by definition “the art of solving or writing codes.” But in terms of mathematics
and computer coding, cryptography uses algorithms and protocols to secure and scramble
information into an encrypted format. Imagine carefully placing letters into boggle, spelling
out several words. Encryption is just the action of shaking up that boggle board,
while decryption is the process of putting the original messages back together. In essence, it’s
an encrypted string of data that’s been encoded to signify a single, specific unit of currency.
Solving mathematical problems, based specifically on cryptography–or the art of writing
codes–produces cryptocurrency.

Other names for cryptocurrency include digital currency, crypto, or virtual currency. Basically,
it’s “digital gold.” No governmental oversight is associated with cryptocurrency, which makes
it unique. Instead, a peer-to-peer (P2P) Internet protocol monitors. Fiat currency, on the other
hand, is physical money. Fiat currency includes both bills and coins, and a wallet stores them.
A wallet stores cryptocurrency, as well—just a digital one!. A wallet requires a key, which is
essentially a password. Without the key, you’re absolutely 100% unable to get into your wallet.
There have been many stories of people losing their keys, and are never again able to access

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their wallets. So, write your password down and don’t let anyone else see it. Keep that puppy
safe!

Tokens
Tokens are essential to getting a true grip on cryptocurrencies. They’re the amount of
digital resources you control on a given platform. As mentioned before, a digital wallet stores
them and accessed with a key, which can be reassigned to someone else. Two types of tokens
exist.
First, is a native token. This type of token has an intrinsic utility. It forms the core part of a
blockchain. That is to say, a blockchain could not run without a native token. Often times,
they’re used as an incentive to validate transactions, or create blocks.

A asset-backed token is the other type. The basis of this token is claims from a specific
user, on an underlying asset. Let’s get a little history under our belts, before diving deeper. In
the old days, if you gave gold to a goldsmith, he’d hand you an IOU (I owe you) for the
equivalent value of the gold you gave him. You could give anyone the IOU. And the possessor
has the ability to claim the gold from the goldsmith.
In much the same way, asset-backed tokens allow you to “hand over” your asset to the
blockchain, and you’ll receive a token stating as much. That token represents your asset, be it
a car, house, or something else, and you can physically hand over the asset-backed token to
someone else, just like you can hand over a virtual currency.
Be aware that there is a difference between tokens and coins. Most people often use them
interchangeably, but this is not really correct. Learn about the difference between tokens and
coins here!

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Types of Cryptocurrency

There are literally thousands of cryptocurrencies on the market. The most famous of
which is known as Bitcoin. As the first of its kind, it paved the way for other cryptocurrencies
to expand the use of virtual currencies. An Altcoin, or alternative coin, is a cryptocurrency
based on Bitcoin.
Some of the most well-known Altcoins include Dash, Litecoin, Monero. Each has made
its own impact on the market, to expand both the breadth and capabilities they bring.
Different cryptocurrencies can serve different functions beyond being a digital currency.
The different types of cryptocurrencies.
BITCOIN
The king of the castle. Created in 2008, it housed the original code for blockchain
technology. Its creation spurred many other cryptocurrencies. It’s easily the most trusted and
known virtual currency on the market, even if it has its flaws.
ETHEREUM
Probably the second most well-known cryptocurrency. It allows users to do more than
just use it as a virtual currency. It’s an open-source blockchain. Money and assets are quickly
transferred with the use of smart contracts. Assets include houses, cars, stocks, and other
property owned with real-world value.
LITECOIN
One of the first cryptocurrencies to emerge after Bitcoin’s initial release. It has a much
shorter processing time—about 2.5 minutes—than Bitcoin’s crazy 10-minute timeframe.
Litecoin provides more tokens and a different mining algorithm, but it ultimately didn’t take
off the same way its big brother did.
RIPPLE
Because every single token was mined before its release, it is quite possibly the most
despised cryptocurrency by the community. This action is known as pre-mining and is a huge
no-no. Essentially, this takes away the community aspect of virtual currencies. It attempts to
take a decentralized platform and centralize it.
MONERO
Solved many of Bitcoin’s privacy issues. It adds an additional level on anonymity to
transactions. A few darknet markets (networks that require specific software or authorization
to access them) started accepting the cryptocurrency in 2016, where it ultimately reached its
peak.

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Permissioned Model of Block chain

Decentralized Ledger Networks(DLT) has opened up a slew of opportunities for the
companies that are looking to innovate. It is not new. Blockchain technology is one of those
technologies that have radically changed how industries work. However, there cannot be one
single solution for the whole industry.
Each startup, company, enterprise, or an industry is different when it comes to their needs and
requirements. It is evident that a privately held company just cannot use a fully decentralized
blockchain network. That’s where different types of DLT’s comes in.

What are Permissioned Blockchains?

Permissioned blockchains are blockchain networks that require access to be part of. In
these blockchain types, a control layer runs on top of the blockchain that governs the actions
performed by the allowed participants. As you can see, permissioned blockchains work entirely
different than that of private and public blockchains. They are crafted to take advantage of
blockchains without sacrificing the authority aspect of a centralized system.
So, basically, there is one big difference between a permissioned and an un-
permissioned one, i.e., the way the participants are going to interact with the network. A
permissioned system is also known to have a restriction on the consensus participants, making
permissioned networks highly configured and controlled by the owners. However, it is not a
bad thing, but it is all about building a suitable blockchain network.
There are many popular permissioned blockchain frameworks out there. It includes
Hyperledger, Quorum, Corda, and others.

Benefits of Permissioned Blockchains? Do we need them?

There are many benefits of permissioned blockchains.
§ Efficient performance: When we compared permissioned blockchains to public
blockchains, they offer better performance. The core reason behind is the limited number
of nodes on the platform. This removes the unnecessary computations required to reach
consensus on the network, improving the overall performance. On top of that,
permissioned networks have their own pre-determined nodes for validating a
transaction.
§ Proper governance structure- Permissioned networks do come with an appropriate
structure of governance. This means that they are organized. Administrators also require

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less time to update the rules over the network, which is considerably faster when
compared to public blockchains. Public blockchain network suffers from the consensus
problem as not all nodes work together to get the new update implemented. These nodes
might place their self-interest above the needs of the blockchain, which, in return, means
slower updates to the whole network. In comparison, permissioned blockchain doesn’t
have the problem, as the nodes work together to move the updates faster.
§ Decentralized storage: Permissioned networks also make proper use of blockchain,
including utilizing its decentralized nature for data storage.
§ Cost Effective – There is no doubt that permissioned blockchains are more cost-
effective
Drawbacks of Permissioned blockchains
Permissioned blockchains are not free from disadvantage or drawbacks.
§ Compromised security – A public or private blockchain have a better security as the
nodes participate in a consensus method properly. But, in the case of permissioned
blockchains, this might not hold true. The security of a permissioned network is as good
as the member’s integrity. This means that a small section of a permissioned system can
work together to modify the data stored within the network. In this way, the integrity of
the network can be compromised. To resolve it, the system should have proper
permissions set so those bad actors cannot merge together to cause the desired effect.
§ Control, Censorship, and Regulation – In an ideal world, these permissioned
blockchains should work as that of a public blockchain, but with regulations. However,
the regulations bring censorship to the network, where the authority can restrict a
transaction or control it from happening. These are a threat to any business or
organization who is using the permissioned network. This approach also stops the
permissioned network from making the most out of the whole blockchain ecosystem.

Types of blockchain permissioned ledger technologies (DLTs)

The blockchain technology used in bitcoin was simple. It was a public peer-to-peer
network capable of doing transactions without any centralized authority, and each node has its
own copy of the ledger. However, it is not the only possible blockchain or distributed ledger
technology. There are many types of DLTs. Let’s list them briefly to get a clear idea.

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Public blockchains
Public blockchains are the most common type of blockchain that allows anyone to
participate and do transactions or even participate in the consensus method. There are many
prominent public blockchains out there. Bitcoin and Ethereum are two great examples. Bitcoin
is the first generation cryptocurrency that utilizes the most basic idea of blockchain. Ethereum
brings more on the table by providing the developers with the ability to develop distributed
apps(dApps) using smart contracts.
Public blockchains also utilize consensus algorithm that doesn’t support a permissioned
approach. They are open source, and anyone without any prior permission can take part in the
network.

Federated/Consortium blockchains – Permissioned blockchains

When it comes to permissioned blockchain, Federated/Consortium blockchain falls
into the category. These blockchain doesn’t allow any external people to take part in the
blockchain. There are many benefits to it, including higher scalability and is an excellent choice
for enterprise companies. There are a lot of permissioned blockchains, including R3, B3i,
Hyperledger, and so on.

Private blockchain
The last type of blockchain that we are going to discuss is private blockchains. Private
blockchains are “similar” to permissioned blockchains but have some differences that bring
them apart. The private blockchains are not open to the “public” at all, whereas a permissioned
blockchain might have some criteria for the public to join. Both of them are restrictive in nature,
but their approach differs a little.

Key difference between permissioned and permission-less

There are many key differences between permission-less and permissioned
blockchains. We are comparing these two so that you can get a clear picture of how
permissioned blockchains and are implemented.

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Permissioned vs Permission-less blockchain

Category Permissioned Permission-less

Speed Faster Slower
Transparent and open – anyone can become a
Privacy Private membership member
Legitimacy Legal Allegal
Managed by a group of nodes pre-
Ownership defined Public ownership – no one owns the network
Decentralization
nature Partially decentralized Truly decentralized
Cost Cost-effective Not so cost-effective
Security Less secure More secure

Best Permissioned Blockchain

As we can see that permissioned networks are crucial to the different industries out
there. Industries such as the finance industry, supply chain, etc. can benefit immensely through
permissioned networks. The key permissioned blockchains include Quorum, Corda,
and Hyperledger Fabric. Let’s look briefly into each of the permissioned blockchains below
that we think falls in the “best permissioned blockchain” category.
§ Hyperledger Fabric: Hyperledger Fabric Framework is one of the popular Hyperledger
projects that is maintained by Linux foundations. The modular architecture enables
anyone to develop solutions or applications to plugin and play with different services. It
uses smart contracts known as “chaincode” containing the system’s logic. Want to know
more about Hyperledger? Check out our detail coverage here.
§ Quorum: Quorum blockchain is an enterprise-focused Ethereum blockchain that is
aimed at the financial industry. It is created by JP Morgan.
§ Corda: Corda lets businesses build interoperable blockchain networks. It is open-source
in nature and provides excellent value to businesses.

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Challenges of Permissioned Solutions

Permissioned blockchains are not free from challenges. In fact, implementing
permissioned blockchain solutions can be a tough task. So, what makes it so challenging? There
are many challenges that it has to go through. Few of them include data storage, messaging and
integration, identity, smart contracts management, and so on.
As a business, many decisions need to be made before starting a permissioned network.
For example, the company first needs to decide which blockchain platform to use. They also
need to determine the blockchain runtime to use. After all, answers to these two questions will
give them the development stack on which the development will take place. If you are are a
business looking for the best, then we suggest checking out Hyperledger Fabric, Quorum,
Corda, and Parity. They are a top-notch solution when it comes to permissioned solutions.
§ Integration: One of the biggest challenges that a business or organization has to go
through integration challenges, especially when using APIs for communication. To
make it easy, you can use Rhombus, Chain Link, and Oraclize. They are great tools
which will help you connect and integrate services more efficiently.
§ Data Privacy: Privacy is a big concern, especially when it comes to regulated industries.
To ensure proper privacy, they must meet specific requirements. Quorum and Aztec are
a good pick when it comes to developing permissioned blockchains that offer great
privacy.
§ Data Access: Accessing information in a permissioned blockchain can be slow
compared. A right solution is to use The Graph which can expose data to the APIs and
smart contracts for easy access.
§ Data Storage: Data can be stored in many ways on a blockchain. However, not all of
them are optimal, considering that a huge amount of data is stored on the blockchain. To
ensure proper storage, it is advised to use data storage solutions such as IPFS Private
Network, Bigchain DB, and AWS Quantum Ledger.
§ Identity: The last challenge that we are going to discuss is the participant’s identity
problem. As it is permissioned network, the identity of the peers is already known, which
can cause issues during the consensus computations. To simplify the issue, it is advised
to use Azure BaaS or uPort that will help your business to better leverage their identity
protocols and solutions for decentralized applications.

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Overview of Security aspects of Block chain.

Introduction

Blockchain is a distributed file system where participants keep copies of file and agree
on changes by consensus. This file is composed of blocks, where each block includes a
cryptographic signature of the previous block, creating an immutable record. Systems built on
blockchain are considered safer than the current ones built on the internet infrastructure based
on TCP/IP.

However, blockchain does have technology challenges related to scalability, latency,

performance and security. Also, blockchain has many operational problems. For example,
logging and monitoring which are essential for enterprise environments, have not been
addressed yet.

Besides that, application built on blockchain still can have security issues, even if
blockchain is airtight. If one wants public accessibility, developers can put that in your
application. Without a good design of features, applications can still be vulnerable and
exploitable. For database, hackers can replicate the file to get their hands on confidential
contract information.

To The Community

Blockchain can be thought of as an abstraction of the fundamental mechanism of

digital-currency like Bitcoin. This distributed abstraction can have many applications and be a
solution for internet security, privacy and transparency in many specific scenarios. So, it is
very important for the internet community to know about the applications of Blockchain and
its impact on security. Unlike bitcoin as a type of currency, Blockchain is for the
decentralization of markets more generally, and contemplates the transfer of many other kinds
of assets beyond currency, from the creation of a unit of value through every time it is
transferred or divided.

The key idea is that the decentralized transaction ledger functionality of the blockchain
could be used to register, confirm, and transfer all manner of contracts and property. All
financial transactions could be reinvented on the blockchain, including stock, private equity,

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crowdfunding instruments, bonds, mutual funds, annuities, pensions, and all manner of
derivatives.

Public records, too, can be migrated to the blockchain: land and property titles, vehicle
registrations, business licenses, marriage certificates, and death certificates. Digital identity can
be confirmed with the blockchain through securely encoded driver’s licenses, identity cards,
passports, and voter registrations. Private records such as IOUs, loans, contracts, bets,
signatures, wills, trusts, and escrows can be stored.

Applications in Identity Authentication

The need for blockchain based identity authentication is particularly salient in the
internet age. While there exist somewhat imperfect systems for establishing personal identity
in the physical world, in the form of Social Security numbers, drivers' licenses and even
passports or national identity cards, there is no equivalent system for securing either online
authentication of our personal identities or the identity of digital entities. Facebook accounts,
now often used as login for different digital applications, and media access control (MAC)
addresses, may come close, yet both can hardly function as trustworthy forms of identification
when they can be changed at will.

Online Identity

Several blockchain startups are looking to use blockchain for online identity. A
ShoCard, for example, is a digital identity that protects consumer privacy. ShoCard strives to
be as easy to understand and use as showing a driver’s license; and simultaneously be so secure
that a bank can rely on it. The key is that the ShoCard Identity Platform is built on a public
blockchain data layer, so as a company it is not storing data or keys that could be compromised.
According to ShoCard all identity data is encrypted, hashed and stored in the blockchain, where
it cannot be tampered with or altered. A start-up in a similar vein that bridges the gap of both
human and digital entities, is Uniquid. Uniquid allows for the authentication of devices, cloud
services, and people. Uniquid’s aim is to provide identity and access management of connected
things, as well as humans, utilizing biometric information for the latter.

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Ownership rights

Another important aspect of identity is the ownership rights. The strong consensus
security offered by blockchain without the need for a central certifying authority renders it
particularly suitable for the authentication of ownership rights. This includes digital property,
intellectual property and physical property, including physical products and land. For example,
Ascribe is a startup in this space. It describes itself as a “fundamentally new way to lock in
attribution, securely share and trace where digital work spreads”. Ascribe creates a permanent
and unbreakable link between the creator and his or her creative work. By allowing ownership
to be forever verified and tracked, Ascribe leverages blockchain technology to make it possible
to transfer, cosign or loan digital creations similar to physical pieces of work. By preventing
unauthorized access to creative work, Ascribe also helps creators monetize their work.

Smart Property

The general concept of smart property is the notion of transacting all property in
blockchain-based models. Property could be physical-world hard assets like a home, car,
bicycle, or computer, or intangible assets such as stock shares, reservations, or copyrights (e.g.,
books, music, illustrations, and digital fine art).

The key idea of smart property is controlling ownership and access to an asset by having
it registered as a digital asset on the blockchain and having access to the private key.
Smartphones could unlock upon reaffirming a user’s digital identity encoded in the blockchain.
The doors of physical property such as vehicles and homes could be “smart-matter” enabled
through embedded technology (e.g., software code, sensors, QR codes, NFC tags, iBeacons,
Wi-Fi access, etc.) so that access could be controlled in real time.

Security Issues and Future Directions

One central challenge with the underlying Bitcoin technology is scaling up from the
current maximum limit of 7 transactions per second (the VISA credit card processing network
routinely handles 2,000 transactions per second and can accommodate peak volumes of 10,000
transactions per second), especially if there were to be mainstream adoption of Bitcoin. Some
of the other issues include increasing the block size, addressing blockchain bloat, countering

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vulnerability to 51 percent mining attacks, and implementing hard forks (changes that are not
backward compatible) to the code.

1. 51-percent Attack

There are some potential security issues with the Bitcoin blockchain. The most
worrisome is the possibility of a 51-percent attack, in which one mining entity could grab
control of the blockchain and double-spend previously transacted coins into his own account.
The issue is the centralization tendency in mining where the competition to record new
transaction blocks in the blockchain has meant that only a few large mining pools control the
majority of the transaction recording. At present, the incentive is for them to be good players,
and some (like Ghash.io) have stated that they would not take over the network in a 51-percent
attack, but the network is insecure. Double-spending might also still be possible in other
ways—for example, spoofing users to resend transactions, allowing malicious coders to
double-spend coins. Another security issue is that the current cryptography standard that
Bitcoin uses, Elliptic Curve Cryptography, might be crackable as early as 2015. However,
financial cryptography experts have proposed potential upgrades to address this weakness.

2. Compatibility

Another significant technical challenge and requirement is that a full ecosystem of plug-
and-play solutions be developed to provide the entire value chain of service delivery. Ideally,
the blockchain industry would develop similarly to the cloud- computing model, for which
standard infrastructure components—like cloud servers and transport systems—were defined
and implemented very quickly at the beginning to allow the industry to focus on the higher
level of developing value-added services instead of the core infrastructure. That way, the
blockchain industry’s development can be hastened, without every new business having to
reinvent the wheel.

3. the Need of a Decentralized Storage

There is a need for a decentralized ecosystem surrounding the blockchain itself for full-
solution operations. In the case of file serving, the IPFS project has proposed an interesting
technique for decentralized secure file serving. IPFS stands for Inter- Planetary File System,
which refers to the need for a global and permanently accessible filesystem to resolve the

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problem of broken website links to files. In the area of archiving, a full ecosystem would also
necessarily include longevity provisioning and end-of-product-life planning for blockchains.
A blockchain archival system like the Internet Archive and the Wayback Machine to store
blockchains is needed. Not only must blockchain ledger transactions be preserved, but we also
need a means of recovering and controlling previously recorded blockchain assets at later dates.

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