FINT-6207 INTRODUCTION TO BLOCKCHAIN TECHNOLOGY IN BANKING

INTRODUCTION TO BLOCKCHAIN TECHNOLOGY Page |1

Module 001 INTRODUCTION TO BLOCKCHAIN

TECHNOLOGY

Learning Objectives:
In this module, you will learn the following:

 Cryptographic Components

 Blockchain Protocol

 Classification of Blockchain Ledgers

 Business networks, wealth & markets

`Tech and banking have a tight association for a long time. This relationship has
benefited greatly both, innovations that leverage technology unusually by definition
have a strong potential to destabilize standard systems. However, in this process, we
win, but the fact that such inventions are painful for society is not unusual. Therefore, it
is essential to carefully analyze the advantages and contras, to consider the risks, to carry
out a more thorough pilot study before the scale-up is taken and to fine-tune them on
the basis of feedback.
-R. Gandhi (Deputy Governor, Reserve Bank of India, Chairman, IDRBT)
Researching beyond the coverage of this module is highly encouraged to
supplement your understanding of the topics covered. Always, think and see beyond the
box.
The citation provided is a guideline. Please check each citation for accuracy
before use.
So, what are we waiting for? Let us now explore the Introduction to Blockchain
Technology in Banking.
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Introduction

Blockchain has recently gripped the world of banking and

technology by using modern Bitcoin crypto-currency in its pioneering
manner and more because of its troubling trends which appear to have an
unassuming data structure and a set of related protocols. Although to far
Bitcoin is the most frequently talked about using Blockchain technology,
emerging applications such as smart contracts have sought to harness the
platform's more abstract nature. In this context, we are also exploring the
Blockchain – like White Paper – an abstract data format and platform for
developing general FinTech solutions.

Cryptographic Components

Blockchain technology relies substantially on critical data security

and cryptology capabilities, particularly to authenticate a message to
manipulate proof and manipulation. The Blockchain is a tamper-obvious
leader who is shared throughout a network of entities that have a
transaction log between entities in its most abstract form. Blockchain uses
cryptographic hash functions to obtain manipulative evidence in the
ledger.
Cryptographic Hash Function
A generic Hash feature transfers arbitrary inputs and messages to
fixed hash values or tags. A crystalline Hash function seeks to provide
pseudo one method of making an input, i.e. a practical failure to construct
an input message with a tag and a pseudo collision resistance, in order to
explain the authenticity of your message using its tag. Because of these two
characteristics of cryptographic hash features, the hash value of a message
is probably not the same as the original tag if the messages are accidently
exposed to or are actively manipulated, and hence manipulation becomes
apparent. In reality, the tag generated by an encryption hash function
should show a big (random) difference for little alterations in the input
message. In order to create tamper obvious structures, we can use Hash
functions.
Hash Pointer
The Hash Pointer is a pivotal aspect for blockchain technology (a
blend of the conventional pointer structure and the hash of the data
fragment it points out). This creates an integrated data integration method
since the storage of the hash pointer ensures both that data are located and
that the data is tampered with (via the normal pointer) (through the hash
value). This means that each data piece is stored in the Hash Point as an
undertaking for the location and integrity of its data fragment. The hash
pointer is flexible enough to substitute the regular pointer on the basis of
an acyclic pointer in any associated data structure, thus producing several
data structures, including data integrity and manipulative evidence. The -
Blockchain is such a visible example of data manipulation.
Blockchain: Tamper-evident Linked-List
Take a link list with the regular points that link the nodes to the hash
points in the blockchain data structure into account. Each block of the
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blockchain is a node with a number of data and a hash indicator pointing to

the preceding block of the chain. The initial block in the chain is known as
the block of genesis as it is the only block without the hatching point.

It's worth noting that if any block in the blockchain is tampered with
or contains an unintended error, the block holding the hash reference of
the erroneous block will no longer match. This can trace any unintended
inaccuracy in a blockchain. The opponent will be needed to fix the hatch
pointer in all the succeeding blocks to verify the whole blockchain if the
tampering is intentional. However, if someone retains a commitment to the
last block of the blockchain, it is easy to validate any effort to distort
everywhere in the network. As a result, we have a manipulative data
structure in the form of this blockchain that allows a continuous size
commitment. When a network of entities monitors the final block of the
blockchain at a time, a really decentralized platform is automatically in
place to record the commitment and a decentralized network to ensure that
blockchain manipulation is proven.
It is possible to expand the chain easily by establishing a new block
with a hash pointer on the previous block in the chain which then adds the
newly produced block to the existing chain. In the chain, however, it is more
complex to insert a new block between two existing blocks. When an inner
hash point is updated, the following hash points and therefore all blocks
are modified. The same goes for the removal of a block from the blockchain.
In a blockchain with n blocks, insertion and deletion are O(n) procedures,
however adding is O(1), or a constant time process.
Insertion and deletion will not be feasible if a decentralized network
parallels the blockchains since it is not conceivable to alter O(n) blocks in
the network by one entity in the network without other network members.
Note that it's OK to add the chain and a network entity may potentially add
a new block to the last block of the chain. A block added activity does not
require all network entities to participate. To ensure consistency of
recording, the attached block needs to be broadcast over the network so
that any entity can update its copy of the blockchain, in particular the last
block, as an undertaking. This feature of blockchain is useful for building a
decentralized records ledger across the network.
Merkle Tree: Tamper-evident Binary Tree
A Merkle Tree can be created by constructing a binary tree and
substituting the regular pointers with hash pointers, similar to the
blockchain. The blocks of data are saved in a Merkle tree's leaf nodes, while
the cumulative hash points are stored in the intermediary nodes of the
relevant subtrees. The hash pointer to the root node (top hash) of the
Merkle Tree is like blockchains and is a continuous commitment in size to
the entire tree.
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Figure 2. Blockchain visualized as a linked-list of blocks connected

by hash pointers

Unlike blockchains, the Merkle Tree can insert and add nodes that
are O(log n) operating, where n is the total number of nodes in the tree, and
merely change the shortest route of the Leaf Node to the root to attach a
data block.
Anyone holding the hash point to the root node will note any
inadvertent error or deliberate handling that causes any tree node content
to be altered. For the network, the root node hash reference can be saved
as a distributed commitment for each entity, with the decentralized
tamper-obvious data storage functioning of the Merkle Tree being used in
this scenario.
As adding to the tree corresponds to inserting a node, it is much
more like a generic set than a list in this nonlinear structure. Merkle Trees
also provides a proof of membership O(log n) for every leaf node, can be
used to check the consistency of the data block or to validate evidence. All
that is needed to demonstrate that each node in a Merkle Tree is a member
is O(log n) evidence in the shape of sibling hash references from the leaf
node to the root of the tree on the shortest path. Evidence that a data block
collection is a subset of another set can be utilized in the same way.
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Figure 3. Merkle Tree as a binary tree connected by hash pointers

(Source: Wikipedia)

Patricia Tree: Tamper-evident Trie

In addition to blockchain (linked lists based on hash points) and Merkle
Tree, the Patricia Tree or Merkle Trie is a modified format of Trie's data
system based on hash pointers rather than on ordinary pointers (binary
tree based on hash pointers). The data blocks collected in a Patricia Tree or
Merkle Trie are retained in the format (key, value), the maximum length of
the key values controlling the depth of the tree.

Blockchain Protocol

Blockchain technology's recent reputation and success is based on

its tremendous scale and flexibility of protocols that may be created by
using the basic data structure outlined in the last section. To comprehend
blockchain protocols, we must first identify several key functional
components, which are as follows:
Network
The blockchain protocol generates consensus among a
decentralized network of protocol participants in its broadest sense. The
people involved in the protocol can have a different function and activities
in managing the authenticated data structure as stated in this protocol. In
order to make the protocol really flexible, such duties and activities may
depend, where appropriate, on a predefined access control or a set of
permissions. This allows for either peer-to-peer (flat) or hierarchical
topology for the blockchain network in line with the protocol.
Transactions
A transaction is how the blockchain network is commonly referred
to. Any such contract is referred to as the 'transaction' of blockchain
technology in Bitcoin due to its historical beginnings. A transaction, in its
broadest sense, a multiparty contract may be sophisticated and
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represented as the Boolean logic and executable script. Smart Contracts are
the generic name for these blockchain transactions. The transactions in a
blockchain protocol are the atomic components, and the protocol's other
structures are built on top of them. A blockchain platform can be thought
of as a distributed ledger of transactions that is impenetrable to tampering.
Ledger
A Merkle Tree is utilized in a network of blockchain transactions to
ensure that the transactions set are proven through constant commitment
to size (hash pointer to the root of the tree). Each of such transactions will
be recorded in the blockchain ledger (as seen in Figure 4) in a chronological
way (as per their timestamps).
.

Verification
Blockchain was meant to be a decentralized transaction directory
right from the beginning. Therefore, instead of being an unbiased
arbitrator, the network itself must inspect or approve each transaction or
contract between two (or more) members. A protocol verification
mechanism is used to accomplish this. This verification method is generally
used as an executable script in genuine blockchain systems as part of the
transaction, which entails either the acceptance or reject of each
transaction.
The method of verification also links the present operation to
previously existing blockchain transactions, which have been confirmed as
inputs for certain practical blockchain applications. In Figure 4, dotted lines
have been used to show these linkages. The verification method can be
constructed to allow for public verification or, depending on the
application, it can be fully permitted.
Consensus
To aggregate the transactions, a Merkle Tree is employed, and the
block containing this tree is recorded in the blockchain ledger. It's worth
emphasizing that in a distributed network, the task of creating a block and
linking it to the ledger should be organically decentralized. The blockchain
technology is flexible enough to allow for a decentralized adding method,
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which is commonly referred to as mining.

It is important, regardless of the particular mining procedure which
updates the blockchain ledger, to be acknowledged universally throughout
the network at all times. This requires that a consensus technique be
included in the protocol. This decentralized consensus method assures that
the blockchain ledger is the same version of the network user and offers
the blockchain its most important manipulative and tamper-resilient
qualities. Indeed, if a member brings in an incompatibility of the mining
process, the other members can force the chain and cancel the inserted
block.

Specific consensus mechanisms for the blockchain can be devised to

provide tamper resilience dependent on the nature of the application and
the network topology. It is vital to remember that the cornerstone for every
blockchain system is mining and consent algorithms so that they should be
picked attentively.
Smart Contracts
“A smart contract is a legally enforceable contract that can be
automated. Although some components may require human input and
control, computer-assisted automation is conceivable. Either the legal
enforcement of rights and obligations, or the impregnable performance of
those rights and obligations.” (According to Barclays).
Intelligent contracts are software components that enable
blockchains to perform more than simply log financial transactions in
accordance with multi-party agreement rules automatically. Intelligent
Contracts are controlled via consensus protocols by a computer network to
agree on the contract code's execution order. Intelligent contracts use
blockchain technology to run in a shared database, and all participants
validate their findings rapidly without a third-party intermediary.
Classification of Blockchain Ledgers

The architectures of the Blockchain can be separated into two

functional groupings: public and private. as indicated above. The process
for initiating and verifying the transaction is made public for public
architectures, which permits anybody on the network. Everyone in the
network can actually participate. On the other hand, the mining process
often relies on different proof of work concepts that may be monopolized
by financial or processing power. For private blockchain systems it can be
password locked and limited exclusively to a sub-package of network
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users. The procedures for producing and confirming transactions. This

often leads to a simpler technique of consensus that may or may not require
competitive mining.
The authorized and permissionless blockchain architecture is
another important classification in this line. A blockchain is regarded as
unauthenticated if anybody on the network can conduct or check
transactions while an authorized blockchain only allows transactions to be
carried out, or certified, by a certain permitted entity. Furthermore,
permissioned blockchains may feature a specially designed access control
mechanism that determines who in the network has permission to read the
blockchain ledger, mine blocks, and verify blocks. Majority consensus is
generally followed in permissionless blockchain protocols like Bitcoin,
with the longest chain surviving. The consensus process in permissioned
blockchains may be designed to be substantially simpler because the
miners and auditors are trusted actors. In a permitted environment, mining
can be a transfer mechanism rather than a competitive strategy.
Permissionless Blockchain
We may use pioneering blockchain application–Bitcoin–as an
illustration of the generic structure of a permissionless blockchain
architecture.
Block: A Bitcoin block is made up of its own hash, the hash of the last block,
the Root Merkle of the block transactions, a nonce that a miner uses to solve
the Bitcoin computer hash-puzzle and when it was produced. The block of
genesis is the initial block in the block and the blocks afterwards form a
publicly published block chain. Examples of such ledgers can be found on
blockchain.info, blockexplore.com, and other websites. Every 10 minutes
or so, a new block is added through a mining method.
Transaction: The header, inputs, and outputs of a Bitcoin transaction are
as follows:
 The transaction, the transaction identity, the number of inputs and
outputs, transaction time and a version number informing the
verifier of which rules are included in the header.
 Another transaction is the entry into a Bitcoin transaction. Each
input has a sequence number for the input, an address for the
previous output, a signing input script with a private key that
spends the coins, as well as the value of the transaction.
 Each output includes a transaction index, receiver address, output
value and an output script (see below).
Verification: Bitcoin transactions are verified using Scripts constructed in
Turing's unfinished stack-based computer language. Input and output
scripts are two types of scripts. "This transaction can be redeemed (spent)
by anyone who knows the public key that hashes the recipient's address, as
well as the signature of the owner of that public key," says the output script
for each transaction. When a transaction is verified, the digital signature is
compared to the public key that corresponds to it. This verification
approach results from the combination of a new transaction's input script
with the previous transaction output scripts. In some cases, obtaining the
approval of many parties is required with order to complete a transaction;
in Bitcoin, this is accomplished through multi-signature. Bitcoin scripts are
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far more versatile, which allows for payments after a specified length of
time (defined by a time lock).
Mining: Bitcoin has a competing mining method based on hash puzzles.
Miners must compete with each other utilizing their access to computer
resources in order to add a new block to the blockchain record. Bitcoin uses
a smart system of incentives to ensure that miners are honest and to
regulate the number of Bitcoins entering the market. In order to further
govern the flow of Bitcoins, the hash puzzle is built to create new Bitcoin
blocks (mined) every 10 minutes on the average. Also known as a
demonstration-of-work consensus approach to the Hash Puzzle mining
competition.
Consensus: Bitcoin utilizes a standard majority consensus mechanism in
which each miner decides to add to which block of the chain and finally
survive the longest chain. The longest chain is usually anticipated to
increase and outperform alternative forks while honest parties are
controlling the majority of processing power.
Ethereum: Is a common cryptocurrency that allows platform users to
improve the fundamental flow of transactions by adding a richer control
flow known as an intelligent contract. Ethereum currently implements the
ETHash work proof technique that is intended to prevent pool mining
utilizing integrated Application Specific Chips (ASIC). The current block
latency is 12 seconds, compared to 10 minutes for bitcoin, so GPUs can be
used for mining. There are plans to convert from this proof of work
approach to proof of the stake in a next version of the Ethereum Consensus
algorithm. Ethereum gives a 5 Ether incentive, like Bitcoin (Coins in
Ethereum).

Ethereum has been built to support complicated operations on a

distributed ledger. Unlike Bitcoin, the Ethereum Virtual Machine enables
the operation of a loop. Consensus and mining algorithms consider time
and resources used for longer procedures to make that easier (resource-
intensive). Any material thing, like an automobile produced by an
undertaking, can be represented on the blockchain as a digital entity. Once
this digital object is displayed on the blockchain, it will be possible to
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openly manage the complex procedures around ownership/purchase.

Permissioned Blockchain
The mining process is the main difference between an authorized
blockchain and an unauthorized blockchain structure. Authorized
members perform mining on a permitted blockchain, and the mining
process may be fully delegated to authorized network members in certain
applications. The authorized individuals might be allocated the same
verification of transactions and blocks. As a result, a consensus technique
is not necessary in many scenarios to maintain the ledger's tamper
resilience. Each functional part of the blockchain architecture, as discussed
previously, is specifically designed for a permitted platform. In
implementing a permitted document, the following are some of the most
critical design concerns:
 Identification of who and what roles are part of the system.
 Identification of the structure and the methodologies of verification
of each type of transaction that must be carried out in the network.
 Create a framework for access control to link each type of
transaction to members of the network (initiate, check, view, etc.
 Develop an access control method to limit who may mine a block
and who can include transactions for each miner in the network.
 Creating a network member's access control framework for
establishing block content reading and blocking capabilities to.
 Develop a suitable way of consensus and incentive strategy to
ensure honesty for the network participants, if needed.

Any of the design possibilities referred to above may be used

according to the objective application.

Business Networks, Wealth & Markets

Connectivity is beneficial to business networks.

 Customers, suppliers, banks, and partners are among the
participants.
 Crossing geographical and regulatory barriers
Transactions and contracts are rich by the flow of goods and services
within a corporate network.
The role of markets is crucial in this process:
 Open to the public (fruit market, car auction) or
 Closed to the public (fruit market, car auction) (supply chain
financing, bonds)
Transferring assets, building value
Two fundamental types of asset
 Tangible,
 Intangible,
Intangible assets subdivide
 Financial,
 Intellectual,
 Digital,
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Cash is also an asset

 Has property of anonymity
There is no overemphasis on the importance of ledgers. The leader of a
company is its main record keeping system. Companies will use many
books to track their engagement in different corporate networks. A
transaction is known as a transfer of assets to or outside the ledger.
 John gives a car to Anthony (simple)
Contract
 If Anthony is paying John money, the automobile is moved to
Anthony from John (simple)
 If the car does not start, the money is not paid to John (as established
by an arbitration of a third party) (more complex)
Problem

Solution

What is a Blockchain?
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It's made up of a succession of blocks that have been placed in a

chronological order. A new block will not be produced until at least one
transaction is present in each block.

References and Supplementary Materials

Book and Journals

Applications of Blockchain Technology to Banking and Financial Sector in
India
Institute for Development and Research in Banking Technology
(Established by Reserve Bank of India) Blockchain in Finance
Vinayaka Pandit
Leader - Blockchain Research IBM Research