08-11-2023

Blockchain Technology: A Managerial

Perspective

MBA 2022-24
Term 5

Agenda
• Introduction to the Course
• Course Formalities
• Introduction to ”Blockchain Technology”

1
 08-11-2023

Title: Blockchain Technology: A Managerial Perspective

 Course Code: INFS607
• Class Schedule
• Thursday:
 Area: Information Systems
• 2:00 pm – 3:30 pm
 Credits: 3 • 6:00 pm – 7:30 pm
 Term: 5 • Location: 2-C
 Duration: 30 hours • Office Hours for Students
 Instructor: V. N. Rajesh • Thursdays:
• 11:30 AM to 12:30 PM
 Email:
• Please send me an email if you want to
rajesh.natarajanv@krea.edu.in meet during office hours or at any
suitable time other than the above office
hours 3

What is Blockchain?
 IBM’s Definition: Blockchain is a shared, immutable ledger that
facilitates the process of recording transactions and tracking assets
in a business network.
 An asset can be tangible (a house, car, cash, land) or intangible (intellectual
property, patents, copyrights, branding).
 Virtually anything of value can be tracked and traded on a blockchain
network, reducing risk and cutting costs for all involved.
 PWC’s Definition: A blockchain is a decentralized ledger of all
transactions across a peer-to-peer network. Using this technology,
participants can confirm transactions without a need for a central
clearing authority.
 Potential applications can include fund transfers, settling trades, voting, and
many other issues.
4

2
 08-11-2023

What is Blockchain?
 The whole point of using a blockchain is to let people — in
particular, people who don't trust one another — share valuable
data in a secure, tamperproof way.
— MIT Technology Review
 Architecture of Trust
— Kevin Werbach

Course
Blockchain: ObjectivesPerspective
A Managerial
Understand the basic Assess business benefits Design innovative Blockchain
building blocks of from Blockchain Use Cases
Blockchain Technology • Where and how to • Study of typical Usecases
• Decide whether implement Blockchain across education,
Blockchain is the • Implementation Government, supply
proper technology Challenges and Mitigation chain, hospitality, land
choice for a particular Techniques records, agriculture,
application elections, manufacturing,
etc.

Inputs from Various Disciplines

3
 08-11-2023

Learning Outcomes
At the end of the course every committed participant would have developed an
appreciation of:
1. The underpinning business need for Blockchain
 Need for ‘trust’ in an environment where parties don’t trust a central authority.
2. The technical understanding of the Blockchain Technology – how the
different technological components are integrated
3. Application of critical thinking and analytical reasoning to construct
Blockchain-based solutions for relevant industry use cases.
4. The management, legal, regulatory and policy level challenges involved in
implementing Blockchain

Tentative course contents [1]:

Bitcoin and Overview of

Blockchain Concepts
Blockchain Technical Concepts
• Introduction • Need for Trust • Bitcoin
• Blockchain • Smart Contracts • Technical
ecosystem and its • Distributed Components
players Autonomous • Distributed Ledger
• Different types of Organizations • Timestamping &
Blockchains – • Cryptocurrencies Hashing
Public & Private and NFTs • Merkle Trees

4
 08-11-2023

Tentative course contents [2]:

Overview of Some Popular Blockchain and
Technical Concepts Blockchain Networks Business Applications
• Bitcoin Mining • Permissioned vs • Finance &
• Consensus Permissionless Insurance
Mechanisms – • Hyperledger Fabric • Logistics & Supply
Proof-of-Work, • Ethereum Chain
Proof-of-Stake, etc. • R3 Corda • Sharing Economy
• Zero Knowledge • Ripple • Voting on
Proof Blockchain
• Blockchain • Education, etc.
Technology Stack

Tentative course contents [3]:

Blockchain Adoption
Demos & Hands-on Other Topics
& the future
• Bitcoin Demo • Start-up • When should you
• Use Case Modeling Ecosystem across use a Blockchain?
• ETH.BUILD countries • Adoption
• Sandbox • Blockchain in challenges
Government • Expected future
• Hyperledger
Fabric • Metaverse trajectory
• Ethereum • Regulatory • Managerial
challenges implications

5
 08-11-2023

Evaluation Scheme: Tentative

Weightage
S. No. Component
(%)

Class Participation/Attendance/Mini-
1 10
Quiz

2 Quizzes [2/3] (announced or Surprise) 30

Group Assignment/Project &

3 30
Presentation
4 End-Term Examination 30
Total 100
11

Course Text Book

 Prescribed Textbook:
 Saurabh, K., & Saxena, A. (2020).
Blockchain Technology Concepts
and Applications. Wiley India Pvt.
Ltd.
 Additional Reference:
 Lipton, Alexander, and Adrien
Treccani. Blockchain and
Distributed Ledgers: Mathematics,
Technology, and Economics.
World Scientific, 2021.
12

6
 08-11-2023

Text Book and References

 Primary Reference:
 Arvind Narayanan , Joseph Bonneau ,
Edward Felten , Andrew Miller , Steven
Goldfeder, “ Bitcoin and
Cryptocurrency Technologies: A
Comprehensive Introduction”,
Princeton University Press, Princeton,
NJ, 2016, draft version available at:
https://bitcoinbook.cs.princeton.edu/
 Additional References:
 Tapscott, Don, and Alex Tapscott.
Blockchain Revolution: How the
Technology Behind Bitcoin Is 13
Changing Money, Business, and the

Text Book and References

 Additional References:
 Swan, Melanie. “Blockchain:
Blueprint for a new economy. "
O'Reilly Media, Inc., 2015.
 Wattenhofer, Roger. “Distributed
Ledger Technology: The Science
of the Blockchain.” CreateSpace
Independent Publishing
Platform, 2017.
 Werbach, Kevin. “The
blockchain and the new
architecture of trust.” Mit Press, 14

2018.

7
 08-11-2023

Text Book and References

 Additional References:
 Antonopoulos, Andreas
M. Mastering Bitcoin: unlocking
digital cryptocurrencies. "
O'Reilly Media, Inc.", 2014.
 Antonopoulos, Andreas
M. ”Mastering Ethereum: Building
Smart Contracts and Dapps,”
O'Reilly Media, Inc.", 2018.
 Additional readings will be assigned
from time to time
15

Introduction to Blockchain

8
 08-11-2023

From physical transactions to blockchain [1]

 Alice hands-over a physical token to Bob

 Once Bob has the physical token and Alice has zero - The transaction
is complete.
 No verification: Alice and Bob do not need an intermediary to verify
the transaction.
 No double spending: Alice can’t give Charlie the same token,
because she no longer has the token to give — Bob has it. 17

From physical transactions to blockchain [2]

▪ What about a digital transaction?

▪ Alice sends Bob a digital token — via email, for example.
Bob should have the digital token, and Alice should not.
▪ Possibility of copies or “forgeries” of the digital token.
18

9
 08-11-2023

Payment networks
▪ Prevention of fraudulent transactions and double spending
needs:
▪ Verification of whether a party has requisite funds to pay their
counterpart in a transaction
▪ Revealing private information (such as funds position) may
increase the possibility of funds being stolen before payment
▪ Traditional solution:
▪ Reliance on a trusted third-party for verification
▪ Increased transaction costs by charging fees
▪ Vulnerable to attack themselves
▪ Equifax hack of 2017 – personal details of 145.5 million Americans stolen 19

From physical transactions to blockchain [3]

▪ Ledger – to record the transactions & prevent fraudulent

transactions
▪ Who will hold the ledger? A trusted third party who is not
involved in the transactions
▪ The third party might have too much power …..
20

10
 08-11-2023

From physical transactions to blockchain [4]

▪ Decentralize trust by distributing the ledger to all their “trusted”

friends - verification
▪ If a simple majority of participants agree that the transaction is
valid, it gets added to the ledger 21

22

11
 08-11-2023

The Blockchain Solution

▪ First proposed by Satoshi Nakamoto in 2008
▪ Replaced centralized trusted third party with a network or
distributed community of users
▪ Decentralized peer-to-peer payment solution
▪ Integrated insights & ideas from many fields in a unique & original:
▪ Ledger
▪ immutable or append only with a succinct cryptographic digest of the state
of the ledger at any time
▪ Linked time-stamping (Haber & Stornetta, 1990-1997)
▪ Merkle trees – documents linked together within a block with a binary tree
of hash pointers (proposed by Ralph Merkle in 1980)
▪ Byzantine fault-tolerance
▪ problem studied in distributed computing
▪ unreliable communication channels
23

How does the Bitcoin network work?

 The steps to run the network are as follows:
 1) New transactions are broadcast to all nodes.
 2) Each node collects new transactions into a block.
 3) Each node works on finding a difficult proof-of-work for its
block.
 4) When a node finds a proof-of-work, it broadcasts the block to
all nodes.
 5) Nodes accept the block only if all transactions in it are valid
and not already spent.
 6) Nodes express their acceptance of the block by working on
creating the next block in the chain, using the hash of the
accepted block as the previous hash. 24

12
 08-11-2023

25

HOW BLOCKCHAIN TECHNOLOGY POWERS BITCOIN

26

13
 08-11-2023

HOW
BLOCKCHAIN
TECHNOLOGY
POWERS
BITCOIN

27

Blockchain technology fundamentals

▪ Cryptographic hash function – a mathematical algorithm
that creates a mapping from an arbitrary amount of data
to a bit string of a fixed size
▪ Cryptographic hashing is not the same as encryption
▪ Encryption
▪ Sender: Original message → Encryption → Encrypted Message
▪ Receiver: Encrypted Message →Decryption → Original
Message
▪ The encrypted message moves over the communication channel
▪ Public Key Encryption 28

14
 08-11-2023

Cryptographic Hashing
▪ Cryptographic Hashing is a one-way function with the goal of making it
impossible to decrypt
▪ From a hash, a recipient can extract the original message only by “brute force” trial
and error
▪ Algorithm used in Bitcoin – “SHA-256”
▪ Mapping from data of any size to fixed size 256-bit (32-byte) hash, which is
represented as a string of 64 Hexadecimal characters (0-9, a-f)
▪ Same data will always return the identical hash thus allowing input data to be
easily verified (https://andersbrownworth.com/blockchain/hash )
▪ IFMR Krea
▪ e699bfd8a2583aee5d985226695e10b0a4b637e3b5306d255135d8d5fa8df48b
▪ IFMr Krea
▪ dfdb41b2a6b5950bea080535e46b5c6e18df94f9a1ca86c2737014d17baf8970
29

Properties of a good cryptographic hash function

1. The same input always generates the same output (and is quick to compute)
2. One cannot easily recreate the original message from the hash (any given hash can be
reverse engineered only by brute force and with current technology it is estimated to
take 1000 trillion years to do so)
3. It is impossible (technically only improbable) to alter a message without changing the
hash
4. It is impossible (technically only improbable) for two messages to create the same hash
(called a collision)

30

15
 08-11-2023

Blockchain
▪ The properties of “hash” functions form the foundational block of Blockchain
▪ Allows for a network of peers where every individual node in the network can
view all transactions occurring between any two counterparties
▪ the identities of counterparties may be hidden, but not their public “address”
▪ Decentralized public ledger
▪ Online, decentralized and transparent record of every transaction undertaken
on the network since its inceptions
▪ “Blocks” – set of new transactions combined to facilitate efficient processing
▪ Each block will have a unique hash
▪ To link the blocks, the “hash” from the block immediately prior to it on the
chain is added to it
31

Blockchain

32

16
 08-11-2023

Blockchain
▪ The most recent block contains the history of all transactions on the
blockchain network to date
▪ Timestamping
▪ Directly linking each contiguous block on the chain of transactions
through hashes
▪ Security and Completeness of the system is ensured by this
procedure
▪ Even the smallest of change in any previous transaction will change the
hash
▪ The altered hash will not match the hashes of other agents in the network
and will be discarded by the consensus of the network
▪ Truth by “Consensus” mechanism instead of trusted third party
▪ Any given individual attempting to attack the network is small
relative to all those attempting to verify the truth
33

Blockchain – proof of work

▪ Technically, any node can post a new block with transactions
▪ In practice, nodes with low processing power will find it difficult
to post new blocks. Why?
Proof of Work
▪ Propose a block onto the network requires:
▪ Node must solve a computationally demanding mathematical puzzle that
can be solved only by brute force (based on hash function)
▪ Present evidence of the solution. Solution can be verified easily.
▪ Block proposed by the first node that solves the problem is added to the
existing chain
▪ “Proof-of-Work” – helps protect the network from fraudulent transactions
▪ “ As long as a majority of CPU power is controlled by nodes that are not
malicious, they will generate the longest chain and outpace attackers.”
Nakamoto (2008)
34

17
 08-11-2023

Blockchain – incentive mechanism

▪ Security of the network depends on large amounts of decentralized
computational power to demonstrate “Proof-of-Work”
▪ Why should individuals incur such large costs to demonstrate “Proof-of-
Work”?
▪ Incentive:
▪ Each time a block is proposed, the party that proposed it and was first to
demonstrate “Proof-of-Work” receives several newly minted “bitcoins”.
▪ Miners
▪ Nodes that invest processing power and propose blocks are referred to as miners
▪ Mining Hardware: CPUs → GPUs → ASIC (application specific integrated
circuits)
▪ ASIC (application specific integrated circuits)
▪ Designed for a specific task (bitcoin mining)
▪ cannot be used for any other task, including mining other cryptocurrencies
35

Is blockchain technology really “new”?

36 Source: “Bitcoin’s Academic Pedigree”, Arvind Narayanan & Jeremy Clark, Communications of the ACM, Dec 2017, Vol 60, No 12, pp 36-45.

18
 08-11-2023

Is Bitcoin/Blockchain really “new”?

▪ The “hype” surrounding bitcoin and blockchain sometimes
gives the impression that bitcoin is novel and bears no
resemblance to earlier academic proposals.
▪ Nearly all of the technical components of bitcoin originated in
the academic literature of the 1980s and 1990s
▪ Nakamoto’s genius and true leap of insight – the specific,
complex way in which underlying components are put together

37

Nakamoto’s
genius and true
leap of insight –
the specific,
complex way in
which underlying
components are
put together

38

19
08-11-2023

39

40

20
 08-11-2023

Origin of bitcoin’s value & The

blockchain ecosystem

41 Source: “Bitcoin’s Academic Pedigree”, Arvind Narayanan & Jeremy Clark, Communications of the ACM, Dec 2017, Vol 60, No 12, pp 36-45.

Currencies: crypto or otherwise

 Properties of a good currency:
▪ Medium of exchange – eliminates the need for an agent
▪ Unit of Account – all goods and services can be quoted in terms of
that unit
▪ Store of Value – the purchasing power of money can be transferred
from the present to the future
▪ Can bitcoin be looked upon as a currency?
▪ Not backed by a central bank – is this a necessary condition?
▪ Lack of governance structure
▪ No obligation to verify identity of any user
▪ Consequence – it has been used for illicit transactions related to
drugs, weapons, extortion and money laundering
42

21
 08-11-2023

Crypto-
currency
prices
(28-03-
2023)
43

Crypto-
currency
prices
(08-08-
2023)

44

22
 08-11-2023

Bitcoin’s value
▪ How does “bitcoin” get its value?
▪ Not backed by a central bank
▪ The value of the bitcoin stems from its scarcity.
▪ The Bitcoin protocol limits the number of bitcoins that will be
ever mined to 21 million
▪ Supply of bitcoin is fixed – bitcoin supply cannot be increased
artificially unlike printing of $ or INR
▪ No central authority – immune to the failure of any central node
and completely transparent
▪ Decentralization means that there are no centralized third parties
who can exploit their market power and charge exorbitant fees
45

46

23
 08-11-2023

bitcoin vs Traditional Currencies

Limitations
▪ Involves substantial spending on electricity and processing power
▪ Power consumption almost equals that of Republic of Ireland in a year
▪ With passage of time, reward for adding new blocks falls
▪ Initial reward was 50 bitcoins per block
▪ Decreases by 50% (halves) every 210,000 blocks or about 4 years
▪ Undermine current advantage of low transaction fees
▪ reward insufficient to recoup investment in processing power
▪ possible solution is to increase transaction fees
▪ Another solution could be to increase block size
▪ Limited processing speed of 7 transactions per second 47

Source: “Blockchain and Cryptocurrencies: Model,

Techniques, and Applications” ,Yong Yuan and Fei-YueWang,
IEEE TRANSACTIONS ON SYSTEMS, MAN, AND
CYBERNETICS: SYSTEMS,VOL. 48, NO. 9, SEPTEMBER
Bitcoin eco-system 2018

48

24
 08-11-2023

49

Six
dimensions in
bitcoin
innovation

Source: “Blockchain and Cryptocurrencies: Model,

Techniques, and Applications” ,Yong Yuan and Fei-YueWang,
IEEE TRANSACTIONS ON SYSTEMS, MAN, AND
CYBERNETICS: SYSTEMS,VOL. 48, NO. 9, SEPTEMBER
2018
50

25
 08-11-2023

Reference
model of
blockchain

Source: “Blockchain and Cryptocurrencies: Model,

Techniques, and Applications” ,Yong Yuan and Fei-YueWang,
IEEE TRANSACTIONS ON SYSTEMS, MAN, AND
CYBERNETICS: SYSTEMS,VOL. 48, NO. 9, SEPTEMBER
51
2018

Data Layer of
blockchain

Source: “Blockchain and Cryptocurrencies: Model,

Techniques, and Applications” ,Yong Yuan and Fei-YueWang,
IEEE TRANSACTIONS ON SYSTEMS, MAN, AND
CYBERNETICS: SYSTEMS,VOL. 48, NO. 9, SEPTEMBER
52
2018

26
 08-11-2023

Is bitcoin a bubble?

53

Bitcoin transactions over time

54

27
 08-11-2023

55

Crypto-
currency
prices
(15-09-
2023)
56

28
08-11-2023

57

29
 08-11-2023

Stages in a bubble

59

Is bitcoin a bubble? Bitcoin vs dotcom

 The time
scale is not
the same.
NASDAQ
took years
to reach its
peak, while
Bitcoin rose
20x in less
than a year.
But the
patterns
look very,
very
similar.
60

30
 08-11-2023

Ethereum and smart contracts

61

What is ethereum? [1]

▪ Bitcoin – a decentralized application for payments.
▪ Ethereum adds another layer by allowing users to put code on its blockchain
that executes automatically. This code is called a “smart contract.”
Example: “ Alice and Bob enter into a bet.”
▪ Alice thinks that the temperature tomorrow morning will reach 18 degrees.
Bob thinks that it will stay lower and they wager 10 bitcoin on the outcome.
▪ Lack of Trust: They will have to use a trusted third party as an escrow
agent. In other words, they will each have to give the agent that amount of
bitcoin, and the agent will distribute the winnings and the amount staked to
the winner.
▪ Is there a way around the middleman in this scenario using “bitcoin”
62

31
 08-11-2023

What is ethereum? [2]

▪ Ethereum, founded by Vitalik Buterin offers a decentralized solution.
▪ Smart Contract: Alice and Bob could agree to use some basic code — a
contract of sorts — to alert the system to what the temperature ended up
being and pay out based on who was correct. If the temperature goes higher
than 18 degrees, the code pays Alice, otherwise, it pays Bob.
▪ Alice and Bob could then place this code (their bet) on Ethereum’s
blockchain.
▪ The code becomes their trusted third party.
▪ All parties in the Ethereum blockchain hold a copy of this agreement.
▪ This contract is self-enforcing.
▪ Ethereum has all properties of a blockchain and hence these “smart
63
contracts” are very hard to attack, change, or forge.

What is ethereum? [3]

▪ Ethereum provides a
“platform” for other “digital
assets” with settlement on
their own terms – through the
creation of “smart
contracts”
▪ Ethereum has a built-in
special purpose
programming language so
that users can adjust their
own “smart contracts”

64

32
 08-11-2023

What is ethereum? [4]

▪ Ethereum can also be used to build Decentralized Autonomous
Organizations (DAO).
▪ A DAO is fully autonomous, decentralized organization with no
single leader.
▪ DAO’s are run by programming code, on a collection of smart
contracts written on the Ethereum blockchain.
▪ The code replaces the rules and structure of a traditional
organization, eliminating the need for people and centralized
control.
▪ A DAO is owned by everyone who purchases tokens.
65

What is ethereum? [5]

“A DAO consists of one or more contracts and could be funded

by a group of like-minded individuals. A DAO operates
completely transparently and completely independently of any
human intervention, including its original creators. A DAO will
stay on the network as long as it covers its survival costs and
provides a useful service to its customer base”
Stephen Tual, Slock.it Founder, former CCO Ethereum.

66

33
 08-11-2023

What are the benefits of a decentralized

Ethereum Platform?
 Because decentralized applications run on the blockchain, they
benefit from all of its properties.
 Immutability – A third party cannot make any changes to data.
 Corruption & tamper proof – Apps are based on a network formed
around the principle of consensus, making censorship impossible.
 Secure – With no central point of failure and secured using
cryptography, applications are well protected against hacking attacks
and fraudulent activities.
 Zero downtime – Apps never go down and can never be switched
off.
67

What are the limitations of decentralized

Ethereum applications?
▪ Smart contracts are can have flaws and are only as good as the
people who write them.
▪ Code bugs or oversights can lead to unintended adverse actions
being taken.
▪ If a mistake in the code gets exploited, there is no efficient way in
which an attack or exploitation can be stopped other than obtaining a
network consensus and rewriting the underlying code.
▪ This goes against the essence of the blockchain which is meant to
be immutable.
▪ Also, any action taken by a central party raises serious questions
about the decentralized nature of an application.
68

34
 08-11-2023

Thanks

Thanks

35