Managing Industry 4.

0 Ecosystem

Session 9

Term VI, BM (2023-25)

XLRI: Xavier School of Management | Jamshedpur

Campus
Blockchain
 Blockchain is a distributed ledger of the history of transactions or other successive
events that is

 Consistent

 Tamper-proof

 Easily verifiable

 Authenticated

 And can be

 Permission-less, or permissioned

 Anonymous, or named

 “Intelligent”

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 1

Bitcoin Blockchain
Fundamentals
Some Questions!
 How is the puzzle difficulty changed?

 How can individual transactions be traced?

 What is a consensus mechanism in Blockchain?

 The question of parallel vis-à-vis sequential placement of blocks

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 3

What have we achieved?
 When you are paid with a bitcoin, you need to ensure:

 The buyer actually owns the bitcoin he is paying you with

 The buyer is not spending the same bitcoin for another transaction

 The buyer cannot later deny that he has spent this bitcoin with you

 How many of these requirements have we been able to ensure till now?

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 4

Decentralization: Technical Part
 Every transaction, instead of being sent to a CA, gets broadcast over the network
 Thus, every node will have a collection of outstanding transactions that are yet to be added to the
chain as a block

 Any node in the network can propose the next Block in the chain, and all other nodes need
to reach a consensus about it
 However, for that, the proposing node has to establish proof-of-work by solving a Hash puzzle

 The Hash Puzzle

 Find a number, or nonce, such that when you concatenate the nonce, the previous hash, and the list
of transactions that comprise that block and take the hash of this whole string, the hash output
should be a number that falls into a target space (that is quite small in relation to the much larger
output space of that hash function)

 H(nonce || prev_hash || tx || tx || ... || tx) < target

 Brute force being the only way to find nonce, it is highly computation intensive

 However, Why would any node take that trouble?

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 5
Decentralization: Incentivization Part
 In Bitcoin Blockchain, the proposer of a block, the miner, is incentivized in two ways:

 Block Reward:

 The successful miner adds a transaction that creates and sends 3.125 Bitcoin (as of now) to a node of his
choice

 The reward gets halved every 210,000 blocks (Bitcoin Halving)

 This is the only way money gets minted in Bitcoin

 Every block has a transaction proposed by the miner that assigns newly minted bitcoin to herself/himself

 Transaction Fee (or Miner Fee; as of now, voluntary):

 The owner of a transaction can make the total input to be slightly more than the total output

 The difference goes to the miner

 Why should the owner of a transaction pay Transaction Fee to the miner?

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 6

Characteristics of Proof-of-Work (PoW)
 Given the puzzle-friendliness of the Hash function, brute force is the only approach to find
the nonce, and will depend on the computing power that the node can deploy to find it

 Difficulty level: At the end of 2014, the target space was 1/1020 of the size of the output space of the
hash function, and that was still a lot of computation

 Parameterizable: Every node knows the target (i.e., the size of the target space as a fraction of the
output space) and the target is recalculated it after every 2016 blocks in such a way that the average
time between successive blocks produced in the Bitcoin network is about 10 minutes

 Verifiability: Once the proposer publishes the nonce found, any node can calculate the H() to see that
it falls within the target

 Miners use ASIC (application specific integrated circuit) hardware to hasten the computation
to find the nonce

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 7

So, What Do the Miners Do?
 Listen for transactions
 Maintain blockchain and listen for new blocks

 Assemble a candidate block

 Find a nonce that makes your block valid

 Abort if you notice that a new block has been proposed and that is a valid block

 Go back to assembling a candidate block

 Publish the block and hope it gets accepted

 Acceptance happens when further new blocks proposed links to your block

 Lengthier the chain containing your block, more is the assurance of acceptance

 Make profit if the block gets accepted

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 8

Consensus in Bitcoin Network
 How can the nodes reach a consensus in the Bitcoin Network?
 Variety of nodes broadcasting transactions as and when they keep happening

 At any point in time, nodes in the network would have

 A ledger consisting of a sequence of blocks, each consisting of a list of transactions

 A pool of outstanding transactions that have not been included on the blockchain

 Due to network imperfections, each node might have a slightly different version of the
outstanding transaction pool
 Some nodes may have heard about a transactions before others (this being a peer-to-peer network not all
pairs of nodes are connected to each other)

 Poor internet connectivity or latency in the network could be some of the reasons

 The Bitcoin protocol must reach consensus in face of two types of obstacles
 Imperfections in the network, such as latency, nodes crashing, poor connectivity

 Deliberate attempts by some nodes to subvert the process

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 9

Consensus in Bitcoin Network
 Bitcoin blockchain tries to achieve consensus through the following two ways –

 It introduces the idea of incentives

 Novel application in case of distributed consensus

 It embraces the notion of randomness through puzzle-solving

 Notion of a particular starting point and ending point for consensus does not exist

 Instead, consensus happens over a long period of time

 As time goes on, probability of any block being a part of the eventual consensus view increases

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 10

Simplified Bitcoin Consensus Algorithm
 New transactions are broadcast to all nodes

 Each node collects new transactions into a block

 In each round a random node gets to broadcast its block (randomization implemented
through puzzle solving)

 Other nodes accept the block only if all transactions are valid (unspent, valid
signatures)

 Nodes express their acceptance of the block by including its hash in the next block
they create

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 11

Why Does this Consensus Algorithm Work?
 Threat 1: Stealing Bitcoins

 Any such effort would need creation of a valid transaction spending that coin

 A valid signature would need forging of signature of the owner of the coin

 Digital Signature scheme does not allow signature forging

 Threat 2: Denial of Service Attack

 The proposing node may not like another user and may decide not to include a transaction
broadcast by that user

 In other words, it is denying service to the concerned user

 Next time, an honest node proposes a block, the denied transaction would get included

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 12

Why Does this Consensus Algorithm Work?
 Threat 3: Double-Spend Attack
 Let’s assume that Alice is a customer of a website run by Bob, who allows the download of a
software against payment in bitcoins. Alice adds an item to her shopping cart on Bob’s website
and the server requests payment. Then Alice creates a Bitcoin transaction from her address to
Bob’s and broadcasts it to the network. Let’s say that some honest node creates the next
block and includes this transaction in that block

 Upon seeing this transaction included in the block chain, Bob concludes that Alice has paid
him and allows Alice to download the software

 Suppose the next block is proposed by Alice or someone of her allies. The proposer can now
ignore the block containing the payment to Bob and instead includes a transaction that
transfers the coins that Alice was sending to Bob to a different address controlled by her

 This is a classic double‐spend pattern. Since the two transactions spend the same coins, only
one of them can be included in the block chain

 How do we know if this double spend attempt is going to succeed or not?

 It depends on which block will ultimately ends up on the long‐term consensus chain — the one with the
(Alice → Bob) transaction or the one with the (Alice → Alice) transaction

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 13

Why Does this Consensus Algorithm Work?
 Threat 3: Double-Spend Attack (Contd.)

 What determines which block will be included?

 Honest nodes follow the policy of extending the longest valid branch. However, at this point, the two
branches are the same length — they only differ in the last block and both of these blocks are valid

 The node that chooses the next block then may decide to build upon either one of them, and this choice
will largely determine whether or not the double‐spend succeeds

 Nodes often follow a heuristic of extending the block that they first heard about

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 14

Why Does this Consensus Algorithm Work?
 How can Bob protect himself from Double-Spending attack?
 Bob will act like a fool if he allows Alice to download the software just after hearing that Alice
has broadcast the transaction
 Checkout process is completed even before the transaction has been included in a block

 Zero-Confirmation transaction

 Bob should wait until the transaction (with which Alice pays him) is included in the Blockchain
and received multiple confirmations
 Higher the number of confirmations, higher would be the confidence (common heuristic: 6 confirmations)

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 15

Do Incentives Encourage Honest Behavior?
 Can we penalize dishonest behaviors?

 It is hard to identify morally illegitimate transactions

 Also, it is hard to punish nodes without identities

 Can incentivization work?

 Block Reward

 But a node gets the reward irrespective of whether it proposes an honest block or a malicious block!

 THINK about how will the node collect the reward?

 This is only possible if the block in question ends up on the long-term consensus branch

 Otherwise, the coin-creation transaction would not be accepted by others

 Transaction Fees

 The proposer includes a transaction paying the (input-output) difference to its own account

 Similar arguments will be applicable

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 16

Orphan Blocks
 Mining leads to generation of new block and linking it to the existing blockchain
 However, sometimes different miners each add different blocks

 Possible reasons: Invalid transactions, double-spend attacks, network latency

 In such cases, the blockchain branches

 The next block is added to one of the branches

 In Bitcoin Blockchain, the longest chain is called the "main chain," and blocks on the main
chain are considered to be the valid ones
 Blocks not on the main chain are considered invalid and called "orphan" blocks

 What happens to transactions placed into orphan blocks?

 There is no cause for concern

 Even if included in the orphan blocks, transactions made without malicious intent would eventually be
included in the main chain

 However, one needs to be careful if he/she receives Bitcoin in such a case

 If the transaction is not on the main chain, he/she would not be able to spend the amount received

 That’s why six confirmations are sought before assuming that a transaction is on the main chain

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 17

What have we achieved?
 A transaction is only ‘eligible’ to be considered valid when it just gets published as part of a
block

 Every miner extends the longest valid chain of blocks

 Can the miner steal coins of others?

 No. For that he has to forge signature of the original owner!

 Can the miner deny service to some by not including their transactions?
 Yes. But it’s a minor irritant as some other miner will include those transactions in some subsequent
block, possibly 10 minutes later

 Can the miner double spend a coin?

 No, if the recipient is vigilant

 A transaction is usually considered valid only after it has received a few, heuristically six,
confirmations through extension of the block

 A lot of attacks are infeasible if the majority of miners, weighted by hash power, are
following the protocol — or are honest

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 18

That’s the Blockchain as in Bitcoin
 A distributed ledger that is Authenticated, Consistent, Tamper-proof, Easily verifiable,
Democratic and Anonymous

 However, …
 Bitcoin is only about ‘payments’, not meant to record any other transaction

 Bitcoin is anonymous, which may not be desired in other situations

 Bitcoin is slow, processes about 7 transactions per second compared to 2000 by VISA or 200
by PayPal

 Bitcoin transactions have long lead time, you need to wait for about an hour to be assured of
a payment

 Bitcoin is permission less, anyone can join, transact, mine or verify

 So, NOW the goal is…

 Adopting the concept of the authenticated, tamper-proof, consistent, verifiable distributed

ledger and adapting it to situations other than cryptocurrency

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 19

Modifications Being Experimented with
 How to incorporate two-way transactions?
 If you give me X, I will give you Y Smart Contract

 What if there are needs for validators or regulators?

 Think of buying a piece of land, or cross-border payments Permissioned Blockchain

 Can only relevant parties play role in a transaction?

 Why broadcast it to parties who are not involved in it? Channeled Communication

 What if the parties want to keep the transaction private?

 Can a transaction be verifiable without divulging data in it? Zero Knowledge Proof

 Can there be alternatives to PoW? Proof of Stake

 PoW is energy-inefficient, slow and, soon may not be attractive enough

 Some of these can be achieved by adding layers on top of established Blockchain like
bitcoin
 But it might be advisable to borrow the concepts, and build more generic or domain-specific
platforms

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 20

Issues to be Resolved
 Privacy
 Transactions are not anonymous but pseudonymous

 Encryption of transaction is not feasible

 Scalability
 Bitcoin processes 7 transactions per second compared to 2000 by Visa

 Consensus regarding transactions in decentralized situation takes time

 Recent issue of decreased hash rate due to crackdown on bitcoin mining in China

 Security
 Agents with high decision-making power might influence consensus

 Bugs in smart contracts can play havoc

 Environmental sustainability
 Prevalent consensus protocols are dependent on ever-expanding energy consumption

 Most of the applications use trade offs among security, scalability and environmental
sustainability, thereby slowing down adoption
Managing Industry 4.0 Ecosystem (2023-25) | Session 9 21
Chow Tai Fook: Blockchain for the
Diamond Industry
Case Context
 Chow Tai Fook Jewellery (CFT), one of the world’s largest jewelry retailers, has
adopted blockchain

 To address some of the challenges in the diamond industry

 As part of their digital transformation initiative

 Moving from paper-based certificates to digital certificates

 Tracing the origin of diamonds

 Eliminating the problem of blood diamonds

 Eradicating the risk of certificate or diamond swap

 The case is an example of how technology can disrupt a traditional industry

 Also discusses the pros and cons of such an implementation

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 23

What are the challenges of the Diamond Industry?
 Long, fragmented, and complicated supply chain

 Information is not shared across the entire network

 Multiple versions of the same document maintained at different points

 Risk of frauds is sufficiently high

 Proving authenticity is a real challenge

 Competition posed by synthetic diamonds

 Certificate and Diamond swaps

 Protecting the brand image

 Issues related to conflict diamonds or ‘blood diamonds’

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 24

What issues is CTF facing?
 Issues faced by CTF

 CTF experienced sales decline in three consecutive years (2014-16) before picking up

 Slow pace of growth amid intensified competition

 Uncertain macro environment (US-China trade war)

 More sophisticated customer expectations

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 25

 How can blockchain be used to solve CTF’s challenges?

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 26

Challenges faced by CTF in implementation
 Technical knowledge and technology investment

 How informed are the end-users?

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What would be the Consumers' responses?
 Would you buy a diamond with blockchain technology by paying some additional
amount? Why?

 Willingness to pay for the additional utility that blockchain provides?

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 28

Differences with Bitcoin Blockchain
 How is the Blockchain platform used by CTF different from Bitcoin Blockchain?

Managing Industry 4.0 Ecosystem (2023-25) | Session 9 29

Thank You