M.Sc.IT-Part-II-Bolck-Chain-Semester-IV_compressed-munotes

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1Unit I
1
INTRODUCTION TO BLOCKCHAIN
Unit Structure
1.0 Objectives
1.1 Introduction to Blockchain
1.2 Evolution of Blockchain
1.2.1 TCP/IP
1.2.2. World Wide Web
1.2.3 Banking
1.3 What is Blockchain?
1.3.1 Blockchain
1.3.2 Centralized vs. Decentralized S ystems
1.3.2.1Centralized Systems
1.3.2.2 Decentralized Systems
1.4 Layers of Blockchain
1.5 Why is Blockchain Important?
1.6 Blockchain Uses and Use Cases
1.7Summary
1.8Questions
1.9References
1.0 OBJECTIVES:
●Introduction to Blockchain
●Evolution of Blockchain
●What is Blockchain?
●Layers of a Blockchain
●Importance of Blockchain
●Blockchain Uses
●Blockchain Use cases
1.1 INTRODUCTION TO BLOCKCHAIN
Blockchain is the new phenomenon to sweep the world of
technology and moreover financial transactions. Many of us are drawn to
it because of cryptocurrency. However, there is more to blockchain than
cryptocurrency. Blockchain is a technology that can be used for carryingmunotes.in

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2out financial transactions, creating applications as well as a database for
your applicatio n. Blockchain has introduced a lot many new concepts as
well as reused the existing ones in such an exemplary way that we are
stunned by the sheer simplicity of the technology and awed by the possible
scope of its applications.
Blockchain technology has a lot of advantages like lowering the
costs related to financial transactions, elimination of third parties, speed of
transactions, reducing the risk of fraud and the flexibility to involve and be
a part of the process.
1.2 EVOLUTION OF BLOCKCHAIN
1.2.1 T CP/IP
TCP/IP was the biggest invention in the field of Technology. It
changed the way people perceived and used technology. The circuit
switching technology was used prior to TCP/IP for the exchange of data.
Circuit switching technology was based on the c oncept of resource
allocation for transmission.
Circuit switching technology characteristics:
●Circuit switching involves resource allocation prior to
transmission.
●It consists of three phases: connection setup, data transfer, and
connection teardown.
●In ci rcuit switching, the resources are reserved during the setup
phase; these resources are reserved for the entire duration of data
transfer until the teardown phase.
●Data is transferred as a continuous flow.
TCP/IP introduced the concept of Packet switching .I np a c k e t
switching, there is no need to allocate resources prior to transmission.
Data is sent across the network without dedicated resources yet it is
delivered in order and without any errors. The TCP/IP protocol suite
ensured that data was delivered to the correct destination in a correct
orderly format.
Packet switching technology characteristics:
●In a packet -switching, there is no resource reservation at the start
of transmission; resources are allocated on demand.
●Data is not a continuous flow bu t it is divided into packets of fixed
or variable size.
●Each packet is treated independently of all others.
As can be seen that the devices work in tandem with each other for
delivery without any central controller, we can say that TCP/IP works in a
peer-to-peer or decentralized manner.
1.2.2. World Wide Web
The Invention of the World Wide Web (WWW) in the early 1990s
was a game -changer. It was decentralized and used the TCP/IP protocolmunotes.in

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3for communication. It was a humongous success and the current times are
proof as to how it hasn’t faded into oblivion. WWW or the Internet has
changed the way we work or live our lives. Many applications are built on
top of the Internet. However, it has somehow turned into a centralized
system.
The usability of the Inte rnet and the various applications that it
supports has led it to become a norm. The Internet is currently being used
for entertainment, education, e -commerce, banking, to carry out financial
transactions, and various other purposes. People have started tru sting the
internet for carrying out various transactions online.
1.2.3 Banking
The most ancient form of banking is called the Barter System
where goods were exchanged for other goods or services. For example, a
farmer producing rice would exchange it with another farmer for wheat or
other staples. However, there were a lot of loopholes in this system due to
lack of trust or the occurrences of fraud and exploitation.
The introduction of fiat currencies solved this problem. Fiat
currency is a standard curr ency introduced by a trusted authority and
accepted by all. For example, Rupee is the currency in India and dollars in
the USA. Traditionally gold and silver coins were used as fiat currency.
A Transaction can be defined as the currency which is being
transferred from one entity to another. For example, you are paying for a
book you purchased. The book costs ₹500. So, you are supposed to give a
₹ 500 note to the bookseller. Once you handover the note to him, the
transaction is settled. In this scenario, t here are two parties carrying out a
transaction without a need for an intermediary. Imagine the same
transaction is being done when you cannot be physically present at the
book shop. In this case, you will need a trusted third party for settling your
transaction. The banking system is the most widely used third party for
settling financial transactions. In the banking scenario, ₹ 500 will be
deducted from your account and deposited in the Booksellers account.
Banking evolved as an intermediary for settling transactions and
various other services related to it. The combination of the Internet and the
banking system allows us to settle transactions all over the world. So,
making a monetary transaction to any part of the world is as easy as doing
it locally. H owever, offshore transactions take more time to settle and are
a bit expensive because of the additional fee involved as compared to local
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4As can be seen, the role of a trusted third party is extremely
important in settling a transaction. He nce, there are many types of
intermediaries that exist like banks, escrow services, clearinghouses, and
others for settling a transaction.
Blockchain is a solution that eliminates this need for a trusted third
party. It provides a way to transact without an intermediary in a secure
way by using various cryptographic techniques.
A research paper by Satoshi Nakomoto, which is a pseudonymous
name, introduced the concept of “Bitcoin -Ap e e r -to-peer electronic cash
system”. In this paper, he describes a solu tion to replace the traditional
banking system with a decentralized, peer -to-peer, trustless system for
exchanging currency.
Banks are currently the centralized authority for carrying out
financial transactions, settling them, maintaining records of trans actions,
enforcing the security of transactions, and safeguarding the assets of an
entity. The entire commerce platform is dependent on the banks for
settling their transactions. The bank is the trusted third party for carrying
out a financial transaction so that it can intervene in case of a dispute.
However, the need for an intermediary leads to an increase in the cost as
well as time taken to settle a transaction.
However, with the enormous change in how financial transactions
are being done online, Sa toshi Nakomoto invented the Bitcoin currency
for settling transactions online without using the bank as an intermediary.
Bitcoin is a very widely known example of Blockchain Technology
implementation.
However, there is more to Blockchain than being a cryp tocurrency.
Bitcoin is an implementation of Blockchain used for financial purposes.
Barter System => Gold/Silver Coins => Paper Money=> Credit Card =>
Digital Wallets =>CryptoCurrency
1.3 WHAT IS BLOCKCHAIN?
The Internet has revolutionized many aspects of life, society, and
business. However, not much has changed in the past couple of decades
with respect to transactions in an untrusted environment. Blockchain is the
component that makes the internet more open, more accessible, and more
reliable.
Blockc hain is a collection of transactions. It is a system that
records transactions between two communicating nodes. It works in a
peer-to-peer fashion. There is no need for a trusted intermediary in
blockchain. The system is designed in such a manner that all transactions
are verified by everyone, eliminating the need for a trusted intermediary.
Transactions can be monetary or non -monetary.munotes.in

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5Let's take a situation where A needs to pay 50$ to B. There are two ways
to carry out this transaction.
1. A can pay it in person to B
A=>50$ =>B
2. A has to make a transfer of 50$ via a trusted intermediary such as a
bank or escrow or any other trusted third party.
A=>50$ => B
The first transaction is an example of a peer to peer transaction
without the need of a trusted third party. However, the challenge is to
perform such transactions when both the parties are geographically far
placed.
Figure 1 -1. Transaction through an intermediary vs. peer -to-peer
transaction
#imgref: Beginning Blockchain -Singhal, Dhameja, Panda
Some transactions take weeks to settle. A typical example is a stock
transaction which happens in a second but takes weeks to settle. This
delay is not desirable in today’s fast moving world.
Figure 1 -2. Stocks trading through an intermediary clearing house
#imgref: Beginning Blockchain -Singhal, Dhameja, Pandamunotes.in

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6Stock trading needs to be carried out by eliminating the need for a
broker or a clearing house. It needs to be peer to peer and instantaneous.
Figure 1 -3. Peer -to-peer stock trading
#imgref:B eginning Blockchain -Singhal, Dhameja, Panda
Transactions in Blockchain are similar to the financial transaction
carried out with fiat money. A currency note handed over to someone does
not belong to the payer. It belongs to the payee. Blockchain transacti ons
are somewhat similar to this.
1.3.1 Blockchain
Blockchain is a peer -to-peer system of transacting values with no
trusted third parties in between.The sender and receiver can transact
without the need of a third party.
It is a shared, decentralized, a nd open ledger of transactions.
Ledger is a record of transactions. It can be considered as a transaction
log, This ledger database or transaction log is replicated across a large
number of nodes.
New entries to this ledger database can only be appended. It cannot
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7All databases are synchronized across nodes i.e. every new entry is
reflected on all copies of the databases hosted on different nodes.
There is no need for any intermediary or trusted third pa rties to
verify, secure, and settle the transactions.
Blockchain is not disruptive and operates above the Internet. It
does not affect the other applications on the Internet.
The most important characteristic of Blockchain being that it is
open source an d decentralized.
A typical blockchain may look as shown in Figure 1-4.
Figure 1 -4. The blockchain data structure
#imgref:Beginning Blockchain -Singhal, Dhameja, Panda
A Blockchain consists of multiple blocks of transactions
interlinked together. The first block in a blockchain is called the “Genesis”
block. Every block contains a block header and body. The body contains
the list of transactions and details related to that transaction like the
amount, address, etc.
The header contains information about the previous block hence
creating a link between the current block and previous block.
Every node on the blockchain network has an identical copy of the
blockchain.
To understand blockchain better, let’s look at an example where
three candidates are transacting with each other.
Step-1:
Alice has $50 with her. This is the first transaction called genesis . All
nodes are updated with the genesis.
Figure 1 -5. The genesis block
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
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8Step-2:
Alice pays $20 to Bob thus making a new transaction. This transaction is
updated on all the nodes of the blockchain.
#img ref:Beginning Blockchain -Singhal, Dhameja, Panda
Step-3:
Bob pays $10 to Charlie which is further reflected on all nodes of the
Blockchain.
#imgref:Beginning Blockchain -Singhal, Dhameja, Panda
As can be seen, blockchain is a list of transactions. All new
transactions are appended to the list. A transaction entry cannot be
modified. It is immutable. All transactions are validated by the remaining
nodes in a blockchain.
1.3.2 Centralized vs. Decentralized Systems
Blockchain is Decentralized. A distribut ed system is a system in
which the computation is performed on multiple nodes. A distributed
system can be centralized or decentralized.
A centralized distributed system has a central controller which
breaks down a task and distributes it amongst the othe rn o d e sf o r
processing.Hadoop is an example of centralized distributed architecture.
A decentralized distributed system does not have any master node
yet the processing is done by multiple nodes.
Blockchain is an example of decentralized distributed arch itecture.
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9Figure 1-8is a pictorial representation of how a centralized distributed
system may look.
Figure 1 -8. A distributed system with centralized control
#imgref: Beginning Blockchain -Singhal, Dhameja, Panda
Centralization or Decentralization can be perceived as being
Technical, Political or Logical.
Technical Architecture: This perspective deals with the physical
placement of devices in a system. It deals with the system as a whole, the
number of devices, the robustness of the system based on the participating
nodes, etc.
Political perspective: This perspective is about the control/decision
maki ng of the system. When a single node or multiple nodes are
controlling the system, it is centralized. However, if all nodes are equally
responsible for decision making then it is decentralized.
Logical perspective: The logical perspective deals with how t he
system performs if it is split horizontally or vertically. If a system is
performing similarly before and after a split it is decentralized. It is
independent of the other nodes in the system.
An organization has one head office(architecturally central ized),
governed by a CEO(politically centralized) and the organization cannot be
split in 2 equal halves(logically centralized).
Our language of communication is decentralized from every
perspective —architecturally, politically, as well as logically. For two
people to communicate with each other, in general, their language is
neither politically influenced nor logically dependent on the language of
communication of other people.
The torrent systems such as Bit Torrent are also decentralized from
every per spective. Any node can be a provider or a consumer, so even if
you cut the system into halves, it still sustains.
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10The Content Delivery Network on the other hand is architecturally
decentralized, logically also decentralized, but is politically centralized
because it is owned by corporations.
Blockchain is made up of multiple nodes(architectural
decentralization) and each node is equal(political decentralization).
However, there is a commonly agreed mechanism to operate (logical
centralization).
1.3.2.1 Centralized Systems
A centralized system has a centralized control with all
administrative authority. Such systems are easy to design, maintain,
impose trust, and govern. However, they suffer from many inherent
limitations:
●The system is not robust as the re is a single point of failure.
●Security of system based on the security of the controller so it is
vulnerable to attack
●Centralization of power leads to monopoly
A typical centralized system may appear as shown in Figure 1-9.
Figure 1 -9. A centralized system
#imgref:Beginning Blockchain -Singhal, Dhameja, Panda
1.3.2.2 Decentralized Systems
All syst ems have the same authority in a decentralized system.
Every node is independent of the other node and works in a commonly
agreed upon protocol.
Such systems are difficult to design, maintain, govern, or impose
trust. However, they offer the following adva ntages:
●They are extremely robust because they do not have a central point
of failure, so more stable and fault tolerant
●They are more secure because there is no central point to easily
attack.
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11●All systems are treated equally so no monopoly. They are
democ ratic in nature.
A typical decentralized system may appear as shown in Figure 1-10.
Figure 1 -10. A decentralized system
#imgref:Beginning Blockchain -Singhal, Dhameja, Panda
Blockchain is an example of a decentralized distributed system. All
nodes participate in the system and are responsible for the entire
blockchain.
A typical decentralized and dist ributed system, which is effectively
ap e e r -to-peer system, may appear as shown in Figure 1-11.
Figure 1 -11. A decentralized and peer -to-peer system
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
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121.4 LAYERS OF BLOCKCHAIN
The blockchain technology can be visualized as layers similar to
the TCP/IP protocol suite. However, it is not standardized yet and
provides a basic understanding of the working of a blockchain. These
layers are present on all the nodes in a blockchain.
Ah i g h -level, layered representation of blockchain consists of 5
layers as shown in Figure 1-12.
Figure 1 -12. Various layers of blockchain
#imgref: Beginning Blockchain -Singhal, Dhameja, Panda
Application Layer
This layer deals with applications which are built on the
Blockchain technology as well as applications which enhance the
blockchain technology and are part of the various flavors of blockchain.
There are various flavors of blockchain in the market and each has its o wn
implementation of blockchain. Some of the flavors have developed
applications which are integrated into the technology and become a part
of it.
Some applications in blockchain follow the traditional
development model and include programming construct s, scripting, APIs,
development frameworks, etc.
Other types of applications use blockchain as a backend. These
applications might be hosted on some web servers and that might require
web application development, server -side programming, and APIs, etc.
Since blockchain is decentralized, an ideal blockchain application
will not have a client –server model.
Some applications use off -chain networks so that the resource
intensive network operations do not affect the blockchain network.
Execution Layer
Theexecutions of instructions as ordered by the Application Layer
take place in the Execution Layer. The instructions could be a simple
instruction or a set of multiple instructions in the form of a smart contract.
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13In either case, a program or a script is exe cuted for the correct execution
of the transaction. All the nodes in a block chain network execute the
programs/scripts independently. The output on the same set of inputs and
conditions always produces the same output on all the nodes.
Bitcoins scripts a re simple and have only a few sets of instructions.
Ethereum and Hyperledger, use smart contracts that are made up of
multiple instructions and can be complex executions.
Ethereum’s code is written in solidity which gets compiled to
Bytecode or Machine C ode that gets executed on its own Ethereum
Virtual Machine.
Hyperledger code, called as chaincode smart contracts, supports
running of compiled machine codes inside docker images, and supports
multiple high -level languages such as Java and Go.
Semantic L ayer
The instructions executed in the previous layer are validated in the
Semantic layer. It is a logical layer because there is an orderliness in the
transactions and blocks. Semantic layer is responsible for checking if a
transaction is legitimate or not . It checks for the authorization of a
transaction. In case of bitcoin, an amount is paid by the amount received
in a previous transaction. This layer checks if the previous transaction is
legitimate and has received the amount they are spending. Ethereum has
the system of Accounts like banks. It means that the account of the one
making the transaction and that of the one receiving it both get updated.
The rules of the system, the data models and structures are defined in this
layer.
A block usually contai ns a bunch of transactions and some smart
contracts. The data structures such as the Merkle tree are defined in this
layer with the Merkle root in the block header to maintain a relation
between the block headers and the set of transactions in a block. Als o, the
data models, storage modes, in -memory/disk based processing, etc. can be
defined in this logical layer.
The semantic layer also defines how the blocks are linked with
each other. Every block in a blockchain contains the hash of the previous
block, all the way to the genesis block. Though the final state of the
blockchain is achieved by the contributions from all the layers, the linking
of blocks with each other needs to be defined in this layer.
Propagation Layer
This layer is responsible for inf ormation dissemination. It deals
with the communication between nodes in the Blockchain. The previous
layers are all about transaction processing at independent block level. The
Propagation Layer is the peer -to-peer communication layer that allows the
nodes to discover each other, and talk and sync with each other with
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14When a transaction is made it gets broadcast to the entire network.
Similarly, when a node wants to propose a valid block, it gets immediately
propagated to the entire network so that other nodes could build on it,
considering it as the latest block.
So, transaction/block propagation in the network is defined in this
layer, which ensures stability of the whole network. By design, most of the
blockchains are designed such that they forward a transaction/block
immediately to all the nodes they are directly connected to, when they get
to know of a new transaction/block.
In the asynchronous Internet network, there are often latency issues
for transac tion or block propagation. The time taken for propagation is
dependent on the capacity of the nodes, network bandwidth, and a few
more factors.
Consensus Layer
The Consensus Layer is usually the base layer for most of the
blockchain systems. The primary p urpose of this layer is to get all the
nodes to agree on one consistent state of the ledger. There are different
ways of achieving consensus among the nodes. This layer is responsible
for the Safety and security of the blockchain.
For a public blockchain to be self -sustainable, an incentives
mechanism helps in keeping the network alive as well enforces
consensus.In Bitcoin or Ethereum, the incentive technique is called
“mining”. Bitcoin and Ethereum use the Proof of Work (PoW) consensus
mechanism.
An o d e is randomly selected that can propose a block. Once a
block is proposed, it is propagated to all the nodes. All nodes check to see
if it is a valid block with all legitimate transactions and if the PoW puzzle
was solved properly. If true, then the block is added to their own copy of
the blockchain.There are different variants of consensus protocols such as
Proof of Stake (PoS), delegated PoS (dPoS), Practical Byzantine Fault
Tolerance (PBFT), etc.
1.5 WHY IS BLOCKCHAIN IMPORTANT?
Blockchain, being a decen tralized peer -to-peer system, has some
inherent benefits and complexities. There are also scenarios where
implementing blockchain for the existing system makes it more robust,
transparent, and secured. However, blockchain should be used sparingly
with resp ect to the system. It is not feasible for all kinds of use cases and
works efficiently in particular scenarios only.
Limitations of Centralized Systems
The software development trend currently has an inclination
towards client server systems. It uses a ce ntralized architecture. Also, all
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15The current system involves working with a trusted environment or in case
of an untrusted environment involves a trusted third party.
E-commerce platforms are the best example of involving a trusted
third party in an untrusted environment. The buyers and sellers do not
know each other. However, the e -commerce platform is the trusted third
party involved. Hence, people can transact with each other v ia this
platform. The buyer and seller both trust the platform and hence can
transact in a safe and secure way.
Blockchain eliminates the need for a trusted third party while
carrying out transactions in an untrusted environment. The building block
of blo ckchain is trust amongst the transacting nodes.
Disadvantages of a conventional centralized system:
●Trust issues
●Security issue
●Privacy issue —data sale privacy is being undermined
●Cost and time factor for transactions
Advantages of decentralized systems:
●Elimination of intermediaries
●Easier and genuine verification of transactions
●Increased security with lower cost
●Greater transparency
●Decentralized and immutable
Blockchain Adoption
Blockchain became popular with the introduction of Bitcoin in
2009. How ever, companies have developed different implementations of
Blockchain like Ethereum, Hyperledger, etc. Microsoft and IBM came up
with SaaS (Software as a Service) offerings on their Azure and Bluemix
cloud platforms, respectively.
Many companies started integrating blockchain in their problem
solving solutions. Blockchain has a tremendous impact on the financial
services market. A lot of industries are moving towards using blockchain
as their technological solution. However, the biggest challenge is
designing the right kind of Blockchain. Blockchain can be designed as
public or private. Using blockchain for building non -financial transactions
without disrupting the existing system can be a challenge. Some of the
design challenges are whether to convert th e entire existing system to
Blockchain or to use blockchain as a backend or to use partial
implementation of blockchain.
1.6 BLOCKCHAIN USES AND USE CASES
In this section, we will look at some of the implementation of
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16True Sharing Economy
Blockchain can be used to create a true sharing economy where
transactions could be carried out in a peer to peer manner like Uber,
AirBNB,etc.
Self-Sovereign Digital Identity
Self-Sovereign Digital Identityis an implementation where the
citizens can own their identity and monetize their own data.
Asset Registration
Any type of property or asset, whether physical or digital, such as
laptops, mobile phones, diamonds, automobiles, real estate, e -
registrations, digital files, etc. can be registered on block chain. Blockchain
can keep a track of the transfer of these assets from one entity to another,
maintain the transaction log, and check validity or ownerships. It can also
be used for notary services, proof of existence, tailored insurance schemes,
etc.
Financial Use Cases
Cross -border payments, share trading, loyalty and rewards system,
Know YourCustomer (KYC) among banks, ICO,etc., can be implemented
using Blockchain.
The Wisdom of Crowds
The Wisdom of Crowds can be used to take the lead and shape
businesses, economies, and various other national phenomena by using
collective wisdom. Financial and economic forecasts based on the wisdom
of crowds, decentralized prediction markets, decentralized voting, as well
as stocks trading can be possible on blockch ain.
Music Royalties
Blockchain can be used to maintain a public ledger of music rights
ownership information as well as authorised distribution of media content.
This will help us in determining music royalties in internet enabled music
streaming service s.
IoT
There are a plethora of IoT devices and from different vendors.
Hence, it becomes difficult for all of them to have a centralized system to
control devices.
Blockchain can be used to build a decentralized peer -to-peer
system for the IoT devices t o communicate with each other. ADEPT
(Autonomous Decentralized Peer -To-Peer Telemetry) is a joint initiative
from IBM and Samsung that has developed a platform that uses elements
of the Bitcoin’s underlying design to build a distributed network of
devices —a decentralized
IOT.
ADEPT uses three protocols: Bit Torrent for file sharing, Ethereum
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17platform. The IOTA foundation is another such initiative.
Government Agencies
Land registration, vehicle registration, and management, e -Voting,
Supply chains, etc. are some of the use cases where blockchain can be
used.
1.7SUMMARY
This chapter is a brief overview of the evolution of blockchain, the
history and the benefits of blockchain. It concen trated on the difference
between the centralized and decentralized systems. Also, it listed out the
various use cases of Blockchain.
Blockchain is a solution to peer to peer transactions eliminating the
need for a trusted third party.
Blockchain deals w ith three key areas: Control, Trust, and Value.
Control: Blockchain enabled distribution of the control by making the
system decentralized.
Trust: Blockchain is an immutable, tamper -resistant ledger. It gives a
single, shared source of truth to all nodes , making the system trustless.
What it means is that trust is no longer needed to transact with any
unknown person or entity and is inherent by design.
Value: Blockchain enables exchange of value in any form. One can issue
and transfer assets without cent ral entities or intermediaries.
1.8QUESTIONS:
1.What is a blockchain?
2.What is the difference between a centralized and decentralized
system?
3.Explain the different layers of Blockchain.
1.9REFERENCES:
© Bikramaditya Singhal, Gautam Dhameja, Priyansu S ekhar Panda
2018 31
B. Singhal et al., Beginning Blockchain, https://doi.org/10.1007/978 -1-
4842 -3444 -0_2
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182
BLOCKCHAIN FOUNDATION
Unit Structure:
2.0 Objective
2.1 Laying the Blockchain Foundation
2.2 Cryptography
2.2.1. Symmetric Key Cryptography
2.2.1.1 Kerckhoff’s Principle and XOR Function
2.2.1.2Stream Ciphers vs. Block Cipher
2.2.1.3 One -Time Pa d
2.2.1.4 Data Encryption Standard
2.2.1.5 Advanced Encryption Standard
2.2.1.6 Challenges in Symmetric Key Cryptography
2.3 Cryptographic Hash Functions
2.3.1 A Heads -up on Different Hash Functions
2.3.1.1 SHA -2
2.3.1.2 SHA -256 and SHA -512
2.3.1.3 RIPEMD
2.3.1.4 SHA -3
2.3.1.5 Applications of Hash Functions
2.3.1.6 Code Examples of Hash Functions
2.3.2 MAC and HMAC
2.3.2.1 MAC Strategies
2.4 Asymmetric Key Cryptography
2.4.1 RSA
2.4.2 Digital Signature Algorithm
2.4.3 Elliptic Curve Cryptography
2.4.4 Ellip tic Curve Digital Signature Algorithm
2.4.5 Code Examples of Asymmetric Key Cryptography
2.4.6 The ECDSA Algorithm Code
2.5 Diffie -Hellman Key Exchange
2.5.1 Code for DH:
2.6 Symmetric vs. Asymmetric Key Cryptography
2.7 Game Theory
2.7.1 Nash Equilibrium
2.7.2 Prisoner’s Dilemma
2.7.3 Byzantine Generals’ Problem
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192.7.5 Why to Study Game Theory
2.8 Computer Science Engineering
2.8.1 The Blockchain
2.8.2 Merkle Trees
2.8.3 Code Snippet for Merkletree
2.9 Putting It All Together
2.10 Prope rties of Blockchain Solutions
2.11 Blockchain Transactions
2.12 Distributed Consensus Mechanisms
2.13 Proof of Work
2.14 Proof of Stake
2.15 Practical Byzantine Fault Tolerance algorithm (PBFT)
2.16 Blockchain Applications
2.17 Scaling Blockchain
2.17.1 Of f-Chain Computation
2.17.2 Sharding Blockchain State
2.18 Summary
2.19 Questions
2.20 References
2.0 OBJECTIVES:
●Understanding the Components of Blockchain
●Cryptography
●Symmetric key Vs Asymmetric key
●Game Theory
●Computer Science
●Blockchain Scaling
2.1LAYING THE BLOCKCHAIN FOUNDATION
Blockchain is a combination of the concepts from cryptography,
game theory, and computer science engineering, as shown below:
Figure 2 -1. Blockchain at its coremunotes.in

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20Traditional centralized systems allowed only one entity to maintain
the history of transactions or modifications to ensure concurrency in a
system. However, the issue with a single point of control was the complete
trust on that single entity. If all the systems were given full control to
modify the transactions then the problems would definitely increase
because we never know what those systems might do. So, the trust issue
now multiplies to the number of nodes with full control.
Blockchain uses cryptography, game theory and computer science
concepts to solve th e trust issues plaguing a trustless system with multiple
entities.
Cryptography can be used to check the validity of the user
performing a particular transaction. However, it does not prevent a user
from spending the same amount twice called as the double spend attack.
The only way to thwart a double spend is to make all the nodes aware of
all the transactions.
This leads to another problem as to how do everyone agree on a
common database state? How does the system prevent anyone from
injecting a fraudule nt database? Such problems can be solved using game
theory. There is a popular case study in Game theory called the
ByzantineGenerals’ Problem. It is synonymous to the problems we face
while making several nodes trust each other and to ensure the system is
fault tolerant. Game theory provides different approaches to determine the
behavior of a system and solutions to problems in a trustless system.
Game theory believes that participants do not care about moral values but
as per the advantage that they get w hile playing a game. It does not matter
if a node is honest or cheat, malicious or ethical or has any other traits. Its
all about winning a game. Blockchain uses the concepts of game theory
for ensuring stability in a trustless system. Cryptography and gam e theory
help in validating transactions and carrying out transactions in a trustless
system. However, the concepts in computer science tie these two together
by providing data structures and network communication techniques.
Computer science techniques i ncorporate cryptography and game
theory concepts into an application and enables decentralized as well as
distributed computing amongst the nodes using data structure and network
communication components.
2.2 CRYPTOGRAPHY
Cryptography is one of the most important components of
blockchain. It plays an important part in validating users and securing
transactions. Cryptography consists of many mathematical techniques that
can be used to solve various issues in Blockchain.
Cryptography has been used from a l ong time ago for hiding
information i.e. keeping the messages confidential. Cryptography has
various applications likemaintaining the integrity of the message,
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21Figure 2 -2. How Cryptography works in general
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Confidentiality: Confidentiality means that only the intended recipient can
access the message.
Data Integrity: Data Integrity allows us to check if the data has been
altered or modified during transmission.
Auth entication: The sender of a message is verified and validated using
authentication. It checks whether a user is who he/she claims to be.
Non-repudiation: It ensures that the sender cannot deny sending a
message.
Plaintext: The actual information that n eeds to be sent is called plaintext.
Ciphertext: The information to be sent(plaintext) is converted to another
form called ciphertext.
Encrypt: The process of converting plaintext to ciphertext is called
Encryption or encoding. It usually consists of an algorithm and a key.
Decrypt: The process of recovering plaintext from ciphertext is called
Decryption or Decoding. It usually consists of an algorithm and a key.
Alice wants to send a message (m) to Bob. If the message is sent as
it is, then anyone can read the message. So, Alice encrypts the message
using an encryption algorithm (E) and a secret key (k) to produce the
ciphertext. The receiver, Bob, on receiving the cipher text, decrypts the
message using an algorithm and the secret key(k) to read the m essage.
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22Anyone who wants to decrypt the message needs to know the
algorithm and the secret key being used. The strength of the algorithm and
the secrecy of the key are factors that influence the efficacy of a
cryptosystem.
There are two types of cryptogra phy systems: symmetric key and
asymmetric key cryptography.
2.2.1 Symmetric Key Cryptography
Symmetric key cryptography is named so because it uses the same
key for encryption and decryption. The sender and receiver agree on a
Secret Key(k) before they s tart sharing confidential information. Since, the
success of this system is based on the secrecy of the key, the key is kept
extremely secure and private. Hence, this system is also called as private
key encryption system. The secret key agreement is perfo rmed using an
extremely secure channel whereas the information is exchanged using any
insecure channel.
Figure 2-3. Symmetric Key Information Exchange
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
The process of Symmetric Key cryptography(Figure 2 -2.) is:
Sender(Alice):
Encrypt the plaintext message m using encryption algorithm E and the
previou sly agreed upon secret key k to generate the ciphertext c.
c=E ( k ,m )
The ciphertext c is sent to Bob.
Receiver(Bob):
Decrypt the ciphertext c using decryption algorithm D and the previously
agreed upon secret key k to retrieve the plaintext m
m=D (k ,c )
Symmetric key cryptography is used widely because it is fast and simple
to implement. It is used in secure file transfer protocols such as HTTPS,
SFTP, and WebDAVS.
There are two variants of symmetric key cryptography: stream ciphers and
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232.2.1.1 Kerckhoff’s Principle and XOR Function
Kerckhoff’s principle states that a cryptosystem should be secured
even if everything about the system is publicly known, except the key.
In general, the encryption algorithm E and decryption algorithm
Dare public. However, the message cannot be intercepted because the key
is known only by the communicating parties. Hence, the security of the
keys is paramount in symmetric key cryptography.
The XOR, otherwise known as “Exclusive OR” and denoted by the
symbol ⊕ is the basic building block for many encryption and decryption
algorithms.
The truth table for XOR is:
A B A⊕B
0 00
1 01
0 11
1 10
Table 2 -1. XOR Truth Table
Properties of XOR Function:
Associative: A(BC) = (AB)C
Commutative: AB=BA
Negation: A1=Ā
Identity: AA=0
The same XOR function is used for both encryption and decryption.
mk=ca n dck=m
XOR is the most basic form of encryption algorithm. It is very
simple to get the original plaintext message just by XORing with the key,
which is a shared secret and only known by the intended parties.
2.2.1.2Stream Ciphers vs. Block Cipher
Stream Ciphers
In a Stream cipher, encryption and decryption are performed on
one symbol at a time.There is a stream of symbols (characters or bits) that
is encrypted using a stream of keys.
P=(p1,p2,p3…)
K=(k1,k2,k3..)
C=E(p1,k1),E(p2,k2)…..munotes.in

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24Usually a XOR operation is performed in a bit by bit manner to
encrypt every bit of the plaintext to generate ciphertext. The key is
genera ted by a pseudorandom keystream generator from a random seed
value using digital shift registers. The key generation can be online or
offline. However, synchronization of keys can be challenging. The
security of the entire system is based on the unpredicta bility and security
of the pseudo random generator which stands to be its biggest
disadvantage. The pseudorandom number generator has been attacked
many times in the past, which led to deprecation of stream ciphers.
Another disadvantage is that of low di ffusion. All information in
one bit of input text is contained in its corresponding one bit of ciphertext.
It could have been more secure if the information of one bit was
distributed across many bits in the ciphertext.
The most widely used stream cipher is RC4 (Rivest Cipher 4) for
various protocols such as SSL, TLS, and Wi -Fi WEP/WPA etc. However,
it suffers a lot of vulnerabilities and hence is not recommended. Examples
of stream ciphers are one -time pad, RC4, FISH, SNOW, SEAL, A5/1, etc.
Block Ciphers
In a block cipher, the plaintext is divided into groups of symbols of
fixed size called blocks. The encryption is performed on an entire block of
plaintext at a time. The same key is used for encryption of all the blocks.
The ciphertext is repeated if the blocks of plaintext are also repeated.
The block size is usually64 bits, 128 bits, and 256 bits called block
length, and their resulting ciphertext blocks are also of the same block
length.
Block cipher operation is performed in various modes. The
simplest mode is the basic mode of encryption and decryption. However,
the ciphertext is the same for the same blocks of plaintext. Hence, the
other modes can be used which try to introduce randomness in the output.
The various modes of operation are: Electron ic Codebook (ECB), Cipher
Block Chaining (CBC), Cipher Feedback (CFB), Output Feedback (OFB),
and Counter (CTR).
Block ciphers are slower compared to stream ciphers. Error
propagation is higher in block ciphers, error in one bit could corrupt the
whole bl ock. Block ciphers have the advantage of high diffusion, which
means that every input plaintext bit is diffused across several ciphertext
symbols. Examples of block ciphers are DES, 3DES, AES, etc.
2.2.1.3 One -Time Pad
This is the most popular symmetric s tream cipher. The name one -
time pad comes from an encryption method in which a large, non
repeating set of keys is written on a pad. The sender encrypts the message
one bit at a time using keys from the pad. Since, it is a stream cipher; the
number of keys is equal to the number of plaintext symbols. For example,munotes.in

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25if a sender must transmit a message of 300 characters, the sender would
use300 key characters from the pad. The keys are destroyed and never
reused. The receiver has the same key pad. On receiving the ciphertext , he
decrypts it using the keys from the pad.
The one -time pad method has two problems: the need for absolute
synchronization between sender and receiver, and the need for an
unlimited number of random keys.
Table 2 -2. Example Encryption Using XOR Function
Plain Text 100111001010110110
Key 010011011100101011
Ciphertext 110100010110011101
Another problem with this scheme is how do the sender and
receiver agree on a secret key that they can use? If the sender and the
receiver already have a secure channel, why do they even need a key? If
they do not have a secure channel, then how can they share the key
securely? This is called the “key distribution problem.”
2.2.1.4 Data Encryption Sta ndard
The Data Encryption Standard (DES) algorithm is a symmetric
block cipher technique having a block size of 64 -bits and key size of 64
bits. However, out of the 64 -bit key, 8 bits are reserved for parity checks
and technically only 56 bits of the key is used for encryption and
decryption.
It was widely used in banking applications, ATMs, and other
commercial applications, and more so in hardware implementations than
software.However, it has been found to be vulnerable to brute force attack.
Hence, it is deprecated or no longer recommended.
DES is a Feistel Cipher with 16 rounds. A Feistel cipher consists
of multiple rounds for processing the plaintext with the key. Every round
consists of a substitution step followed by a permutation step. Increasing
the number of rounds makes it more secure however the encryption/
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26A general sequence of steps in the DES algorithm is shown in Figure 2-4.
Figure 2 -4. DES cryptography
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
Key Generation
The key is 64 bits. However, every 8th bit(bit number 8, 16, 24,
32, 40, 48, 56, and 64) is used as a parity bit. So, only 56 bits are used for
encryption and decryption.
12345678
91
01
11213141516
1
71
81
92021222324
2
52
62
72829303132
3
33
43
53637383940
4
14
24
34445464748
4
95
05
15253545556
5
75
85
96061626364
The 56 -bit key is further divided into two blocks of 28 bits each.
Each block is circularly shifted left by one or two positions in every round.
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27mechanism t hat emits a 48 -bit key called subkey which is used for
encryption.
This process is repeated in every round.
Encryption
The plaintext block is divided into 64 bits blocks. If the number of
bits in the message is not evenly divisible by 64, then the last block is
padded to make it a 64 -bit block.
Initial Permutation
Each plaintext block goes through an initial permutation (IP)
round. The IP round simply permutes, i.e., rearranges the bits within the
block in a specific pattern. It has no cryptographic sig nificance as such,
and its objective is to make it easier to load plaintext/ciphertext into DES
chips in byte -sized format.
Division of Blocks
The 64bit output from the IP round is divided into two 32 -bit
blocks denoted as L (left block) and R(right block ). The blocks are
represented as L iand R i, where i denotes the number of rounds. The
output of the IP round is denoted as L 0and R 0.
In the first round, the blocks are swapped i.e. the right side 32 -bit
block (R) becomes the left side (L) and the left si de becomes R. The 32 -
bit block (L) goes through an operation with the key k of that round and
the right side 32 -bit block (R) as shown following:
Li=R i−1
Ri = Li −1F(Ri −1, Ki)
F() is the “Cipher Function” which consists of multiple steps or
operations. All the operations are performed on the R block.
1.The 32 -bit R -block undergoes an Expansion Permutation and
produces a 48 -bit block.
2.This 48 -bit block is then XORed with the 48 -bit subkey supplied
by the key generator of the s ame round.
3.The 48 -bit XORed output is fed to the substitution box which
reduces the block to 32 bits.
4.The 32 -bit output of the S -box is fed to the permutation box (P -
box)that outputs a 32 -bit block. This is the final output of F()
cipher function.
The 32 -bit output of F() is then XORed with the 32 -bit L -block. This
XORed output then becomes the final R -block output of this round.munotes.in

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28Figure 2 -5. Round function of DES
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The steps in Feistel round get repeat ed 16 times, where the output
of one round is fed as the input to the following round.Once all the 16
rounds are over, the output of the 16th round is again swapped such that
the left becomes the right block and vice versa.
Then the two blocks are clubbed to make a 64 -bit block and passed
through a permutation operation, which is the inverse of the initial
permutation function and that results in the 64 -bit ciphertext output.
Since, DES is a symmetric algorithm the decryption process is similar.
The 56 -bit key was susceptible to brute force attack and the S -
boxes used for substitution in each round were also prone to cryptanalysis
attack. Hence, the AES is used over the DES Algorithm.
2.2.1.5 Advanced Encryption Standard
AES algorithm is a symmetric bloc k cipher.The block size is fixed
at 128 bits and allows a choice of three keys: 128 bits, 192 bits, and 256
bits.AES is named as AES -128, AES -192, and AES -256 depending on the
size of the key.
The number of encryption rounds is dependent on the length of the
key. There are ten rounds in AES -128, 12 rounds in AES -192 and 14
rounds in AES -256.
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29AES-128
The encryption rounds in AES are iterative and operate on an
entire data block of 128 bits in every round.
The 128 -bit block can be considered as 16 bytes where individual
bytes are arranged in a 4 × 4 matrix called a State Array.
AES uses the concept of words where a word consists of four
bytes, that is, 32 bits. Hence, the bytes in each column of the state array
together form a 32 -bit word called state words.
Also, every byte can be represented with two hexadecimal
numbers. Example: if the 8 -bit byte is {00111010}, it could be represented
as “3A” in Hex notation. “3” represents the left four bits “0011” and “A”
represents the right four bits “1010.”
The processing in each round consists of byte -level substitution
followed by word -level permutation. The overall encryption and
decryption process of AES can be represented in Figure 2-6.
Figure 2 -6. AES cryptography
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30The AES decryption process is not the reverse of the encryption
process. The operations in the rounds are executed in a different order. All
steps of the round function —Sub Bytes, Shift Rows, Mix Columns, Add
Round Key —are invertible. The rounds are iterative in nature. All rounds
perform all the four operations but the last round excludes t he “Mix
Columns” operation.
Sub Bytes: This step is the substitution step. Each byte is represented as
two hexadecimal digits. For example, the byte {00111010} is represented
as {3A}. A S -box lookup table (16 × 16 table) is used to find the
corresponding value for row number 3 and column number A.
Shift Rows: This is the transformation step. It is based upon the matrix
representation of the state array. It consists of the following shift
operations:
●No circular shifting of the first row
●Left circular sh ifting of one byte from the second row
●Left circular shifting of two bytes from the third row
●Left circular shifting of three bytes from the fourth row
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
#imgref:BeginningBlockchain -Singhal,Dhameja,Pand a
Mix Columns: This is also a transformation step. All the four columns of
the state are multiplied with a fixed polynomial (Cx) and get transformed
to new columns. Each byte of a column is mapped to a new value that is a
function of all four bytes in th e column. This is achieved by the matrix
multiplication of state as shown:
Byte 0 `is calculated as shown:
Byte 0 `=( 2.B y t e 0 )(3 . Byte1)Byte3Byte4
The Mix Columns step, along with the Shift Rows step, provide
the necessary diffusion property to the cipher.
Add Round Key: This is a transformation step. The 128 -bit round key is
bitwise XORed columnwise with the 128 bits of state i.e. four bytes of a
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31The 128 -bit key can be represented in the same 4 × 4 matrix as
shown here:
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There are ten rounds in AES -128 and each round has its own round
key.
In one round, all 128 -bits of the subkey are XORed with the 128 -
bit input data block.
The key word [w0, w1, w2, w3] gets XORed with the initial input
block before the round -based processing begins. The remaining 40 word -
keys, w4 through w43, get used four words at a time in eac h of the ten
rounds.
AES Key Expansion
The AES key expansion takes a 128 -bit cipher key (four -word key) as
input and produces a schedule of 44 key words from it.The key expansion
operation is designed such that each grouping of a four -word key produces
the next grouping of a four -word key.
Figure 2 -7. AES key expansion
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
The initial 128 -bit key is [w0, w1, w2, w3] arranged in four words.
The expanded word [w4, w5, w6, w7] is derived from the previous and th e
corresponding position word in the previous block i.e.4 positions back.
For example,w5 is derived from w4 and w1. In the case of the first word,
a three step function denoted as “g” is used.
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321.The input four -word block goes through a circular left shift by one
byte. For example [w0, w1, w2, w3] becomes [w1, w2, w3, w0].
2.The four bytes input word (e.g., [w1, w2, w3, w0]) is taken as
input and byte substitution is applied on each byte using S -box.
3.The result of step 2 is XORed with something called round
constant denoted as Rcon[]. The round constant is a word in which
the right -most three bytes are always zero. For example, [x, 0, 0,
0]. The purpose of Rcon[ ] is to perform XOR on the left -most byte
of the step 2 output keyword. The Rcon[ ] is different for each
round.
The final output of the complex function “g” is generated, which is
then XORed with w i–4t og e tw i.
The output state array of the last round is rearranged to form the
128-bit ciphertext block.
The AES algorithm is standardized by the NIST (National Institute
of Standards and Technology). AES needs a longer processing time
making it infeasible for larger data. AES is more secure than DES.
2.2.1.6 Challenges in Symmetric Key Cryptography
Key exchange is the biggest challenge in symmetr ic key
encryption. Trust is another factor because of the shared secret key. If the
key is shared by one of the communicating parties, the security of the
system is compromised.
The number of keys needed is another biggest drawback of
symmetric key crypto graphy. The number of keys needed for n nodes to
communicate securely is n(n –1)/2 key pairs. Also, the keys need to be
changed for each communication session. A trusted third party is needed
for effective key management.
2.3 CRYPTOGRAPHIC HASH FUNCTIONS
Hash functions are the mathematical functions that are used for
checking the integrity of the data. They play a very important role in
blockchain as well as many cryptographic protocols and information
security applications like Digital Signatures and mess age authentication
codes (MACs). Cryptographic hash functions are a special class of hash
functions that are apt for cryptography.
A cryptographic hash function is a one -way function that converts
input data of arbitrary length and produces a fixed -length output. The
output is usually termed “hash value” or “message digest.” The hash is
calculated at the receiver to check if the integrity of the message was
compromised during transmission. It can be represented as shown in
Figure 2-8.munotes.in

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33Figure 2 -8. Hash function in its basic form
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Properties of hash functi on:
●The input size is not fixed but the size of the output is fixed.
●The hash value can be computed for any given message.
●Hash function is deterministic i.e. it produces the same hash value
for the same input.
●A hash function cannot be inverted i.e. the i nput cannot be
predicted from the hash value.
●The hash value changes drastically even for a small change in the
input.
Properties related to cryptography:
Collision resistance: Two different inputs, say, X and Y, never give the
same hash value.
#imgref :BeginningBlockchain -Singhal,Dhameja,Panda
Hash function is collision resistant. However, the fact that the
output function is of fixed size might lead to collision. For example, if the
output size is a 256 -bit hash value, then the output space can have a
maximum of 2256 values which implies that a collision must exist.
However, it is extremely difficult to find that collision. This scenario is
similar to the birthday paradox.
Collision resistance property is used to check for the integrity of a
file upl oaded on cloud storage. The hash value of the file is calculated and
stored along with the file. It can be checked for tampering by calculating
the hash function and comparing it with the previously stored hash. Since,
it is extremely rare for a file to ha ve the same hash value, it is collision
resistant.
Preimage resistance: This property means that it is computationally
impossible to find the input X from the output H(X).It is also called the
“hiding” property. This property is effective if the number of input values
is infinite or unknown. In case of a limited number of known inputs, an
adversary can calculate the hash for all values and compare it with the
received hash to predict the input.
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34Example: If the outcome of an experiment has only 3 values, th ea d v e r s a r y
can calculate the individual hash for each outcome. He will then compare
the received hash with all the three computed hash valuesand easily
determine the input.
To avoid such predictions, the input is combined with another
random input “r,” so that it becomes difficult to find X from H(r || X).
If “r” is chosen from a 256 -bit distribution, the probability of
finding the exact value of r is 1/2256. This random value “r” is called
nonce in blockchain. A nonce is a random number that can be u sed only
once.
This property can be used to commit a value. For example, the user
has participated in an event where he has to commit to a betting value. The
user is supposed to declare it without disclosing the actual value. This
dilemma can be solved by using the preimage resistance property of a
Hash Function. The value to be betted on can be hashed and the hash
output can be declared publicly. So, looking at the hash, nobody can
predict what you have bet on. Also, you can always prove the value if
needed by computing the hash.
Second preimage resistance: This property states that it is not
possible to find 2 values which have a similar hash i.e. given an input X
and its hash H(X), it is infeasible to find Y, such that H(X) = H(Y). This
implies that a h ash function which is collision resistant is second preimage
resistant too.
The “puzzle friendliness” property implies that the only way to get
to a solution is to traverse through all the possible options in the input
space.
GivenH(r || X) = Z, the puz zle friendliness property means that it is
difficult to find a value “Y” that exactly hashes to “Z.” i.e. H(r´ || Y) = Z,
where r and r´ are part of the random input.
In the previous example, if “Z” is an n -bits output, then it has taken
just one value ou t of 2n possible values. Note carefully that a part of your
input, say “r,” is from a high min -entropy distribution, which has to be
appended with your input X. Now comes the interesting part of designing
a search puzzle.
Let’s assume that Z is a n -bits o utput and is a set of 2n possible
values. The goal is to find a value of r such that when hashed appended
with X, it falls within the output set of 2n values i.e. within Z. This
situation is similar to a search puzzle. The smaller the output space, the
harder the problem. The only solution is to try all possible values of r so
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35For an n -bit hash value output, an average effort of 2n is needed to
break preimage and second preimage resistance, and 2n/2 for collision
resistance.
2.3.1 A Heads -up on Different Hash Functions
The most popular and widely used hash function was MD4 which
belongs to the message digest (MD) family. There are other variations of
MD like MD5 and MD6, RIPEMD,etc.
The MD family of algorithms is used for checking the integrity of
a message. It takes an input of 512 bit blocks to produce a 128 -bit message
digest checksum. The message and message digest are sent along to the
receiver. The receiver on receiving the message calculates the checksum
and compares it with the sent message digest.
Secure Hash Algorithm (SHA) is another such hash function
family which is widely used. It consists of four algorithms namely SHA -0,
SHA -1, SHA -2, and SHA -3. The algorithm was named SHA however as
new versions were invented with improved features, the algorithm was
suffixed with a version number.
SHA -1 was found to solve some irregularities in SHA -0. Both
were 160 -bit hash functions that consumed 512 -bit block sizes. SHA -1
was designed by the National Security Agency (NSA) for use in the digital
signature algorithm (DSA) as well as with various security tools and
Internet protocols such as SSL, SSH, TSL, etc. It was used for consistency
checks in version control systems such as Mercurial, Git, etc.Some
cryptogra phic weaknesses were found in the algorithm in 2005so it was
deprecated after the year 2010.
2.3.1.1SHA -2
SHA -2 has many variants such as SHA -224, SHA -256, SHA -384,
SHA -512, SHA -512/224, and SHA -512/256 where SHA -256 and SHA -
512 are theprimitive hash fun ctions; while the other variants are derived
from them. The SHA -2 family of hash functions are widely used in
applications such as SSL, SSH, TSL, PGP, MIME, etc.
SHA -224 is a truncated version of SHA -256 with a different initial
value or initialization ve ctor (IV). However, both produce the same bit
length hash outputs.
SHA -224 computation is a two -step process:
●SHA -256 value is computed with a different IV instead of the
default used in SHA -256.
●The resulting 256 -bit hash value is truncated to 224 -bits
Algorithm Truncated version of
SHA -224 SHA -256
SHA -382 SHA -512
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36Truncations are performed to accommodate applications that have
a requirement of a certain length of output.
Truncation value can be determined by the se curity level expected.
160 bits are needed for collision resistance whereas 80 bits are
necessary for preimage -resistance. Collision resistance decreases with
truncation.
Truncation also helps maintain backward compatibility with older
applications.
Example: SHA -224 provides 112 -bit security that can match the key
length of triple -DES (3DES).
SHA -256 is based on a 32 -bit word and SHA -512 is based on a 64 -bit
word. So, on a 64 -bit architecture, SHA -512 and all its truncated variants
can be computed fas ter with a better level of security compared with SHA -
1 or other SHA -256 variants.
Table 2-3is a ta bular representation taken from the NIST paper that
represents SHA -1 and different SHA -2 algorithms properties :
Table 2 -3. SHA -1&S H A -2 Hash Function in a Nutshell
2.3.1.2SHA -256 and SHA -512
SHA -256 belongs to the SHA -2 family of hash functions and is
called so because it produces a 256 -bit hash value as output. It is used in
bitcoins.
Hash functions take arbitrary length input and produce a fixed size
output. The arbitrary length input is broken into fixed length blocks before
it is fed to the compre ssion function. A construction method is used to
iterate through the compression function by constructing fixed -sized input
blocks from arbitrary length input data and produce a fixed length output.
Merkle -Damgård construction, tree construction, and spong e construction
are examples of construction methods. It is proven that if the underlying
compression function is collision resistant, then the overall hash function
with any construction method should also be collision resistant.
The construction method t hat SHA -256 uses is the Merkle -
Damgård construction, so let us see how it works in Figure 2-9.munotes.in

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Figure 2 -9. Merkle -Damgård construction for SHA -256
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
The message is divided into 512 -bit blocks. If the message is not
an exact multiple of 512 bits it is padded to make it 512 bits.
The 512 -bit blocks are fu rther divided into 16 blocks of 32 -bit
words (16 × 32 = 512).
Each block goes through 64 rounds of round function where each
32-bit word goes through a series of operations. The round functions are a
combination of some common functions such as XOR, AND, OR, NOT,
Bit-wise Left/Right Shift, etc.
The steps and the operations of SHA -256 are similar in SHA -
512.However, there are 80 rounds of round functions in SHA -512 and the
word length is 64 bits. The block size in SHA -512 is 1024 bits, which gets
further d ivided into 16 blocks of 64 -bit words The output message digest
is 512 bits in length, that is, eight blocks of 64 -bit words.
2.3.1.3RIPEMD
RACE Integrity Primitives Evaluation Message Digest (RIPEMD)
hash function is a variant of the MD4 hash function. It is used in bitcoins.
RIPEMD was originally 128 bits but RIPEMD -160 was developed
later. There exist 128 -,2 5 6 -,a n d3 2 0 -bit versions of this algorithm, called
RIPEMD -128, RIPEMD -256, and RIPEMD -320, respectively,
RIPEMD -160 is a cryptographic hash fun ction whose compression
function is based on the Merkle –Damgård construction. The input is
broken into 512 -bit blocks and padding is applied when the input bits are
not a multiple of 512. The 160 -bit hash value output is usually represented
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38The compression function is made up of 80 stages, made up of two
parallel lines of five rounds of 16 steps each (5 × 16 = 80). The
compression function works on sixteen 32 -bit words (512 -bit blocks).
Bitcoin uses both SHA -256 and RIPEM D-160 hashes together for
address generation. SHA -256 is used for address generation whereas
RIPEMD -160 is used to reduce the hash value to 160 bits.
2.3.1.4SHA -3
SHA or the Keccak (pronounced as “ket -chak”) algorithm was
standardized by the NIST in 2015 .S H A -3 used a different construction
method called sponge construction.SHA -3 has variants like SHA3 -224,
SHA3 -256, SHA3 -384, SHA3 -512, and two extendable -output functions
(XOFs), called SHAKE128 and SHAKE256 to provide backward
compatibility with SHA -2.XOFs are used for their capability to give an
output that can be extended to any desired length.The following diagram
(Figure 2-10)s h o w sh o wS H A -3 (Keccak algorithm) is designed at a high
level.
Figure 2 -10. Sponge construction for SHA -3
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
Steps in SHA -3
As you can see in Figure 2-10, the message is first divided into
blocks (Xi) of size r bits. If the input data is not a multiple of r bits, then it
ispadded to Xi.
Padding is performed as below
Xi = m || P 1 {0}* 1
“P” is a predetermined bit string followed by a leading and trailing 1 and
some number of zeros. Table 2-4shows the various values of P.munotes.in

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39
Table 2 -4. Padding in SHA -3 variants
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
SHA -3 sponge construction consists of two phases namely the
“absorbing” phase for input, and the “squeezing” phase for output using
keccak -3. The Absorbing phase consists of various operations of the
algorithm whereas the Squeezingphase gives an output of a configurable
length.
The SHA -3 is designed to be tunable f or its security strength, input, and
output sizes with the help of tuning parameters “r” and “c” to tradeoff
between security and performance.
r + c = b where r is bitrate and “b” represents the width of the state
b=2 5×2 ℓwhere “ ℓ” can take on values between 0 and 6
Hence, “b”can be {25, 50, 100, 200, 400, 800 and 1600}.
“c” is the capacity which satisfies the condition r + c = b ∈{25, 50, 100,
200, 400, 800, 1600}
In SHA -3, the exponent value ℓis fixed to be “6,” so the value of b
is 1600 bits.There are two permissible bitrate values for r : r = 1344 which
gives c = 256 and r = 1088 which gives c = 512.
The core engine of the algorithm Keccak -f is called “Keccak -f
Permutation”. It consists of “n” rounds, where “n” i s computed as: n = 12
+2ℓ. Since the value of ℓis 6 for SHA -3, there will be 24 rounds in each
Keccak -f. Every round takes “b” bits (r + c) input and produces the same
number of “b” bits as output.In each round, the input “b” is called a state.
This stat ea r r a y“ b ”c a nb er e p r e s e n t e da sat h r e e -dimensional (3 -D) array
b = (5 x 5 × w), where word size w = 2 ℓ. So, w = 64 bits, which means 5 ×
5 = 25 words of 64 bitseach. Recall that ℓ=6f o rS H A -3, so b = 5 × 5 x 64
=1 6 0 0 .T h e3 -Da r r a yc a nb es h o w na si n Figure 2-11.munotes.in

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40
Figure 2 -11. State array representationin SHA -3
#imgref:BeginningBlockchain -Singhal,D hameja,Panda
Each round consists of a sequence of five steps and the state array
gets manipulated in each of those steps as shown in Figure 2-12.
Figure 2 -12. The five steps in each SHA -3r o u n d
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
Theta (θ) step: It performs the XOR operation to provide minor diffusion.
Rho (ρ) step: It performs bitwiserotation of each of the 25 words.
Pi (π) step: It performs permutation of each of the 25 words.
Chi (χ) step: In this step, bits are replaced by combining those with their
two subsequent bits in their rows.
Iota (ι) step: It XORs a round constant into oneword of the state to break
the symmetry.
The last round of Keccak -f produces the y0 output, which is
enough for SHA -2 replacement mode, i.e., the output with 224, 256, 384,
and 512 bits. Note that the least significant bits of y0 are used for the
desired length output. In case of variable length output, along with y0,
other output bits of y1, y2, y3… can also be used.
Compared to SHA -2, the performance of SHA -3 is good in
software and is excellent in hardware.
2.3.1.5Applications of Hash Functions
Hash functions are used in verifying the integrity and authenticity
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41Hash functions can also be used to index data in hash tables which
speeds up the process of searching. Hash values are shorter than original
data so the search is faster.
Itcan also be used for authenticating users without storing the
passwords locally. The hash of the password is calculated and stored
locally. Whenever a user enters a password, its hash is calculated and
further compared to the stored hash. If both the has h matches, the user
logs in successfully.
Hash function can be used to implement PRNG.Bitcoin uses hash
functions as a proof of work (PoW) algorithm to verify transactions and
also to generate addresses.The two most important applications are digital
signatures and in MACs such as hash -based message authentication codes
(HMACs).
2.3.1.6Code Examples of Hash Functions
#-*-coding: utf -8-*-import hashlib
# hashlib module is a popular module to do hashing in python
#Constructors of md5(), sha1(), sha224() ,s h a 2 5 6 ( ) ,s h a 3 8 4 ( ) ,a n d
sha512() present in hashlib
md=hashlib.md5()
md.update("The quick brown fox jumps over the lazy dog") print
md.digest()
print "Digest Size:", md.digest_size, " \n", "Block Size: ", md.block_size
#C o m p a r i n gd i g e s to fS H A 2 2 4 ,S H A 2 5 6 ,SHA384,SHA512
print "Digest SHA224", hashlib.sha224("The quick brown fox jumps over
the lazy dog").hexdigest()
print "Digest SHA256", hashlib.sha256("The quick brown fox jumps over
the lazy dog").hexdigest()
print "Digest SHA384", hashlib.sha384("The quic k brown fox jumps over
the lazy dog").hexdigest()
print "Digest SHA512", hashlib.sha512("The quick brown fox jumps over
the lazy dog").hexdigest()
# All hashoutputs are unique
# RIPEMD160 160 bit hashing example h = hashlib.new('ripemd160')
h.update("The q uick brown fox jumps over the lazy dog") h.hexdigest()
#Key derivation Alogithm:
#Native hashing algorithms are not resistant against brutefore attack.
#Key deviation algorithms are used for securing password hashing.
import hashlib, binascii algorithm='sh a256' password='HomeWifi'
salt='salt' # salt is random data that can be used as an additional input to a
one-way function
nu_rounds=1000
key_length=64 #dklen is the length of the derived keymunotes.in

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42dk=hashlib. pbkdf2_hmac(algorithm,password,salt, nu_rounds,
dklen=k ey_length)
print 'derieved key: ',dk
print 'derieved key in hexadeximal :', binascii.hexlify(dk)
# Check properties for hash import hashlib
input = "Sample Input Text" for i in xrange(20):
# add the iterator to the end of the text input_text = input + str( i)
# show the input and hash result
print input_text, ':', hashlib.sha256(input_text). hexdigest()
#coderef:BeginningBlockchain -Singhal,Dhameja,Panda
2.3.2 MAC and HMAC
HMAC is used to provide message authentication using Symmetric
Key and message integri ty using hash functions. The sender sends the
message and MAC together for the receiver to verify and trust it. The
receiver uses the symmetric key K to compute the MAC of the received
message. The computed MAC iscompared with the received MAC for
verifica tion.MAC = H(key || message). HMAC is a technique to turn the
hash functions into MACs. They are widely used in RFID -based systems.
In SSL/TLS, HMAC is used to allow client and server to verify and ensure
that the exchanged data has not been altered during transmission.
2.3.2.1 MAC Strategies
MAC -then-Encrypt:
MAC is computed on the cleartext, appended to the data, and then
the mac and data are encrypted together. This scheme does not provide
integrity of the ciphertext. At the receiving end, the message decryption
has to happen first to be able to check the integrity of the message. It
ensures the integrity of the plaintext, however. TLS uses this scheme of
MAC to ensure that the client -server communication session is secured.
Encrypt -and-MAC: This tech nique requires the encryption and
MAC computation of the message or the cleartext, and then appending the
MAC at the end of the encrypted message or ciphertext. MAC is
computed on the cleartext, so integrity of the cleartext can be assured but
not of the c iphertext, which leaves scope for some attacks. Unlike the
previous scheme, integrity of the cleartext can be verified. SSH (Secure
Shell)uses this MAC scheme.
Encrypt -then-MAC: This technique requires that the cleartext
needs to be encrypted first, and t hen compute the MAC on the ciphertext.
This MAC of the ciphertext is then appended to the ciphertext itself. This
scheme ensures integrity of the ciphertext, so it is possible to first check
the integrity and if valid then decrypt it. It easily filters out the invalid
ciphertexts, whichmakes it efficient in many cases. Also, since MAC is in
ciphertext, in no way does it reveal information about the plaintext. It is
usually the most ideal of all schemes and has wider implementations. It is
used in IPsec.munotes.in

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432.4ASYMMETRIC KEY CRYPTOGRAPHY
Asymmetric key cryptography is also known as “public key
cryptography”. Every user has a pair of keys i.e. a public key and a private
key.One key is used for encryption and another for decryption. Both the
keys are different. Asymmetric key cryptography can be used for
confidentiality or as digital signatures. The public key can be shared with
everyone but the private key is kept secret.Since, the key is public and
usually stored in a public repository it is called public key cryptography.
Public key cryptography is used forEncryption.
Let’s assume that Alice wants to send a message to Bob.
Alice encrypts the plaintext message m using encryption algorithm
E and the public key PukBob to prepare the ciphertext c.
c=E ( P u k B o b ,m )
Send the ciphertext c to Bob.
Bob receives the encrypted text c and decrypts it using the
decryption algorithm Dand his own private key PrkBob to get the original
plaintext m.
m=D ( P r k B o b ,c )
Such a system can be represented as shown in Figure 2-13.
Figure 2 -13. Asymmetric cryptography for confidentiality
#imgref:BeginningBlockchain -Singhal,Dhame ja,Panda
Public key cryptography can also be used for authentication.
The sender encrypts the message with his own private key. The
receiver on receiving the encrypted text decrypts it using the sender’s
public key thereby authenticating that the message originally came from
the sender.Since, a private key is used for encrypting a message it is called
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44
Figure 2 -14. Asymmetric cryptography for authentication
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
In the example in Figure 2-14, the message was prepared using
Alice’s private key, so it could be ensured that it only came f rom Alice.
So, the entire message served as a digital signature. Note that both
confidentiality and authentication are desirable. To facilitate this, public
key encryption has to be used twice. The message should first be
encrypted with the sender’s privat e key to provide a digital signature.
Then it should be encrypted with the receiver’s public key to provide
confidentiality. It can be represented as:
c = E[PukBob, E(PrkAlice, m)]
m = D[PukAlice, D(PrkBob, c)]
As you can see, the decryption happens in ju st its reverse order.
In the real world, App stores such as Google Play or Apple App
Store require that the software apps should be digitally signed before they
get published.
Public keys are known and accessible to everyone. They can be
used to encrypt t he message or to verify the signatures.
Private keys are extremely private to individuals. They are used to
decrypt the message or to create signatures.
In asymmetric or public key cryptography, there is no key
distribution problem, as exchanging the agr eed upon key is no longer
needed.
The biggest challenge with this scheme is authentication of the
public key. How to ensure that the public key used is really the public key
of the intended recipient and not of an intruder or eavesdropper? To solve
this, a trusted third party called Public Key Infrastructure (PKI) is used.
PKIs assure the authenticity of public keys by the process of attestation or
notarization of user identity. PKIs provide verified public keys by
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45The public key encryption is a one -way function or a trapdoor
function because both the keys are needed for the scheme to work. The
encryption key cannot be used for decryption and vice versa.
2.4.1 RSA
The RSA algorithm, named after Ron Rivest, Adi Shamir, and
Leonard Adleman, is possibly one of the most widely used cryptographic
algorithms. It is based on the practical difficulty of factoring very large
numbers. In RSA, plaintext and ciphertext are integers between 0 and n −
1for some n.RSA is a block cipher.
Modular Arithmetic
Let m be a positive integer called modulus. Two integers a and b
are congruent modulo m if:
a≡b (mod m), which implies a −b = m . k for some integer k. Example: if
a≡16 (mod 10) then a can have th e following solutions: a = . . ., −24,−
14,−4, 6, 16, 26, 36, 46
Any of these numbers subtracted by 16 is divisible by 10. For example,
−24−16 = −40, which is divisible by 10. Note that a ≡36 (mod 10) can
also have the same solutions of a.
As per the Q uotient -Remainder theorem, only a unique solution of
“a” exists that satisfies the condition: 0 ≤a < m. In the example a ≡16
(mod 10), only the value 6 satisfies the condition 0 ≤6 < 10. This is what
will be used in the encryption/decryption process of the RSA algorithm.
Let us now look at the Inverse Modulus. If b is an inverse to a
modulo m, then it can be represented as:
ab≡1 (mod m), which implies that a b −1=m.kf o rs o m ei n t e g e rk .
Example: 3 has inverse 7 modulo 10 since
3·7=1( m o d1 0 ) => 21 −1 = 20, which is divisible by 10.
Generation of Key Pairs
In the RSA scheme, the public key consists of (e, n) where n is
called the modulus and e is called the public exponent. Similarly, the
private key consists of (d, n), where n is the same mo dulus and d is the
private exponent.
Let us see how these keys get generated along with an example:
1.Generate a pair of two large prime numbers p and q.
Let us take two small prime numbers as an example here for the
sake of easy understanding. So, let the two primes be p = 7 and q =
17.
2.Compute the RSA modulus (n) as n = pq.
This n should be a large number, typically a minimum of 512 bits.
In our example, the modulus (n) = pq = 119.munotes.in

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463.Find a public exponent e such that 1 < e < (p −1) (q −1) and there
must be no common factor for e and (p −1) (q −1) except 1. It
implies that e and (p −1) (q −1) are coprime. Note that there can
be multiple values that satisfy this condition and can be taken as e,
but any one should be taken.In our example, (p −1) (q −1) = 6 ×
16 = 96. So, e can be relatively prime to and less than 96. Let us
take e to be 5.
4.The pair of numbers (e, n) form the public key and should be made
public. So, the public key is (5, 119).
5.Calculate the private exponent d using p, q, and e considering the
number d is the inverse of e modulo (p −1) (q −1). This implies
that d when multiplied by
e is equal to 1 modulo (p −1) (q −1) and d < (p −1) (q −1). It can
be represent ed as:
ed=1m o d( p −1) (q −1)
In our example, we have to find d such that the above equation is
satisfied which means, 5 d = 1 mod 96 and also d < 96.Solving for
multiple values of d, we can see that d = 77 satisfies our condition.
See the math:77 × 5 =3 8 5a n d3 8 5 −1 = 384 is divisible by 96
because4 × 96 + 1 = 385
6.The private key is (77, 119).
Encryption/Decryption Using Key Pair
Encryption:
c = m . e (mod n) given the public key (e, n) and the plaintext message m.
Decryption :
m=c.d( m o dn )g i ven the private key (d, n) and the ciphertext c.
RSA at work:
The sender wants to send a text message to the receiver whose public
key is known and is say (e, n).The sender breaks the text message into
blocks that can be represented as a series of numbers less than n.
The ciphertext equivalents of plaintext can be found using c = m e
(mod n). If the plaintext (m) is 19 and the public key is (5, 119) with e
= 5 and n = 119, then the ciphertext c will be 195(mod 119) = 2, 476,
099(mod 119) = 66, which is the remainder and 20,807 is the quotient.
So, c = 66
When the ciphertext 66 is received at the receiver’s end, it needs to be
decrypted to get the plaintext using m = c d (mod n).
The receiver already has the private key (d, n) withd = 77 and n = 119,
and rec eived the ciphertext c = 66 by the sender. So, the receiver can
easily retrieve the plaintext using these values as m = 6,677(mod 119)
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47The RSA scheme is based on this practical difficulty of factoring large
numbers. If p and q are not large enough, or the publickey e is small, then
the strength of RSA goes down. Currently, RSA keys are typically
between 1024 and 2048 bits long. The computational overhead of the RSA
cryptography increases with the size of the keys. Hence, in situations
where the amoun t of data is huge, it is advisable to use a symmetric
encryption technique and share the key using an asymmetric encryption
technique such as RSA.
Also, we looked at one of the aspects of RSA, that is, for encryption
and decryption. RSA can also be used for authentication through digital
signature. One can take the hash of the data, sign it using their own private
key, and share it along with the data. The receiver can check with the
sender’s public key and ensure that it was the sender who sent the data,
and not someone else. This way, in addition to secure key transport, the
public key encryption method RSA also offers authentication using a
digital signature. RSA is widely being used with HTTPS on web browsers,
emails, VPNs, and satellite TV. It is also used to digitally sign many
commercial applications or the apps in app stores. SSH also uses public
key cryptography; when you connect to an SSH server, it broadcasts a
public key that can be used to encrypt data to be sent to that server. The
server can then decrypt the data using its private key.
2.4.2 Digital Signature Algorithm
The DSA was designed by the NSA as part of the Digital Signature
Standard (DSS) and standardized by the NIST. Its primary objective is to
sign messages digitally, and not encry ption. RSA is for both key
management and authentication whereas DSA is only for authentication.
DSA is based on discrete logarithms. At a high level, DSA is used as
shown in Figure 2-15.
Figure 2 -15. Digital Signature Algorithm (DSA)
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48As you can see in Figure 2-15, the message is first hashed and then
signed. So, after the message is signed, the signed hash is tagged with the
message and sent to the re ceiver. The receiver can then check the
authenticity and find the hash. Also, hash the message to get the hash
again and check if the two hashes match. This way, DSA provides the
following security properties:
Authenticity: Signed by private key and verif ied by public key
Data integrity: Hashes will not match if the data is altered.
Non-repudiation: Since the sender signed it using a private key,
they cannot deny later that they did not send the message. Non -repudiation
is a property that is most desirable in situations where there are chances of
a dispute over the exchange of data. For example, once an order is placed
electronically, a purchaser cannot deny the purchase order if non -
repudiation is enabled in such a situation.
A typical DSA scheme consists of three algorithms: (1) key
generation,(2)signature generation, and (3) signature verification.
2.4.3 Elliptic Curve Cryptography
Elliptic curve cryptography (ECC) refers to a suite of
cryptographic protocols and is based on the discrete logarithm prob lem.
ECCoffers greater security using a smaller key size hence it is widely used
in small embedded devices, sensors, Iot devices, etc.A 160 -bit ECC key is
considered to be as secure as a 1024 -bit RSA key.
ECC is based on a mathematically related set of n umbers on an
elliptic curve over finite fields.The elliptic curve satisfies the following
mathematical equation:
y2 = x3 + ax + b, where 4 a3 + 27 b2 ≠ 0
With different values of “a” and “b”, the curve takes different shapes as
shown in the following diagr am:
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
There are several important characteristics of elliptic curves that are
used in cryptography, such as:
1.The curves are horizontally symmetrical. i.e., the curve on the X -
axis is a mirror image of the curve on the Y -axis.
2.Any nonvertical line can intersect the curve in at most three places.
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49through them. This line intersects the curve at one more place.
Let’s name it ( −R). If you draw a vertical line through ( −R), it
will cross the curve at, say, R, which is a reflection of the point
(−R).
3.The third property implies that P + Q = R. This is called “point
addition,” which means add ing two points on an elliptic curve will
lead you to another point on the curve. Refer to the following
diagram for a pictorial representation of these three properties.
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
We can apply this operation to th e same point P, i.e., P and P
(called “point doubling”). We can have an infinite number of lines passing
through P. Let’s consider the tangential line. The tangent line will cross
the curve in one more point and a vertical line from there will cross the
curve again to get to the final value. It can be shown as follows:
Hence it is can be seen that we can apply point doubling many
times to the initial point and every time it will lead us to a different point
on the curve as shown in the following diagram:
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50When the initial and final point is given, there is no way to
determine if point doubling was applied to reach the final resulting point.
This is the discrete logarithm problem for ECC, where it states t hat given a
point G and Q, where Q is a multiple of G, find “d” such that Q = d G.
Here, Q is the public key and d is the private key.
The curve should be defined over a finite field which means that
there is an upper limit on the maximum value on the X -axis. This value is
represented as P and is called "modulo” value. It also defines the key size.
So, in order to define an ECC, the following domain parameters need to be
defined:
The Curve Equation: y2 = x3 + ax + b, where 4 a3 + 27 b2 ≠ 0
P: The prime number, which specifies the finite field that the curve will be
defined over (modulo value)
a and b: Coefficients that define the elliptic curve
G: Base point or the generator point on the curve. This is the point where
all the point opera tions begin and it defines the cyclic subgroup.
n: The number of point operations on the curve until the resultant line is
vertical. So, it is the order of G, i.e., the smallest positive number such that
nG = ∞. It is normally prime.
h: It is called “cofac tor,” which is equal to the order of the curve divided
by n. It is an integer value and usually close to 1.
ECC is a great technique to generate the keys and is used along with other
techniques for digital signatures and key exchange.
2.4.4 Elliptic Curv e Digital Signature Algorithm
The ECDSA is a type of DSA that uses ECC for key generation.
ECDSA can be a better alternative to RSA in terms of smaller key size,
better security, and higher performance.
There are broadly three steps to ECDSA: key generat ion, signature
generation, and signature verification.
Key Generation
Since the domain parameters (P, a, b, G, n, h) are pre -established,
the curve and the base point are known by both parties. Also, the prime P
that makes it a finite field is usually 160 bits. So, the sender, say, Alice
does the following to generate the keys:
Select a random integer d in the interval [1, n −1]
Compute Q = d G
Declare Q is the public key and keep d as the private key.
Signature Generation
Once the keys are generated, Alice, the sender, would use the
private key “d” to sign the message (m). So, she would perform the
following steps in the or der specified to generate the signature:munotes.in

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51Select a random number k in the interval [1, n −1]
Compute k.G and find the new coordinates (x1, y1) and find r = x1 mod n
If r = 0, then start all over again
Compute e = SHA -1( m )
Compute s = k −1( e+d.r )m o d n
If s = 0, then start all over again from the first step
Alice’s signature for the message (m) would now be (r, s)
Signature Verification
Let us say Bob is the receiver here and has access to the domain
parameters and the public key Q of the sender Alice . As a security
measure, Bob should first verify that the data he has, which is the domain
parameters, the signature, and Alice’s public key Q are all valid. To verify
Alice’s signature on the message (m), Bob would perform the following
operations in the order specified:
Verify that r and s are integers in the interval [1, n −1]
Compute e = SHA -1( m )
Compute w = s −1m o dn
Compute u1 = e w mod n, and u2 = r w mod n
Compute X = u1 G + u2 G, where X represents the coordinates, say (x2,
y2)
Compute v = x1 mo dn
Accept the signature if r = v, otherwise reject it
ECDSA is used in digital certificates. A digital certificate is a
public key, bundled with the device ID and the certificate expiration date.
This way, certificates enable us to check and confirm to w hom the public
key belongs and the device is a legitimate member of the network under
consideration. These certificates are very important to prevent
“impersonation attack” in key establishment protocols. Many TLS
certificates are based on ECDSA key pairs.
2.4.5 Code Examples of Asymmetric Key Cryptography
#-*-coding: utf -8-*-import Crypto
from Crypto.PublicKey import RSA from Crypto import Random
from hashlib import sha256
# Function to generate keys with default length 1024 def
generate_key(KEY_LENG TH=1024):
random_value= Random.new().read
keyPair=RSA.generate(KEY_LENGTH,random_value) return keyPair
#Generate Key for ALICE and BOB bobKey=generate_key()
aliceKey=generate_key()
#Print Public Key of Alice and Bob. This key could
sharedalicePK=aliceKey.p ublickey()
bobPK=bobKey.publickey()
print "Alice's Public Key:", alicePK print "Bob's Public Key:", bobPK
#Alice wants to send a secret message to Bob. Lets create a dummy
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52secret_message="Alice's secret message to Bob" print "Message",
secret_message
# Function to generate a signature def generate_signature(key,message):
message_hash=sha256(message).digest()
signature=key.sign(message_hash,'') return signature
# Lets generate a signature for secret message
alice_sign=generate_signature(ali ceKey,secret_message)
# Before sending message in network, encrypt message using the Bob's
public key...
encrypted_for_bob = bobPK.encrypt(secret_message, 32)
# Bob decrypts secret message using his own private key...
decrypted_message = bobKey.decrypt(enc rypted_for_bob) print
"Decrypted message:", decrypted_message
# Bob will use the following function to verify the signature from Alice
using her public key
def verify_signature(message,PublicKey,signature):
message_hash=sha256(message).digest()
verify = Pu blicKey.verify(message_hash,signature) return verify
# bob is verifying using decrypted message and alice's public key
print "Is alice's signature for decrypted message valid?",
verify_signature(decrypted_message,alicePK, alice_sign)
2.4.6 The ECDSA Algor ithm Code
import ecdsa
# SECP256k1 is the Bitcoin elliptic curve
signingKey = ecdsa.SigningKey.generate(curve=ecdsa.SECP256k1) # Get
the verifying key
verifyingKey = signingKey.get_verifying_key()
#G e n e r a t eT h es i g n a t u r eo fam e s s a g es i g n a t u r e=
signingKe y.sign(b"signed message")
# Verify the signature is valid or invalid for a message
verifyingKey.verify(signature, b"signed message") # True.
Signature is valid
# Verify the signature is valid or invalid for a message assert
verifyingKey.verify(signature, b "message") # Throws an error. Signature
is invalid for message
#coderef:BeginningBlockchain -Singhal,Dhameja,Panda
2.5 Diffie -Hellman Key Exchange
It is one of the most popular ,simple and effective key exchange
algorithmdeveloped for securely exchanging the cryptographic keys in an
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53
Figure 2 -16. Diffie -Hellman key exchange illustration
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
DH is based on the concept of sharing components used for key
formation. The key is generated at both the ends. In the figure shown
above, only the yellow color was shared between the two parties in the
first step, which may represent any other color or a random number. Both
parties then add their own secret to it and make a mixture. That mixture i s
again shared through the same insecured channel. Respective parties then
add their secret to it and form their final common secret. In this example
with colors, observe that the common secrets are the combination of the
same sets of colors.
Mathematical Example of DH:
1.Alice and Bob agree on P = 23 and G = 9
2.Alice chooses private key a = 4, computes 94 mod 23 = 6 and
sends it to Bob
3.Bob chooses private key b = 3, computes 93 mod 23 = 16 and
sends it to Alice
4.Alice computes 164 mod 23 = 9
5.Bob computes 63 m od 23 = 9
Alice and Bob are able to generate the same secret key at their ends
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542.5.1 Code for DH:
/* Program to calculate the Keys for two parties using Diffie -Hellman
Key exchange algorithm */
// function to return valu eo fa^bm o dP
long long int power(long long int a, long long int b, long long int P)
{
if (b == 1)
return a;
else
return (((long long int)pow(a, b)) % P);
}
//Main program for DH Key computation int main()
{
long long int P, G, x, a, y, b, ka, kb;
// Bo th the parties agree upon the public keys G and P P = 23; // A prime
number P is taken
printf("The value of P : %lld \n", P);
G = 9; // A primitve root for P, G is taken printf("The value of G :
%lld\n\n", G);
// Alice will choose the private key a a = 4; / / a is the chosen private key
printf("The private key a for Alice : %lld \n", a); x = power(G, a, P); // gets
the generated key
// Bob will choose the private key b b = 3; // b is the chosen private key
printf("The private key b for Bob : %lld \n\n", b); y = power(G, b, P); //
gets the generated key
// Generating the secret key after the exchange of keys ka = power(y, a, P);
// Secret key for Alice
kb = power(x, b, P); // Secret key for Bob
printf("Secret key for the Alice is : %lld \n", ka); printf("Secret Ke yf o rt h e
Bob is : %lld \n", kb);
return 0;
}
#coderef:BeginningBlockchain -Singhal,Dhameja,Panda
2.6 SYMMETRIC VS. ASYMMETRIC KEY
CRYPTOGRAPHY
Symmetric Asymmetric
Private Key Public Key
Key Exchange Problem None
Simple Compute intensivemunotes.in

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55Fast Slow
Suitable for large data Suitable for short messages
Permutation and substitution Integer arithmetic
Purely for Encryption and
DecryptionKey sharing
Trusted environment Untrusted environment
Cannot be used for authentication Can be used for authenticatio n
More keys are required n * (n −
1)/2Less number of keys = 2n
Table 2 -5. Key Requirements Comparison for Symmetric and Asymmetric
Key Techniques
2.7 GAME THEORY
Game Theory is used in many real -life situations to solve complex
problems. It is used in Bitcoins and many other block chain solutions. It
was introduced by John von Neumann to study economic decisions.
However, it became popular after the theory of “Nash Equilibrium,” by
John Forbes Nash Jr.
Game Theory is based on situations where one or more parties are
involved and th e actions that they perform are going to influence the
outcome just like when playing games. In a game there are two or more
players. Each player wants to win the game so every player plans a
strategy as to how to win the game.
For example, in cricket or football, there are two teams which are
competing with each other. There is a referee overseeing the game and
there are rules for the game. Every team plays to win. In real life, there
are various situations where you have to take a decision which will be
beneficial for you that is also like playing a game. When you are
appearing for an interview, the chances of your selection can also be
considered as a game. Whenever we are in such situations we think about
all the possible outcomes for every action that we take and finally select
the one which is going to benefit us the most.Games are not just about the
action that an individual performs, it is also about the actions that others
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56outcome o f the interview is not just about how good your performance is,
it is also about how the other candidates perform.
Game theory is a study of strategies involved in complex games. It
is the art of making the best move, or opting for the best strategy in a
given situation based on the objective. To do so, one must understand the
strategy of the opponent and also what the opponent thinks your move is
going to be.
Let us take a simple example: There are two siblings, one elder and
the other younger. Now, the re are two toy cars that they got as a gift, one
is red and the other is blue. The elder one wants the red car, but knows if
he opts for that, then the younger one would cry for the same car. So, he
opts for the bluecar and it turns out as expected, the yo unger one wants the
same. Now, the elder one pretends to have sacrificed the blue car and
gives it to the younger one and keeps the red car to himself. This is a win -
win for both the parties, as this was the objective of the elder one. If the
elder one wan ted, he could simply have fought with the younger kid and
got the red car if that was his objective. In the second case,the elder one
would strategize where to hit so that the younger kid is not injured much
but enough so that he gives up on the redcar. Th is is game theory: what is
your objective and what should be your best move?
Another example: Imagine a vendor supplies vegetables to a town.
There are three ways to get to the town. One Is a regular or the usual route
which is a shorter route and better, second is a shorter route but it is narrow
and third is a longer route that is wide. One day there is a block on the
regular route. Now, the vendor has to choose a route. The second route is
narrow and it will be the obvious choice by everyone. Hence, it m ay get
congested. The third route is longer and may add to the fuel costs but the
vendor will definitely reach faster. The vendor has to strategize his moves.
If he reaches before everyone he can sell his vegetables at higher cost and
recover the additiona l fuel expense. This is game theory: what is your best
move for the objective you have in mind, which is usually finding an
optimal solution.
The role that you play and your objective both play a vital role in
formulating the strategy. Example: If you are an organizer of a sport event,
and not a participant in the competition, then you would formulate a
strategy where your objective could be that you want the participants to
play by the rules and follow the protocol. This is because you do not care
who win s at the end, you are just an organizer. You should consider if
there could be a situation where a participant breaks a rule and loses one
point but injures the opponent so much that they cannot compete any
longer. So, you have to take into account what th e participants can think
and set your rules accordingly.
On the other hand, a participant would strategize the winning
moves by taking into account the strengths and weaknesses of the
opponent, and the rules imposed by the organizer because there could be
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57Game theory is the method of modeling real -life situations in the
form of a game and analyzing what the best strategy or move of a person
or an entity could be in a given situation for a desired outcome.
Game theory co ncepts can be used to design systems where the
participants play by the rules without assuming emotional or moral values
of them. It can help you build robust solutions and lets you test those with
different interesting scenarios.
2.7.1 Nash Equilibrium
Games can be classified as cooperative/non -cooperative games,
symmetric/ asymmetric games, zero -sum/non -zero-sum games,
simultaneous / sequential games, etc. Nash equilibrium is related to
cooperative/non -cooperative games.
In cooperative games, the playe rs cooperate with each other and
can work together to form an alliance. An external force can also be
applied to ensure cooperative behavior among the players. In non -
cooperative games, the players compete as individuals with no scope to
form an alliance. The participants justlook after their own interests. Also,
no external force is available to enforce cooperative behavior.
Nash equilibrium states that, in any non -cooperative games where
the players know the strategies of each other, there exists at leas to n e
equilibrium where all the players play their best strategies to get the
maximum profits and no side would benefit by changing their strategies. If
you know the strategies of other players and you have your own strategy
as well, if you cannot benefit by changing your own strategy, then this is
the state of Nash equilibrium. Thus, each strategy in a Nash equilibrium is
a best response to all other strategies in that equilibrium.
A player may strategize to win as an individual player, but not to
defeat the opponent by ensuring the worst for the opponents.Also, any
game when played repeatedly may eventually fall into the Nash
equilibrium.
2.7.2 Prisoner’s Dilemma
Prisoner’s dilemma is an example of a non -zero-sum game. It is a
symmetric game because cha nging the identities and strategies of the
players does not change the payoff of the game.
Prisoner’s dilemma is about two criminals, Rob and Smith, caught
by the cops for selling drugs. They are kept in different cells for
interrogation. They are informe d that the sentence for drug dealing is two
years. The cops suspect these two could be involved in a robbery that
happened last week. The cops have to strategize a way to get to the truth.
The cops go to Rob and give him three choices:
1.If Rob confesses the robbery and Smith does not, then his
punishment would be reduced to just one year and Rob will get
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582.If Rob denies and Smith confesses, then Rob gets five years and
Smith gets one year.
3.If both confess, then both get three years of imprisonment .
The cops give the same choice to Smith. This situation is called the
prisoner’s dilemma.
Rob and Smith are in two different cells and cannot communicate
with each other. Both cannot decide to deny it and just get out in two years
in jail for the drug dealing case, which seems to be the global optimum in
this situation. The biggest problem is even if they could talk to each other,
they may not really trust each other.
Each has two choices, confess or deny. Each knows that the other
would choose what is best for him.
If he denies and the other confesses, then he is in trouble by getting
five years of jail and the other gets just one year of jail. He certainly does
not want to get into this situation.
If he confesses, then other has two choices: confess or deny.
Now Rob thinks that if he confesses, then whatever Smith does, he is not
getting more than three years.
Let us state these scenarios for Rob.
Rob confesses and Smith denies —Rob gets one year, Smith gets five years
(best case given Rob confesses )
Rob confesses and Smith also confesses —Both Rob and Smith get three
years (worst case given Rob confesses)
This situation is called Nash equilibrium where each party has taken the
best move, given the choices of the other party. This is definitely not th e
global optimum, but represents the best move as an individual.
Nash equilibrium is the most stable stage where changing your decision
does not benefit you at all. It can be pictorially represented as shown in
Figure 2-17.
Figure 2 -17. Prisoner’s dilemma —payoff matrix
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592.7.3 Byzantine Generals’ Pro blem
The Byzantine Generals’ Problem was a problem faced by the
Byzantine army while attacking a city. Several army factions commanded
by separate generals surrounded a city to win over it. The only chance of
victory was when all the generals attacked the city together. However, the
problem was how to reach a consensus i.e.either all the generals should
attack or all of them should retreat.If some of them attack and some
retreat, then chances are greater they would lose the battle.
Let assume there are fi ve factions of the Byzantine army surrounding a
city. They would attack the city if at least three out of five generals are
willing to attack, but retreat otherwise. If there is a traitor among the
generals, he will vote for attack with the generals willin g to attack and
vote for retreat with the generals willing to retreat.He can do so because
there is no central coordination amongst the generals. There can be various
situations based on the number of traitors like:
✔Two generals attack the city and get out numbered and defeated.
✔There can be more than one traitor.
✔Message co -ordination between the generals
✔The messenger is caught/killed/bribed by the city commander
✔Traitor general forges a different message and fools other generals
✔Finding the honest and tr aitor generals
As you can see, there are so many challenges that need to be addressed
for a coordinated attack on the city. It can be pictorially represented as in
Figure 2-18.
Figure 2 -18. Byzantine army attacking the city
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
A group of people reaching consensus on some voting agenda or
maintaining the c onsistent state of a distributed or decentralized database,
or maintaining the consistent state of blockchain copies across nodes in a
network are a few examples similar to the Byzantine Generals’ Problem.
2.7.4 Zero -Sum Games
Az e r o -sum game is a game i n which one player’s gain is
equivalent to another player’s loss, one wins exactly the same point as the
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60the available resources in a given situation. Poker, Chess, Go, etc. are a
fewexamples of zero -sum games. Only one person wins and the opponent
loses in a zero sum game, such as tennis, badminton, etc. Financial
instruments such as swaps, forwards, and options can also be described as
zero-sum instruments. The amount is deducted fro m one account to be
added to another account.
Insurance is an example of a zero -sum game. We pay an insurance
premium to the insurance companies to guard against some difficult
situations such as accidents, hospitalization, death, etc. We are
compensated by the insurance companies when we face such tough
situations. However, everyone who pays the premium does not meet with
an accident or get hospitalized. If anyone does, they might need a lot of
money compared with the premium they pay. So, the insurance c ompany
can make a profit by investing our premium amount and getting returns
on it.
An interview is an example of a zero sum game. A candidate who
is selected is at the cost of others rejection.
2.7.5 Why to Study Game Theory
Game theory is a revolutio nary interdisciplinary phenomenon
bringing together psychology, economics, mathematics, philosophy, and
an extensive mix of various other academic areas.
Game theory is a part of our life because we take decisions
everyday by thinking about the probable o utcome. Game theory helps us
in thinking differently.
In many real -world situations, the participants or the players are
faced with a decision matrix similar to that of a “prisoner’s dilemma.” So,
learning these concepts not only helps us formulate the pr oblems in a more
mathematical way, but also enables us to make the best move. It lets us
identify aspects that each participant should consider before choosing a
strategic action in any given interaction. It tells us to identify the type of
game first; who are the players, what are their objectives or goals, what
could be their actions, etc., to be able to take the best action. Much
decision -making in real life involves different parties; game theory
provides the basis for rational decision -making..
2.8 CO MPUTER SCIENCE ENGINEERING
Computer science stitches the various components of
cryptography, game theory, and many others to build a blockchain.
2.8.1 The Blockchain
A blockchain is actually a data structure. It is a chain of blocks
linked together. A b lock can be made up of a single or multiple
transactions.A hash pointer is a cryptographic hash of a data block.
(Figure 2-19). In blockchain, hash pointers point to the previous block
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61
Figure 2 -19. Hash pointer for a block of transactions
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
The hash of the prev ious block is stored in the current block
header, and the hash of the current block and its block header will be
stored in the next block’s header. This creates the blockchain as we can
see in Figure 2-20.
Figure 2 -20. Blocks in a blockchain linked through hash pointers
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
The first block in a blockchain i s called the genesis block. Since,
all the blocks are linked together with hashes it is impossible to tamper the
contents of a block without changing the consecutive blocks.
Let us focus on Figure 2-21to understand how it is not possible to alter
the data in any way.
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
Figure 2 -21. Any attempt in chan ging Header or Block content
breaks the entire chain. Assume that you altered the data in block -178. If
you do so, the hash that is stored in the block header of block -179 would
not match.So one has to keep calculating and changing the hash of all the
consecutive blocks until it reaches the latest block. It is extremely
infeasible to do so. Also, the blockchain state is stored by many nodes in
the blockchain,so all the nodes have to be updated which is extremely
unlikely. Thus, hashing makes it a tamper -proof blockchain data structure.
The hash is calculated using either the SHA2 or SHA3 family of hash
functions.It produces a 256 -bit hash output which is represented using
hexadecimal characters.
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622.8.2 Merkle Trees
A Merkle tree is a binary hash tree. It is n amed after its inventor
Ralph Merkle. Merkle trees are constructed by hashing paired data
(usually transactions at the leaf level), then again hashing the hashed
outputs all the way up to the root node, called the Merkle root. It is
constructed bottom -up.In Bitcoin, the transactions of a single block
become the leaves in a merkle tree. A typical Merkle tree can be
represented as in Figure 2-22.
Figure 2 -22. Merkle tree representation
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
The Merkle tree is tamper -proof. A slight change in data at any
level in the tree, the hash will not mash the hash stor ed one level up until
the root node. It is really difficult for an adversary to change all the hashes
in the entire tree. The hashes in the tree change even if the order of the
transactions is changed.Merkle is a binary tree so if the number of
transaction s in a block is odd then the last transaction is duplicated to
make it even.
Merkle trees are used to verify if a specific transaction belongs to a
particular block. If there are “n” transactions in a Merkle tree (leaf items),
then this verification takes just Log (n) time as shown in Figure 2-23.
Figure 2 -23. Verification in Merkle tree
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63A subset of transactions is needed to verify if a transaction or any
other leaf item belongs to a Merkle tree, we do not need all as we can see
in the diagram in Figure 2-23. One can just start with the transaction to
verify along with its sibling leaf item, calculate the hash of those two, and
see if it matches their pare nt hash. Then continue with that parent hash and
its sibling at that level and hash them together to get their parent hash.
Continuing this process all the way to the top root hash is the quickest
possible way for transaction verification. No of computatio ns needed for
verification of transactions is log 2N. Hence, for 8 transaction elements,
only three computations (log2 8 = 3) would be required for verification.
Imagine a situation in a blockchain where each block has a lot of
transactions. Since it is a blockchain, the hash of the previous block is
already there; now, including the Merkle root of all the transactions in a
block can help in quicker verification of the transactions. If we have to
verify a transaction that is claimed to be from, say, block -22456, we can
get the transactions of that block, verify the Merkle tree, and confirm
quickly if that transaction is valid.
A node that has to verify if a certain transaction took place needs
to verify: transaction as part of the block(Merkle), and block as part of the
blockchain(Hash).
2.8.3 Code Snippet for Merkletree
#-*-coding: utf -8-*-from hashlib import sha256
class MerkelTree(object): def init (self):
pass
def chunks(self,transaction,n):
#This function yeilds "n" number of transaction at time for i in range (0,
len(transaction),number):
yield transaction[i:i+2]
def merkel_tree(self,transactions):
#Here we will find the merkel tree hash of all transactions passed to this
fuction
#Problem is solved using recursion techqiue
# Given a list of trans actions, we concatinate the hashes in groups of two
and compute
# the hash of the group, then keep the hash of group.
We repeat this step till # we reach a single hash sub_tree=[]
for i in chunks(transactions,2): if len(i)==2:
hash = sha256(str(i[0]+i[1])) .hexdigest() else:
hash = sha256(str(i[0]+i[0])).hexdigest() sub_tree.append(hash)
# When the sub_tree has only one hash then we reached our merkel tree
hash.
#Otherwise, we call this fuction recursively if len(sub_tree) == 1:
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64return self.merkel_tree(sub_tree)
if name ==' main ': mk=MerkelTree()
merkel_hash= mk.merkel_tree(["TX1","TX2","TX3","TX4","TX5",
"TX6"])
print merkel_hash
#coderef:BeginningBlockchain -Singhal,Dhameja,Panda
2.9 PUTTING IT ALL TOGETHER
Cryptographic functions are deterministic. Given an input they
always produce the same output. They are one -way and cannot be
inverted. The hash value changes for even a small change in the input.
Public key cryptography can be used for authentication by digital
signatures. It also helps in non -repudiation.
Game theory helps in designing sustainable robust systems. It
helps in solving various situations that can arise when unknown entities
are transacting with each other. The best way to handle such a system is to
reward the pa rticipants playing by the rules and penalizing those who do
not.
The blockchain data structure uses cryptographic hashes and
merkle trees for building a tamper resistant chain of blocks. Merkle trees
are specifically used for verification of transactions.
2.10 PROPERTIES OF BLOCKCHAIN SOLUTIONS
Immutability
A blockchain transaction is irreversible. Once a transaction is
recorded, it cannot be altered. The transactions are broadcast to the
network so all the nodes have a copy of the blockchain. As the num ber of
blocks increase so does the immutability of the blockchain. It is not
feasible for someone to alter the data of so many blocks in a series. A
transaction that gets logged in the system remains forever in the system.
Forgery Resistant
Blockchain is decentralized in nature. Hence, it is prone to attack
and forgery. Cryptographic hash and digital signatures used in blockchain
ensure the system is forgery resistant. The transactions are signed using a
private key and a hash is calculated of the same. He nce, it is impossible
for anyone to forge it thus ensuring integrity and authentication.
Democratic
Blockchain does not have a centralized controller. All the nodes
are treated equally. Hence, every participant has equal rights in any
situation, and deci sions are made when the majority reaches a consensus.
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65Double -Spend Resistant
When an amount is spent twice in more than one transaction, then
it is called double spend. For example, you have 50$ in your account. You
send 50 $ to Alice and 40$ to Bob. This is double spend. This is difficult to
track when there is no account balance system like in Bitcoin. In bitcoin,
there is no notion of account balance. Every transaction has its source
from other transactions you have receiv ed. Assume, you have received
100$ from Bob. You need to give 50$ to Alice. So, you have to give the
100$ transaction as input for spending 50$ to Alice. It is easy to prevent
double -spend in a centralized system because the central authority is
aware of a ll the transactions like our bank. So, the only way possible to
prevent double -spend is to be aware of all the transactions. Hence, all the
nodes in the blockchain have access to the entire blockchain right until the
genesis block.
Consistent State of the Ledger
The state of the blockchain should be consistent across all the
nodes of the network. To ensure the stability of the system, a consensus
mechanism is used in blockchains.
Resilient
The network should be resilient enough to withstand temporary
node failures, unavailability of some computing nodes at times, network
latency and packet drops, etc.
Auditable
A blockchain is a chain of blocks that are linked together through
hashes. Since the transaction blocks are linked back till the genesis block,
auditability already exists and we have to ensure that it does not break at
any cost. Also, if one wants to verify whether a transaction took place in
the past, then such verification should be quicker.
2.11 BLOCKCHAIN TRANSACTIONS
Blockchain consists of b locks of transactions that are verified and
then added to the block. Whenever an individual or an entity is making a
transaction, they just have to broadcast it to the whole network. This
transaction is validated by multiple nodes. Once validated, it is up dated on
all the nodes of the network as part of the blockchain. When the
transactions happen every second, broadcasting individual transactions can
become a costly affair. Hence, transactions are combined in blocks. It is
also done to prevent a Sybil Atta ck. In a Sybil attack, people create
replicas of their nodes to dominate the network.
Steps in blockchain transactions:
Every new transaction gets broadcast to all the nodes on the
network so that all the computing nodes are aware of all transactions
Every transaction undergoes validation and authentication checks by the
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66multiple transactions into blocks to share with the other nodes in the
network. This is called proposing a bl ock. Every node is given equal
priority in the generation of new blocks. A consensus mechanism ensures
that every node agrees upon a block. The blocks are time stamped in the
order they arrive and get added to the blockchain.
Once the nodes in the network unanimously accept a block, then
that block gets added to the blockchain by including the hash of the
previous block. “Bloom filters” are widely used to test the membership of
a transaction in a block.
2.12 Distributed Consensus Mechanisms
The biggest ch allenge in a decentralized system is achieving
consensus about which node will propose the new block. The best strategy
is that only one node should propose a block at a time and the rest of the
nodes should validate the transactions in the block and add t o their
blockchains if transactions are valid. If any one node proposes a block and
the rest of the nodes agree on it, then all those nodes add that block to their
respective blockchains. The agreement about who proposes a block is
called consensus, it com es from game theory. The system is designed in
such a manner that players are rewarded for playing by the rules and
penalized for bad behavior. Hence, the reward becomes a reason for
everyone playing by the rules. Players would shy from breaking rules
irrespective of the anonymity offered by bitcoins. The reward is the
driving factor for a stable system. Players can use multiple identities to
reap rewards.The goal of consensus is to ensure that the network is robust
enough to sustain various types of attack s. The consensus algorithm has to
fall into the Byzantine fault tolerant consensus mold to be able to get
accepted.
2.13 PROOF OF WORK
The PoW consensus mechanism is used in Bitcoin. The idea
behind the PoW algorithm is to essentially do a lot of comput ation for a
block of transactions before it gets proposed to the whole network.APoW
is actually a piece of data that is difficult to produce in terms of
computation and time, but easy to verify.
PoW was initially used to prevent email spams. If a lot of
computation is to be done before one can send an email, then spamming a
lot of people would require a lot of computation to be performed which
can act as a deterrent to an adversary. Similarly, in blockchain, a lot of
computations need to be done before pr oposing a block. Hence, proposing
a block is a lot of hard work which is rewarded. However, if someone is
playing mischief and injecting a fraudulent transaction then rejection of
that block by the rest of the nodes will be very costly.
The difficulty of the work before the block proposal should be
adjustable so that there is a control over how fast the blocks can get
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67Blockchain uses a concept of difficulty level. The user has to find a
number below the difficulty level. It can be found by try ing out a lot of
numbers(puzzle friendliness). So, proposing a block is finding a value by
trying all possible values to meet the criteria. The difficulty level is
adjusted further after every new block to keep a check on how fast a new
block is proposed.
Since, all the participating nodes are solving it, it is impossible to
predict which node would solve it first. Once the puzzle is solved, that
node proposes a block. In case of public blockchains, the nodes that are
investing their computing resources ar e rewarded for their honest
behavior.(block reward)
2.14 PROOF OF STAKE
The Proof of Stake (PoS) algorithm is another popular distributed
consensus algorithm.It is used for validating blocks of transactions and not
for mining new coins.
In PoS systems, the validators have to bond their stake,i.e.
mortgage some amount as stake, to be able to participate in validating the
transactions. The probability of a validator being selected is proportional
to their stake; the more the amount at stake, the greater is their chance to
validate a new block of transactions. A miner only needs to prove they
own a certain percentage of all coins available at a certain time in a given
currency system. For example, if aminer owns 5% of all Ether (ETH) in
the Ethereum network, they would be able to mine 5% of all transactions
across Ethereum. Decisions about which node gets to create the new block
of transaction is based on the PoS algorithm being used. There are various
types of PoS algorithms such as naive PoS, delegated PoS, chain -based
PoS, BFT -style PoS, and CasperPoS, to name a few. Delegated PoS
(DPOS) is used by Bitshares and Casper PoS is being developed to be
used in Ethereum.
The creator of a block in a PoS system is based on the amount at
stake and henceis much fast er compared with PoW systems. There are no
block rewards in PoS. Validators receive transaction fees.ThePoS systems
provide better protection against malicious attacks because an attacker has
to put an amount at stake and executing an attack would risk the entire
amount at stake. PoS is not compute intensive like PoW hence it saves a
lot on resources like electricity and consuming CPU cycles.
2.15 PRACTICAL BYZANTINE FAULT TOLERANCE
ALGORITHM (PBFT)
Hyperledger, Stellar, and Ripple use PBFT consensus. PBF Td o e s
not generate rewards like PoW. Every node has a replica of the internal
state. The requests are broadcast to all participating nodes.On receiving a
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68The outcome of the computati on is shared with all other nodes in the
system. Hence, every node is aware of the computations done by other
nodes. The results are compared and a final value is agreed and committed
upon.Every Node is aware of the final value and a final consensus is
achieved. This is demonstrated in Figure 2-24.
Figure 2 -24. PBFT consensus approach
#imgref:Beginnin gBlockchain -Singhal,Dhameja,Panda
PBFT is efficient compared with other consensus algorithms.
However, anonymity in the system may be compromised because of the
way this algorithm is designed. It is one of the most widely used
algorithms for consensus eve n in non -blockchain environments.
2.16 BLOCKCHAIN APPLICATIONS
Blockchain can be implemented fully for creating a decentralized
system or partially by using blockchain as a backend. Bitcoin blockchain
is an example of a decentralized blockchain applicati on where every
transaction is broadcast to the entire network. A web application is built
and hosted in a centralized web server that makes Bitcoin blockchain
updates when required.
Figure 2 -25. Bitcoin blockchain nodes
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
Every node is self -sufficient and maintains its own copies of the
blockchain database. Blockchain applications with no centralized servers
are the purest decentralized applications; they are usually public
blockchains. Public blockchains rarely use the infrastructure from cloud
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69There could be one or more web applications for different
departments or actors with Blockchain as their backends. These
blockchains are in sync with each o ther. This is an example of technical
decentralization. However, it is politically centralized. The system is able
to maintain transparency and trust because of the accessibility to a single
source of truth. Take a look at Figure 2-26, which may resemble most of
the blockchain POCs or applications being built on blockchain where
blockchains are hosted by some cloud service provider by consuming their
blockchain -as-a-Service (BaaS) offering.
Figure 2 -26. Cloud -powered blockchain system
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
One web application can handle requests f rom multiple different
actors in the system with proper access control mechanisms. All the actors
in the system have their own copies of blockchains which helps in
maintaining transparency in the system as well to generate data -driven
insights with ready a ccess to data all the time.
The different “blockchains” maintained by different actors in the
system are consistent by design because of consensus algorithms such as
PoW, PoS, etc.
PoS is preferred over Pow by the private blockchains because of
PoW’s h eavy resource consumption, electricity and computing power
requirements.
Decentralized applications (DApps) are being built on Ethereum
blockchain networks. These applications could be permissioned on private
Ethereum or could be permissionless on a publi c Ethereum network.
Figure 2-27gives ah i g h -level understanding of how those applications
might loo k.
BlockchaiPrev iousBloc kPreviousBlockPr ev iousBlockPrev iousBlock Pr ev iousBlockPrev iousBlockPrev iousBlo ckPrev iousBloc k Prev iousBlockPrev iousBlo ckPrev iousBlockPreviousBlockGenesisBlockTransactionsGenesisBlockGenesisBlock TransactionsTrans acti onsTransactions TransactionsTransactionsTransactions TransactionsTransactionsTransactionsTransactionsBlock-2Block-3Block-4Block-1265Block-2Block-3Block-4Block-1265Block-2Block-3Block-4Block-1265 Block-1Block-1Block-1WebServers
WebApplicationishostedhereDept.Dept.Dept.
ActorsinaBlockchainsyste
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70
Figure 2 -27. DApps on Ethereum network
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
Blockchain applications can be Pure blockchain native applications
or applications that treat blockchain as just a backend,and there are hybrid
applications that use the legacy applications along with the blockchain for
some specific purpose.
2.17 SCALING BLOCKCHAIN
Blockchains are difficult to scale. Bitcoins are not a replacement to
fiat currencies.It cannot be used for day to day monetary transactions
which are carried out by our debit or credit card.
Consensus protocols are used for agreement between all the
communicating nodes for stability of the system. In a blockchain network,
every node maintains its own copy of the entire blockchain, validates all
transactions and blocks, serves requests from other nodes in the network,
etc. to achieve decentralization. This can lead to latency. Increase in the
number of nodes provides stability however it also increases the number
of transactions hence adding to the l oad of computing and storage
requirements. This is a common cause for concern in public blockchains.
Private blockchains on the other hand can be easily scaled because the
controlling entities could define and set node specifications with high
computation power and more bandwidth or use off -chain computations.
2.17.1 Off -Chain Computation
Off-chain computation is outsourcing the resource intensive
operations and limiting only the storage of outcomes on blockchain nodes.
There are different variants of off -chain computation depending on people
as well as the computation needs and limitations of the nodes involved. It
can be considered as a layer on top of the blockchain which is responsible
for processing involved in a blockchain. Off -chain computation can b e
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71by a centralized node or amongst a random group of nodes. Off -chain
computation helps in scaling the blockchain, it isolates damages to the
sidechain and prevents the main blockc hain from any damages from a
sidechain. The “Lightning Network” for Bitcoins is an example of a
sidechain that helps in faster execution of transactions. “Zerocash,” in
bitcoins is another example of a sidechain used for privacy. Off -chain
computation does not affect a node's capability of carrying out or verifying
transactions. A user with his own private key can carry out a transaction
by signing it. Bitcoins do not have a concept of accounts. Every
transaction has its origin or funding from another trans action. So, if a user
is spending some amount, he has to show some previous transactions
where he received that amount. Ethereum on the other hand has accounts
so it is important to maintain state information.
Let's assume Alice and Bob carry out a lot of transactions in a
month. All these individual transactions would have their state information
which will be maintained by all the nodes in a stateful blockchain. The
concept of “state channels'' is introduced to address this challenge. The
state channel i s updated with utmost security using cryptography
periodically or when a certain transaction threshold is reached. State
channels are essentially a two -way communication channel between users,
objects,or services.
Figure 2 -28. State channels for off -chain computation
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
The off -chain state channels are private and confined to a group of
participants. The state of blockchain for the participants is locked in the
beginning by using MultiSig scheme or a smart contract -based locking.
The participants make cryptographically secured transactions
among each other. Since the transactions are cryptographically signed,
they can be verified and submitted to the blockchain.
The state channels could have a predefined lifespan, or could be
bound to the amount of transactions being carried out in terms of
volume/quantity or any other quantifiable measure. The final outcome of
the transactions is saved on the blockchain and that unlocks the state as the
final step.The Li ghtning Network is an Off -chain computation network for
Bitcoin whereas the “Raiden Network” was designed for Ethereum
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722.17.2 Sharding Blockchain State
Sharding is a concept of slicing databases for easy processing.
Operations like Disk read/wr ite always lead to bottlenecks while dealing
with huge data sets. The data is partitioned across multiple disks so that
the read/ write could be performed in parallel leading to reduced latency.
This technique is called sharding. Take a look at Figure 2-29.
Figure 2 -29. Database sharding example
#imgref:BeginningBlockchain -Singhal,Dhameja,Panda
Notic e in Figure 2-29, a300GB database table is partitioned into
three shards of 100GB each and stored on separate server instances. The
same concept can be applied for blockchain. The complete blockchain
state is divided into different shards which contain their own substates i.e.
a node need not store the entire blockchain, it can just store portions or
shards relevant to it. When a transaction occurs, it is routed to only
specific nodes depending on which shards they affect. It is not mandatory
for all the nodes to perform calculations and verifications for each and
every transaction. A mechanism or a proto col could be defined for
communication between shards when multiple shards are needed to
process transactions. Each blockchain can implement its variant of
sharding.For example, using unique account wise shards(applicable in
Ethereum).
2.18SUMMARY
This chapter deals with the core fundamentals of cryptography,
game theory, and computer science engineering. These concepts play an
important role in Blockchain implementations. We learned various
cryptographic algorithms used in blockchain. These techniques h elp in
solving various issues related to security of the transmission of data. Game
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732.19QUESTIONS:
1.What is symmetric key cryptography?
2.What is asymmetric key cryptography?
3.How does game theory influence Blockchain?
4.What is ECDSA?
5.What is Off -chain computation and sharding?
2.20REFERENCES:
A. Bikramaditya Singhal, Gautam Dhameja, Priyansu Sekhar Panda
2018 31
B. Singhal et al., Beginning Blockchain, https://doi.org/10.1007/978 -1-
4842 -3444 -0_2
❖❖❖❖
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74Unit II
3
ETHEREUM
Unit Structure
3.0 Objectives
3.1 Introduction
3.2 Three parts of Block chain
3.3 Ether as currency and commodity
3.4 Building Trustless systems
3.5 Smart Contracts
3.6Ethereum Virtual Machine
3.6.1Wallets as a computing metaphor
3.6.2The Bank teller metaphor
3.6.3Bre aking with banking history
3.6.4How encryption leads to trust system
3.6.5Using parity with Geth
3.6.6Anonymity in Cryptocurrency
3.6.7The Mist browser Installation
3.7 Central Bank Network of Yesterday
3.8 Virtual Machines
3.9 EVM Applications
1. State Ma chines
2. Guts of the EVM
3. Block, Mining place in the state transition function
4. Renting time on the EVM
5.Gas, Working with gas, Accounts, transactions and messages,
transactions and messages, Estimating gas fees for operations ,
opcodes in the EVM
3.10 Summary
3.11 Questions
3.12 References
3.0 OBJECTIVES
At the end of this unit, the student will be to
Describe the three parts of block chain
Demonstrate Mist Browser
Explain the EVM and EVM applications
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753.1 INTRODUCTION
1. A block chain is a fully -distributed, peer -to-peer software network
which make use of cryptography to securely host applications, store
data and easily transfer digital instruments of value that represents
real-world money.
2.In Bitcoin and Ethereum, cryptography is used to conjur one secure
computing environment out of thousands of similar machines, running
with no central authority and no single owner.
3. The term “Ethereum” can be used refer to three distinct things: the
Ethereum protocol, the Ethereum network created by computers using
the protocol and the Ethereum project funding development of the two
things listed in above line.
4. On the heels of bitcoin, Ethereum has become its own macrocosm,
attracting enthusiast and e ngineers from numerous industries.
5.Many of civilization’s most nagging imperfections could become the
domain of blockchain’s killer apps and the Ethereum protocol is
widely considered to be the network where these distributed apps will
spring up.
6.For programmers, the challenging thing about Ethereum isn’t usually
the code, like most open source software projects, this one has on -
ramps for people who already program in other environments.
7.For nonprogrammers, the challenge is divining how the ecos ystem will
develop and how the whole system will fit in to it. Claims that block
chains will modernize the banking system, revolutionize insurance and
lay waste to counterfeiting may be overblown, but by how much is
again a question mark case.
8.Open sour ce block chain networks such as Ethereum and Bitcoin are
kits that allow us to pop up an economic system in software, complete
with account management and a native unit of exchange to pass
between accounts. Just like game monopoly.
9. People call these nat ive units of exchange coins, tokens or
cryptocurrencies, but they are no different from tokens in any other
system, they are a form of money(or scrip) that is usable only within
that system.
10. Block chains work something like mesh networks or local area
networks(LANS), they are merely connected to other “peer”
computers running the same software. When you want to make one of
these peer -peer(P2P) networks accessible through a web browser, we
need to use special software libraries such as web3.js to connect an
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7611. In Ethereum, we can take this concept one step further by easily
writing financial contracts with other users inside the system, financial
contracts are nothing but sm art contracts.
12. The key component is this idea of a Turing -complete block chain. As a
data structure, it works kind of the same way that bitcoin works,
except the difference in Ethereum is, it has this built -in programming
language, phrase by VitalikBut erin, inventor of Ethereum.
13. In Ethereum, smart contracts are written in the programming language,
known as solidity. Turing completeness was an advantage that many
developers quickly latched onto, but more important is Ethereum’s
ability to save state.
14. In computing, a simple definition of a stateful system is one that can
detect changes to information and remember them over time.
15. The ability to engineer interactions between users in the future and
under certain conditions is a powerful addition to a blockchain. It
allows developers to introduce control flow in to cryptocurrency
transaction programming. This is the biggest distinction between
Ethereum and Bitcoin, but not the only one, as described here.
16. In Bitcoin, all transactions happen as soon as possible. Because of
Bitcoin’s lack of statefulness,it has to execute transactions all in one
go. The block chain as envisioned by Bitcoin’s creators was a
distributed transaction ledger that kept a running tally of everyone’s
bitcoin balances in t he network(In Bitcoin, the network is written in
the uppercase and bitcoin the token in lowercase).
17. The common scripting language makes it more straightforward for
blockchains that share the Ethereum protocol to share data with one
another, enabling g roups that use separate block chains to share
information and value with each other.
18. In a telecommunication context, a protocol is a system of rules that
describes how a computer (and it programmer) can connect to
participate in and transmit informatio n over a system or network,
whereas in Ethereum, the protocol is designed for building
decentralized applications with emphasis on rapid development time,
security and interactivity.
3.2 THREE PARTS OF BLOCK CHAIN
1.A block chain can be thought of as a database that is distributed or
duplicated across many computers. The innovation represented by the
word blockchain is the specific ability of this network database to
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772.This usually happens because of network latency due to physical
distance, for example, a transaction created by a user buying a hot dog
in Tokyo will be dispatched first to nodes in Japan.
3.By the time a node in new York ge ts word of this transaction a few
milliseconds later, a nearby transaction in Brooklyn sneaks in “ahead”
of the one in Tokyo. These inconsistencies are there in current
distributed system, and this makes a challenge for removing
inconsistencies for handlin g distributed types of task.
4. So, to remove the inconsistencies present in current distributed system
transactions, power of block chain system is deployed with various
technologies to crack the problem.
5. A block chain is really the combination of thre e technologies as follows
5.1 Peer -to-Peer networking -A group of computers such as the Bit torrent
network that can communicate among themselves without relying on a
single central authority and therefore not presenting a single point of
failure.
5.2 Asym metric cryptography -I.A way for these computers to send a
message encrypted for specific recipients such that anyone can verify
the sender’s authenticity, but only intended recipients can read the
message contents. II. In Bitcoin and Ethereum, asymmetric
cryptography is used to create a set of credentials for your account, to
ensure that only you can transfer your tokens.
5.3 Cryptographic hashing -A way to generate a small, unique
“fingerprint” for any data, allowing quick comparison of large datasets
anda secure way to verify that data has not been altered in both bitcoin
and Ethereum, the merkle tree data structure is used to record the
canonical order of transactions, which is then hashed in to a
“fingerprint” that serve as a basis of comparison for com puters on the
network and around which they can quickly synchronize.
6.The combination of these three elements grew out of experiments with
digital cash in the 1990s and early 2000s. Adam Back released
Hashcash in 2002, which pioneered the use of mining to send
transactions. The pseudonymous Satoshi Nakamoto added distributed
consensus to this innovation with the creation of Bitcoin in 2009.
7.Together, these three elements can mimic a simple database that is
decentralized and stored in the nodes of the network. In the same way
that a group of ants constitute a functioning colony, you can think of
Bitcoin as a machine. In computing terms, it’s a virtual machine, the
particulars of which we’ll get into later.
8.Ethereum adds in computer science terms, a trustful global object
framework messaging system to the paradigm established by the
bitcoin virtual machine.
9. Ethereum assumes many chains -The Bitcoin we know today is not the
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78uses the bitcoin software modified as do dozens more. Ethereum was
built with the assumption that there may be many blockchains and thus
there should be a set of protocols in place by which they can
communicate.
10. Ethereum network will be a distributed networ k of decentralized
systems, enabling many different cryptographic tokens of value, with
various purposes and interpretations to be easily and quickly defined
and then brought to life.
11.The value of a bitcoin is determined by the market for bitcoins. Sur e,
certain bitcoin -holding entities have obtained domestic money
transmitter licenses and will redeem your bitcoins for US dollars,
Euros, gold or other flat currency. But these entities are private
businesses that charge fees and could go out of business at any time.
12. So, bitcoin and networks like it are vulnerable only to the extent that
there is no “redeemer of last resort”, no trusted (government or
corporate) entity you can be sure will redeem your bitcoins or ether for
US dollars in the future. Sho rt of paying a private money changer, the
only option for converting bitcoins to something of real value is to
connect to an online exchange and trade the coins for flat currency,
thus finding another buyer.
13.Just as the Bitcoin network moves bitcoin to kens, the Ethereum
network moves ether tokens.
3.3 ETHER AS CURRENCY AND COMMODITY
1.It’s commonly said that the bitcoin isn’t backed by anything, and
that’s true. Of course, modern fiat currenciesaren’t backed by anything
either. But they’re differen t: endorsed by a government, a fiat currency
is held by default by anyone paying taxes and buying government
bonds. Some international commodities sales are denominated in
dollars, too (for example, oil) giving people another reason to hold
dollars.
2. For cryptocurrencies, challenges to adoption remain. Today, these
digital tokens remain a fast, secure, public payment layer on top of the
existing fiat money system; an experimental deployment that might
someday grow to replace the centralized payments netwo rking
technologies used by companies like Visa and MasterCard today.
3.However, incredible possibilities are on the horizon as governments
and private institutional investors begin to create large markets for
inancial products and services denominated in ryptocurrencies.Central
banks may even adopt the technology. As of this writing, at least one
country has issued a digital dollar using Bitcoin software known as
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794. Gresham’s Law
4.1A currency that can buy a lot of valuable securities and ass ets is a
currency worth saving. The Ethereum network allows anyone to write
a trustworthy, self -executing financial contract (smart contract) that
will move ether in the future. Conceivably, this could allow financial
contracts that project far into the fu ture, giving stakeholders in the
contract a reason to hold and use ether as a store of value.
4.2 Originally applied to gold and silver currency, Gresham’s Law states
that in an economy, “bad” money drives out “good.” In other words,
people save and hoard currencies they expect to appreciate in value,
while spending currencies they expect to depreciate in value.
4.3 Although the law is named for a 16th -century English financier, the
concept appears to date all the way back to Medieval writings, and
indeed a ll the way back to ancient texts including Aristophanes’ poem
“The Frogs,” usually dated to around 405 BC -Coins untouched with
alloys, gold or silver, Each well minted, tested each and ringing clear.
Yet we never use them! Others pass from hand to hand.
4.4 For millennia, people have saved the value of their work -product in a
monetary instrument that will stay stable, appreciate in value, or inflate
in price —not something prone to crashing in value.
4.5 Today, crypto currencies are volatile in price, and a re accepted by only
a handful of governments and corporations worldwide as of this
writing. Few, if any, decentralized smart contracts are in use in
businesses today.
4.6 But by the same token, flat currencies issued by central banks have an
awful historic al record, demonstrably prone to bubbles, depressions
and manipulation. Can crypto currency ever be real money and will it
be better than the money to which we are accustomed?.
5. The path to Better Money
5.1 Today, Bitcoin(denoted by the ticker symbol BTC ) is used by people,
governments and corporations to transfer value and buy products or
services. Each time they send bitcoins, they pay a small fee to the
network, which is denominated in bitcoins. Ether, denoted by the
ticker symbol ETH, can be used simi larly.
5.2 First ether, has another use, it can pay to run programs on Ethereum’s
network. These programs can move ether now or in the future or when
certain conditions are met.
5.3 Because of its ability to pay for the execution of transactions in the
future, ether can also be considered a commodity, like fuel for the
network to run applications and services. So it has an additional
dimension of intrinsic value over bitcoins, it is not just a store of value.
5.4 Today, the overwhelming usage of flat curre ncies might suggest that
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80worthlessness in the long run and yet bitcoins and ether are famously
hoarded by holders, and even held in a trust by atleast one company
where grayscale, a subsidiary of dig ital currency group. Meanwhile,
central banks in the west experiment with near -zero interest rates and
quantitative easing, also known as money printing in ever more
dangerous and desperate attempts to keep inflation and deflation in
check.
5.5 Crypto curr encies are being drawn in to the market by higher process
to service genuine demand. This is reflected in the ever -increasing
process of most cryptographic tokens, however volatile their prices in
over period of time. This balancing act between hoarders, s peculators
and spenders creates a thriving and healthy marketplace for
cryptocurrency and suggest that cryptotokens as an asset class are
already serving the purpose of money and much more.
6. Cryptoeconomics and Security
6.1 One reason to bring up currenc ies and commodities in the discussion
of smart contracts is to train ourself to think in terms of building
economic systems in pure software, that’s the promise of Ethereum.
6.2 The design of software systems with game theoretic rules constitutes
the emerg ing field of cryptoeconomics, which may seem simple at
first-an equity coin, for example -creates worlds of complexity when
rendered in code. In fact, what makes systems like Ethereum and
Bitcoin so secure is that they are not based on any hack -proof
techno logy but rather rely on powerful financial incentives and
disincentives to keep malefactors at bay.
6.3 These are attractive value propositions that every engineer and
software designer should be excited about. But bootstrapping
currency(or strip) coins is an altogether separate, added challenge to
getting people excited about end -user applications.
6.4 Although the most obvious applications of this software might be
found in financial services, future applications may also use the same
levers -trust, trans actions, money and scripting -for entirely other
purposes.
7.Back to the Good Old Days
7.1 It’s true that Bitcoin and Ethereum add a bit of complexity —
economics —to writing software programs. But they are also simpler in
some ways; working with decentraliz ed protocols is similar to working
with computers of the 1970’s.
7.2 They were enormous and expensive shared resources, and individuals
could rent time on these machines from a university or corporation that
owned one. The Ethereum network functions as one large computer
which executes programs in lockstep; it is a machine which is
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817.3 Being composed of many private computers, the Ethereum Virtual
Machine (EVM) itself can be said to be a shared computer which i s
ownerless.
7.4 Changes to the EVM are achieved through hard forking: persuading
the entire community of node operators to upgrade to a new version of
the Ethereum software.
7.5 Changes to the network can’t simply be pushed by the core
development team. T hey involve a political process of persuasion and
exposition. This ownerless configuration is meant to maximize uptime
and security, while minimizing the incentive for subterfuge.
8.Cryptochaos
8.1 Everybody who looks at blockchain development for the fir st time
feels overwhelmed. It’s a new technology, things are changing rapidly,
and expertise in decentralized systems is rare.
8.2 Nobody knows what’s coming next, but it’s clear the technology is
working —to the tune of over $26 billion USD (as of this wri ting),
which is roughly the market capitalization of all cryptocurrencies
combined. Retailers big, small, online, and offline are beginning to
accept payments in digital coins.
8.3 The Ethereum project is built with new developers in mind, and gives
you th e tools to create unheard -of solutions to age -old problems. It’s
up to developer to figure out what to build with this powerful new
toolset.
3.4 BUILDING TRUSTLESS SYSTEMS
1. With help solidity programming language, which is used for writing
secure block chain programs to improve or automate the end -user
experience of all sorts of businesses and enable the creation of new
kinds of products and services.
2. As we are seeing how the banking products and services we know
today, which evolved over a thousand y ears of trial -error, can change,
benefit or be brought to scale by trustless distributed or semi
distributed systems.
3. Trustless is used in this context to mean “Not requiring faith that
counterparties will operate honestly and without failure, thus
impe rvious to fraud and other counterparty risks”.
3.5 SMART CONTRACTS
1. Ethereum and that is the notion of a smart contract, some business logic
that runs on the network, semi -autonomously moving value and
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822. Smart contracts are often equated to software applications, but this a
reductive analogy; they’re more like the concept of classes in
conventional object -oriented programming.
3. When developers speak of “writing smart contracts,” they are typically
referri ng to the practice of writing code in the Solidity language to be
executed on the Ethereum network. When the code is executed, units
of value may be transferred as easily as data.
4. Objects and methods for value
4.1 In computing, an object is usually a li ttle chunk of data —
information —encapsulated in a particular structure or format. Often
this data has associated instructions called methods indicating how the
object can be used or accessed. Now let’s imagine the information held
in this object is valuable to someone, and this person would be willing
to pay to trigger a method which displays it.
4.2 In the example given below, let’s imagine a user wants to pay a small
fee to use a cake recipe he or she discovered online. This recipe is the
data object in ou r example. At the most literal level, the characteristics
of the cake object, called attributes, are stored along with the methods
at a certain address in the computer’s memory.
4.3 The object below represents the attributes of a cake, and contains a
metho d whereby the computer can display instructions for how to
combine these ingredients to make the cake. Storing the information in
this way makes it easy for the program and the programmer to swap in
and out the attributes without needing to change the code for the
display instructions.
4.4 Javascript code for cake recipe is shown here
var cake = {
firstIngredient: "milk",
secondIngredient: "eggs",
thirdIngredient: "cakemix",
bakeTime: 22
bakeTemp: 420
mixingInstructions: function() {
return "Add " thi s.firstIngredient + " to " + this.secondIngredient + " and
stir with " + this.thirdIngredient + " and bake at " + bakeTemp + " for "
+ bakeTime + " minutes." ;
}
4.5 This is an example of how computers “move” data around to display
useful results to their human users. In Ethereum, you can write
functions that send money around, just as this little object’s method
called mixing Instructions, when executed, can display the mixing
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834.6 Solidity code can be used on the back -end of an ap plication to add
micro -payments, user accounts, and functionality to even simple
computer programs, without the need for third -party libraries.
4.7 Imagine for a moment that the mixing Instructions function cost a few
cents in ether to execute. After the p rice of the cake recipe is deducted
from the user’s Ethereum wallet balance —which takes a few seconds,
on average —your smart contract would call the mixing Instructions
method and show the user how to make the cake. All this can be done
without authenticat ion, payment APIs, accounts, credit cards,
extensive web forms, and all the typical work that comes with building
an e-commerce application.
5. Content creation
5.1 The cake recipe example showcases another big area of potential for
Ethereum: intellectual property, licensing, and content royalties.Today,
selling content on the Web or through apps means dealing with
powerful distributors including Apple, Google, and Amazon, who
make punitive rules about selling digital content and levy large fees.
5.2 Ethere um makes it possible to facilitate micro transactions whereby a
user pays only, say, $0.25 for a recipe —an amount that would be
impractical to pay using fee -laden credit -card networks. There are
challenges to content creators doing business this way today, including
the price volatility of the ether token also.
6. Where’s the Data
6.1 All transactions in Ethereum are stored on the blockchain, a canonical
history of state changes stored on every single Ethereum node. When
you pay for computing time on the Et hereum network, this includes
the cost of running the transaction and for storage of the data included
in your smart contract.
6.2 As soon as you execute your smart contract and the fees are paid from
your ether balance, that data will then be included in the next block.
Because the Ethereum network requires all nodes to keep a full state
database of all contracts, any node can query the database locally.
7. What is Mining?
7.1 A distributed system has no single owner, machines are free to join the
Ethereum network at will and begin validating transactions. This
process is known as mining.
7.2 Mining nodes confer to arrive at a consensus about the order of
transactions across the system, which is necessary to tabulate
everyone’s account balances on the fly, even as many transactions pass
through the network. This process consumes electricity, which costs
money, and so miners are paid a reward for each block they mine,
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848. Ether and Electricity Prices
8.1 Miners are paid this ether for mining, a nd also for running scripts on
the network (in the form of gas). The cost associated with electricity
expenditure of servers running on the Ethereum network is one of the
factors that gives ether, as a crypto commodity, its intrinsic value —
that is, someone paid real money to their electricity company to run
their mining machine.
8.2 Specialized mining rigs, which use arrays of graphics cards to increase
their odds of completing a block and getting paid, can run up
electricity bills anywhere from $100 to $30 0 a month per machine,
depending on rates as per area.
8.3 Mining is fundamental to both Bitcoin and Ethereum, and in principle
works similarly in both networks, with a few caveats.
3.6 ETHEREUM VIRTUAL MACHINE
1.The Ethereum Virtual Machine (EVM) —the na me for the system just
described —can be programmed, and to what ends. It is written in a
way that should make sense to both financial and technical thinkers, so
that developers and domain experts can more easily arrive at a
common understanding of what the y should build together, and which
tools are right for their project.
2.In the realm of cryptocurrency software, there are generally two
essential types of client applications wallets and full nodes. Wallet
usually denotes a lightweight node that connects to a block chain to
perform basic functions, such as sending and receiving cryptocurrency.
Full nodes are command -line interfaces that can perform the full
gamut of operations allowed by the network.
3.Ethereum can refer to both the Ethereum protocol and the Ethereum
network created by computers using the protocol. Operating a node on
the network allows you to upload smart contracts. For sending and
receiving cryptocurrencyall you need is a wallet application for your
computer or smartphone.
4. Ethereum h as several client applications, like mist browser is one of
them, the mist browser, a user friendly wallet that can perform some of
the duties of a full node -namely executing smart contracts.
5. Eventually, entire web -app-like programs will be accessible t hrough
Mist, with their back ends built on Ethereum; that’s why it’s called a
browser. Today, it’s useful for sending and receiving the ether
cryptocurrency. But tomorrow, it may also be a distribution point for
consumer and enterprise software application s, almost like an App
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856. The term currency as in cryptocurrency refers to a fungible unit of value
for the system, much like a token or scrip. The term fungible applied
to a currency means “Mutually interchangeable”. In flat currency
terms, one do llar can be said to fungible for another dollar.
3.6.1 Wallets as a Computing Metaphor
1 Wallets are software applications for desktop or mobile devices that hold
your keys to the EVM. These keys correspond to an account, which is
referred to by a long acc ount address. In Ethereum, accounts do not
store your name or any other personal information. They are
pseudonymous. Anyone can generate an Ethereum account by
connecting to the network with any Ethereum client (such as Mist).
2.If you’ve already downloa ded an Ethereum wallet or full node on your
computer or phone, you were probably prompted to create an account.
The wallet application probably also asked you to create a password to
protect your keys with encryption. As you can gather, these keys are
an important part of sending and receiving ether.
3.Let’s begin by looking at your account address, also called a public
key. Your public key has a matching private key that allows access to
your account. This private key should be kept secret and not publis hed
anywhere.
4. Accounts in both Bitcoin and Ethereum are represented by long
hexadecimal addresses. An Ethereum address looks like this:
0xB38AA74527aD855054DC17f4324FE9b4004C720C. In the Bitcoin
protocol, the raw hexadecimal address is encoded in base 5 8 with a
built-in version number and checksum, but underneath looks just like
an Ethereum address. Here’s an example of a Bitcoin address:
1GDCKfdTo4yNDd9tEM4JsL8DnTVDw552Sy.
5. To receive ether or bitcoins, you must give the sender your address,
which is why it’s called a public key. An account is a data object, an
entry in the block chain ledger, indexed by its address, containing data
about the state of that account, such as it balance. An address is a
public key belonging to a particular user, it’s how user access their
accounts. In practice, the addresses is technically the hash of a public
key, not the public key itself.
6.In the EVM, asymmetric cryptography is used by the network to
generate and recognize valid Ethereum addresses, and also to
“digita lly sign” transactions. In secure communications, asymmetric
cryptography is used to encipher private communications, so that even
if they are intercepted by enemies, they remain unreadable.
7.It’s important to note that ether is not contained in any part icular
machine or application. Your ether balance can be queried, and ether
sent or received, by any computer running an Ethereum node or wallet.
Even if the computer where your Mist wallet lives gets destroyed,
never fear: all you need is your private key , and voila, you can access
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868. However, if you hand over your private keys to someone else, that
person can access the EVM and pull your money out without you ever
knowing. As far as the network is concerned, anyone with your private
key is you.
9. Because the EVM is a global machine, it has no way of knowing which
node you’ll create a transaction from. Unlike today’s web apps,
Ethereum does not look for a “trusted” computer; it doesn’t know your
phone from any other phone. If this seems unusual, think of it like a
bank ATM system, which provides account access for anyone holding
your debit card number and your four -digit pin.
10. Losing your phone or computer to theft or destruction does not mean
you lose your money, provided t he following are true: You have
backed up your private key. You didn’t give your private key to
anyone else.
3.6.2 The Bank Teller Metaphor
1. In a way, using a wallet or full node is like getting behind the bank
teller’s desk and being in control of your own money. Not in the sense
that you can get paper cash, but in the sense that a bank teller controls
a node within the bank’s computer system that can execute
transactions in a global database of transactions. A teller controls the
bank’s database, which connects to other bank databases.
2. In conventional banking, by extension, a paper check is a written
instruction for the bank teller to make a transaction using the bank’s
computer system. On the check is your account number and a routing
number.
3. In c ryptocurrency, this legacy banking system —ah o d g e p o d g eo f
human and computer processes —is completely obviated by the use of
an algorithmic consensus engine running on a peer -to-peer computer
network.
4. Settlement and clearing of transactions happens on th e network itself
within seconds (or, with bitcoin, minutes) of the transaction being
digitally signed and broadcast by a node. Thus it can be said in in
cryptocurrency transaction that “the settlement is the trade.”
5.Cryptocurrencies are different from t he fiat currencies used by
conventional banks, which are centralized. Your tokens are virtual, and
your balance (along with that of everyone else who holds ether) is
tabulated by the blockchain network. There is no tangible ether or
bitcoin currency, altho ugh some third parties have created
“collectible” coins preloaded with cryptocurrency.
6. Be extremely wary of any online service or organization that offers to
hold, store, or act as custodian of ether, bitcoins, or any other
cryptocurrency. The advantage of distributed public systems is to
eliminate counterparties from transactions, and allow entities to
transact on a peer -to-peer basis. The point is, you can hold these assets
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877. Do not use any wallet or online service that holds your private keys for
you. Only use applications that store your private keys on your device.
8. The best way for new Ethereum programmers to visualize the concept
of a blockchain is to imagine a paper transaction ledger that can be
synchronized with other paper transaction ledgers around the world.
8.1 When a wallet application attempts to make a change to the database,
the change is detected by the nearest Ethereum node, which then
propagates the change around the network. Eventually, all the
transa ctions are recorded on every ledger. In the abstract, this works
something like the polygraph machine patented by John Isaac Hawkins
in 1803. This was the first “copy machine,” although its name today is
used to refer to so -called lie -detecting devices. Ju st like the polygraph,
the blockchain is an apparatus for allowing many “machines” to
change the state of a ledger in the same way, nearly simultaneously.
Fig 1 The Polygraph Machine
3.6.3 Breaking with Banking History
1.The only important to point out that (as with Bitcoin) no individual has
the power to create more ether. This characteristic stands in stark
contrast to the last 400 years of financial markets and central bankers,
which reads like a history of large -scale scam artists.
2. Since the stoc k-jobbing days of the late 17th century in London’s
Exchange Alley, entrepreneurs and scammers (then called stock
projectors) have been selling equity in ventures both legitimate and
not. Often they would secretly issue new shares to themselves and
their c onfederates when the price would go up —known to Americans
in the 19th century as watering the stock.
3. Over time, speculating on stocks became a pastime that people of all
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88modern stock ma rkets were born, with their processes and
counterparties to act as middlemen who ensure trustworthy
transactions..
4. But even with the banking regulations passed after the Great
Depression, dishonest entrepreneurs still found ways to carve out
secret stoc k pools, or unload the shares they had without the public
knowing —only to let the business collapse after getting their money
out.
5. Few times in modern history have speculative bubbles wiped out as
much wealth and human progress as the crash of 1929 in t he United
States. However, similar depressive episodes in the United States and
Europe (including the Panic of 1873 –1879) were caused by someone,
either central banks or investors themselves, messing with the base
quantity of money, equities, or bonds in a large marketplace.
3.6.4 How Encryption leads to Trust
1.Asymmetric cryptography is a method of sending secure messages
back and forth over a network, where the sender and the recipient do
not trust the channel of communication. In the case of the EVM, those
messages are transactions, being signed and sent to the network in
order to change the state of some of its accounts. It’s called
“asymmetric” because each party has a pair of two different, but
mathematically related, keys.
2.Public -key cryptograph y was developed for wartime communications,
and when used properly, can be extremely secure. Unlike symmetric -
key cryptographic, public key cryptographic communications don’t
require a secure channel between parties. This is essential in Bitcoin
and Ethere um, because any computer running the protocol can join the
network, without any vetting. However, the computational complexity
involved in encrypting data makes it useful only for small data objects,
like the alphanumeric string that becomes your private k ey. This is
why encryption must be used sparingly.
3. At a high level, it can be said that Ethereum uses encryption to validate
and verify that any and all changes made to account balances in the
EVM are legitimate, and that no account has been increased ( or
decreased) erroneously. Here are some definitions that will help
moving forward.
3.1 Symmetric Encryption -A process by which a snippet of plain text,
usually held in a document, is smashed together with a shorter data
string called a key to produce a c iphertext output. This output can be
reversed, or decrypted, by the party that receives it, so long as they
also have that same key. Trying to decode the message without the key
would be, computationally speaking, immensely time -consuming and
expensive —somuch so that some kinds of encryption are considered
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893.2 Asymmetric Encryption -This way of encrypting information requires
the program to issue two keys simultaneously, one that is public and
one that you keep private. The public key is public in the sense that
you can list it on your web site or social profile, such as an e -mail
address.
3.3 Secure Messaging -Alice uses Bob’s public key to encrypt a message.
When he receives the ciphertext, he c an decrypt it using his matching
private key, ensuring that only Bob can read the message. This is
called secure messaging. But it leaves a dangerous possibility open:
anyone could send Bob a message claiming to be Alice. How does he
know that Alice is the real sender of the message?.
3.4 Secure and Signed Messaging -If Alice wanted to assure Bob that she
is the true sender, she would do things differently. First, she would
take her plaintext message and encrypt it using her private key. Then,
she would encr ypt it again using Bob’s public key. When Bob receives
the message, he decrypts it first using his private key, but he’s still left
with ciphertext. He must decrypt it again using Alice’s public key.
This second layer of encryption assures him that Alice i si n d e e dt h e
sender, because presumably, nobody has Alice’s private key but Alice.
This is known as “secure and signed” messaging.
3.5 Digital Signature -For maximum security, Alice would take another
step: she would hash the plaintext of her message, and a ttach it along
with the message. She would then encrypt this bundle with her own
private key, and again with Bob’s public key. When Bob receives and
decrypts the ciphertext he can run Alice’s plaintext message through
the same hashing algorithm Alice used. If for some reason the
fingerprint of the message turns out differently, then it means the
actual message text was damaged or altered an route.
3.6.5 Using Parity with Geth
1 Ethcore.io is a private Ethereum development company composed of a
few former co ntributors to the Ethereum project, including Gavin
Wood, another Ethereum project cofounder, who created the Solidity
language and authored the Ethereum Yellow Paper.
2. He and his team have created a powerful node written in the Rust
programming language . Parity works on macOS, Windows, Ubuntu,
and in a Docker instance.
3.6.6 Anonymity in Cryptocurrency
1. Bitcoins and ether are not anonymous payment instruments. Anyone
who knows your public key can look on the blockchain and see the
dates and amounts of transactions coming in and out of your account.
From this data, they might be able to put together a pattern of
transactions from which they could deduce your activities. Federal
authorities are already using machine -learning transactions to decode
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902. Anonymity, secrecy, and privacy in cryptocurrency are generally
conflated by newbies, sometimes with disastrous ends. Bitcoin and
Ethereum addresses are pseudonymous by nature; they’re not linked to
your real name or information. But every transaction you send is
public, in the sense that anyone can see the transaction on the
blockchain. This is why public blockchains are touted for their
transparency; if you know someone’s public key, you can look up all
their transactions..
3. Data within smart contracts themselves are encoded but not encrypted.
Encryption is used only to hash large datasets and verify transaction
senders and recipients. However, you can encrypt data yourself before
putting it into an Eth ereum smart contract, if you’d like to use the
public Ethereum chains in a private manner.
3.6.7 The Mist Browser Installation
1. In simple term, Mist browser is user interface for Geth client. Geth is
one of the Ethereum client that is used to connect to Ethereum
networks and it provide command line utility to do various functions.
Mist browser provide user interface to perform similar functions that
we perform using Geth client command line utility.
2. To download the mist browser, use the link given here -
https://github.com/ethereum/mist/releases
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913. Run the exe file and install the mist browser. Once you open the mist
browser, it start connecting to peers/nodes and start downloading the
block chain data. Click on launch application to launch the mist
browser.
4. Once you open it, we can go to “develop” menu bar and check the
“Ethereum Node” option that shows which version of Geth i sb e i n g
used.
Fig 3 Mist Browser Ethereum Node
5. You can go to “Network” option under “develop” menu bar option to
choose to which block chain network you want to connect.
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926. You see one more option “Sync Mode” that sh ow the mode that you
would like to choose to connect with block chain network.
Fig 5 Mist Browser Sync Mode
7. You can also create accounts and develop smart contracts under wallet
option as shown below.
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93
Fig 7 Mist Bro wser smart Contract
3.7THE CENTRAL BANK NETWORK OF
YESTERDAY
1.Today, corporations, insurers, universities, and other large institutions
spend incredible amounts of money building and maintaining software
services and IT for their own employees, and all th eir lines of business.
Their various inflows and outflows are reconciled by large commercial
banks, which have their own architecture, policy, codebase, databases, and
layers of infrastructure. This, of course, is all on top of the Fedwire, which
is the Fe deral Reserve’s real -time gross settlement system, or RTGS.
2.The Federal Reserve is the central bank of the United States. The
Fedwire is used by all Federal Reserve member banks to settle final
payments in electronic US dollars. Any qualified state -chartered bank may
become a member of the system by buying shares in it. Fedwire is owned
and operated by the 12 Federal Reserve Banks themselves, and although it
does charge fees, it isn’t operated for profit.
3. This system processes unthinkable amounts of US dollars every day —
trillions upon trillions. It has some great features, too: there’s an overdraft
system covering allexisting and approved accounts, and the system is
famously reliable, even for remittances overseas. It has been in operation
in some for mo ra n o t h e rf o ra b o u t1 0 0y e a r s .
4. As you can imagine, maintaining the security and reliability of the
Fedwire software is extremely expensive. Yet, the cost of building and
maintaining layers on top of an RTGS is higher still, owing to its security
requirements. Ultimately, these costs are passed on to corporations who
use commercial banks, in the form of fees. Those companies have their
own IT infrastructure costs. In the aggregate these costs ultimately drive
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943.8 V IRTUAL MACHINES
1. Generally speaking, a virtual machine is an emulation of a computer
system by another computer system. These emulations are based on
the same computer architectures as the target of their emulation, but
they’re usually reproducing that architecture on different hardware
than it may have been intended for.
2. Virtual machines can be created with hardware, software, or both. In the
case of Ethereum, it’s both. Rather than securely network thousands of
discrete machines, as with Fedwire, Et hereum takes the approach of
securely operating one very large machine that can encompass the
whole Earth.
3. The Fedwire system is a settlement system with a user experience
tailored to statechartered banks and their operators. It makes little or
no conce rn for the end user of a retail bank, for example; that’s the job
of the retail bank.
4. Software developers will recognize Fedwire as a “platform for banks.”
What the bank chooses to build on top of Fedwire (the customer
experience, the online banking too ls, the brick -and-mortar branches,
the financial products, the cross -selling) is what distinguishes it from
other banks on the Fedwire system.
5. Ethereum is far more generalized. It allows anyone to spin up a network
with as good or better security and re liability than Fedwire, and with
the ability to make secure value transfers nearly instantly.
6. Developers can build any sort of financial products or business logic
they want on top of this secure ledger, withautomated and immutable
scripts, and without needing to pay the overheads dumped on them by
the traditional centralized hosting and banking infrastructure.
7. But does it scale to the speed and size of a system like Fedwire? The
answer is, yes, it can, but this will take several years. There are no
direct or fixed limit neither for transaction sizes or block sizes. In
Bitcoin, the size of the block is limited to 1MB, which works out to
about 7 transactions per second. In Ethereum these limits increase and
decrease in accordance with demand and network capacity.
8. However, this does not mean that blocks can be unlimited size. Recall
that units of work in the Ethereum network are priced in gas. Thus,
larger, more complex smart contracts cost more gas to store and
execute.
9. An unbundling of banking ser vices into ever smaller brands as the
public Ethereum chain scales and is capable of processing more
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95blockchain -centric podcast Unchained, interviewed Adam Ludwin of
San Francisco blockcha in startup Chain in 2016 and wrote this:
9.1As for who owns the network, in the current system, if you go to Chase
to deposit $50 cash, Chase holds that money, which was issued by the
Federal Reserve, on its network. But Ludwin said you could imagine,
instead of banks running the network, Fedwire, the current system for
electronically settling payments between member banks, being
reconstructed on a blockchain for which banks hold keys to make
transfers.
9.2That could then lead to nonfinancial institutions being custodians of
such currency. “With small enough amounts, you don’t need a bank,”
said Ludwin. “Could Google, could Apple, could Facebook be holding
small amounts of digital cash? Does that change the model of who a
custodian is or could be? And the answer is yes.” It could also open up
more avenues for peer -to-peer lending, reducing consumers’ reliance
on banks for loan
10. The EVM may be coming into focus: a generalized, secure, ownerless
virtual machine that offers cheap Fedwire -like functionality with a
bunch of other magic on top. The EVM can run arbitrary computer
programswritten in the Solidity language. These programs, given a
particular input, will always produce the output the same way, with the
same underlying state changes.
11. Solidity pro grams are capable of expressing all tasks accomplishable
by computers, making them theoretically Turing complete. That means
that the entire distributed network, every node, performs every
program executed on the platform. When one user uploads a smart
contract through their Ethereum node, it is included in the latest block
and propagated around the network, where it is stored on every other
node in the network.
12. The job of each and every node in the EVM to run the same code, as
part of the block process ing protocol. The nodes go through the block
they are process and run any code enclosed within the transactions.
Each node does this independently; it is not only highly parallelized,
but highly redundant.
3.9 EVM APPLICATIONS
1.The EVM is a transaction singleton machine with shared state. In
computing, this means it behaves like one giant data object, rather than
what it is: a network of discrete machines, themselves singletons, in
constant communication.
2. State machines.
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962.2 Digital V/s Analog
1. Foundational to the concept of a stateful computer is the idea of a
switch that can be on or off. The 1s and 0s always referred to as the lingua
franca of machines refer to arrays of metaphorical switches, so to speak,
put in a certain configuration in order to code for specific letters, numbers,
or other keyboard symbols. All of the symbols on a keyboard (and more)
can be represented with just eight switches, which is why computing
memory is stacked in multiples of eight. The so -called character code for a
comma, for example, is 0010 1100.
3. State -ments
1. Individual snippets of code, when considered by themselves, fall
broadly into two buckets: expressions and statements. Expressio ns are
used to evaluate a particular condition; statements (note the root word!)
are used to write information into the computer’s memory. Together,
expressions and statements let computers modify a database in a
predictable way when specific conditions ar e met. This is the crux of
automation, and it’s the reason we find computers so useful.
4. Data’s Role in State
1 Every time you change data in a computer’s memory, you can think of
its zillions of internal switchesas being in a slightly different
configu ration. State generally refers to the present condition of the system:
the objective series of changes in information, across various memory
addresses of the machine, that led to the current contents of its memory.
2. It’s important to distinguish between an attribute and state. State is
something that can change easily and predictably. Let’s use the example of
a car. Repainting a car is hard work, but it can be done. Paint color is an
example of an attribute. In pseudocode, you might say the following abo ut
ac a r
Bodycolor=red
3. In computer programming, this is called a key/value pair. The key,
bodyColor, has a value assigned to it, which is red. To change the value of
this key, your code makes a new statement of the value to be something
else
Bodycolor= green
4. Now let’s say you instruct the computer that the color of this car will
change frequently. In other words, you make the car’s color a variable.
Well, it can be said that the variable (in this case, the color) can have a
state, which is a value th at changes. But an individual value, such as
green, has no state; green is simply green.
5. Working familiarity with the concept of state transition will help
nonprogrammers gain insight into the truly hard problems incumbent in
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973. Guts of the EVM Work
1 The computer itself is running a state function, constantly checking for
changes to its state. It’s like an overeager intern who wonders thousands
of times per second if any new work has landed on his desk.
2. When n ew instructions are triggered, the computer runs code and may
write new data to its memory. It’s important to note that each state change
must be based on the last state change; a computer doesn’t just toss
information into memory addresses willy -nilly.
3. The EVM runs a loop continuously that attempts to execute whatever
instructions are at the current program counter (whatever program is “on
deck” to be processed). The program counter works like a delicatessen
queue: each program takes a number and waits its turn.
4. This loop has a few jobs: it calculates the cost of gas for each
instruction; and it uses memory, if necessary, to execute the transaction if
the preamble calculation succeeds. This loop repeats until the VM either
finishes running all the c ode on deck, or it throws an exception, or error,
and that transaction is rolled back.
5. The EVM Constantly checks for Transactions -the EVM has a constant
history of all transactions within their memory banks, leading all the way
back to the very first t ransaction. Unlike people, who have to deal with
imperfect memory, a computer’s state (as it exists today) is the specific
outcome of every single state -change that has taken place inside that
machine since it was first switched on.
6. Creating a Common M achine Narrative of What
6.1 Transactions, therefore, represent a kind of machine narrative —a
computationally valid arc between one state and another.
6.2 As Gavin Wood’s Ethereum Yellow Paper says: There exist far more
invalid state changes than valid s tate changes. Invalid state changes might,
e.g., be things such as reducing an account balance without an equal and
opposite increase elsewhere. A valid state transition is one which comes
about through a transaction.
7. Cryptographic Hashing -Hash Funct ions
7.1 Generally speaking, the purpose of hash functions, in the context of a
blockchain, is to compare large datasets quickly and evaluate whether
their contents are similar. A oneway algorithm processes the entire block’s
transactions into 32 bytes of data—a hash, or string, of letters and numbers
that contains no discernible information about the transactions within.
7.2 The hash creates an unmistakable signature for a block, allowing the
next block to build on top of it. Unlike the ciphertext that r esults from
encryption, which can be decrypted, the result of a hash cannot be “un -
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984. Block : The History Changes
4.1 Transactions and state changes in the Ethereum network are
segmented into blocks, and then hashed. Each block is verified and
validated before the next canonical block can be placed on “top” of it.
4.2 In this way, nodes on the network do not need to individually evaluate
the trustworthiness of every single block in the history of the Ethereum
network, simply to compute the presen t balances of the accounts on the
network.
4.3 They merely verify that its “parent block” is the most recent canonical
block. They do this quickly by looking to see that the new block contains
the correct hash of its parent’s transactions and state.
4.4All the blocks strung together, and including the genesis block, an
honorific describing the first block the network mined after coming online,
are called the blockchain. In some circles, you will hear the blockchain
referred to as a distributed ledger or distributed ledger technology (DLT).
4.5 Ledger is an accurate description, as the chain contains every
transaction in the history of the network, making it effectively a giant,
balanced book of accounts. However, most so -called digital ledgers do not
use proof of work to secure the network, as Bitcoin and Ethereum do.
4.6 Understanding Block Time -In Bitcoin, a block is 10 minutes. This so -
called block time is derived from constants hardcoded into Bitcoin’s
issuance scheme, with a total of 21 million co ins to be released from 2009
to 2024, and rewards halving every four years and n Ethereum, block time
is not a function of the issuance schedule of ether. Instead, block time is a
variable that is kept as low as possible, for the sake of speedy transaction
confirmation.
4.5 The Drawbacks of Short blocks -It’s important to note that Bitcoin’s
long confirmation times make retail commerce and other practical
applications difficult. When blocks are shorter and transactions move
faster, user experience is bette r. However, shorter blocks and faster
transactions make it more likely that a given node will get the order of
transactions wrong, because it may not have heard about some
transactions originating from far away.
4.6 Solo Node Block Chain -when you spin up your own blockchainit’s
possible to use the Ethereum protocol with a single machine. It will
process your transactions just fine, as long as one or more nodes are
mining on the chain. But if someone knocks that machine offline, your
chain is inaccessible, and transactions stop going through.For this reason,
despite Ethereum being free and open software, the necessity for many,
many nodes to create a resilient network causes developers to converge
and work (for the most part) as one community, on a small nu mber of
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994.7 Distributed Security -The distributed nature of the Ethereum Virtual
Machine, and the fact that it is composed of many nodes around the world,
means that it must be purpose -built to solve the diffmatching problem that
can arise w hen there are many near -simultaneous changes to the same
database, from many users, all over the world.The EVM’s resilience and
security arise from the large number of machines mining on the network,
incentivized by the earning of fees denominated in ether or bitcoins.
5. Mining’s Place in the State Transition Function
5.1 Mining is the process of using computational work to nominate a
block —that miner’s version of recent transaction history —as the
canonical block for this, the most recent block on the ch ain.
5.2 . Mining achieves the consensus required to make valid state changes,
and the miners are paid for contributing to the consensus building. This is
how ether and bitcoin are “created.”
5.3 Each time a new block is created, it is downloaded, proces sed, and
validated by node on the network. During processing, each node executes
all the transactions contained therein. the Ethereum state transition
function can be defined as the following six steps. For each transaction in
a block, the EVM performs the following:
5.3.1 Check whether the transaction is in the right format. Does it have the
right number of values? Is the signature valid? Does the nonce —a
transaction counter —on the transaction match the nonce on the account? If
any of these are missing, r eturn an error.
5.3.2 Calculate the transaction fee by multiplying the amount of work
requiredby the gas price. Then deduct the fee from the user’s account
balance, and increment the sender’s nonce (transaction counter). If there’s
not enough ether in the account, return an error.
5.3.3 Initialize the gas payment; from this point forward, take off a certain
amount of gas per byte processed in the transaction.
5.3.4 Transfer the value of the transaction —the amount being sent —to the
receiving account.If th e receiving account doesn’t exist yet, it will be
created. (Offline Ethereum nodes can generate addresses, so the network
may not hear of a given address until a transaction takes place.) If the
receiving address is a contract address, run the contract’s c ode. This
continues either until the code finishes executing or the gas payment runs
out.
5.3.5 If the sending account doesn’t have enough ether to complete the
transaction, or the gas runs out, all changes from this transaction are rolled
back. A caveat are the fees, which still go to the miner and are not
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1005.3.6 If the transaction throws an error for any other reason, refund the gas
to the sender and send any fees associated with gas used to the miner.
6. Renting Time on the EVM
6.1 For every instruction the EVM executes, there must be a cost
associated, to ensure the system isn’t jammed up by useless spam
contracts.
6.2 Every time an instruction executes, an internal counter keeps track of
the fees incurred, which are charged to the user. Ea ch time the user
initiates a transaction, that user’s wallet reserves a small portion (selected
by the user) to pay these fees.
6.3 After a transaction has been broadcast to the network from a given
node—let’s say Bob sends Alice some ether from his compu ter—the
network propagates the transaction around so that all the nodes can
include it in the latest block.
6.4 Gas is a unit of work used to measure how computationally expensive
an Ethereum operation will be. Gas costs are paid with small amounts of
ether. The purpose of gas is twofold. First, it guarantees a prepaid reward
for the miners that execute code and secure the network, even if the
execution fails for some reason. Second, it works around the halting
problem and ensures that execution can’t go o n longer than the time it
prepaid for.
6.5 Gas is a unit of work; it’s not a subcurrency, and you can’t hold or
hoard it. It simply measures how much effort each step of a transaction
will be, in computational terms.
6.6 Gas costs ensure that computation time on the network is appropriately
priced. This works differently in Bitcoin, where the fee is based on the
size of the transaction in kilobytes. Because Solidity code can be
arbitrarily complex, a short snippet of instructions could generate a lot of
computational work, whereas a long snippet could generate less. That’s
why fees in the EVM are based on the amount of work being done, not on
the size of the transaction.
7. Working with Gas
7.1 Unfortunately, the term gas creates some confusion. Every tr ansaction
requires a STARTGAS value. This value is referred to as gasLimit in the
Yellow Paper and often just as gas in Geth and Web3.js.
7.2 Every transaction also requires the user to specify a gas price.
7.3 The amount stipulated in STARTGAS, multipli ed by the gas price, is
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1017.4 If the gas price you offer for a transaction is too low, nodes won’t
process your transaction, and it will sit unprocessed on the network.
7.5 If your gas price is acceptable to the network, but the gas cost runs
over what’s available in your wallet balance, the transaction fails and is
rolled back; this failed transaction is recorded to the blockchain, and you
get a refund of any STARTGAS not used in the transaction.
7.6 Using excessive STARTGAS does not cause your transactions to be
processed more quickly, and in some cases may make your transaction
less appealing to miners.
7.7 Accounts, Transactions and Messages
1 Ethereum has two types of accounts: Externally owned account s
Contracts accounts.
2. Externally Owned Accounts
2.1 An externally owned account (EOA) is also known as an account
controlled by a pair of private keys, which may be held by a person or an
external server. These accounts cannot hold EVM code. Character istics of
an EOA include the following: • Contains a balance of ether • Capable of
sending transactions • Controlled by the account’s private keys • Has no
code associated with it • A key/value database contained in each account,
where keys and values are both 32 -byte strings.
3. Contract Accounts
3.1 Contract accounts are not controlled by humans. They store
instructions and are activated by external accounts or other contract
accounts. Contract accounts have the following characteristics: • Have an
ether balance • Hold some contract code in memory • Can be triggered by
humans (sending a transaction) or other contracts sending a message •
When executed, can perform complex operations • Have their own
persistent state and can call other contracts • Have no owner after being
released to the EVM • A key/value database contained in each account,
where keys and values are both 32 -byte strings.
8. Transactions and Messages
8.1 A transaction in the EVM is a cryptographically signed data package
storing a messag ewhich tells the EVM to transfer ether, create a new
contract, trigger an existing one, or perform some calculations.
8.2 Characteristics of Transactions
A recipient address; specifying no recipient (and attaching smart contract
data) is the method for up loading new smart contracts. As you’ll see, a
contract address is returned so that the user knows where to access this
contract in the future. • A signature identifying the sender • A value field
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102this is being sent to a contract address) • A STARTGAS value, indicating
the maximum number of computational steps the transaction are prepaid •
A GASPRICE value, representing the fee the sender is willing to pay for
gas.
9. Characteristic o fM e s s a g e s
9.1 Messages are virtual objects that are never serialized and exist only in
the EVM. When a miner is paid in the Ethereum network, this is
accomplished by way of a message to increment the miner’s payment
address; it does not constitute a tran saction.
9.2 A message is sent when a contract is being run by the EVM, and it
executes the CALL or DELEGATECALL opcodes.
9.3 Messages are sent to other contract accounts, which in turn run the
code enclosed in the message. Thus, contracts can have relat ionships with
each other. A message contains the following: • The sender address of the
message • The recipient address of the message • The value field
(indicating how much ether, if any, is being sent) • An optional data field
(containing input data for the contract) • A STARTGAS value limiting the
amount of gas the message can use.
10 Estimating Gas Fees for Operations -Transactions need to provide
enough STARTGAS to cover all computation and storage.
Table 1 Costs of Common EVM operations
11. Opcod es in the EVM
11.1 In Ethereum and Bitcoin, things work differently. Because the
network is also a global machine, the “methods” you use to make calls
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103Table 2 List of some of the Opcodes. Many more are there for exploration
3.10SUMMARY
In this chapter, we learned that Ethereum offers another approach
to building software, one in which security and trust are baked in at the
protocol level. This may have a substantial global impact. As the world
digitizes, large -scale systems become increasingly mission -critical for all
kinds of organizations —not just in banking and insurance, but also in city
services, retail, logistics, content distribution, journalism, apparel
manufacturing, and any other industry that has provenance or payments in
play.
3.11REFERENCES
[1] Chris Dannen -“Introducing Ethereum and Solidity” -Foundations of
Crytocurrency and Blockchain Programming for Beginners by Apress.
3.12QUESTIONS
Q1. Describe Block Chain
Q2. Specify the Characteristics of Ethereum
Q3. List down the installation steps of MIST browser.
Q4. Why Gas is important?
Q5. List down the opcodes of EVM?
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1044
SOLIDITY PROGRAMMING
Unit Structure
4.0 Objectives
4.1 Introductions
4.2 Global Banking Made real
4.3 Complementary currency
4.4 Programming the EVM
4.5 Design Rationale
4.6 Importance of formal proofs
4.7 Testing formatting solidity files, Tip s for Reading Code
4.8 Statements and expressions in solidity
4.9 Value types, Global special variables, Units and Functions
4.10 Summary
4.11 Questions
4.12 References
4.0 OBJECTIVE
At the end of this unit, the student will be able to
Define the solidi ty programming.
Illustrate the concept of Global banking, complementary currency.
Summarize the programming construct of EVM and solidity.
Give the method of testing the solidity codes.
4.1 INTRODUCTION
1. Solidity is a new programming language used to w rite programs called
smart contracts, which can be run by the EVM. This new language is a
hodgepodge of conventions from networking, assembly language and web
development.
2. Imagine a person on a beach in another country. The person took a trip
here in a whim and breezed past the currency exchange booth in the
airport, figuring use of credit or debit card while visiting -no need for
cash. But in a rush he forgot to bring sunglasses. A vendor walking along
the beach has a pair that happen to be a style of a person. In fact, they are
better than the pairs passing in the duty free area of the airport. He doesn’t
have a credit card reader -just only having Android phone and that person
don’t have any local currency. He give a person a little card with an email
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1053. Think about this scenario for a time being and see the power of
protocol -based digital currency. Why a person send this man a text
message or an email or even call him on the phone, but cant send him
money the same way?.
4. In general, a computing environment is an infinite loop that repeatedly
carries out whatever operation is current in the system’s program
counter(jumping the queue in the program counter is where the JUMP
opcodes derive their name).
5. The program counter iterates one by one until the end of that particular
programs is reached. The machine exits the execution loop only if it
encounters (throws) an error or hits an instruction designating the machine
to STOP or Return a result or value.
6.These operations have access to three types of space in which to store
data:
6.1 The stack, a container in which values can be added or removed
(pushed or Popped). Stack values are defined within a method.
6.2 Dynamic memory, also known as the heap, an infinitely expandable
byte array. This resets when the program finishes.
6.3 A key/value store for account balances and in the case of contract
addresses, solidity code.
7. Solidity contracts can also access certain attributes about the inco ming
message such as the value, sender and data of the incoming message as
well as the data from the block header.
4.2 GLOBAL BANKING MADE REAL
1. The banks of the world have computer systems that while upgraded and
mostly modern are the descendants of m achines that predate the Internet
and certainly the world wide web. As a result they are architected to be
safe. There is no single global banking network but rather an
interconnected mass of an interconnected mass of national systems and
private banking s oftware stacks with their own risks.
2. Extra -Large Infrastructure
2.1 A system such as Ethereum has nodes all over the world, being
operated by private individuals who are paid for their activity in the form
of mining fess, denominated in ether.
2.2 As a result, cryptocurrency protocols have the power to elevate
financial transactions to the level of convenience we now enjoy with our
telecommunications. But question here is how does a decentralized system
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1063. Worldw ide Currency
3.1 The idea of a universal cryptocurrency seems to rest on the assumption
that every human on earth will eventually download a cryptocurrency
wallet on to their cell phone. However, such a pipe dream is not the
roadmap for Ethereum.
3.2 Ins tead, the Ethereum core developer have chosen to make it easy for
third parties to create complementary currencies or custom tokens that will
be branded and used for special purposes(similar to credit card rewards
points today).
3.3 These third parties(wh ether existing corporations, startups,
municipalities, universities or nongovernmental organizations) could rely
upon the public chain or large permissioned chains, to push around many
different types of tokens, much the way that the global banking system is
equipped to handle many different currencies.
3.4 It’s unlikely that most people’s first experience with ether will be for
the sake of cryptocurrency experimentation. It’s more likely they will end
up holding digital tokens or points as part of a brand loyalty program,
university program or employer -sponsored system.
3.5 Sports stadiums, theme parks, city summer camps, shopping malls,
large office parks -anywhere there’s a community exchanging money, a
complementary currency might make sense.
4.3 COMP LEMENTARY CURRENCY
1. Why would a country ever need more than one form of money? In the
decades leading up to the establishment of the federal reserve, the united
states present day central bank, many local currencies circulated.
2. These paper bills gen erally represented gold on deposit somewhere and
were thus local by nature, a certificate for gold is worth little if the
redeeming institution is thousands of miles away.
3. In the period before widespread, systematic private money systems(a
period of A merican history known as the wildcat banking era), many
printing houses made their primary incomes from printing money with
various ant counterfeiting features to rival their competing printing houses.
4. Benjamin franklin was one such printer who enriche d himself on the
printing of complementary currencies. In fact, he was known for his ant
counterfeiting measures that went above and beyond.
5. According to the Smithsonian institution, he once printed an official
issuance of local Pennsylvania currency with the name of the state spelled
wrong, in the hopes of foiling counterfeiters who assumed those bills must
be fake. Many of franklin’s colonial bills bore the words to counterfeit is
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1076. The term complementary currency refers to a medium of exchan ge
functioning alongside national flat currency, meeting a need the national
coin cannot. These currencies generally have four purposes.
6.1 To promote local economic development within a small community.
6.2 To build social capital in that community.
6.3To nurture more sustainable lifestyles.
6.4 To meet needs that mainstream money does not.
7. Solidity programming allows anyone to create a complementary
currency, with a simple token contract. Those tokens can have whatever
parameters the situation call s for, when we deploy a token contract using
solidity as a programming language.
8. The Promise of solidity
8.1 Solidity is a high -level contract oriented language with similaritiesto
javascript and C languages. It allows us to develop contracts and compi le
to EVM bytecode.
8.2 It is currently the flagship language of Ethereum. Although it’s the
most popular language library to be written for the EVM, it was not the
first and probably will not be the last.
8.3 There are four languages in the Ethereum pro tocol at the same level of
abstraction, but the community has slowly converged on solidity, which
has edged out serpent(similar to python), Lisp like language(LLL) and
mutan, the latter of which is deprecated.
8.4 Learning solidity enables us to moves tok ens of value in any
Ethereum -based system and because Ethereum and solidity itself are free
and open source technology, clever minds will likely alter and re -release it
or deploy it privately.
8.5 Browser Compiler
1. The most common way to test solidity i s by using the browser -based
compiler.
2. Sample code for browser compiler is given as follows
pragma solidity ^0.4.0;
contract Ballot {
struct Voter {
uint weight;
bool voted;
uint8 vote;
address delegate;
}
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108uintvoteCount;
}
address chairperson;
mapping(address => Voter) voters;
Proposal[] proposals;
/// Create a new ballot with $(_numProposals) different proposals.
function Ballot(uint8 _numProposals) public {
chairperson = m sg.sender;
voters[chairperson].weight = 1;
proposals.length = _numProposals;
}
/// Give $(toVoter) the right to vote on this ballot.
/// May only be called by $(chairperson).
function giveRightToVote(address toVoter) public {
if (msg.sender != chairperson || voters[toVoter].voted) return;
voters[toVoter].weight = 1;
}
/// Delegate your vote to the voter $(to).
function delegate(address to) public {
Voter storage sender = voters[msg.sender]; // as signs reference
if (sender.voted) return;
while (voters[to].delegate != address(0) && voters[to].delegate !=
msg.sender)
to = voters[to].delegate;
if (to == msg.sender) return;
sender.voted = true;
sender.delegate = to;
Voter storage delegateTo = voters[to];
if (delegateTo.voted)
proposals[delegateTo.vote].voteCount += sender.weight;
else
delegateTo.weight += sender.weight;
}
/// Give a single vote to proposal $(toProposal).
function v ote(uint8 toProposal) public {
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109if (sender.voted || toProposal>= proposals.length) return;
sender.voted = true;
sender.vote = toProposal;
proposals[toProposal].voteCount += sender.weight;
}
function winningProposal() public constant returns (uint8
_winningProposal) {
uint256 winningVoteCount = 0;
for (uint8 prop = 0; prop if (proposals[prop].voteCount>winningVoteCount) {
winningVo teCount = proposals[prop].voteCount;
_winningProposal = prop;
}
}
}
Fig 1 Output of code compiling and executing on browser compiler
4.4 PROGRAMMING THE EVM
1. Sometimes it’s easier to learn a new habit than to break an old one.
Many conventions in distributed application programming will strike
today’s web and native application programmers as odd or quirky.
2. Plus, they may already be professionally or personally invested in other
languages or subject areas. So don’t f eel like the whole world has a
head start on you if you are just starting out.
3.New coders can approach Ethereum without preexisting assumptions.
Better yet they will find a system they can understand from top to
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1104. Not all hackers nor even softw are engineers know the intricacies of the
underlying networks in the layers below their application hosting
provider.
5. In conventional web applications, there are many individual servers
with databases, communicating and sharing data over a network. This
data may be manipulated by applications that live on still other servers.
Even more servers may be in the mix to balance surges in demand.
6. A server is a computer that acts in a dedicated role, as part of a certain
kind of service you want to offer peop le via the web. Some servers
hold data (For example spreadsheets of information, such as customer
names and addresses) in what are known as databases. Some servers
run applications that other computers can access over the network.
7. In Ethereum, the netwo rk is the database and this network can run
applications available to everyone on it. So you end up learning quite a
bit about all three.
8. Watching a blockchain explorer report new transactions is something of
a marvel when you know what’s happening unde rneath. Although
learning Ethereum may seem like a lot of work, it would be much
more work to understand today’s Web with a similar breadth and
depth.
9. The following reasons urge users to begin experimenting with solidity
9.1 Easy Deployment
1. In Ethere um, you don’t necessarily have much of the hassle of
deploying and scaling a normal web application. All the required smart
contracts for the back -end of distributed app also known as a dapp, can
be neatly bundled up in a few documents and sent to the EVM and
your program is available instantly to anyone on earth who installs an
Ethereum wallet or command -line code.
2. Today, developers may want to build “hybrid” Ethereum dapps that are
accessible through normal Web browsers, in which case adding ether
paym ents is just adding more work. But by the time the network is
complete in 2 -3 years, it will be able to far easier to host all the
components of an application using the Ethereum protocol.
3. In business jargon, time to value, or TTV, is the amount of tim e that
passes from the moment the customer requests something to the
moment the customer gets it. This something can be tangible or
intangible. But a low TTV suggests that it is easy to think up a product
or service and deliver it quickly to the people who want to use it.
4. In Ethereum, it is fast and inexpensive (if not yet easy) to develop and
deploy unalterable, always -up, uncensorable applications that move
real value over arbitrary distances. And everything is free, except the
gas costs generated by y our programs, and your own time (and
computer).
5. For software engineers, service providers, system administrators, and
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111ecosystem means less brittle systems, faster product iterations, and far
less time developing infrastructure to support new applications or
services. In short, this may amount to a drastic reduction in TTV for
enterprise software vendors and in -house teams alike.
9.2 The case for writing Business Logic in Solidity
1. Becaus e of its novel characteristics, the fate of Ethereum in 2017 and
beyond doesn’t necessarily rest on the mainstream popularity or
adoption of today’s Ethereum clients.
2. Instead, it relies on popularity with developers, brands, corporations,
organizations, governments, and other institutions that are in a position
to create an Ethereum token for their community, and perhaps even
their own branded wallet.
3. They might do so in the interest of quickly and safely rolling out cool
new products and services wit h ultra -low overhead. This also goes for
large marketing campaigns, which must be deployed faster and faster
today to keep up with the speed of Internet meme culture.
4. The frictionless nature of the payments in cryptonetworks makes it
easier than ever to build a seamless sales and marketing experience for
customers, with payments built in.
5. A complementary currency is also a highly valuable tool for use in
rewards programs, membership clubs, and large retail districts.
Customers who hold money in the fo rm of a branded coin are apt to
spend more regularly on that brand, just as frequent flyers today stay
loyal to the airline miles and credit -card point schemes that give them
the best bang for the buck.
6. Today, loyalty programs can be obscure and even sl ightly scammy. But
the transparency of a blockchain -based loyalty coin would make it as
good as any other form of cryptocurrency —meaning it might be traded
on exchanges or accepted by other parties as payment.
9.3 Code, Deploy and Relax
1. Many Ethereum -enabled applications might be used through the Mist
wallet, or another Ethereum -native application running a node under
the hood. For developers of client applications, adding compatibility
with new Ethereum -based tokens is trivial, meaning that a high degre e
of overlap and intercompatibility will exist between Ethereum wallets
and tokens, just as there are many IMAP -and POP -compatible e -mail
clients today.
2. It’s also possible to create an Ethereum program today that is accessible
through the regular old W eb, with a little bit of work. However,
deployment will be made increasingly easy with the use of new third -
party frameworks.
3. However, this isn’t to say that conventional web apps will go away.
Many individuals and organizations have enormous resources invested
in legacy web apps. That said, the Ethereum network makes it far
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112you’ll see, tempting more and more teams to consider decentralizing
their applications.
4.5 DESIGN RATIONA LE
1. The solidity programming language has a syntax like javascript, but it is
specially designed to compile in to bytecode for the Ethereum virtual
machine. The EVM runs code that is fully deterministic the same
algorithm with the same inputs will alway s yield the same results.
2. Solidity is statically typed, supports inheritance, libraries and complex
user-defined types, among other features. Conscientious use of types
can help programmers understand how their programs will execute.
3. Data types are exactly what they sound like. A programmer has the
option of telling the machine what type of data to expect: for example,
will it be a number or a string of letters? Loosely typed languages
don’t require the programmer to be specific; strongly typed langu ages
do.
4. Writing Loops in Solidity
4.1 Loops are foundational to control flow in programming —that is, the
codification of if -this-then-that contingencies or do -this-while -doing -
that concurrencies. In most programming languages, loops are initiated
with similar syntax. Solidity adheres to all the same syntactical
regularities as JavaScript and C when it comes to loops.
4.2 An iterator loop is an object that enables a programmer to move
through a container or list. Sometimes, iterators are used to instruct the
computer to perform the same operation a certain number of times, or
on a number of elements in the code.
4.3 A general -purpose loop has the same syntax in JavaScript, C, and
Solidity. It instructs the computer to count up from 0 to 10: for (i = 0;
i<10; i++) {...}.
4.4 the EVM allows looping in two ways. You can write loops in Solidity,
or you can create them using JUMP and JUMPI instructions. This
jumps ahead a specified number of steps in the program counter.
Recall that the program counter keeps t rack of the number and order of
computational steps in a given program as it is being executed on the
EVM.
4.5 This is just one way that Solidity and EVM opcodes can be used
together to create a contract that is mostly expressive and readable, but
also che ap to run. It’s important to point out that because of the way
gas price is calculated, some functionality might be easier to enforce or
less expensive to execute if written using opcodes, and this can be
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1135. Expressiveness and Security
5.1 The adjective expressive is used in computer science to mean code that
is easy for a human programmer to write and to understand.
Expressive languages are the bridge between human thought patterns
and machin e execution patterns.
5.2 For a language to be expressive, its various constructs must be
intuitively readable, and its boilerplate code (such as keywords, special
variables, and opcodes) must use human -readable words that help
programmers remember what th ey represent.
5.3 Expressive languages must be compiled down into something more
machine -friendly before they can be run, and this requires work on the
part of the computer. After all, expressive languages tend to be harder
to reason about (harder to predi ct the behavior of), whereas more -
restricted, lower -level, less -abstract languages make that reasoning
easier.
5.4 The final frontier is smart contracts that can be easily formally
verified, but also written in an expressive high -level language such as
Solidity. This problem begs for automation, and indeed, automated
formal verification is now on the horizon —a fact that computer
scientists must be excited about, and that Ethereum developers will
unknowingly benefit from.
6. The importance of Formal Proofs
6.1 If you learn Solidity programming, you may encounter the curiosity of
other developers, who will get right to the point: how do you prevent
someone writing an infinite loop and locking up the machine?.
6.2 Far from being a niche argument, this is the mo st relevant issue related
to software engineering’s role in the world today: can human beings
make a free, openly accessible virtual computer that other human
beings can’t spoil? If the answer is yes, then it stands in stark defiance
of the theory of the t ragedy of the commons.
6.3 Historical Impact of a shared global Resource
1. In economics, the tragedy of the commons is the idea that a shared
resource can’t last. Eventually, users acting in their own self -interests
will deplete the resource, because it c omes at no cost to themselves to
do so. A scenario like this, whereby someone can enrich themselves or
act profligately while externalizing the costs to other people, is known
as a moral hazard.
2. Here’s an example: In New York City in late 2016, the muni cipal
government installed computing terminals on the streets of Lower
Manhattan. These terminals offered free WiFi to passing pedestrians.
However, these terminals also came with a small touchscreen allowing
walk-up Internet access.
3. No sooner were thes e shared resources up and running before people
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1144. Program administrators were forced to quickly restrict the onscreen
Internet access, and now the terminals serve mostly as just Wi -Fi
hotspots.
5. Thus, the notion of an extremely inexpensive public computer such as
the EVM is nothing short of fantastic. It can be accessed by anyone,
with any computer, anywhere, and will run programs far into the
future. Nobody owns it and nob ody can tamper with it. It can even
store your money for you.
6.4 How attackers bring down communities
1 Decentralized economies represent a nascent threat to all sorts of private
vested interests around the world, especially in developing economies,
where powerful people would prefer the world continue on without a
solution to the tragedy of the commons (and thus, remain at the mercy
of the latest autocrat or crazy mob).
2. A network as a community of people connecting with each other via
computer. An atta cker is someone who hates this group, and seeks to
cause them grief at any expense.
6.5 Hypothetical Attack written in solidity
1.Imagine that an attacker wants to lock up the EVM with a super
memory -intensive smart contract, written in Solidity.
2. Keep in mind that for the purposes of this example, the contract could
also be written in any language created for the EVM, such as Serpent
or even the lower -level EVM code, not just Solidity.
3. According to Rice’s theorem, the behavioral properties of some
computer programs are mathematically undecidable, meaning it is not
possible to write another computer program that can definitively
predict whether Solidity code you show it will ever terminate.
4. Thus, there is no way to write any kind of effective “gatek eeper”
program that will swat down a hypothetically memory -hungry smart
contract written by the attacker in this scenario.
5. Smart contracts are distinct from distributed applications, or dapps,
even though both are distributed and application -like. A dap p is a GUI
application that uses Ethereum smart contracts on the back end, in lieu
of a conventional database and web application hosting provider.
Dapps may be accessed through the Mist browser or over the Web.
6. The EVM deals with this reality in variou s ways, including a hard limit
on the number of computational steps per block, its deterministic
language, and gas costs. Nevertheless, gray areas will always be
explored by attackers if a financial incentive exists, and at $1 billion
market capitalization , there’s significant incentive to crack the EVM
and steal ether.
7. Although gray areas can’t be engineered away at once, they can be dealt
with in a series of protocol forks over time. As far as accidentallymunotes.in

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115destructive programs, it’s upto the Ethereum c ommunity to develop
patterns and practices that are conducive to straightforward, easy -to-
prove contracts that can develop into boilerplate standards.
6.5 Automated Proofs to the Rescue?
1. Although it’s not possible to create a gatekeeper that kicks out b ad
programs, it is increasingly feasible to produce provably correct
programs by using a machine -checkable proof —an automated
program that mathematically proves other programs.
2. Because smart contracts move money, they make great lab rats for
automated m athematical proofs. The goal of this area of computer
science and mathematics research is to ensure, in a systematic way,
that source code satisfies a certain formal specification. It’s a way for
independent auditors to come in and mathematically verify th at the
program is actually doing what it’s supposed to do.
3. Automating the proving process is a boon for businesses but won’t do
much for the average programmer learning Solidity. Proofs merely
show you whether what you intended to happen actually did ha ppen in
the program.
4. If your program doesn’t prove out, there is no way for an automated
system to tell you how to write it better.
5. Nevertheless, the point of exploring this topic is to signal that Ethereum
networks may indeed one day carry high volu mes of automated
money -moving bots pushing around trillions of dollars safely; and that
developing these bots may not be as slow, risky, and obscure a process
as it is today.
6. Determinism in practice
6.1 Combining the concepts from the preceding sections , you can see that
in some ways, the whole idea of Turing completeness may be an
idealized concept of limited usefulness when designing a public
system in the real world.
6.2 Thus, it could also be said that in practice, the EVM is not really
Turing comple te, because the bounded nature of execution in Solidity
contracts could soon make it possible to theoretically predict the
behavior of any program the EVM will run.
6.3 Bitcoin escapes none of these issues. The gray areas that exist between
expressive lang uages and machine languages exist for Bitcoin’s
scripting language too, which is also compiled down at runtime into
machine code.
7. Lots in Translation
7.1 A human can perform a mathematical proof on only a high -level,
abstract language —that is, a human -readable programming language
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116machine code would be next to impossible for even the most dedicated
mathematical minds.
7.2 The compilation process —the transmission of human -readable code
into low er level machine code —sacrifices a lot of (human
interpretable) information about how to reason about the program.
7.3 It also sacrifices information that would be useful to anautomated
theorem prover. Thus, some ambiguity is always introduced into the
process. Today, you can never be fully sure that even a mathematically
proven smart contract written in Solidity will still be provable after
being compiled.
4.7 TESTING ,FORMATTING SOLIDITY FILES
1. The way to prevent ambiguous code from losing your money is to test
vigorously. The Ethereum network comes with a testnet called
Ropsten that uses play ether, which costs nothing and can be drawn
from a faucet quickly in a sandbox -like environment.
2. In reality, Ropsten is no different from the main chain. It i ss i m p l ya
different chain that was designated for testing. Like the Titanic and its
sister ship the Britannic, they are identical except for the names, as is
every other chain someone spins up.
3. Command Line Optional
3.1 Keep in mind that most of the im portant functions of Ethereum can be
done in the Mist wallet: sending and receiving ether, tracking tokens,
and deploying contracts. Using Geth (or the other command -line
clients) is a good choice for developers who intend to learn to write
dapps.
3.2 If y ou can’t read or write code, don’t worry. A tutorial on syntax and
structure follows this example that will help you reason about what the
code is doing. In the next chapter, we’ll deploy a standard Ethereum
token, with zero coding required.
3.3 There are only three requirements for deploying a simple contract in
Solidity:
1. A text editor such as TextEdit on macOS, Gedit on Ubuntu, or Notepad
on Windows. Be sure to switch to plain -text mode, which strips away
all fonts, underlining, bold, hyperlinks, and i talics. (Never use rich text
to write code!).
2. The Mist Wallet.
3. The browser solidity compiler located at https://ethereum.
github.io/browser -solidity/ or available at the following shortlink:
http://compiler.et h.guide
3.4. Upload a contract is to copy -paste your solidity code from your text
editing application in to the solidity browser compiler.
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117that bytecode into Mist. It’s really very eas y, but let’s not get bogged
down in the logistics just yet.
3.6 For example Solidity program will look like this as given below
3.7 Formatting Solidity Files
1. Every Solidity file should have (but does not require) a version pragma,
a statement indicati ng which Solidity version this contract was written
in.
2. Over time, this should prevent older contracts from being rejected by
future versions of the compiler.
3. Before writing any solidity program, a programmer should write version
in top of the code. Here for example version is pragma solidity ^0.4.7
4. Tips for reading code
Here are seven facts that will make this contract more legible for
beginners
4.1 Computers read code from top to bottom, left to right, just like English
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1184.2 Typically programs takes an input and return some kind of output.
Computable functions (mathematical functions that can be performed
by a computer) are defined as functions t hat can be written as
algorithms.
4.3 Algorithms take in data, perform an operation on it, and return some
kind of output. Programs are algorithms with other algorithms nested
in them.
4.4 An algorithm is like a machine: you can reuse it many times. Thus,
writing algorithmic instructions —programming —will strike you as
being a lot like writing Mad Libs, which the computer will later
autocomplete with information that a user (or in Ethereum, a contract)
gives it, via a transaction or message call.
4.5 Operato rs are the symbols between the English words, such as the
equal sign, plus sign, and minus sign.
4.6 Types are the nouns of computer programming. So when you see a
type, you know what is allowed in that space of the Mad Lib. A
common type in Solidity is an address.
5. The EVM is much closer to this original kind of computer, but it’s
suited to thinking about sophisticated accounting and fiscal
reconciliation. Recall that databases are merely spreadsheets
themselves, and computer programs manipulate these da tabases. Thus,
when you declare something, you are telling the computer to put it in
the spreadsheet —specifically, to put it in the stack.
6. The computer will figure out, on its own, how much memory to have
ready to store the values in any temporary, or s o-called dynamic,
computations —small, pivotal logical statements used to compute
contingencies such as if -then. (It’s important to define the stack and
heap in order to see that this is where the danger of memory -hog
programs lies: in asking the computer t o use more dynamic memory
than it has to spare).
4.8 STATEMENTS AND EXPRESSIONS IN SOLIDITY
1. Some functions produce a value, such as a number, or an answer to a
true/false question. What exactly this value can be is determined by
Solidity’s types, ment ioned earlier; the true/false value is called a
Boolean.
2.What is an Expression?
2.1 Functions that produce a value are known as expression functions.
Because expressions evaluate to a value of one type or another, in
programming they can be used in place of values.
2.2 Other functions are declarative, and lead to the creation of a dedicated
space in the computer’s memory, which will be used each time it runs
this routine. These declarative functions are important because they are
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1193. What is a Statement?
3.1 A statement tells the computer to perform an action. The computer
uses expressions to figure out how to take this action, and when. Thus,
computer programs are composed of statements, and statements are
often composed of e xpressions (or other statements).
4. Functions, public and private
4.1 In JavaScript and Solidity, you can use semicolons to chain statements,
and tell the computer that another statement is coming up in the code:
function first(); function second()
4.2 In Solidity, you can also declare whether you want certain functions to
be available outside that program. These designations are as follows:
• public: Visible externally and internally (an accessor function for
storage/state variables is created) • private : Visible only in the current
contract (default
4.3 Functions written in Solidity code are not public by default. You must
declare them as public when you make them, or they will not be
available to contracts outside of the one they’re in.
4.9 VALUE TYPES , GLOBAL SPECIAL VARIABLES,
UNITS AND FUNCTIONS
1. Value Types -When writing solidity code, we can tell the computer
what type of value to expect in each algorithmic instruction.
2. Booleans -Known in code as bool, the boleans are true/false expressions
that evaluate to true or false.
3. Addresses -The address type holds a 20 -byte value, which is the soze of
an Ethereum address(40 hex characters or 160 bits). Address types
also have member types.
4. Members of Addresses -These two members allow user to qu ery the
balance of an account or to transfer ether to an account. Be careful
with transfer in smart contracts. It’s better to use a pattern where the
recipient is allowed to withdraw the money, than to have a contract
initiating transfers 1)Balance 2) tran sfer
5. Address Related Keywords
Keywords come with the solidity language
5.1

.balance (uint256): Returns the balance of the address in
power.
5.2

.send(uint256 amount) returns (bool): Sends given amount
of weightage to address, and retur ns false on failure.
5.3 this(current contract’s type): Explicitly converts to the address
5.4 selfdestruct(address recipient): Destroys the current contract, sending
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1206. Less -Common Value Types
6.1 Several other value types may be useful
1. Dynamically sized byte arrays
2. Fixed -point numbers
3. Rational and integer lietrals
4. String Literals
5. Hexadecimal Literals
6. Enums
7. Complex(Reference) Types
7.1 Generally speaking, types in Solidity are allotted 256 bits of memory
in the EVM’s storage; that’s 2,048 characters. Types that are any
longer than that can incur more -significant gas costs to move around.
You’ll need to choose carefully when assigning persistent storage in
the EVM’s stack. Here are the complex types that e xceed 256 bits:
Arrays
Array Literals / Inline Arrays
Structs
Mappings
7.2 Arrays, structs, and other complex types have a data location that can
be used by Solidity programmers to manipulate whether they are
stored dynamically in memory or persistently st ored.
8. Global Special Variables, Units and Functions
8.1 Global special variable can be called by any solidity smart contract on
the EVM, they are built in to the language.
8.2Most of them return information about the Ethereum chain. Units of
time and e ther are also globally available. Literal numbers can take a
suffix of power, finney, szabo or ether and will auto -convert between
sub-denominations of Ether. Ether currency numbers without a suffix
are assumed to be power.
8.3 Time -related suffixes can be used after literal numbers to convert
between units of time. Here, seconds are the base unit, and units are
treated as general units. Owing to the existence of leap years, be
careful when using these suffixes to calculate time, as not all years
have 365 d ays, and not days have 24 hours.
1= =1s e c o n d s
1 minutes == 60 seconds
1 hours == 60 minutes
1d a y s= =2 4h o u r s
1w e e k s=7d a y s
1y e a r s=3 6 5d a y s
8.4 Block and Transaction Properties
block.blockhash(uintblockNumber) returns (bytes32): Hash of the
given block, works for only the 256 most recent blocks .
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121•block.difficulty (uint): Current block difficulty
•block.gaslimit (uint): Current block gas limit
•block.number (uint): Current block number
•block.timestamp (uint): Current block timestamp
•msg.data (bytes): Complete call data.
•msg.gas (uint): Remaining gas.
•msg.sender (address): Sender of the message (current call).
•msg.sig (bytes4): First 4 bytes of the call data (function
identifier).
•msg.val ue (uint): Number of wei sent with the message.
•now (uint): Current block timestamp (alias for block.
timestamp).
•tx.gasprice (uint): Gas price of the transaction.
•tx.origin (address): Sender of the transaction (full call chain).
9 Operator Cheat Sheet
Table 1 Shows the operators we can use in solidity expressions
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10. Global Functions
1. In general in Solidity, special functions are mainly be used to provide
information about the blockchain, but some can also perform
mathematical and cryptographic fu nctions. They are as follows:
keccak256(...) returns (bytes32): Computes the Ethereum -SHA -3
(Keccak -256) hash of the (tightly packed) arguments.
sha3(...) returns (bytes32): An alias to keccak256().
sha256(...) returns (bytes32): Computes the SHA -256 hash of the
(tightly packed) arguments. “Tightly packed” means that the
arguments are concatenated without padding.To see how to add
padding to arguments, see the following URL: http://
solidity.readthedocs.io/en/develop/units -and-
globalvariables.html#mathemati cal-and-cryptographic -functions
ripemd160(...) returns (bytes20): Computes the RIPEMD -160 hash
of the (tightly packed) arguments
ecrecover(bytes32 hash, uint8 v, bytes32 r, bytes32 s) returns
(address): Recovers address associated with the public key from
elliptic curve signature, returns 0 on error.
addmod(uint x, uint y, uint k) returns (uint): Computes (x + y) % k,
where the addition is performed with arbitrary precision and does
not wrap around at 2**256.
mulmod(uint x, uint y, uint k) returns (uint): C omputes (x * y) % k,
where the multiplication is performed with arbitrary precision and
does not wrap around at 2**256.
this (current contract's type): The current contract, explicitly
convertible to its address .
2. It’s also worth mentioning contract -related variables that can be useful
in writing solidity contracts -
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1232.2 selfdestruct(address recipient): Destroys the current contract, sending
its funds to the given address.
2.3 assert(boo l condition): throws if the condition is not met.
2.4 revert(): abort execution and revert state changes.
4.10 SUMMARY
The first steps toward understanding the impact of programs written for
the EVM. You also took a critical look at the way these progra ms can
achieve a meaningful degree of Turing completeness without sacrificing
the security of the network. We’ve only touched briefly on the formal
mathematics that make these programs so exciting for enterprise
information technology.
4.11REFERENCES
[1] Chris Dannen -“Introducing Ethereum and Solidity” -Foundations of
Crytocurrency and Blockchain Programming for Beginners by Apress
4.12QUESTIONS
Q1. Explain the concept of Global banking?
Q2. Give the different value types of solidity
Q3.What is Compl ementary Currency?
Q4. What are the different types of operator used in solidity programming
language?
Q5. What is testing and formatting of Solidity programming language?
Q6. Give the tips for Reading code?
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124Unit III
5
HYPERLEDGER
Unit Structure
5.0 Objectives
5.1 Introduction to Hyperledger.
5.2 What is Hyperledger Fabric?
5.2.1 Hyperledger Fabric Layers
5.2.2 Role of Peers
5.2.3 Hyperledger Fabric Work Flow
5.2.4 Application areas of Hype rledger Fabric
5.2.5 Benefits of Hyperledger Fabric
5.3 Hyperledger Composer
5.3.1 Advantages of Hyperledger composer
5.4 Installing, Deploying & Running the Hyperledger Fabric
5.5Summary
5.6Questions
5.7References
5.0 OBJECTIVES
At the end of this u nit, the student will be able to:
➢Understand the concept of Hyperledger using Blockchain
Technology.
➢Understand the working of Hyperledger.
➢Understand the applications of Hyperledger Fabric in various
domains
➢Understand the need of a composer in Hyperledge r Fabric.
➢Setup Environment for Hyperledger Fabric and build the network
in Linux environment.
5.1 INTRODUCTION TO HYPERLEDGER
Hyperledger is an open source project under linux foundation
where people can come and work on the platform to develop the
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125
Figure 1: Hyperledger Fabric
Hyperledger provides the platform to create personalized
blockchain service according to the need of business work. Unlike other
platforms which only develop blockchain based software, Hyperledge r
has an advantage of creating secured and personalized blockchain
networks.
The public blockchain requires every peer in the network to
complete the process and run consensus at the same time. when the
business requires confidentiality in the work, the public network fails to
keep this as it does not support private and consortium networks.
Example:
Consider a situation when person X wants to buy medicine from
person Y, who is a doctor living in another country. As the medicine
requirement is of the one person’s private need, they need to maintain the
data confidentially. But Dr. Y is selling medicine on the network to so
many people, in the case of public blockchain, every transaction will get
updated in the network to all the peers. That’s where hyperl edger finds its
significance. In the hyperledger, the parties are directly connected and the
concerned people’s ledger will be updated. Hence Providing privacy and
confidentiality.
5.2 WHAT IS HYPERLEDGER FABRIC?
Hyperledger Fabric is a framework for dev eloping Blockchain -
based solutions for the enterprise. It is open -source and under the umbrella
of the Linux Foundation, designed by IBM. It is a private chain, thus
super -helpful for enterprises since you don’t want to put your transactions
for public dis play. Having private chains also means faster transactions.
It is a permissioned blockchain network that gets set by the
organizations that intend to set up a consortium. The organizations that
take part in building the Hyperledger Fabric network are call ed the
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126Simple Steps involved are as follows:
1.A requirement for the contract can be initiated through an app.
2.The membership service involved in the network validates the
contract.
3.The concerned two -peer has to produce a result and then sen d it to
the consensus cloud. The generated result from both the peers has
to be the same inorder to validate the contract.
4.Once it is validated, then the transaction will happen between the
affiliated peers and their ledger will be updated.
Thus, when a business requires a confidentiality and private network
for their transaction to happen, hyperledger paves the way.
5.2.1 Hyperledger Fabric Layers
Hyperledger -based technology works using these layers:
1.Consensus layer :I tm a k e sa na g r e e m e n to no r d e ra n d confirms if
the transactions in a block are correct.
2.Smart Contract Layer: It processes and authorizes transaction
requests.
3.Communication layer: It manages peer -to-peer ( P2P)m e s s a g e
transport.
4.AnApplication Programming Interface (API) is required which
allows other applications to communicate with the blockchain.
5.Identity management services , which validates the identities of
users and systems.
5.2.2 Roles of peers:
➔Each me mber organization in the blockchain network is
responsible to set up their peers for participating in the network.
All of these peers are configured with appropriate cryptographic
materials like Certificate Authority (CA)and other information.
➔Peers in the member organization receive transaction invocation
requests from the clients inside the organization.
➔A client can be any specific application/portal serving specific
organization/business activities.
➔Client application uses Hyperledger Fabric SDK or RE ST web
service to interact with the Hyperledger Fabric network.
➔Chaincode (similar to Ethereum Smart Contract) installed in peers
causes to initiate transaction invocation requests.
➔All the peers maintain their one ledger per channel that they are
subscrib ed to. Hence Distributed Ledger Technology (DLT). But
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127have different roles.So not all peer nodes are same. There are
different types of peer nodes with different roles in the network:
●Endorser peer
●Anchor peer
●Orderer peer
★Endorser peer
Upon receiving the “transaction invocation request” from the
Client application the Endorser peer
1.Validates the transaction. ie Check certificate details and
roles of the requester.
2.Executes the Chaincode(ie Sma rt Contract) and simulates
the outcome of the transaction. But it does not update the
ledger.
At the end of the above two tasks the Endorser may approve or
disapprove the transaction.
As only the Endorser node executes the Chaincode (Smart
Contract) so the re is no necessity to install Chaincode in each and
every node of the network. Thus, increases the scalability of the
network.
★Anchor peer
Anchor peer or cluster of Anchor peers is configured at the time of
Channel configuration. Just to remind you, in Hyp erledger Fabric
you can configure secret channels among the peers and
transactions among the peers of that channel are visible only to
them.
Anchor peer receives updates and broadcasts the updates to the
other peers in the organization. Anchor peers are di scoverable. So
any peer marked as Anchor peer can be discovered by the Orderer
peer or any other peer.
★Orderer peer
Orderer peer is considered as the central communication channel
for the Hyperledger Fabric network. Orderer peer/node is
responsible for con sistent Ledger state across the network. Orderer
peer creates the block and delivers that to all the peers.
Ordereris built on top of a message oriented architecture. There are
two options are currently available to implement Orderer peer:
1.Solo: Suitable f or development. Single point failure. Solo
should not be used for the production ready network.
2.Kafka: Production ready Hyperledger Fabric network uses
Kafka as the Orderer implementation. Kafka is a messaging
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1285.2.3 Hyperledger Fabric Workflow
Figure 2 : Hyperledger Fabric Workflow
1.A participant in the member Organization invokes a transaction
request through the client application.
2.Client application broadcasts the transaction invocation req uest to the
Endorser peer.
3.Endorser peer checks the Certificate details and others to validate the
transaction. Then it executes the Chaincode (ie. Smart Contract) and
returns the Endorsement responses to the Client. Endorser peer sends
transaction approva l or rejection as part of the endorsement response.
4.Client now sends the approved transaction to the Orderer peer for this
to be properly ordered and be included in a block.
5.The Orderer node includes the transaction into a block and forward the
block to th e Anchor nodes of different member Organizations of the
Hyperledger Fabric network.
6.Anchor nodes then broadcast the block to the other peers inside their
own organization. These individual peers then update their local ledger
with the latest block. Thus al l the network gets the ledger synced.
5.2.4 Application Areas of Hyperledger
-Financial Institutes
-Carbon Emission Reduction
-Healthcare
-Pharmaceutical Retailers
-London Stock Exchange Group
-TenneT Energy Community
-SAP
-Bank Guarantees
-Food Safety
-Banks
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1295.2.5 The benefits of Hyperledger Fabric
1.Permissioned network :Establish decentralized trust in a
network of known participants rather than an open network of
anonymous participants.
2.Confidential transactions :Expose only the data you want to
share to the parties you want to share it with.
3.Pluggable architecture :Tailor the blockchain to industry needs
with a pluggable architecture rather than a one -size-fits-all
approach.
4.Easy to get started :Program smart contracts in the languages
your team wor ks in today, instead of learning custom
languages and architectures.
5.3 HYPERLEDGER COMPOSER
➢It is a set of collaboration tools for building simple blockchain
business networks.
➢Helps business owners and developers to create smart contracts and
blockcha in applications in order to solve business problems in a simple
and speedy manner.
➢It is built in Javascript, a platform -independent programming language
that also supports the use of built -in libraries and uses available
functions and scripts to make the utilities more scalable and reusable.
➢Thus, Composer is an application development framework which
simplifies and expedites the creation of Hyperledger fabric blockchain
applications.
➢One can easily define the business rules based on which blockchain
transactions will be processed, the assets that are exchanged in
blockchain -based use cases, and controls for participants, their
identities, roles and access levels for performing the various kinds of
transactions.
➢Users ,with Hyperledger composer, can easily build and configure core
components of the blockchain which include the network’s digital
assets, transaction logic, participants and access controls.
➢Composer supports sharing, reusability and scalability of components
across various organizations.
➢One can easily generate the required scripts and APIs necessary for
business implementation using Hyperledger Composer.
➢It also supports use cases and real -time testing, which can even be
performed through the web -based Composer playground without the
need fo r local installations.
➢Using Hyperledger Composer, it is possible for an individual to create
and run a sample blockchain, and grant restricted permission to
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130For instance, one can easily build a “ Perishable Goods Network ” that
facili tates trading of items like fruits and vegetables, include
participants like farmers, shippers and importers, define individual
roles for each participant, define and execute terms of agreement
between the participants, track shipments, acknowledge, monito ra n d
report status of goods at various stage in the supply chain, and
payments management.
5.3.1 Advantages of Hyperledger Composer
Hyperledger Composer offers a lot of advantages as follows:
1.Faster creation of blockchain applications in easy steps.
2.Smoo th and low -cost modeling and testing.
3.Allows the user to build, test and deploy various options and then
implement the one that offers the best fit, and reusability of
existing apps and APIs that reduce both effort and costs.
4.Maintenance of Core Data and F unctionality of business network
that includes the business model, transaction logic and access
controls. As the archival of Business Network is central to
Hyperledger Fabric composer.
5.It enables modeling the business requirements and functions,
functional testing, as well as deployment testing on a live
blockchain as it is an Web -based interface
5.4 HYPERLEDGER FABRIC INSTALLATIONS,
DEPLOYING AND RUNNING THE FIRST TEST
NETWORK
Steps to Install HyperLedger Fabric in Linux(Ubuntu)
1.Prerequisites
2.Linux Installation s
1.Prerequisites
1.cURL ₹—₹latest version
2.Docker ₹—₹version 17.06.2 -ce or greater
3.Docker Compose ₹—₹version 1.14.0 or greater
4.Golang ₹—₹version 1.11.x
5.Nodejs ₹—₹version 8.x (other versions are not in support yet)
6.NPM ₹—₹version 5.x
7.Python 2.7
Note:These prerequisites’ versions are ac cording to the fabric v1.4
documentation .
2. Linux(Ubuntu) installation steps
1.sudo apt -get install curl
2.sudo apt -get install golang -gomunotes.in

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1313.export GOPATH =$HOME/go
4.export PATH=$PATH:$GOPATH/bin
5.sudo apt -get install nodejs
6.sudo apt -get install npm
7.sudo apt -get install python
8.sudo apt -get install docker
9.curl -fsSL https://download.docker.com/linux/ubuntu/gpg | sudo apt -
key add -
10.sudo add -apt-repository "deb [ arch=amd64]
https://download.docker.com/linux/ubuntu $(lsb_release -cs) stable"
11.sudo apt -get update
12.apt-cache policy docker -ce
13.sudo apt -get install -yd o c k e r -ce
14.sudo apt -get install docker -compose
15.sudo apt -get upgrade
With the help of the above 15 steps, o ur environment is set up.
Next, we're going to download the samples of Fabric that have
already been prepared to test it out. Enter the following two
commands in your terminal.
16.sudo curl -sSL https://goo.gl/6wtTN5 |sudo bash -s1 . 1 . 0
Figure 3 :Screens hot of execution of step 16
17.sudochmod 777 -R fabric -samples
18.cd fabric -samples/first -network
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132
Figure 4: Screenshot of execution of step 17 to step 19
Now bring the blockchain network up with the following
command.
20.sudo ./byfn.sh up
Figure 5: Screenshot of execution of step 20.
If everything worked, then you successfully created your first
Fabric network! Congratulations!!!!.
For the time being you can bring the network down with the command:
21.sudo ./byfn.sh down
Thus, we reac hed a state where our computer can successfully use and
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1335.5SUMMARY
In this Chapter, we Learnt about what Hyperledger Fabric is. We
set up our computer to be able to deploy Fabric networks by installing the
requirements and deploying the test fabric network. Now what?
With this foundation set, we can learn more about Fabric by
creating more blockchain networks that suit our needs. We can test
deploying smart contracts to our Fabric blockchain which will be taken
care of in chapter 6.
5.6REFERENCE:
1.Installing python 2.7 in ubuntu: https://tecadmin.net/install -python -
2-7-on-ubuntu -and-linuxmint/
2. Step by step fabric insta llation:
https://www.srcmake.com/home/fabric
3. installation guide: Hyperledger Fabric Installation Guide! | Hac ker
Noon
5.7QUESTIONS:
1.What is Hyperledger?
2.What is Hyperledger Fabric? Give its importance over simple
blockchain.
3.Give working of Hyperledger Fabric with a suitable diagram.
4.Describe the role of different layers and peers involved in workflow of
Hyperledger fabric.
5.What is the Hyperledger composer? Give its advantages.
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1346
SMART CONTRACTS AND TOKENS
Unit Structure
6.0. Objectives
6.1. Smart Contracts Defined
6.1.1. How Do Smart Contracts Work?
6.1.2. Benefits of smart contracts.
6.1.3. Applications of Smart Contracts.
6.2. EVM As Back End.
6.3. Assets Ba cked by Anything
6.3.1. Bartering with Fiat Currency
6.3.2. Ether as Glass Beads
6.4. Cryptocurrency Is a Measure of Time
6.5. Function of Collectibles in Human Systems
6.7. Tokens as Category of Smart Contract
6.8.Playing with Contracts
6.9Summary
6.10 Questions
6.11 References
6.0. OBJECTIVES
At the end of this unit, the student will be able to:
➢Understand the concept of Smart Contract, its working and areas of
applications.
➢Understand the role of EVM in smart contracts.
➢Understand the concept of cry ptocurrency and its benefits in
human Life.
➢Understand the concept of tokens.
➢Create and Deploy the token.
6.1.SMART CONTRACTS DEFINED
Smart contracts are simply programs stored on a blockchain that
run when predetermined conditions are met. They typic ally are used to
automate the execution of an agreement so that all participants can be
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135involvement or time loss. They can also automate a workflow, triggering
the next action when conditions a re met.
6.1.2. How do smart contracts work?
Smart contracts work by following simple “if/when…then…”
statements that are written into code on a blockchain. A network of
computers executes the actions when predetermined conditions have been
met and verifi ed. These actions could include releasing funds to the
appropriate parties, registering a vehicle, sending notifications, or issuing
a ticket. The blockchain is then updated when the transaction is
completed. That means the transaction cannot be changed, a nd only parties
who have been granted permission can see the results.
Within a smart contract, there can be as many stipulations as
needed to satisfy the participants that the task will be completed
satisfactorily. To establish the terms, participants must determine how
transactions and their data are represented on the blockchain, agree on the
“if/when...then…” rules that govern those transactions, explore all
possible exceptions, and define a framework for resolving disputes.
Then the smart contract can b e programmed by a developer –
although increasingly, organizations that use blockchain for business
provide templates, web interfaces, and other online tools to simplify
structuring smart contracts.
6.1.2. Benefits of smart contracts
1.Speed, efficiency and accuracy
Once a condition is met, the contract is executed immediately. Because
smart contracts are digital and automated, there’s no paperwork to process
and no time spent reconciling errors that often result from manually filling
in documents.
2.Trust and transparency
Because there’s no third party involved, and because encrypted records
of transactions are shared across participants, there’s no need to question
whether information has been altered for personal benefit.
3.Security
Blockchain transaction reco rds are encrypted, which makes them very
hard to hack. Moreover, because each record is connected to the previous
and subsequent records on a distributed ledger, hackers would have to
alter the entire chain to change a single record.
4.Savings
Smart contract s remove the need for intermediaries to handle
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1366.1.3.Applications of smart contracts
Explore how businesses benefit from smart contracts in active
blockchain solutions
1.Safeguarding t he efficacy of medications
Pharma Portal is a blockchain -based platform that tracks
temperature -controlled pharmaceuticals through the supply chain to
provide trusted, reliable and accurate data across multiple parties.
Example: Sonoco & IBM
2.Increasing t rust in retailer -supplier relationships
The Home Depot uses smart contracts on blockchain to quickly
resolve disputes with vendors. Through real -time communication and
increased visibility into the supply chain, they are building stronger
relationships wit h suppliers, resulting in more time for critical work and
innovation.
3.Making international trade faster and more efficient
Businesses are creating an ecosystem of trust for global trade. Using a
blockchain -based platform, rules are standardized and tradin g options are
simplified to reduce friction and risk while easing the trading process and
expanding trade opportunities for participating companies and banks.
Example:we.trade, the trade finance network convened by IBM
Blockchain
6.2. EVM AS BACK END
Software apps, as they currently exist are typically discussed in two
halves: the front end and the back end.
Back End: It usually refers to the database and the logic around
interacting with it, which is where the program stores its information.
Front End: It usually refers to the part of the application the user sees: the
interface with its various labels and controls.
Controls: controls is the general term for the little buttons, sliders, dials,
hearts, stars, thumbs -up icons, and any other little thing you can click to
make something happen.
The EVM is something like a replacement for the traditional application
back end of a conventionally -hosted web or mobile application. Although
the EVM itself is a fully fledged computer, it is not yet a complete end -to-
end platform capable of hosting HTML/CSS interfaces; the most useful
role it can play is as the back end to a distributed application.
Smart Contracts to Dapps
A smart contract is just a unit of functionality you upload to the EVM. The
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137smartphone -accessible GUI application that uses the EVM as its back end.
Unless it’s a very simple dapp, its back end functionality will rely on
several smart contracts.
6.3.ASSETS BACKED BY ANYTHING
In finance, an asset is a valuable resource that you expect will
produce a benefit or value in the future. It can include physical natural
resources or abstract financial Instruments.
By definition, the price of an asset should go up over time. (If it
goes down, it is known as a depreciating asset.)
It can be said that cryptocurrencies are assets backed by anything.
Let us try to understand this by an example given next.
6.3.1. Bartering with Fiat Currency
Let’s say you are
➔Alice, and you live in Japan. As sume you are paid in Japanese yen
and that the prices of things such as rent, food, and basic services
are denominated in yen. Now you want to pay someone in New
York to do some translation work.
➔On the other side we have Bob. Bob the translator uses US d ollars;
he holds them as savings; he pays taxes in USD, too.
This creates a problem. For most people, foreign currency is not
much use, and exchanging it incurs high fees and risks of price slippage.
Slippage refers to the price dropping before you have a chance to sell your
lot.Bob doesn’t want yen, and Alice doesn’t hold any dollars.
The options available with alice and bob are:
➔Alice and Bob may as well have cabbage and glass beads to barter.
➔One of them can simply drive to the nearest bureau of exch ange,
probably at an international airport, that’s not a parsimonious
solution.
➔Better option: Cryptocurrency, they need only establish a
conversion rate, or multiplier,between their local currency and the
cryptocurrency, and then convert the local price o f the barter goods
by using that multiplier. Whether they’re using paper money or
glass beads isn’t relevant. For a trade to take place, they merely
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1386.3.2. Ether as Glass Beads
This example demonstrates one of the fundamental p roperties of ether
and bitcoins:
1.They are standard accounting units of value, and simultaneously
media of exchange themselves. For Example: Money also serves
these functions, but in actuality, the medium of exchange (paper) is
just a representation of valu e that exists in some bank’s ledger.
Here, they are one in the same value as the media.
2.These standard account units essentially tabulate themselves and
balance the entire ledger anytime a payment moves from one place
to another. This is another advantage over the money of today,
which being inert has no “awareness” of other money in the
system. As you may be imagining already, this makes s mart
contracts perfect for writing self -executing financial agreements.
3.A derivative contract is a financial “bet” be tween two or more
parties made on the value of the underlying asset. A derivative
basically says that under certain conditions,Alice agrees to pay
Bob a particular amount.
What gives cryptocurrency the power to be used this way? Let’s
find out.
6.4.CRY PTOCURRENCY IS A MEASURE OF TIME
Because crypto assets and cryptocurrencies are impossible to
counterfeit, this gives them an interesting property as a measure of
time.But the point here is that these tokens are almost like the rings of a
tree—their manuf acture happens by a sophisticated process that cannot be
“sped up.”
Thus when trading with someone from a faraway economy, it
becomes easy to trust prices denominated in cryptocurrency, because
counterfeiting isn’t possible.
Cryptocurrencies, currently, are not redeemable by any central
authority for gold or fiat currency. However, they are classified as
property or currency in a handful of countries.
Nevertheless, it can be said that cryptocurrency get their price from
the marketplace:they are worth wh atever someone in the marketplace will
pay.As a result of its status as a decentralized digital medium of exchange,
cryptocurrencies can be conceptualized as “assets backed by anything.” It
doesn’t matter whether you’re trading cattle, bananas, soybean fut ures, or
private equities —the deal can be done in cryptocurrency. The only
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139Today, even if the buyer and seller agree to complete their
transaction in cryptocurrency, it’s likely they will quickly sell the
cryptocurrency fo r local fiat money, to avoid price slippage. This will
reduce if the prices of cryptocurrencies stabilize. Prices become more
stable as the volume of transactions increases around the world, and the
markets for trading cryptocurrencies become deeper, or mo re liquid.
Ether is similar to other cryptocurrencies such as bitcoins in this
regard, but it does gain some intrinsic value from its usefulness in paying
gas costs on the EVM.It makes ether more like a commodity such as oil or
corn, which get their resp ective intrinsic values from their uses as fuel and
food, respectively.
6.5.THE FUNCTION OF COLLECTIBLES IN HUMAN
SYSTEMS
Keeping track of favors over time is a major function of money: to
serve as a closed accounting system for a community to keep trac ko f
favors owed and favors given. This gets useful as bigger and bigger
groups try to interact and cooperate.
Using collectibles to count favors is the essence of primordial
accounting. Eventually,the value of these favors became abstracted,
leading to t he generalized instruments of value such as gold. This accounts
for the modern -day association between wealth and esteem.
Ethereum and Bitcoin strike at the heart of a problem that is tens of
thousands of years old, which is that reputation -accounting a n atural
human behavior, but also an imperfect one. Szabo continues:
Reputational beliefs can suffer from two major kinds of errors —
errors of about which person did what, and errors in appraising the value
ordamages caused by that act. In both Homo sapiens neanderthalensis
andHomo sapiens, with the same large brain size, it is quite likely that
every local clan members kept track of every other local clan member’s
favors....
Between clans within a tribe both favor tracking and collectibles
were used.
Two clans within a tribe exchanging collectibles within a closed
system is something like a private bank database. Or a private blockchain.
Szabo writes:
Between tribes, collectibles entirely replaced reputation as the
enforcer of reciprocation, although vi olence still played a major
role in enforcing rights as well as being a high transaction cost
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140Just like the banks of today, human groups of yesteryear had
trouble trading outside their accounting system. Whose money syst em do
you use? Who keeps track of inter -tribe favors? No wonder there was so
much bloodshed: the opportunity for cheating is just too persistent.
Platforms for High -Value Digital Collectibles
In a digital context, a reliable store of time has incredible p otential
as a platform for digital collectibles: valuable items that can be displayed,
worn, or hung in one’s personal space —either online or in real life —and
that are not possible to knock off, nor easily stolen from their rightful
owner.
When most peopl e think of the Internet of Things, they think of
sensor motes, self-diagnosing industrial equipment, and driverless
vehicles. The Internet of Value, a euphemism referring to blockchain
technologies, one of the many metaphors used to represent Ethereum and
Bitcoin conceptually. But rather than think abstractly, it may be more
useful to think about the potential in terms of valuable artwork, jewelry,
fashion, or premium goods that look much like today’s, but feature
verifiable provenance and ownership stored on a blockchain.
In the future, the ownership, value, and provenance of a physical
thing may never be “forgotten” as long as the blockchain where it was
inventoried is still up and running. There will be no Antiques Roadshow
on TV in 100 years. (We could even write a smart contract to take that
bet!)
6.6.TOKENS ARE A CATEGORY OF SMART
CONTRACT
Generally speaking, the Ethereum protocol prides itself on being
featureless, which is one reason that tokens (as a concept) overlap so
heavily with smart contrac ts (as a concept). Tokens are just one
application of smart contract functionality on the EVM.
That said, Ethereum does make provisions for one common use -case
of smart contracts, which is a sub currency, a.k.a. token. In the hopes of
making it easy to ge t up and running, the Ethereum developers have put an
easy-to-use template inside the Mist wallet for quickly launching your
own tokens. Presumably, other templates for common smart contracts will
follow. But at present, the one we get out of the box is th e ability to create
a custom unit of value which can be passed around, alongside ether, within
the EVM.
If you were to phrase the user -friendly token -making progress as an
elevator pitch for its value proposition to users, it would be something like
this: “ultra -secure digital monetary system with automatic ledger
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141Now that you’ve gotten a taste of the historic potential of Ethereum
and Bitcoin to create a new era of crypto collectibles and smart devices,
let’s get back t o the brass tacks of deploying a token in the wild.
Tokens as Social Contracts
Tokens are sometimes called coins. You also learned that tokens
themselves are smart contracts. (With enough repetition, these terms will
hopefully enter your natural vocabula ry by the end of this book!) But
tokens themselves (like all forms of money) can also be seen as social
contracts, or agreements between groups of users. In plain English, the
implicit agreement of a group using a token would be as follows: “We all
agree t his token is money in our community.” It’s also a tacit agreement
not to counterfeit, undermining the system!
The closest thing we have to a social contract in software form
today is probably the end -user license agreements, or EULAs, that users
sign when they create an account on services such as Facebook, Twitter,
iTunes, or Gmail. This agreement usually includes language barring
activities such as spamming other users, which would degrade the user
experience.
Thinking this way allows us to imagine how our digital media and
digital goods today might become digital collectibles that are discussed,
marketed, sold, and displayed inside the social networks of the future, in
which online artifacts like selfies and podcasts can be sold, licensed, or
rented for fees of arbitrary size.
Tokens Are a Great First App
When making a token, consider that it is only as valuable as the
community using it believes it will be. Thus, it is far easier to launch a
token into an existing community that already trades using so me kind of
money or scrip. However, making sub currencies is not the only use of a
crypto asset. The concept of an asset is highly generalized. Assets, in the
form of financial contracts or smart contracts, can be used to represent
shares of equity, or lot tery tickets, or just scrip within a local economy.
The price can be determined by the market, or it can be pegged to another
asset. The rules are largely up to you.
In Ethereum, tokens exist within, and rely upon, the public
blockchain: you can create a sub currency of ether, but ether will always
remain the privileged token with which miners and gas costs are paid. If
you want a purely independent blockchain network, you can create your
own private blockchain and be completely disconnected from the main
Ethereum chain. Making a sub currency is easier and will satisfy most use
cases for curious developers. If you’re working at an institution interested
in using its own blockchain, never fear: you can make your own private
chain and crypto economy that is s eparate and distinct from the Ethereum
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142Note: For topics Creating a Token and Deploying the Contract kindly
visit the first link provided in the reference section.
6.7.PLAYING WITH CONTRACTS
Now that your contract is deployed with an inte rface in Mist, you
can activate it. To call a contract in the EVM, you do not necessarily need
to send any ether; you can call it simply by sending zero ether to the
contract address. Boom, now you are the owner! If this doesn’t work, be
sure that the cont ract was uploaded to the testnet, and that the Mist you are
using to send the zero -ether transaction is also on the testnet. For the
Owned contract, activation is a yes -or-no question. You can call it with
zero ether or 100. In more -sophisticated contracts , the amount you send is
vital to how the contract behaves subsequently after being called. Owned
is just a reference contract that might live on the EVM, a pivotal public
resource contract with lots of incoming references, for years and years. By
working with a small smart contract, you can see how smart contracts are
used piecemeal to cobble together entire distributed apps, largely using
boilerplate code or public -use instances, enabling the end programmer to
just write the most customized of functionali ty, reducing the room for
error.
6.8SUMMARY
In this chapter, you were able to deploy two separate smart
contracts. In the process, you learned about the most basic application you
can write for the EVM, a token contract. You also considered some of the
unique properties of distributed programs by playing with owned.sol. By
now, you should begin to see how powerful the Ethereum protocol can be,
and how simple and easy it is to deploy contracts that leverage the power
of the network.
Next, it’s worth lear ning more about how the EVM network -database
achieves consensus: a process known as proof -of-work mining.
6.9 REFERENCE:
1.Creating a Token, Deploying the Contract, Playing with Contracts.
Smart contracts introduction:
https://www.ibm.com/topics/smart -contracts
2. What is EVM
●https://coinmarketcap.com/alexandria/glossary/ethereum -virtual -
machine -evm
●https://ethereum.org/en/developers/docs/evm/munotes.in

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1436.10QUESTIONS
1.Define Smart contracts.
2.Briefly Describe the working of smart contracts.
3.Give Benefits of Smart contracts.
4.List the Applications of sm art contracts.
5.Explain EVM as Back End.
6.Explain “Cryptocurrency Is A Measure of Time”
7.Exercise
a.Create a custom token with no code.
b.Watch token
c.Deploy a Simple Contract in 5 minutes

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144Unit IV
7
MINING ETHER
Unit Structure
7.0Objectives
7.1Why
7.2 Ether’s Source
7.3 Defining Mining
7.4 Difficulty
7.5 Self -Regulation and Race for Profit
7.6 How Proof of Work Helps Regulate Block Time
7.7 DAG and Nonce
7.8 F aster Blocks
7.9 Stale Blocks
7.10 Difficulties
7.11 Ancestry of Blocks and Transactions
7.12 How Ethereum and Bitcoin Use Trees
7.13 Forking
7.14 Mining
7.15 Geth on Windows
7.16 Executing commands in the EVM via the Geth Console
7.17 Launching Geth with Flags
7.18 Mining on the Testnet
7.19 GPU Mining Rigs
7.20 Mining on Pool with Multiple GPUs
7.21 Summary
7.22 Questions
7.23 References
7.0OBJECTIVES:
After completion of the chapter , students get idea on following :
1.Understanding the Ethereum frame work
2.Detailed understanding on Mining ether using several installations
3.Understanding of Go Ethereum working ,Testnetdemostrationmunotes.in

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1457.1 WHY
Mining is the process by which the Ethereum network reaches
consensus about the order of transactions in a giv en period of time, which
in turn allows the EVM to make valid state transitions.
Using mining, the idea of decentralized systems with security can
be conceptualized. Also there will be fair understanding of how long these
systems can continue and at each level how security will be monitored.
7.2 ETHER’S SOURCE
Ether is considered the native token of Ethereum because it gets
created out of thin air during the mining process, as payment for mining
work performed by computers.
Because mining is computation ally intensive, it can generate large
electricity costs for your home or office. Miners take their rewards
seriously.
Mining rewards are accomplished through an account balance
increase programmed into the EVM’s state transition function. They are
payable to whichever a random miner finds a block.
7.3 DEFINING MINING
Miners refers to a vast global network of computers, operated
mostly by enthusiasts in their homes and offices, running Ethereum nodes
that are paid in ether tokens for the work of executing smart contracts and
validating the canonical order of transactions around the world.
The process of mining is undertaken by each individual node, but
the term also refers to the collective effort of the network: individual
nodes mine, and the network its elf can be said to be secured by mining.
Miners process transactions in groups known as blocks.
Mining can properly be defined as dedicating computational effort
to the bolstering of a given version of history as the correct one.
The mining process is co mputationally demanding for nodes
because it involves executing a memory intensive hashing algorithm
known as a proof -of-work algorithm. The proof -of-work algorithm for the
Ethereum protocol is Ethash, a new function created by the core
developers in order to address the problem of mining centralization
evident in Bitcoin.
The cryptographic proof which results from mining can be
completed more quickly when more hashpower is applied. Therefore,
miners often form mining pools to increase their chances of win ning
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146Note: What’s a block?
A block refers to the data object containing those transactions,
stored on Ethereum nodes. Each time a node starts, it must download the
blocks it missed while offline. Each block contains some metadata from
the previous block, to prove it is authentic and build on the existing
blockchain.
7.4 DIFFICULTY
Ethereum and Bitcoin are self -regulating networks. As a network
gets more popular, more mining hash power joins in search of pro fits, and
blocks might be found too quickly.
To stay within range of its ideal 15 -second block time, a
dynamically self -adjusting value called difficulty will increase.
If blocks are found too quickly or slowly, the system changes the
difficulty to get within range of its ideal block time. As time progresses,
network difficulty increases.
Network difficulty may decrease or go flat if miners begin to drop
off the network or if overall hash power decreases.
You can think of this difficulty variable as be ing part of the
incentive structure to get miners on the network as soon as possible and to
stay there.
However, difficulty has another use in the EVM, as one of several
factors used to determine a block’s score, sometimes referred to as its
heaviness.
The heaviest, or highest -scoring, path through the transaction data
structure can be said to be the longest, the one that most miners have
historically converged upon as the true root -to-leaf path.
7.5 SELF -REGULATION, AND THE RACE FOR PROFIT
Mining is de signed to be a money -maker for the people who
engage in it; they are paid for providing security to the network.
The first thing to know is that time is a factor! When a new crypto
currency launches, miners rush to turn on their machines.
With less compe tition for fees in the early days, they earn more.
Even better, tokens belonging to useful crypto networks usually inflate in
price over their lifetime, so earning them earlier gives miners more
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1477.6 HOW PROOF OF W ORK HELPS REGULATE
BLOCK TIME
Ethereum, like Bitcoin, currently uses a consensus protocol called
Proof -of-work (PoW). This allows the nodes of the Ethereum network to
agree on the state of all information recorded on the Ethereum blockchain,
and prevents certain kinds of economic attacks
Proof of Work (PoW) is the mechanism that allows the
decentralized Ethereum network to come to consensus, or agree on things
like account balances and the order of transactions. This prevents users
"double spending" their coins and ensures that the Ethereum chain is
incredibly difficult to attack or overwrite
Proof -of-work is the underlying algorithm that sets the difficulty
and rules for the work miners do. Mining is the "work" itself. It's the act of
adding valid blocks to the chain. This is important because the chain's
length helps the network spot the valid Ethereum chain and understand
Ethereum's current state. The more "work" done, the longer the chain, and
the higher the block number, the more certain the network c an be of the
current state of things
Block time defines the time it takes to mine a block. Both in
bitcoin blockchain and Ethereum blockchain, there is an expected block
time, and an average block time.
Miners who successfully create a block are rewarded in 2 freshly
minted ETH and all the transaction fees within the block. A miner may
also get 1.75ETH for an uncle block. This is a valid block, created
simultaneously to the successful block, by another miner. This usually
happens due to network latency
Anyone who can optimize for the proof -of-work algorithm can
find valid blocks faster, causing uncles to lag further and further behind. In
the Bitcoin network, a small group of hardware companies has acquired a
disproportionately huge amount of power over t he network by creating
hardware specifically built to run the Bitcoin PoW algorithm. The
centralisation of mining efforts is highly profitable in Bitcoin, because it
allows these big miners to find blocks faster, reaping all the block rewards.
Slower machi nes never get a chance to solve a block, and eventually, even
their uncle blocks come in further and further behind the winning block.
In Ethereum, uncle blocks are required to bolster the winning
block. As uncles lag more, it becomes harder for the netwo rk to find a true
block, being that valid uncles are a requirement.
Enter the Ethash algorithm: The Ethereum protocol’s defense
against mining hardware optimization. Ethash is a derivative of Dagger -
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148with a custom application -specific integrated circuit (ASIC), like the kind
that are popular with Bitcoin mining enterprises.
Key to this algorithm memory -hardness is its reliance on a directed
acyclic graph(DAG) file, which is essentially a1G Bd a t a s e tc r e a t e dan e w
every 125 hours, or 30,000 blocks. This period of 30,000 blocks is also
known as an epoch.
Directed acyclic graph is a technical term for a tree in which each
node is allowed to have multiple parents, with ten levels including the
root, and a total of up to 225 value
7.7 DAG AND NONCE
DAG stands for Directed Acyclic Graph, and it is an ever -
important element within the structure of Ethereum mining. DAG is a
dataset over 1GB in size that is used by all Ethash coins to find sol utions
along the blockchain. It is used in all Ethash coins, like Ethereum,
EthereumClassic, Metaverse, Ubiq and other coins to provide a proof of
work. DAG file is generated every mining epoch and it increases from
epoch to epoch A nonce is the number of the transaction of the sender's
address. Every transaction from an address is numbered sequentially,
beginning with 0 for the first transaction. For example, if the nonce of a
transaction is 10, it is the 11th transaction sent from the sender's address.
In effect, each node is playing a guessing game with itself, trying
to guess a nonce that will validate the current block; if it guesses the right
nonce, it wins the block reward. If not, it continues guessing until it gets
word that another node on the net work has found a winner. Then, it
discards the block it was mining downloads the new block, and begins
mining a new block on top of that one.
But the node gets both parameters of the guessing game, as well as
a new pair of dice (so to speak) with each po tential block as it rolls in. The
rules of the guessing game are designed this way to prevent clever
individual nodes from outsmarting the system in the pursuit of more
mining rewards.
Therefore, you can think of the DAG file as a way of standardizing
thesolution time of the proof -of-work algorithm. It levels the playing field
for miners, but more important, helps cluster block times around the 15 -
second mark by ensuring that —even with massive computing power —you
can’t guess the correct nonce a whole lot faster than your competitors.
All the data a node needs to participate in the guessing came is
drawn from the blockchain itself. In cryptography, an encryption seed can
be used to help generate a pseudorandom number, thus increasing the
randomness of what ever encrypted output the Ethash algorithm produces.
In Ethereum and Bitcoin, each node gets the seed from looking at the hash
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149the correct, canonical chain in order to play the game c orrectly.
Performing proof of work on an erroneous block (say, an uncle) cannot
yield a winning block. This is helpful if you’re trying to reduce unfair
advantage in a proof -of-work scheme, which could be used by a large pool
of miners to highjack the netw ork onto a version of the truth in which
everyone’s ether is transferred to the hijacker’s accounts.
Here is the process by which a node sets itself up to perform the
PoW guessing game:
1. From an encryption seed derived from the block header, the mining
node creates a 16 MB pseudorandom cache.
2. In turn, the cache is used to generate a larger 1 GB dataset that should
be consistent from node to node; this is the DAG. This dataset grows
over time, in a linear fashion, and is stored by all full nodes.
3. Gu essing the nonce requires the machine to grab random slices of the
DAG dataset and hash them together. This works similarly to using a
salt with the hash function. In cryptography, a random data chunk you
toss into a one -way hash function is called a salt. Salts are like nonces:
they make things more random, and thus more secure.
7.8 FASTER BLOCKS
Block time defines the time it takes to mine a block. Both in
bitcoin blockchain and ethereum blockchain, there is an expected block
time, and an average block time. In bitcoin, the expected block time is 10
minutes, while in ethereum it is between 10 to 19 seconds.
Believe it or not, all these modifications to the original Bitcoin
paradigm were made in the service of faster block times. Block times as
low as 3 –5 seconds may be mathematically feasible In both Bitcoin and
Ethereum, we’ve said that block time is an idealized period for collecting
transactions. Why is this? The system works to keep blocks as near as
possible to the ideal, much the way that the human body tries to preserve
homeostasis. The Bitcoin protocol targets 10 -minute block times, and
Ethereum targets 15 seconds. Once a true block is found, it takes a short
while for other nodes to find out about it. Up until they discard their
orphan block and begin mining on the new one,they are actually
competing against the new block instead of building upon it. Thus, the
effort expended on the orphan is wasted. Think of it this way: if latency
causes miners to hear about new blocks an average of one minute l ate, and
new blocks come every 10 minutes, then the overall network is wasting
roughly 10 percent of its has power.
Lengthening the time between blocks reduces this waste. In the
opinion of some blockchain theorists, Satoshi Nakamoto chose this ratio
because it seemed an acceptable level of waste. Ethereum’s faster block
time is desirable because it makes transactions confirm faster, but the
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150commensurate decrease in security brought on by faster block times Block
time can be compared to settlement time in a securities trading, which in
the United States, stands at three days after the trade date, also known as
T+3. A proposal is under consideration by the SEC to quicken settlement
time to T +2. In Bitcoin, which has no smart -contract execution, blocks
take a theoretical 10 minutes on average, but in reality, transactions
process this quickly only about 63 percent of the time. About 13 percent of
the time, it takes longer than 20 minutes for a transaction to receive a
confirmation. During this time, it’s possible to reverse a transaction up to
20 percent of the time. While merely irksome for Bitcoin enthusiasts and
businesses, these conditions are unacceptable for a smart -contracts
platform des igned to power distributed software applications, so Ethereum
takes a slightly different approach to mining, in order to achieve faster
block times.
Making Fast Blocks Work
We’ve already discussed how faster block times are more desirable
from the perspec tive of user experience. However, they can also produce
undesirable effects. Because nodes are located all over the world, it’s hard
for them to stay perfectly in sync. That’s because information takes time
to travel across the Internet from node to node, also known as latency.
Although it may not seem like much time to humans, it’s enough to create
collisions in the transaction record where the books don’t balance On
average, it takes about 12 seconds for a transaction to propagate around
the Ethereum or B itcoin networks; in actuality, much of this time is
consumed by the downloading of transactions to the node. In the
intervening time before it hears about a new block being found, a miner
may continue to work on an old block briefly, before discarding it f or the
new winner.
As described in the section above, uncles that receive mining effort
after a valid block has already been found elsewhere in the network are
also known as stale or extinct blocks. Faster block times create a higher
likelihood of stale blocks, and stale blocks decrease the network’s absolute
strength against attacks. Worse yet, higher rates of stale blocks make it
easier for mining pools to win increasing efficiency advantages over solo
miners, consistently beating them out of mining rew ards. At best, this is
unfair, and at worst, it makes the network less expensive to attack.
7.9 STALE BLOCKS
Stale blocks, are blocks that are not accepted into the blockchain
network due to a time lag in the acceptance of the block in question into
theblockchain, as compared to the other qualifying block.
In Ethereum, as we’ve said already, orphans or stales have yet
another name: they are called uncles, Uncle blocks are created in
Ethereum blockchains when two blocks are mined and submitted to the
ledger at roughly the same time. Only one can enter the ledger as a block,
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151of a block. The way this is done in the Ethereum protocol is similar to the
blockchain scoring system proposed in the GHOST protocol, which was
outlined in a paper by Aviv Zhoar and Yonatan Sompolinsky in December
2013.
The concept of GHOST is simple. Miners that find orphan and
stale blocks get rewarded, but the reward is lower than for standard blocks
Vitalik B uterin describes the way he has adapted the GHOST idea for
Ethereum, and how it compares to Bitcoin:
The idea is that even though stale blocks are not currently counted
as part of the total weight of the chain, they could be; hence they propose a
blockcha in scoring system which takes stale blocks into account even if
they are not part of the main chain. As a result, even if the main chain is
only 50 percent efficient or even 5 percent efficient, an attacker attempting
to pull off a 51 percent attack would still need to overcome the weight of
the entire network. This, theoretically, solves the efficiency issue all the
way down to 1 -second block times. However, there is a problem: the
protocol, as described, only includes stales in the scoring of a blockchain ;
it does not assign the stales a block reward.
Uncle Rules and Rewards
The following are rules regarding uncles:
In Ethereum’s implementation of GHOST, uncles that are
validated along with a block receive 7/8 of the static block reward, or
4.375 ether. A maximum of two uncles are allowed per block. These two
places are won on a first -come, first -served basis. No transaction fees are
collected or paid out for uncle blocks, because users are paying these costs
once already in the valid block, which actuall y executes their commands.
Crucially, in order to be worthy of a reward, an uncle block must have an
ancestor in common with the true block within the last seven generations.
This implementation of GHOST solves the issue of security loss by
including uncle blocks in the calculation of which block has the largest
total proof of work backing it. The uncle rewards are intended to solve the
second issue, centralization, by paying miners who contribute to the
security of the network, even if they do not nominate a winning block.
7.10 DIFFICULTIES
Ethereum’s “difficulty bomb” refers to the increasing difficulty
level of puzzles in the mining algorithm used to reward miners with ether
on its blockchain It’s worth mentioning that the GHOST protocol (even as
Ethere um has adapted it) is the subject of some criticism. Although its
flaws are known, they are generally regarded to be harmless.
Fixing the GHOST implementation may not be worthwhile
anyway, as it will be rendered deprecated when the Ethereum protocol
move sa w a yf r o map r o o f -of-work to what is known as a proof -of-stake
consensus algorithm. One reason why cryptocurrency have value in the
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152Today, 12.5 bitcoins are awarded per block (that is, every 10
minutes). This rate will continue until mid -020, when 6.25 bitcoins per
block will be awarded for each block. Rewards halve this way every four
years until approximately the year 2110 –40, when 21 million bitcoins will
have been issued. Ethereum achieves its limited issuance by planning to
end the proof of work period entirely. The effective mining period for
Ethereum will come to a close sometime in 2017 –2018 when the
Ethereum system makes the switch; one of the big selling points of proof
of stake (or PoS) is that it does not require mining (and the accompanying
energy expenditure) to reach consensus.
In an effort to force this transition, and simultaneously limit the
issuance period for ether, the core developers have built in a difficulty
bomb that makes proof -of-work mining less and less feasible beginning in
the latter half of 2017, before finally becoming impossible in 2021. How
this new proof -of-stake system will work is the subject of much research
and debate within the community.
Miner’s Winning Payout Str ucture
A successful miner of a winning block receives a flat payment,
plus transaction fees, plus a share of the bounty of all uncles that helped it
win. Thus it can be said the rewards in the Ethereum protocol are
determined as follows:
1. A set block rew ard of 5.0 ether (for the miner that finds the winning
block)
2. Fee payments of the gas expended within the block (for the miner that
finds the winning block)
3. 1/32 ether per uncle of this block (for miners that find uncles)
Limits on Ancestry
The part of the protocol requiring uncles to be within seven blocks
of the winning block to receive a partial award exists to make block
history “forgettable” after a small number of blocks. The number seven
was picked because it offers a reasonable amount of time for a miner to
find an uncle, but not so long that it imposes centralization risks.
7.11 ANCESTRY OF BLOCKS AND TRANSACTIONS
Before a completed block can undergo processing and acceptance
by the rest of the network, and before nodes can begin mining on top of a
new block, each and every node must independently download and
validate the block before beginning to mine in top of it.
Here are all the steps the block validator algorithm takes, in order:
1. Check if the previous block referenced exists and is valid.
2. Check that the timestamp of the block is greater than that of the
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1533. Check that the block number, difficulty, transaction root, uncle root and
gas limit (various low -level Ether eum-specific concepts) are valid.
4. Check that the nonce on the block is valid, showing the evidence of
proof of work.
5. Apply all transactions in this now -validated block to the EVM state. If
any errors are thrown, or if total gas exceeds the GASLIMIT, return an
error and roll back the state change.
6. Add the block reward to the final state change.
7. Check that the Merkle tree root final state is equal to the final state root
in the block header.
Only after these seven steps is a block canonized as va lid and true!
To make a blockchain, it would be theoretically possible to create block
headers that directly contain data about every transaction, but this would
pose scalability challenges and require immensely powerful hardware to
run a node.
In Bitcoin and Ethereum, a data structure called a Merkle tree is
used to avoid putting every single transaction in the header, which would
be large and unwieldy. Ethereum adds a data structure representing the
state of the EVM, called a state tree. Global state is presented in an
Ethereum block by another tree structure known as a Patricia tree.
First and foremost, the role of tree structures is to help the node
verify the data it receives inside blocks, such as the transaction ledger.
Secondarily, their role is to do this fast, so that computers of all shapes and
sizes can read the blockchain quickly.
In computer science, an associative array (or dictionary) refers to a
collection of (key/value) pairs. In an associative array, the association
between keys and valu es can be changed. This association is called a
binding.
Operations associated with dictionaries include the following:
• Adding key/value pairs to the collection
• Removing pairs from the collection
• Modifying existing pairs
• Looking up a value associat ed with a given key
Hash tables, search trees, and other specialized tree structures are
common solutions to the dictionary problem, where a dictionary is a
generic term for a database of records. Solving dictionary problems
involves methodologies for que rying for a key (a word) and calling up its
value (a definition).
7.12 HOW ETHEREUM AND BITCOIN USE TREES
In mathematics, a tree is an ordered data structure used to store an
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154A radix tree is a variant that is compres sed, requiring less memory.
In a normal radix tree, each character in the key describes a path through
the data structure to get to the corresponding value, like a set of directions.
Creating a Merkle tree requires hashing a large number of
“chunks” of tr ansaction data together until they become only one: a root
hash. In Ethereum and Bitcoin, the Merkle tree structure is used to record
the transaction ledger in each block. The root for the Merkle tree is hashed
in with other metadata and included in the he ader of the subsequent block.
Thus, it can be said that each additional transaction (within each
block) irrevocably changes the Merkle root; even one wrong transaction
will make the root hash look completely different and thus, obviously
wrong.
This is h ow blocks can prove their legitimate ancestry to the block
validator algorithm, which is part of the overall block processing routine.
For a Bitcoin client, determining the status of a single transaction
is as easy as looking at the header of the most rec ent block of the main
chain. There, the client should find the Merkle proof showing that the root
hash for the block contains the transaction in one of its Merkle trees.
The Merkle root is a fingerprint of all the transactions, correctly
ordered, that hav e occurred in the blockchain up until that block.
Merkle -Patricia Trees
Thanks to the block header, it’s quick and easy for a node to look
for, read, or verify block data. In Bitcoin, the block header is an 80 -byte
chunk of data that includes the Merkle r oot as well as five other things.
The Bitcoin block header contains:
• A hash of the previous block header
• A timestamp
• A mining difficulty value
•Ap r o o f -of-work nonce
• A root hash for the Merkle tree containing the transactions for
that block
Merkl e trees are ideal for storing transaction ledgers, but that’s
about it. From the perspective of the EVM, one limitation of the Merkle
tree is that although it can prove or disprove the inclusion of transactions
in the root hash, it can’t prove or query the current state of the network,
such as a given user’s account holdings.
Contents of an Ethereum Block Header
To remedy this shortcoming and allow the EVM to run stateful
contracts, every blockheader in Ethereum contains not just one Merkle
(transaction) t ree, but three trees forthree kinds of objects:
• Transaction tree
• Receipts tree (data showing the outcome of each transaction)
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155To make this possible, the Ethereum protocol combines the Merkle
tree with theother tree structure we described a bove, the Patricia tree. This
tree structure is fullydeterministic: two Patricia trees with the same
(key/value) bindings will always have thesame root hash, providing
increased efficiency for common database operations such asinserts,
lookups, and deletes . It is therefore possible for Ethereum clients to get
verifiableanswers to all sorts of queries it makes to the network, such as
the following:
• Has transaction X been included in block? (Handled by the transaction
tree.)
• Tell me all instances of event Y in the last 30 days. (Handled by the
receipts tree.)
• What is the current balance of contract account Z? (Handled by the state
tree.)
7.13 FORKING
A network of miners may split in two, if they cannot agree on the
longest, heaviest chain.
▪There’s much ado about forking in the cryptocurrency community, where
it seems to imply the fracture of a community of humans along with a loss
of consensus in the machine network. In reality, nascent forks are
constantly happening.
Sometimes one branch d ies, sometimes both die, and sometimes
one lives on to propagate a winning nephew block.
A fork occurs when two valid blocks point to the same parent, but
some of the miners see one, and the rest see the other.
Effectively, this creates two versions of “t he truth,” ensuring that
these two groups can no longer be said to be on the same network. A state
fork is a much bigger deal than a protocol fork. In a protocol fork, no data
is changed, but miners may adjust parameters or update code on their
nodes to ma ke them perform to a modified specification that the
community has agreed is an overall improvement. Protocol forks can thus
be said to be voluntary, whereas state forks are not necessarily so.
In Ethereum, these constant budding forks are resolved within four
blocks, as a matter of mathematical certainty, as one chain finds a winner,
gets longer, and begins to “pull” other nodes toward it with the incentive
of not only the miner fee for finding and executing the correct block, but
all the added incentive o f collecting the uncle block rewards.
Sometimes a node will find the “right” chain after already
receiving a reward for about one to three blocks. Once the node jumps to a
better, longer, more winning chain, that mining reward may disappear.
However, this all happens within four blocks —that is, one
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156Deliberate forks are typically deployed by attackers in order to
double -spend funds: to make money out of thin air by simultaneously
sending one balance t o many accounts.
In fact, anyone with more than 50 percent of the hash power can
engender a “hostile” deliberate fork, so to speak. In a double spend attack,
an attacker operating a fleet of miners, with a large amount of hash power,
sends an ether transa ction to purchase a product.
After getting hold of the product, the attacker puts together an
erroneous block with a second transaction. This second transaction
attempts to send the same funds back to the attacker. He or she then
creates a block at the sam e level as the block which contained the original
transaction, but containing the second transaction instead, and dedicates
all possible hash power to mining on the fork.
Should the attacker have more than 50 percent of has power, the
double spend is guar anteed to succeed eventually at any block depth.
Below 50 percent it’s far less prone to succeed.
But this attack is still feared enough that, in practice, most
exchanges and other institutions who use ether wait for several
confirmations before considerin g the transfer complete.
7.14 MINING
Because a distributed system has no single owner, machines are
free to join the Ethereum network at will and begin validating transactions.
This process is known as mining.
Mining nodes confer to arrive at a consensus about the order of
transactions across the system, which is necessary to tabulate everyone’s
account balances on the fly, even as many transactions pass through the
network. This process consumes electricity, which costs money, and so
miners are paid a re ward for each block they mine: about 5 ether.
Mining is the process of using computational work to nominate a
block —that miner’s version of recent transaction history —as the
canonical block for this, the most recent block on the chain.
Mining is the proces s by which the Ethereum network reaches
consensus about the order of transactions in a given period of time, which
in turn allows the EVM to make valid state transitions
Mining is important because it is the process by which consensus
is reached in the sys tem, and by which ether is created.
Bitcoin also uses mining to reach consensus, but the way things
work in Ethereum is a little bit different, owing to its ability to execute
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1577.15 GETH ON WINDOWS
Geth is such a great tool for learning, and because it’s fairly easy to
install,
Installing Geth on Windows
Download the latest stable binary.
Extract geth.exe from zip, open command Terminal and type this:
chdir
open geth.exe
7.16 EXECUTING COMMANDS IN THE EVM VIA TH E
GETH CONSOLE
The formula for Geth commands is:
geth [options] command [command options] [arguments...]
To restart Geth with the console, type the following: geth console
Your Geth client should be running with the console enabled, giving you a
command prompt.
Let’s create an account by using a JavaScript API call. Choose a
password.
In the console, type this, then hit Enter:
personal.newAccount("your_new_account_password_here")
You can check out all your accounts in the console by typing the
followi ng:personal.listAccounts
7.17 LAUNCHING GETH WITH FLAGS
Another popular way to get things done at the Geth command line
is to launch Geth with certain flags
To start Geth on the testnet, type this: geth --testnet
You’ll see text output, except that this mining is taking place on the
testnet. Press Control+C to stop it
7.18 MINING ON THE TESTNET
One note about mining, Why is this? Actually, there is no need for
Mist to mine on the main net and take up your computer’s resources,
because your contracts wi ll execute without you mining. This is because
there are currently thousands of nodes already mining on the public
Ethereum chain, and being paid real ether to do so.
While there may coincidentally be others mining on the testnet
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158there’s no real financial incentive to leave a miner running on the testnet,
you might find yourself in a lull, with nobody else on the testnet. This is
why Mist allows testnet mining along with its GUI contract deployment
interface
7.19 GPU MINING RIGS
Most ether mining is done with specialized GPU miners like the
ones in Figure 7.19, which are operated by me. Two of the machines
pictured are running the Claymore Dualminer, a custom mining program
written by a Bitcointalk.org forum member named Claymore, and which
mines both ether and another cryptocurrency simultaneously on multi -
GPU rigs.The third and fourth rigs pictured here are running ethOS, a
special Linux distro specifically created for rigs mining Ethe reum, Zcash,
or Monero. This is a far easier solution if you’re building from scratch.
However, this is easiest done on Ubuntu. If you’re running Ubuntu and
you’d like to mine with multiple GPUs, it’s easiest done with AMD
hardware.
Figure 7 -19.Four E thereum miners running in the author’s basement
Credits : http://ethosdistro.com .
Once your video cards are physically installed, a few quick
commands are all that are needed. In Ubuntu 14.04, open your Terminal
and type the following:
-?s u d oa p t -get-yu p d a t e
-?s u d oa p t -get-yu p g r a d e -f
-?s u d oa p t -get install fglrx -updates
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159Then reboot. Next, enable OpenCL by entering the following Terminal
commands:
-export GO_OPENC L=true
-export GPU_MAX_ALLOC_PERCENT=100
-export GPU_SINGLE_ALLOC_PERCENT=100
You can check that the configuration worked correctly by opening
the Terminal back up again and typing this: aticonfig --list-adapters
You should now see your AMD graphics card s in a list. The card
denoted with an asterix (*) is the computer’s default video output. If you
see a black screen, your monitor may be plugged into the wrong video
card
7.20 MINING ON POOL WITH MULTIPLE GPUS
Competition for mining rewards is intense. Y ou can think of your
miner’s chances of finding a winning block as being represented by the
ratio of your miner’s hashing power to network difficulty.
People who are mining for profit seek to gain an edge by using
powerful hardware to improve their chance s. As Ethereum becomes more
popular, time passes, and mining hashpower on the network increases,
mining becomes less and less appealing for most users.
If for no other reason than to mine new cryptocurrencies in the
future. If you have hardware accessible , there’s no reason not to
experiment with mining, even if buying ether outright may be cheaper
than mining it in some localities.
Once downloaded, extract the archive and make the qt.miner script
executable:
-tar zxvf qtminer.tgz
-cd ./qtminer
-chmod +x qtminer.sh
Finally, start QTMiner with the following command, where
address is the Ethereum address you want to be paid mining rewards, and
name is the name of this particular mining rig: ./qtminer.sh -s
us1.ethermine.org:4444 -ua d d r e s s . n a m e -G.
To che ck your earnings without opening Mist, which can take
forever to sync, go to Ethermine.org and enter the same Ethereum address
7.21 SUMMARY
In this chapter everything is discussed about PoW for Block
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160Geth,EVM and demonstrating it on testnet.It discusses on how to create
and work on testnet , also how certain blocks behave as stale blocks and
how they are useful in the mining process.Understanding on how the
ethereum execution happens on windows platform and detailed
understanding of the Go Ethereum application.
7.22 REFERENCES
[1] Chris Dannen -“Introducing Ethereum and Solidity” -Foundations of
Cryptocurrency and Blockchain Programming for Beginners by Apress.
7.23 QUESTIONS
1.How Proof of Work Helps Regulate Block Time
2.Explain DAG and Nonce
3.Differentiate between Faster Blocks and Stale Blocks
4.How Ethereum and Bitcoin Use Trees
5.Explain Forking and Mining
6. Enlist steps on executing commands in the EVM via the Geth Console
7. Demonstrate Mining on the Testnet
8. Explain the concept of GPU Mining Rigs and Mining on Pool with
Multiple GPUs
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1618
CRYPTOECONOMICS
Unit Structure
8.0Objectives
8.1 Introduction
8.2 Usefulness of cryptoeconomics
8.3 Speed of blocks
8.4 Ether Issuance scheme
8.5 Common Attack Scenarios
8.6Summary
8.7Questions
8.8References
8.0OBJECTIVES :
After completion of the chapter , students get idea on following:
1.Understanding the crypto economics concept and its applications
2. Understanding common attack scenarios
8.1 INTRODUCTION
The study of economic activity conducted across secure computer
networks is known as cryptoeconomics.
Game theory is used in economics, defense planning, psychology,
political science, biology, and even the study of gambling (!) as a
methodology for studying, analyzing, and predicting the behavior of
humans and computers w orking inside a known system.
The digital communication age we know today was ushered in by
cryptanalysis, also known as code -breaking.
Cryptography makes it possible to keep the meaning of those
signals private to the sender and recipient, even when messa ges travel
across the globe, riding along many networks along the way —some of
which may be equipped with a spying apparatus.
The field of economics typically studies interactions between
people, sometimes in hostile contexts such as war.
The emerging field of cryptoeconomics is the study of economic
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162The domains of cryptoeconomics include the following:
● Online trust
● Online reputation
● Cryptographically secure communication
● Decentralized applications
● Currency or assets as a web service (so to speak)
● Peer-to-peer financial contracts (smart contracts)
● Network database consensus protocols
● Antispam and anti-Sybil attack algorithms
Applied cryptoeconomics is creating a game -like system with
workable incentives and disincentives, which create a stable tension that
keeps the network up and running.
8.2 USEFULNESS OF CRYPTOECONOMICS
a.Engineering a layer of defence:
Applied cryptoeconomics is about engineering a layer of defen se
between public networks and attackers of all sizes.
It combines game theoretical system design, encryption, and
cryptographic hashing to protect a commonly used, commonly operated
resource —in this case, a global transaction state machine.
b.Mining Poo l
Mining pools contribute to centralization, which is why any pool
with larger than 25 percent hashpower is approaching the threshold of
network threat.
Should two such pools emerge, they might quickly get control of a
network.
c.Encryption
Encryption tu rns a human -readable string of letters or numbers into
an unreadable blob of random letters and numbers with one important
caveat.
The ciphertext that comes out of encryption algorithms does not
have a fixed length.
Pretty Good Privacy (PGP) and Advanced Encryption Standard
(AES) are popular algorithms for doing.
8.3 SPEED OF BLOCKS
Subroutines in the mining process are engineered to maintain that
block time.
The latency for Bitcoin nodes around the world, about 95 percent
of them can be reached in 12. 6 seconds, as measured by an academic team
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163This number is proportional to block size, so in a “faster” block
time currency, you could have a more responsive network.
Fast blocks are less secure in the near term, for reasons that we
won’t get into here.
But in their favor, they produce fast confirmation times; in order
words, they benefit from more granularity of information.
While nodes may be easier to fool initially, they are drawn
powerfully toward the “true” chain within a few generations. The idea that
faster blocks are proportionally less secure than slower blocks is false.
8.4 ETHER ISSUANCE SCHEME
Ether is created by the network to pay miners.
Some ether was pre -sold in mid -2014 to bootstrap the funding of
the network.
Approximately 6 0 million ETH were sold at prices varying from
1,000 to 2,000 ETH per bitcoin.
(About 10 percent was allocated to the Ethereum Foundation, and another
10 percent was maintained as a reserve at the time of the presale.)
From the presale forward, the system will issue 15.6 million ether
per year in the form of rewards paid to miners.
Ether never stops being issued, but the amount issued per year is a
smaller and smaller percentage of the overall pool.
Thus, ether’s issuance scheme is inflationary (in terms of quantity,
not price) until approximately 2025, and deflationary in quantity
thereafter.
The price of ether is whatever the market dictates, and is
predicated mostly on demand of time on the EVM.
8.5 COMMON ATTACK SCENARIOS
The state transition function is bounded to a limited number of
computational steps per block. If execution runs longer, it is cut off, and
those state changes are reverted. However, fees are still paid to the miners
for these rolled -back changes.
The rationale for this design decisio n in the protocol becomes
apparent when viewed through a cryptoeconomic lens.
The Ethereum White Paper uses the following examples to
demonstrate the usefulness of its specification when the network is under
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164a. If an attacker sends a miner a cont ract containing an infinite loop, it will
eventually run out of gas. However, the transaction is still valid in the
sense that the miner can claim a fee from the attacker for each
computational step the program took.
b. Even if an attacker tries to pay th e appropriate gas fee to keep the miner
working, the miner will see that the STARTGAS value is excessively high
and will know ahead of time that the computation will take too many
steps.
c. Imagine that an attacker is careful with his gas payment: the att acker
sends contract code with just enough to make a withdrawal, but not
enough to make the balance of the account go down. This is similar to a
double -spend attack, in that it creates money out of thin air. However, in
Ethereum, this transaction would be entirely rolled back because it ran out
of gas in the middle
8.6SUMMARY
In this chapter everything is discussed about cryptoeconomics, its
applications, working and common attacking scenarios.It focuses on the
idea of the attacked scenario in decentral ised applications as compared to
the client server architecture. Also, how the speed in which blocks are
mined decides the architecture of economics in the cryptocurrency
environment.It discusses the case studies and scenarios on how the
architecture can b e bridged depending on the attacker perspective.
8.7REFERENCES
Chris Dannen -“Introducing Ethereum and Solidity” -Foundations of
Cryptocurrency and Blockchain Programming for Beginners by
Apress.
8.8QUESTIONS
Q1. Describe Cryptoeconomics
Q2. Enlist applications based on cryptoeconomics
Q3. How speed of blocks play an important role in mining
Q4. Explain common attacking scenarios in working of cryptocurrency
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165Unit V
9
BLOCKCHAIN APPLICATIONS
DEVELOPMENT
Unit Structure
9.0 Objectives
9.1 Introduction
9.2 Decentralized Applications.
9.3 Blockchain Applications Development
9.4 Interacting with the Bitcoin Blockchain
9.5 Interacting programmatically with Ethereum –Sending Transactions
9.6 Creating a smart contract
9.7 Executing a smart contract function
9.8 Public versus private Blockchains
9.8.1 Public Blockchain
9.8.2 Pr ivate Blockchain
9.10 Decentralized Applications Architecture
9.11 Summary
9.12 Reference for further reading
9.13 Questions
9.0 OBJECTIVES
This chapter will help you to understand the basic concepts -of
Blockchain and its applications.
What is the need f or Blockchain technology?
And how does it will enhance the goal for recording digital
information.
Use of Bitcoin.
Use of Ethereum software for creating smart contracts.
Accessing the smart contract functions.
Use of public and private Blockchains.
9.1INTRODUCTION
As if we are aware about the new Blockchain technology which
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166maintains the transactions log (legder) for example the one used for
Bitcoin which allows the recording of trans actions on a spread log
(distributed legder) via network of users. A Blockchain technology
comprises of three prime technologies:
Figure(9.1 a)
9.2 DECENTRALIZED APPLICATIONS
When we talk about decentralized -it refers to the action or
movem ent of command and decision making from a centralized system to
a distributed network. For example: DApp –it is application software or a
program that runs on a blockchain P2P network of computer rather on a
single computer. In this application the data an d records of operation are
encrypted and a cryptographic token is required to access the application.
The advantage of this application is that it’s always accessible and do not
have a single point of failure (SPOF) whereas as in classical application it
was supported by a centralized database.
The DApp is supported by a smart contract that is connected to a
Blockchain. A smart contract comprises of backend only and it is a small
part of the whole DApp which is require in creating a decentralized
applicati on on a smart contract system. For example for creating a smart
contract that is DAPP the most popular one is Ethereum.
9.3 BLOCKCHAIN APPLICATIONS DEVELOPMENT
Blockchain application development helps to increase reliability
and speed up the exchange of information. It is a decentralized digital log
that helps in saving the transactions which takes place on infinite numbers
of computers around the globe.
In this application the transaction are grouped in blocks and its
records one transaction after oth er in blocks of chain that is why it is
named as Blockchain. The links between blocks and its content are
protected via cryptography, so that the previous transaction cannot be
destroyed, changed or created a new one.
In this the transactions are trusted without a central authority or a
middleware. The ability of Blockchain to record, store, and move any kindBlockchain1) CryptographicKey2) Peer-to-PeerNetwork3) Record the transactions
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167of data or records with great efforts in controlling the process in a
decentralized manner has influenced the interest from new starts up and
overall financial services industry.
Listed some of its interest areas are:
9.3.1 Blockchain in capital markets: -using this technology we can
freely speed up and streamline the entire trade and its process.
9.3.2 Blockchain for cross –border payments :-this ca n be achieve by
speeding up and simplifying the process which helps in reducing cost and
cutting down the use of middlemen.
9.3.3 Blockchain to enhance digital identity: -in this technology the
identify is shared to whom and how when it’s online transact ions moved
to a blockchain enabled framework.
In this technology the users are able to choose how they identify
themselves.
9.3.4 Blockcahin in loyalty and rewards: -The blockchain technology
gives many benefits like maintaining transparency and tractabil ity of
various transactions.
9.4 INTERACTING WITH THE BITCOIN
BLOCKCHAIN:
A Bitcoin is nothing a digital currency which can be managed
without any central bank or any administrator. It can be easily sent from
one user to another user via peer -to-peer net works. Each Bitcoin is a
computer file which is saved or stored in a digital wallet app on a
Smartphone or computer. So various transactions which take place are
recorded in a public list which is called as Blockchain. Bitcoin is the first
crypto currency which can be easily buy, sell and exchange directly
without any intermediary like for example -bank.
Blockchain is a chain of blocks that contains information. It is a
distributed ledger that is completely open to anyone. The interesting
property of Blockc hain is that once the data has been recorded in
blockchain it becomes very difficult to change it so how does it works
Each block contains some data and the hash of the block and the hash of
the previous block. The data that is stored inside the block is d ependent
type of Blockchain for example –Bitcoin blockchain stored the
information about the transaction such as sender and receiver.
9.5 INTERACTING PROGRAMMATICALLY WITH
ETHEREUM –SENDING TRANSACTIONS:
An Ethereum transaction refers to an action initi ated by an
externally -owned account ,i no t h e rw o r d sa na c c o u n tm a n a g e db ya
human, not a contract. It is a decentralized, open source blockchain with
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168platform. It was created to enabl e developers to build and publish smart
contracts and distributed applications that are DApps which can be used
without the risk of downtime, fraud, or any interference of third party. It is
also known as a distributed computing platform that supports deve loping
decentralized Digital Applications (DApps) using Blockchain technology.
It can process transaction over one million times per day. On an average
day, it gets anywhere within 15 seconds and 5 minutes to transform a
transaction if the standard gas pri ce is paid.
There are some of the steps getting started as an Ethereun Developers
are:
Step 1: Get a blockchain.
Step 2: Talk to a blockchain.
Step 3: Write some smart contracts.
Step 4: Deploy those smart contracts.
Step 5: Make s smart contract call.
Step 6: Setup your account.
Step 7: Transaction with your smart contracts.
9.6CREATING A SMART CONTRACT
A smart contract is simply a program that runs on the Ethereum
blockchain.
Its’ a collection of code and data that reside at a specific addres so nt h e
Ethereum blockchain.
Smart contracts are a type of Ethereum account. This means that they
have a balance and they can send transactions over the network.
However there are not controlled by a user, instead they are deployed
to the network and run as programmed.
User accounts can then interact with a smart contract by submitting
transactions that execute a function defined on the smart contract.
Smart contracts can define rules, like a regular contract and
automatically enforce them via the code.
Smart contracts are simply programs that are stored on a blockchain
that run when predetermined conditions are met .
They typically are used to automate the execution of an agreement
without any intermediary's involvement or time loss.
A smart contract is an agreement between two people in the form of
computer code.
They run on the blockchain, so they are stored on a public database
and cannot be changed.
The transactions that happen in a smart contract are processed by the
blockchain , which means they can b e sent automatically without a
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169A blockchain is a digital network built and maintained by distributed
computers running specific pieces of software.
A smart contract is a software program that adds layers of information
onto digita l transactions being executed on a blockchain.
On blockchain, the goal of a smart contract is to simplify business and
trade between both anonymous and identified parties , sometimes
without the need for a middleman.
A smart contract is computer code that can automatically monitor,
execute and enforce a legal agreement .
The aim of the smart contract is to provide security while transaction
and reduce surplus transaction costs .
It saves time and conflict and is also cheaper, faster and more secure
way of pa yment as compared to the traditional system.
9.7EXECUTING A SMART CONTRACT FUNCTIONS
Smart contracts get executed by the blockchain nodes ,w h i c h
process the transactions that are committed by the user. A transaction can
be submitted to any node in the block chain network, which then
broadcasts it to the entire network so that all the nodes will see the
transaction so this helps in maintaining transparency.
Firstly the terms of contract should be determined by the
contractual parties. Once the contracts gets finalised, they are translated
into programming code. So the code basically represents a number of
different conditions statements that describe the possible flow of future
transactions. The code which is created, it is then stored in the blockchain
networ k and it is replicated among all the participants in the blockchain.
After that the code is run and executed by all computers connected in the
network. If a term or you can say certain conditions are met or satirised
and it is verified by all participants of the blockchain network, then the
applicable transactions is executed.
9.8 PUBLIC VERSUS PRIVATE BLOCKCHAIN
9.8.1 Public blockchain -is open networks that allow anyone to
participate without any prior permission. In this type of blockchain
anyone can j oin 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 o nce they have
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170Some features ofpublic blockchain are:
High Security –It is secure due to Mining.
Open Environment –The public blockchain is open for all.
Anonymous Nature –In public blockchain every one is
anonymo us. There is no need to use your real name or real identity,
therefore everything would stay hidden, and no one can track you
based on that.
NoRegulations –Public blockchain doesn’t have any regulations
that the nodes have to follow. So, there is no limi tt oh o wo n ec a n
use this platform for their betterment
Full Transparency –Public blockchain allow you to see the ledger
anytime you want. There is no scope for any corruption or any
discrepancies and everyone has to maintain the ledger and
participate in consensus.
True Decentralization –In this type of blockchain, there isn’t a
centralized entity. Thus, the responsibility of maintaining the
network is solely on the nodes.
Full User Empowerment –Typically, in any network user has to
follow a lot of rul es and regulations. In many cases, the rules might
not even be a fair one. But not in public blockchain networks. Here,
all of the users are empowered as there is no central authority to
look over their every move.
Immutable –When something is written to the blockchain, it
cannot be changed.
Distributed –The database is not centralized like in a client -server
approach, and all nodes in the blockchain participate in the
transaction validation.
9.8.2 Aprivate blockchain -aremanaged byanetwork administ rator
andtheparticipants need toconsent tojoin thenetwork. Sotojoin a
private blockchain oneneeds totake permission. There are one or more
entities which control the network and this leads to third -parties
involvement for performing the transactio n. In this type of blockchain
only entity participating in the transaction have knowledge about the
transaction performed whereas others will not able to access it i.e.
transactions are private.
Some of the features ofprivate blockchain are:
Full Privac y–It focus on privacy concerns.
Private Blockchain is more centralized.
High Efficiency andFaster Transactions –When you distribute the
nodes locally, but also have much less nodes to participate in the
ledger, the performance is faster.
Better Scalabil ity-Being able to add nodes and services on
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171Difference between Public blockchain andPrivate blockchain:
Sr.
NoBasis of
ComparisonPublic Blockchain Private Blockchain
1 Access Anyone can read,
write and participant
inablockchain. Itis
public toeveryone no
need to take
permission.Forwriting andreading
in this type of
blockchain one need to
take permission before
joining thenetwork soit
isprivate.
2 Participants in
networkNot aware abou teach
otherKnow each other
3 Centralized/
DecentralizedPublic blockchain isa
centralizedPrivate blockchain isa
decentralized
4 Speed Slow Fast
5 Transaction Transactions arelesser Transactions aremore
6 Security Itismore secure due
todecentralized and
active participation.
As there is high
number ofnodes inthe
network itisvery
difficult toattack the
system andgetcontrol
over thenetwork.Itisvery liable tobe
hacked and attack over
thenetwork. Hence itis
lesssecure.
7
Exampl esBitcoin, Ethereum,
Monero, Zcash, Dash,
Litecoin, Stellar,
Steemit etc.R3 (Banks), EWF
(Energy), B3i
(Insurance), Corda.
9.10 DECENTRALIZED APPLICATIONS
ARCHITECTURE
Decentralized applications (dApps) are nothing it’s a digital
applications or progr ams code that are stored and run on a blockchain or
P2P network of computers instead of a single computer. To build a DApps
it requires a special system in order to achieve high security and
reliability. It is a secure an unchangeable programs code running on a
decentralized network with a mixture of front -end and back -end traditional
technologies are called as DApps. To work with DApps we require tokens.
These Tokens are nothing it’s a smart contract which is written on top of
the decentralized platform li ke Ethereum. Smart contracts are set of
instructions (program codes) that are needed to be met to commit a
particular transaction. By getting these token one can get different services
on a web resource or mobile Apps. In short the client interacts with
decentralized platform directly with the help of Ethereum “wallet”
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1729.11 SUMMARY
This content will help you to understand the basics concept of
Blockchain with its functionality and its execution. It will also help you to
unders tand the concepts of smart contract how to develop with steps and
its uses. How smart contracts help to achieve accuracy, transparency,
security, storage and backups. How Go -green can be achieve via smart
contracts by going paper free across the globe and increasing the business
conscious.
9.12REFERENCE FOR FURTHER READING
https://ethereum.org/en/developers/docs/smart -contracts/
https://corporatefinanceinstitute.com/resources/knowledge/deals/s
mart-contract/
https://www.geeksforgeeks.org/difference -between -public -and-
private -blockchain/
____________________________________
9.13QUESTIONS
Q1. What are decentralized applications?
Q2. What are Ethereum?
Q3. What are smart contracts?
Q4. Explain public and private Blockchain?
MCQ QUESTIONS FOR PRACTICE
Q1.What is a blockchain?
a.Ab l o c k c h a i ni sac e n t r a l i z e dd i g i t a ll e d g e rc o n s i s t i n go fr e c o r d sc a l l ed
blocks.
b.Ab l o c k c h a i ni sad e c e n t r a l i z e d ,d i s t r i b u t e d ,d i g i t a ll e d g e rc o n s i s t i n go f
records called blocks.
c.Ab l o c k c h a i ni sad i g i t a ld a t a b a s ec o n s i s t i n go fr e c o r d sc a l l e dc l a s s .
d.None of the above.
Q2. P2P stands for _____
a.Private to Public
b.Password t oP r i v a t e
c.Peer to Peer
d.None of the above
Q3.The maximum number of bitcoins that can be created is _________.
a.11 Million
b.25 Million
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173Q4.The process of creating new bitcoins is known as __________.
a.Financing
b.Sourcing
c.Mining
d.None o ft h ea b o v e
Q5.__________ is used for storing bitcoins .
a.Block
b.Wallet
c.Both a and b
d.None of the above

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17410
BUILDING AN ETHEREUM DAPP
Unit Structure
10.0 Objectives
10.1 Introduction
10.2 Building an Ethe reum DApp: The DApp
10.3 The DApp, Setting Up a Private Ethereum Network
10.4 Creating the Smart Contract
10.5 Deploying the Smart Contract
10.6 Client 12 CO5 53 Application
10.7 DApp deployment: Seven Ways to Think About Smart Contracts
10.8 Dapp Contract Data Models
10.9 EVM back -end and front -end communication
10.10 JSONRPC, Web 3
10.11 JavaScript API
10.12 Using Meteor with the EVM
10.13 Executing Contracts in the Console
10.14 Recommendations for Prototyping
10.15 Third -Party Deployment Libraries
10.16 Creating Private Chains
10.17 Summary
10.18 Reference for reading
10.19 Bibliography
10.20 Questi ons
10.0 OBJECTIVES
This chapter will help you to understand more deeply about
1.Use of EVM
2.Use of Javascript API
3.Use and deployment of libraries.
4.The third party implications.
10.1 INTRODUCTION
This course content will help out to understand more deeply about
blockchain. A brief idea about the smart contracts and its creation along
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17510.2 BUILDING AN ETHEREUM DAPP: THE DAPP
To build a DApps it requires a special system in order to achieve
high security and reliability. It is a secure and unchangeable programs
code running on a decentralized network with a mixture of front -end and
back-end traditional technologies are called DA pps. To work with DApps
we require tokens. Token is nothing but are smart contracts which is
written on top of the decentralized platform like Ethereum. Smart
contracts are nothing but a set of instructions (programs and code) that are
needed to meet in or der to commit a particular transaction. By getting
these token one can get different services on a web resource or mobile
app. In short the client interacts with the help of Ethereum “Wallet”
software like Metamask.
10.3 THE DAPP, SETTING UP A PRIVATE ETH EREUM
NETWORK:
Steps to create and test the private network
1. Install Ethereum
2. Create directory structure
3. Create accounts with keypairs (public/private)
4. Create a genesis configuration with the account details
5. Create genesis blocks for each node
6. Running a Boo tnode
7. Running a miner
8. Running peer nodes
9. Attaching to a node
Step 1: Install ethereum
sudo add -apt-repository ppa:ethereum/ethereum
sudo apt update
sudo apt install ethereum
sudo apt install puppeth
Step 2: Create directory structure
Create the directory structure shown below, the data for each of the nodes
will stored in the directories node1, node2, node2 and the log files written
out to the directory “log”.
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176Step 3: Create the accounts
Create 3 new accounts for each of the nodes; the keystore is s tored in a
specific directory for each node.
Note: the value after “Public address of the key”.
geth —datadir data/node1/ account new
geth —datadir data/node2/ account new
geth —datadir data/node3/ account new
Step 4: Genesis configuration
Create a g enesis configuration using the account information from the
previous step. The 3 accounts are to be pre -funded in the genesis
configuration to enable you to test various functionality.
Step 5: Create genesis blocks for each Node
geth —datadir data/node1/ init privnet.json
geth —datadir data/node2/ init privnet.json
geth —datadir data/node3/ init privnet.json
Step 6: Running a Bootnode
Generate a key and start the boot node on any random port
bootnode -genkey boot.key
bootnode -nodekey -addr :8009
Copy the enode URL, this will be used by each node to find its peers.
Step 7: Running a miner
Every node can be a miner node by passing parameters to the geth
command. For our example we will be using just one node as the miner
node and the other nodes for tes ting RPC API call. We will be also using
the account associated with the miner node for mining and rewards.
For demo purposes the password is the same for each account and stored in
a file called password.txt.
The options to the command line use the boot node, the network id (in
genesis config), unlock the account using the password in the password.txt
file and “mine”.
Step 8: Running peer nodes
Peer nodes are started with the details of
1. Data directory
2. RPC ports to use
3. Network id (in genesis file)
4. Bootno de to use
5. APIs that are available on the node
Step 9: Attaching to peer nodes
Connect to a node 1 and run commands if you want to test various APIs
(admin,debug,eth,miner,net,personal,shh,txpool,web3)
geth attach http://localhost:8101
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17710.4 CREATING THE SMART CONTRACT
Ethereum are open -source, publicly distributed computing
platform, featuring smart contracts functionality to build decentralised
apps on top of this platform it allows decentralized apps to be build on it
with the help of smart contracts functionality it was developed with solid
butyrins as an extension to original core blockchain concept let look an
analogy think of the ethereum network as a collection of ethereum
network as a collection of decentralized and distributed vending machine
now you go and you put token inside these vending machine and then
specify the action that you want to be taken by pressing in the number now
whenever each numb er is pressed a certain code gets executed inside the
machine these are nothing but smart contracts and then service is provided
to the concerned user on the network now the tokens that you have put
inside the machine were actually ethers. Ethers are the c ryptocurrency
token of the ethereum network and they are used to pay for the transaction
fee there’s also another parameter called gas. Now we will understand
how thereum differs from bitcoin blockhain on various fronts now firstly
both these blockchain ar e conceptually dil+fferent from each other while
bitcoin core idea was to bring a decentralized digital money that is not
governed by anyone ethereum although a derivative extends beyond the
realm of cryptocurrencies that is why it is also referred to as the second
generation of blockchain now talking about cryptocurrency tokens bitcoin
crypto is the inductor itself and it called Bitcoin cash whereas ethereum
crypto token are called ether.
10.5 DEPLOYING THE SMART CONTRACT AND
EXECUTING CONTRACTS I N THE CONSOLE
In the Developing Smart Contracts guide we set up our development
environment.
If you don’t already have this setup, please create andsetup the project
and then create andcompile our Box smart contract.
With our project setup complete we’re now re ady to deploy a contract.
We’ll be deploying Box, from the Developing Smart Contracts guide.
Make sure you have a copy of Boxincontracts/Box.sol .
Hardhat doesn’t currently have a native deployment system, instead we
usescripts to deploy contracts.
We will crea te a script to deploy our Box contract. We will save this file
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178
We use ethers in our script, so we need to install it and
the@nomiclabs/hardhat -ethers plugin .
We need to add in our configuration that we are using
the@nomiclabs/hardhat -ethers plugin.
Using the runcommand, we can deploy the Boxcontract to the lo cal
network ( Hardhat Network ):
10.6CLIENT 12 CO5 53 APPLICATION:
Money Transfer and Payment Processing. ...
Supply Chains Monitoring. ...
Retail Program s Based on Loyalty Rewards. ...
Digital IDs. ...
Sharing of Data. ...
Protection of Royalty and Copyright. ...
Digital voting. ...
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17910.7 DAPP DEPLOYMENT: SEVEN WAYS TO
THINK ABOUT SMART CONTRACTS
Blockch ain technology can help to improve the basic services such
as in trade services. It is based on the decentralized, digitalised and
distributed ledger model and due to these properties it is more secure and
robust in nature. It creates decentralized records of transactions. It keeps
immutable records of all transactions.
Six ways are:
Blockchain and Bitcoin are not the same
Data stored on blockchain is public
On the blockchain, private information is visible to everybody
There is only one blockchain
Smart C ontracts are legal documents
Blockchain –a buzzword, nothing more
10.8 DAPP CONTRACT DATA MODELS
Ethereum is a network convention which allows the users to create
and run smart contracts over a decentralized network. A smart contract
consist set of code that runs specific operations and interacts with other
smart contracts. Unlike Bitcoin which stores a number, Ethereum stores
executable code. Ethereum removes the involvement of third party while
executing a specific transaction. The third party is replaced by the set of
codes which actually reduced time and money.
Some of the most promising Ethereum tokens and Dapps are laying the
foundation for the future of the Internet, including:
Basic Attent ionToken (BAT): used to improve privacy and value
transfer between users, publishers, and advertisers. Used in the Brave
browser .
Golem (GNT): used to run code on one or many distrib uted compute
nodes.
Minds : a social media platform that improves value transfer between
content creators and consumers.
TokenSets : used to manage cryptocurrency assets via toke nized
automated asset management strategies.
Aave : used to earn interest on cryptocurrency deposits and borrow
cryptocurrency assets.
IDEX : a decentralized cryptocurrency exchange.Dapp =frontend +smart contract backend
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18010.9 EVM BACK -END AND FRONT -END
COMMUNICATION
EVM known as Ethereum Virtual Machine is a Turing complete software
that runs on the ethereum network it enables anyone to runs a program
regardless of the programming language and even non -specialized
programmers can create a program on the EVM let me tell you how all of
this works a user request 2 ethers for example the sender initiates a
transaction message code and must pay for each step of the program that
they activated including computation and the me mory storage now this fee
is paid in ethos which is taking from the wallet of the sender and then this
transaction fee is collected by the nodes in the network that ran the EVM
now each and every node of the network runs the EVM to execute the
same instruc tions and this is how the blockchain database is maintained
and updated by the many nodes connected to the network now all of thses
nodes are actually the minor nodes that executes and verify the transaction
and then ethereum blockchain turn they are rewar ded with ethers for each
successful block mining now once the transaction is verified and recorded
the user gets 2 ethers in his wallet.
Figure (10.9 a)
10.10JSONRPC, Web
1) JSON -RPC is a sim ple RPC mechanism, similar to XML -RPC.
Protocol: unlike XML -RPC which is a client -server protocol, JSON -RPC
is a peer -to-peer protocol. Its uses JSON (JavaScript Object Notation), as
the serialization format and plain TCP streams or HTTP as transport
mechan ism.
JSON message types: it defines three messages types:
Request: method invokation with arguments encoded in JSON.
Response: Reply to method invokation containing the return arguments
encoded in JSON.
Notification: Asynchronous request without response.
Specification: JSON -RPC is very simple that is JSON -RPC specification
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1812) JSON -RPC interactions JSON -RPC define 2 message exchange pattern
that support most of the peer -to-peer interactions schemes. A Request -
Response -sending JSON peer invokes a method on the remote JSON peer
with a JSON request. The remote peer sends back a JSON response
message.
10.11 JAVASCRIPT API
Application Programming Interface (API) it is a set of protocols
used for building and integrating application software. I t is used for app
development and it enables the products and services to communicate with
others without having any knowledge about its implementation, which
results in time timing and money. It acts as a software middleware that
allows two applications t o communicate with each other. It sends the
request to the provider and then provides the response back to the sender.
Web3.js
It is a collection of libraries which allow the users to perform
various actions like sending Ether from one account to the othe r, read and
write data from smart contracts, create smart contracts. In short this library
is a collection of modules which contain specific functionality for the
Ethereum ecosystem. By using the functionality of this module it allows
one to interact with a local or remote ethereum node, by using either of the
connection, HTTP, or IPC.It uses Ethereum Blockchain with JSON RPC
(Remote Procedure Call) protocol for the interaction. As Ethereum is a
peer-to-peer network of nodes that stores a copy of all the da ta and code
on the blockchain, this API allows making requests to an individual
Ethereum node with JSON RPC to read and write data to the network.
Ethers.js
It is a complete and compact general -purpose library that interacts
with the Ethereum Blockchain a nd its ecosystem with the main features:
It is an open -source platform.
Keeps your private keys in your client, thus following a safe approach.
It Import and export JSON wallets.
Fully TypeScript ready, with definition files and full TypeScript
source
Comp lete functionality for all your Ethereum needs.
It is an alternative to Web3.js to build javascript frontend and
interact with the Ethereum blockchain. This library is designed to make it
simpler to write client -side JavaScript -based wallets, having the p rivate
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182Light.js
This API provides a set of high -level tools for building light -client -
efficient Dapps, primarily aimed for Dapp developers who are looking for
an alternative to web3.js.
But what if you can’t em bed the light client in your application? Light.js
works well with the remote full nodes, which makes it exceptional for all
Dapps.
This library operates with the underlying goals.
It picks the best pattern that works with light clients, listens to header s
and makes API calls on a new header, making sure that the amount of
network calls is not extreme.
It put it into a high -level library so that Dapp developers use an easy
API instead of following a well -known pattern .
Figure(10.11 a)
10.12 USING METEOR WITH THE EVM
Meteor is a full -stack JavaScript platform. It is used for developing
modern web and mobile applications. It includes a set of technologies
which helps in building connected -client reactive applications.
Meteor allows you to develop in one la nguage , JavaScript, in all
environments: application server, web browser, and mobile device.
Meteor embraces the ecosystem , bringing the best parts of the
extremely active JavaScript community to you in a careful and
considered way.
Meteor provides full st ack reactivity .
10.13 EXECUTING CONTRACTS IN CONSOLE.
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18310.14 RECOMMENDATIONS FOR PROTOTYPING
1. Ethereum
One of the most ideal blockchain rapid prototyping platforms on the
market today is Ethereum. With its robust smart contract flexibilit ya n d
functionality, Ethereum has introduced multiple use cases.
At present, Ethereum is bringing a change in the consensus algorithm for
quick Proof of Stake in the future.
2. Hyperledger Fabric
The Hyberledger Fabric is a B2B module hosted by Linux. The open-
source project works with the aim to create codebase and enterprise -level
distributed frameworks for databases.
Boasting of 185+ enterprises collaborating from a range of different
industries, Hyperledger Fabric offers a grade solution that enables pl ug-
and-play elements that wound the membership consensus and membership
services.
3. R3 Corda
The R3 Corda platform is basically a consortium that consists of a few of
the world’s biggest financial institutions who have, together, developed a
distributed p latform of databases known as Corda.
While created mainly for the financial sector, Corda is even used to a great
extent by healthcare, government, and supply chain industries.
This blockchain rapid prototyping tool has found popularization because
of: A) Its consensus system that accounts the process of managing
financial clauses, and B) Interoperability ease when integrating with
legacy systems.
4. EOS
As a platform that is powered by native cryptocurrency, EOS emulates the
attributes of an actual compute r, including the GPUs and CPUs.
EOSIO mainly operates as a smart contract platform and a decentralized
system that is intended for deployment of industrial -scale, decentralized
use cases. The platform is known to offer all three elements —scalability,
flexibility, and usability —that come together to make decentralized
solutions a success.
5. Multichain
The platform is used for the development and deployment of a private
blockchain —both inside or between two organizations. Its main purpose
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184Offering control and privacy inside a private peer -to-peer chain,
Multichain is the enhanced version of Bitcoin software used for
conducting private financial transactions.
10.15 THIRD PARTY DEPLOY MENT LIBRARIES
Libraries are used to perform simple operations based on input and returns
result. Libraries are not actually meant to change the state of the contract.
Technically smart contracts are building block of a Dapp. In Ethereum
smart contracts has address like external user account which helps to make
interactions with the contract like calling methods , sending ether etc.
Each contract has four properties.
1.Nonce : It’s a count of number of transaction triggered from an
account.
2.Balance: It’s a number that tell about amount of ether this particular
address holds
3.Storage root: Contract can store data, it’s a root of tree which stores
data from this contract
4.Codehash : It’s hashed value of contract code .
How library works?
Figure(10.15 a)
Deployment of libraries: Library deployment is a bit different from regular
smart contract deployment. There are two scenarios in the library
deployment:
1.Embedded Library: If a smart contract is co nsuming a library which
have only internal functions than EVM simply embeds library into
the contract. Instead of using delegate call to call a function, it simply
uses JUMP statement(normal method call). There is no need to
separately deploy library in th is scenario.
2.Linked Library: On the flip side, if a library contains public or
external functions then library needs to be deployed. Deployment of
library will generate unique address in blockchain. This address needs
to be linked with calling contract.Smart contract1.Balance
2.Nonce
3.Storage Root4.CodehashLibrary Contract
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18510.16CREATING PRIVATE CHAINS
Private chains are those blockchain which are managed by a single
organization and this type of blockchain is permissioned blockchain.Its
works on the access controls which restrict the users for participating in
the network. In a private blockchain the entities whose who are
participating in a transaction will have the knowledge about it whereas the
others will not be able to access the network.
10.17 SUMMARY
This course will helps to understand the future trends of blockcha in
technology. This technology will helps you to encounter the issues like
double spending and how it will improve the security, privacy, speed and
reduced cost. How it can give visibility and traceability to any Business
and individual control of data.
10.18 REFERENCE FOR READING
https://docs.openzeppelin.com/learn/deploying -and-
interacting#deploying -a-smart -contract
https://www.marcopolonetwork.com/resources/essential -blockchain -
technology -concepts/
https://www .freecodecamp.org/news/what -is-a-dapp -a-guide -to-
ethereum -dapps/
10.19 BIBLIOGRAPHY
https://www.blockchain -council.org/blockchain/a -comp lete-guide -on-
ethereum -frontend -javascript -apis/
https://guide.meteor.com/
https://docs.openzeppelin.com/learn/deploying -and-
interacting#deploying -a-smart -contract
https://medium.com/@pradeep_thomas/how -to-setup -your-own-
private -ethereum -network -f80bc6aea088
https://d zone.com/articles/the -list-of-best-blockchain -rapid -
prototyping -tool
https://www.freecodecamp.org/news/what -is-a-dapp -a-guide -to-
ethereum -dapps/
https://medium.com/coinmonks/all -you-should -know -about -libraries -
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18610. 20 QUESTIONS
Q1. What are Dapp?
Q2. What are EVM ?
Q3. What are privat e blockchain?
Q4. Does blockchain involves third party? If no explain?
Q5. What are smart contract.

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