UNIT 4 BASICS OF BLOCKCHAIN TECHNOLOGY

Structure
4.1 Introduction
4.2 Components of Blockchain
4.3 Evolution of Blockchain
4.4 Blockchain Applications
4.5 Limitations and Challenges of Blockchain
4.6 Impact of Blockchain Technology
4.7 Blockchain Platforms/Protocols
4.8 Summary
4.9 Keywords
4.10 Check Your Progress—Possible Answers
4.11 References and Selected Readings
4.1 INTRODUCTION
The year 2009 was a remarkable one when bitcoin was launched based on
blockchain technology. The feature of blockchain technology is that it makes the
role of intermediaries redundant in any type of transaction. Thus elements of
security, integrity, immutability, and transparency get embedded into transactions.
These transactions happen in various sectors, be it the financial sector, healthcare,
supply chain, real estate etc., to name a few. Hence the applications of blockchain
technology are vast and are applied in various sectors. Key components of
blockchain technology include hashing methods, consensus mechanisms,
transactions and blocks. Blockchain technology is evolving. It has evolved from
the first generation of cryptocurrency to second generation finances to the third
generation digital society and is still evolving. No doubt there are associated
challenges with evolution. These challenges get manifested in terms of scalability,
loss of privacy and selfish mining. The impact of blockchain technology can be
seen in very diverse sectors. Think of a sector where intermediaries exist, and you
can see the role of blockchain technology. That is why the financial sector, supply
chain, healthcare, tourism, government sector, smart cities, IoT, energy exchange,
and insurance sector are applying blockchain technology to give security and
transparency to the stakeholders.
Objectives:
In this unit, you will learn about the basics of Blockchain Technology,
applications of Blockchain in different fields, the impact of Blockchain
technology, and associated challenges to Blockchain technology. After reading
this unit, you will be able to:
 Identify elements of Blockchain Technology
 Visualize the evolution of Blockchain Technology
 Appreciate application of Blockchain Technology in different spheres
 Discern limitations and challenges to Blockchain Technology and
 Comprehend different Blockchain Protocols
4.2 BLOCKCHAIN TECHNOLOGY AND ITS
COMPONENTS
4.2.1 Concept of Blockchain Technology
Cryptocurrency is the first application of blockchain technology. A cryptocurrency
is a medium of exchange, like the Indian Rupee, but is digital and secured by
cryptography. Bitcoin was the first cryptocurrency developed in 2009 by the
elusive Satoshi Nakamoto. Since then, many cryptocurrencies have come into
existence to fulfil different needs and purposes. Thus, cryptocurrency, like bitcoin,
is one of the applications of blockchain technology. There are numerous other
applications of blockchain technology, for example, in the financial sector,
government and public sectors, Supply Chain Management, Internet of Things,
Healthcare, and Smart cities. Businesses that use intermediaries can be
disintermediated using blockchain technology, thus bringing transparency.
Blockchain can be used wherever authentication is required. One of the
consequences of disintermediation and authentication will be reflected in lower
transaction costs. Blockchain technology is evolving. Blockchain 1.0, i.e. the first
generation of blockchain, refers to cryptocurrency, i.e. digital currency.
Blockchain 2.0, i.e. the second generation of blockchain, refers to digital finance
and Blockchain 3.0, i.e. the third generation of blockchain, refers to digital
society.
Blockchain technology is based on Distributed Ledger Technology (DLT). Ledger
is the record of transactions. These transactions may be financial deals, supply
chain management, and copyright ownership. In a distributed ledger, records of
transactions are available on a blockchain network. A blockchain network is a
peer-to-peer network. A peer or node in a peer-to-peer network is a computer that
has software installed in it. Being a peer-to-peer network, it does not require a
central authority or trusted intermediaries to authenticate or settle the transactions.
This feature brings transparency to transactions. Whereas in the centralized system,
the records of transactions are available in a central server, and these records are
managed by intermediaries, a role played by institutions like banks. Blockchain
technology completely removes the role of intermediary or the third party.
Transactions in Blockchain technology is immutable, i.e. once a transaction is
made, it is permanent and can’t be altered.
Transactions in the blockchain are stored in a block. A block is chained to another
block through a cryptographic hash chain. This chain keeps growing as long as
new blocks are created and maintained. This way, modern financial systems that
track transactions/assets without the need for centralized parties can be enabled.
In a nutshell, blockchain is a network of devices named nodes connected to each
other over the internet. All nodes on a blockchain are equally important. A node
can play diverse roles like storing information recorded in a blockchain, storing a
copy of all the information recorded on a blockchain, and processing transactions
to add a new block in the network.
4.2.2 Working of Blockchain
The working of blockchain technology can be illustrated through one of its
applications. Cryptocurrency is one of the applications of blockchain technology,
and the working of blockchain technology can be demonstrated through a transfer
of cryptocurrency. Let a user ‘X’ wants to send money to user ‘Y’. The process of
transfer of money from user ‘X’ to user ‘Y’ is as shown in Figure 4.1.

Figure 4.1: Working of Blockchain (user X sends money to user Y)

Here sender ‘X’ requests a transaction for sending money to the receiver ‘Y’. The
requested transaction is broadcasted to the P2P network (it consists of computers
known as nodes). This P2P network containing all nodes validates the transaction.
Once verified, this transaction is represented as a new block. The new block is
then added to the existing blockchain. Thus the transaction is completed, and
receiver ‘Y’ receives the money.
The above was the simplest explanation of the working of blockchain. Now see
what happens at every stage of the transaction in a bit of detail. When sender ‘X’
wants to send money to the receiver ‘Y’, then ‘X’ should know the wallet address
of ‘Y’. The transaction gets initiated as user ‘X’ sends the money to user ‘Y’.
Every node of the blockchain will have to verify this transaction. Only then will
user ‘Y’ get money in his/her wallet. Thus every node will record this money
transaction from user ‘X’ to user ‘Y’. Hence, records will be stored in thousands
of computers, but the user may not like his/her transaction information on many
computers. This issue is resolved by blockchain by keeping the transaction
anonymous. For maintaining transactions’ integrity over the network, there is the
need for consensus protocol, cryptographic hashes, and digital signatures at nodes.
Consensus protocol guarantees that transactions recorded in public ledgers are
exact copies. No transaction record can be changed without accessing all the nodes
of the network. Thus making transaction records immutable. SHA-256 (Secure
Hash Algorithm of output size 256 bits), a cryptographic hashing algorithm, is
used to assure that any change in transaction leads to a new hash value being
computed. Digital signatures ensure that the transactions are initiated from
genuine senders.
4.2.3 Types of Blockchain
Blockchain can be classified into the following three major types.
 Public Blockchain
 Private Blockchain
 Consortium Blockchain or Hybrid Blockchain
A public blockchain is one in which anyone can join and participate. It means
anyone can be a user or a miner, and anybody can add new blocks. This ensures
transparency in public blockchain networks. A public blockchain is also called
permissionless as it permits anyone to take a copy of the blockchain and involve in
block validation. Bitcoin and Ethereum are examples of a public blockchain.
A private blockchain is a permissioned blockchain suitable for individual
organizations. Here an organization decides who is allowed to participate and
maintain a shared ledger. Hyperledger is an example of a private blockchain.
A consortium blockchain is a permissioned blockchain where several
organizations take responsibility for maintaining the blockchain. Consortium
blockchain has the privacy benefits of private blockchain and the transparent
nature of public blockchain. A consortium blockchain is also called a hybrid
blockchain. Dragonchain is an example of consortium blockchain.
Features of the above three blockchain types is as shown in Table 4.1:
Table 4.1: Features of Blockchain Types

Feature Public Private Consortium

Blockchain Blockchain Blockchain

User access Public Restricted Restricted

User identity Anonymous Approved users Approved users

Permission Permissionless Permissioned Permissioned

status

4.2.4 Advantages of Blockchain Technology

Following are the advantages of blockchain technology:
 Decentralization
 Transparent and Anonymous
 Less transaction fees and no taxes
 Theft resistant
The above mentioned advantages/characteristics of blockchain technology helped
the rapid evolution of blockchain technology from application in cryptocurrency
(bitcoin) to Industry 4.0 in such a short interval of 10 years.
Security, transparency, traceability, and automation are some of the important
concerns for any business or industry. Blockchain technology can address the
above concerns. As records created through blockchain can’t be tampered with
and are end-to-end encrypted, blockchain enhances security for any business or
industry. Privacy issues can also be addressed on blockchain by making personal
data anonymous.
Decentralization is the hallmark of blockchain technology. There is no role of an
intermediary or third party in blockchain technology. This feature of blockchain
technology provides protection against corruption and tampering. Further, all
transactions in the blockchain are maintained in the public ledger. This ensures
transparency.
4.2.5 Components of Blockchain Technology
Blockchain technology is based on cryptographic concepts and record keeping
principles. Cryptography is the study of secure communication techniques.
Cryptographic techniques use hashing, asymmetric key cryptography and digital
signatures. Some of the key components of Blockchain technology have been
discussed here for a better understanding of blockchain technology.
Hashing Methods
The most important component of blockchain technology is the cryptographic
hashing function. A hash algorithm is a mathematical function that transforms
any input into a fixed size output. The input can be a text, file or image, and the
output is a fixed size alphanumeric string. As shown in Figure 4.2, the
conversion of an input message (Hello world) to hash value using SHA 256
algorithm. You can generate a hash value for any input and see for yourself that
the output is always a fixed size alphanumeric string (you can use python online:
colab.research.google.com).
Hashing is a one way function where any input of arbitrary size can be uniquely
expressed as a string of characters. The meaning of one way function is that it is
easy to go from the input to the hash but extremely difficult to go the other way.
Meaning thereby by knowing only the hash, you can’t find the original message.
In other words, anyone with the original message and the hashing algorithm will
produce the same hash.

Figure 4.2: Hash Function

What is the purpose of hashing in blockchain? The answer is data integrity and
privacy. Hashing protects data integrity by hiding and encoding the original
message (i.e. input) to a unique string. For the hash function to be
cryptographically secure and usable in blockchain technology, it needs to be
collision resistant. Collision resistant means that it should be practically
impossible to find two inputs that produce the same output.
Most blockchain implementation uses Secure Hash Algorithm (SHA) that
generates an output of size 256-bit. Cryptocurrency like bitcoins uses Secure Hash
Algorithm 256, also known as SHA-256.
Transaction
A transaction is a digitally signed message authorizing some particular action
associated with a blockchain. For a cryptocurrency, the dominant transaction type
is sending cryptocurrency units or tokens to someone else. As shown in the Figure
4.3, the five step process of the blockchain transaction. The blockchain transaction
process has been elucidated in the following five steps.
 Transaction initiation: The transaction information contains the
Receiver’s public address, the value of the transaction and a cryptographic
digital signature.
 Transaction authentication: The nodes in the blockchain network receive
transaction information and authenticate its validity. When the transaction
 is validated, it is placed in the pool of transactions. Transaction pool is the
place where all unconfirmed transactions are placed.
 Block creation: the pool of transactions is then placed on the block by one
of the participating nodes of the network.
 Block validation: the participating nodes begin the validation process
upon receiving the block of transaction.
 Block chaining: the block is chained into the existing blockchain, and an
updated blockchain ledger is broadcast to the network. The entire process
takes 3-10 s.

Figure 4.3: Transaction Process

Public Key Cryptography
Public key cryptography is an encryption scheme that uses two mathematically
related but not identical keys: a public key and a private key. A public key is used
to encrypt, and the private key to decrypt.
Address and Wallet
Blockchain addresses are used to send or receive transactions on a network. An
address usually presents itself as a string of alphanumeric characters.
A wallet is a file that contains a collection of private keys and communicates with
a blockchain. Wallets contain keys, not coins. Wallets require backup for security
reasons.
Blocks
A block is the most basic unit of a blockchain database. Each block contains a
record of some or all recent transactions and references to the block that came
immediately before it. As shown in Figure 4.4, the structure of a block. A block
consists of Block number, nonce, data, previous hash and hash. The block number
is a unique number assigned to each block by the user who creates the block. The
nonce is a special value mined by the miner algorithms employed by the creator of
the block. A nonce is a 4 byte field, usually starting at 0, and the value increases
with every calculation. This value calculation is also known as puzzle solving.
Nonce ensures that the hash value generated for a block has a particular format,
like starting with three zeros or ten zeros.
The previous hash is the encryption of the previous block. The hash is calculated
using the SHA-256 algorithm on the combination of the nonce, previous hash and
data.

Block: #4

Nonce:

Data:

Previous Hash:

Current Hash:

Figure 4.4: Structure of Block

A block has only one parent. The first block of a blockchain is called the ‘genesis
block’. The ‘genesis block’ has no parent block.
Consensus Features
The consensus protocol is the set of rules and arrangements to carry out
blockchain operations. Consensus algorithms are designed to achieve reliability in
a network involving multiple unreliable nodes. The consensus algorithms ensure
that the next block in the blockchain is the one and only one version of the truth.
The most common consensus algorithms include Proof of Work (PoW), Proof of
Stake (PoS), Delegated Proof of Stake (DPoS), Proof of Authority and Ripple.
PoW protocol is one of the first utilized consensus protocols. PoW protocol is
based on computational load, requiring miners to find a solution to the puzzle. The
downside to this method of generating consensus and securing the network is that
it requires a large amount of computing power and, therefore, energy and cost. To
reduce the high resource cost of mining, PoS was proposed. PoS assigns a
difficulty value to a puzzle based on how much stake the owner has in the network.
Proof of Authority (PoA) is a reputation based consensus approach where the
preselected validators attempt to validate by leveraging the value of identities.
Therefore, PoA blockchains are scalable and secured as the preselected nodes are
considered as trustworthy entities to verify transactions.
Smart Contract
Smart contracts are translations of an agreement consisting of terms and
conditions into computational code (or program/script). Smart contracts are self-
executing digital contracts. In smart contracts, there are no chances of fraud or
intervention of third parties. Ethereum platform allows the use of the smart
contract. Smart contracts can be used in many applications. One of the
applications of the smart contract is crowdfunding. A crowdfunding platform is
used to raise funds from multiple investors by a startup company. A conventional
case of crowdfunding requires a third party intermediary to control the fund flow
as per conditions of the contract. A smart contract is a secure alternative to an
intermediary.
Check Your Progress 1
In this section, you studied blockchain technology and its components, now
answer the questions given in Check Your Progress-1.
Note: a) Write your answer in about 50 words
b) Check your answer with possible answers given at the end of the unit
(1) Explain the working of Blockchain Technology.
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(2) Discuss components of Blockchain Technology.
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4.3 EVOLUTION OF BLOCKCHAIN
Blockchain technology is continuously evolving with time. In a short span of a
decade, it has seen four generations of its evolution. The first generation of
Blockchain, i.e. Blockchain 1.0, originated from the concept of Distributed Ledger
Technology and was meant for cryptocurrency only.
Blockchain 2.0, i.e. the second generation of Blockchain, is based on the smart
contract concept and the Proof of Work consensus mechanism. The smart contract
is a programming code embedded in a distributed ledger. The smart contract gets
executed when predefined conditions are satisfied. The second-generation
blockchain network was introduced in 2013.
Blockchain 3.0 overcomes the setbacks of Blockchain 1.0 and Blockchain
2.0. What are the setbacks of Blockchain 1.0 and Blockchain 2.0? Blockchain 1.0
and Blockchain 2.0 are not scalable at all. Apart from that, these are mainly based
on Proof of Work. Apart from smart contracts, Blockchain 3.0 mainly involves
Decentralized Apps (dApps). A dApp can be thought of as decentralized software
code that gets executed across all the nodes in given blockchain architecture. A
dApp is very similar to the applications already in use today on smartphones,
tablets, or Desktops. Blockchain 3.0 also utilizes the Proof of Stake and Proof of
Authority consensus mechanism.
Blockchain 4.0 means making Blockchain 3.0 usable in real life business
scenarios. Blockchain 4.0 makes Blockchain technology usable to Industry 4.0
demands. Industry 4.0 refers to the fourth revolution that has occurred in
manufacturing. Industry 4.0 technologies employ Artificial Intelligence, the
Internet of Things, Big Data etc.
Unibright is the framework for Blockchain 4.0. In other words, the introductory
platform for Blockchain 4.0 utilities is Unibright.
Comparison of Different Generations of Blockchain:
As shown in Table 4.2, the evolution of blockchain technology based upon
different parameters. The consensus mechanism for the first generation blockchain
technology is Proof of Work. The fourth generation of blockchain technology uses
Proof of Integrity. When it comes to the application of blockchain technology, it
has achieved many milestones. It began with application in the financial sector
and now heading towards application in Industry 4.0. The fourth generation of
blockchain technology is incorporating Artificial Intelligence. Blockchain
technology is moving from guaranteed transaction authenticity to a faster
consensus and transaction confirmation, removing the initial bottlenecks and
hiccups.
Table 4.2: Comparison of Different Generations of Blockchain

Parameter Blockchain 1.0 Blockchain 2.0 Blockchain 3.0 Blockchain 4.0

(2008) (2013) (2015) (2018)

Principle Distributed Smart Contracts Decentralized Apps Blockchain with

Ledger (dApps) Artificial
Technology Intelligence
(DLT)

Consensus Proof of Work Delegated Proof Proof of Stake, Proof of Integrity

mechanism of Work Proof of Authority

Example Bitcoin Ethereum Cardano, Anion Unibright, SEELE

Application Financial Sector Non-Financial Business Platforms Industry 4.0

Sector

Features Guaranteed Creating and Completely open- Faster consensus

transaction transferring source; autonomous and transaction
authenticity digital assets operation confirmation

Source: Blockchain Technology: Applications and Challenges (Springer 2021)

and other sources
Check Your Progress 2
In this section, you studied the evolution of blockchain technology, now answer
the questions given in Check Your Progress-2.
Note: a) Write your answer in about 50 words
b) Check your answer with possible answers given at the end of the unit
(1) Discuss the evolution of Blockchain.
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(2) What are the setbacks of Blockchain 1.0 and Blockchain 2.0?
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(3) Compare different generations of blockchain technology on parameters like
principles and applications.
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4.4 BLOCKCHAIN APPLICATIONS
Wherever there is a requirement of trust, security, accuracy, and transparency,
there is the application of Blockchain technology. Blockchain applications can be
vividly seen in the government and public sectors. Governments can use
Blockchain in improving record management. Governments keep people’s records
like birth and property exchanges. Blockchain can make the record more secure.
Decentralized file storage protects files from getting hacked or lost.
The financial sector has seen the benefits of blockchain technology from the very
beginning. The most popular application of blockchain technology is
cryptocurrency. Other industries and sectors are exploring opportunities actively
for the implementation of blockchain technology in their fields and domains.
The applications of blockchain technology in the financial services, Governments
and public sectors, healthcare, Industry and Internet of Things (IoT) have been
discussed here.
4.4.1 Financial Applications
Banks and other financial institutions are highly susceptible to money laundering,
identity theft and digital transfer of funds. These institutions are highly affected as
far as services rendered, and reputations are concerned. Banking institutions are
already using blockchain technology to solve their traditional problems.
4.4.2 Blockchain Applications in Government
Typical problems faced by governments in many countries pertain to land registry
records. Keeping track of ownership of hundreds of years of land records is a
difficult task. The problems faced by land registry officials are: discrepancies with
paperwork, forged documents, and loss of documents.
Blockchain technology can take care of above mentioned problems in a cost-
effective way. Blockchain technology provides immutable records and secure
access as well as storage. Governments can use Blockchain in the following areas:
 Record management for secure record-keeping of people
 Identity management for proof of identity
 Government services like public safety and welfare
  Payment infrastructures to collect dues, taxes and other payments fast and
safe
 Smart property to digitally record assets
4.4.3 Blockchain Applications in Healthcare
There has been an increase in the hacking of healthcare records. The year 2018
witnessed the hacking of medical records of 1.4 million patients from the
UnityPoint Health hospital network of the USA. The hacked records included
sensitive information, including the patient's social security number and insurance
information.
Blockchain technology provides data security and integrity. Patients, healthcare
providers (hospitals, doctors, lab technicians etc.), data analysts and insurance
providers are key stakeholders of healthcare. The Distributed Ledger
Technology/Blockchain technology in healthcare guarantees the security and
privacy of healthcare data of all stakeholders. These stakeholders can share
information without compromising data security and integrity.
4.4.4 Blockchain Applications in Industry:
Tracking of movements of goods and services is vital in any industry. Be the
movement of goods under process or processed goods, visibility at every stage of
production is very much needed. Blockchain technology can help in tracking the
movements of goods and services efficiently. Almost all business operations, be it
purchase management, customer relationship management, supply chain
management or operation management, blockchain technology is there to address
business concerns.
4.4.5 Blockchain Application in the Internet of Things (IoT)
In IoT applications, smart devices interact with each other using the internet. The
biggest concern is the security of data generated by these smart devices within
distributed nature of wireless networks. As blockchain is distributed public ledger,
it will take care of the security of data generated by smart devices.
Check Your Progress 3
In this section, you studied blockchain technology applications, now answer the
questions given in Check Your Progress-3.
Note: a) Write your answer in about 50 words
b) Check your answer with possible answers given at the end of the unit
(1) Discuss Blockchain technology’s application in cryptocurrency.
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(2) Discuss Blockchain technology’s application in governance.
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(3) Discuss Blockchain technology’s application in healthcare.
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4.5 LIMITATIONS AND CHALLENGES OF BLOCKCHAIN
Though blockchain has numerous benefits, it is prone to some technical challenges
also. Challenges in terms of scalability, loss of privacy, selfish mining and energy
have been discussed here.
4.5.1 Scalability
As transactions are increasing in numbers, the blockchain network keeps on
growing day by day. As blockchain network is growing, data and resources are
burdening the system. Due to this reason, nodes will take more time to
synchronize data and carry out the complex computation. Thus affecting the
effective working of the blockchain system. Storage optimization and redesigning
of blockchain can resolve these issues.
4.5.2 Loss of Privacy
In the blockchain, a considerable amount of privacy is maintained by using a
public key cryptography mechanism in transactions to keep the user identity
anonymous. However, transactional anonymity cannot be assured by blockchain
because the identities of all transactions and balances for each cryptographic key
are publicly accessible. Thus it is possible to recognize the user by keeping track
of the transactions.
4.5.3 Selfish Mining
In Bitcoin’s blockchain, the process of adding new blocks to the blockchain is
called mining, and the nodes that do the job of generating a new block are called
miners. Selfish Mining is a strategy where an over-ambitious miner secretly keeps
his blocks without publishing them. It would be revealed to the public only if
some conditions were satisfied.
4.5.4 High Energy Consumption
The blockchain network uses Proof of Work (PoW) as a consensus protocol. It
requires a lot of energy and computing resources to calculate the required hash
value for a block.
Check Your Progress 4
In this section, you studied the limitations and challenges of blockchain
technology, now answer the questions given in Check Your Progress-4.
Note: a) Write your answer in about 50 words
b) Check your answer with possible answers given at the end of the unit
(1) What are the challenges associated with Blockchain technology?
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(2) Explain selfish mining.
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4.6 IMPACT OF BLOCKCHAIN TECHNOLOGY
The impact of blockchain technology can be seen in businesses. The impact may
be manifested in different forms. It may be business models; it may be the
business environment. The existing business models may change or transform in
view of the new reality of market requirements. Some of the impacts of the
blockchain in the financial and non-financial sector has been discussed here.
4.6.1 Impact of Blockchain Technology in Financial Sector
It is the transaction that takes place in the Financial sector like banking, where the
introduction of blockchain technology can make its impact the most. The standard
practice of transactions in the Financial sector like banking is based on a trusted
third party. This role of a third party is the main source of worry for all
stakeholders. This trusted third party can be eliminated by using blockchain
technology in the Financial sector like banking. The architecture of the standard
banking system is based on a centralized server/clients model, and hence a copy of
the database is centralized at the server level only. As a blockchain technology-
based system gets introduced in the banking system, the peer-to-peer network
model will be there, ensuring multiple copies of transactions in a database. A
comparison of existing banking system models and blockchain-based models are
as shown in Table 4.3.
Table 4.3: Comparison of Transactions between Existing Financial Sector
like Banking and Blockchain-based Financial Sector like Banking

Transactions in Existing Financial Transactions in Blockchain-based Financial

sector like Banking sector like banking

Trusted third party Trustless

Centralized server/clients Peer-to-peer network

A single copy of transactions in the Multiple copies of transactions in the database

database

Intermediation Consensus mechanism/ Proof of work

Source: Adapted from Blockchain and Distributed Ledger Technology (DLT): What impact on the Financial Sector by
Klara Sok

4.6.2 Impact of Blockchain Technology Application in Supply Chain:

Supply Chain Management (SCM) is the handling of the entire production flow of
goods or services. SCM takes into account the handling and processing of raw
materials to delivering finished products to the consumers. There are five key
components of SCM.
 Planning
 Sourcing
  Manufacturing
 Delivery and logistics
 Returning
When blockchain technology is used in Supply Chain, the following benefits can
be had.
 All information pertaining to supply and demand can be captured in real
time
 The status of an item in transition/process can be known
 Smart contract management can be done (customized or individual
contract can be defined for each function)
 Operational efficiency in Supply Chain can be achieved
Check Your Progress 5
In this section, you studied the impact of blockchain technology, now answer the
questions given in Check Your Progress-5.
Note: a) Write your answer in about 50 words
b) Check your answer with possible answers given at the end of the unit
(1) Discuss the impact of Blockchain technology in the financial sector.
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(2) Discuss the impact of Blockchain technology in the supply chain.
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4.7 BLOCKCHAIN PLATFORMS/PROTOCOLS
The rules that govern a blockchain network are referred to as blockchain protocols.
Blockchain protocols are essentially the common communication rules that the
network follows. These rules include the following:
 Rules for governing and validating transactions
 An algorithm that defines the mechanism for all participating nodes to
interact with each other
 Application programming interface (API)
Some of the blockchain protocols have been discussed here.
4.7.1 Bitcoin
Bitcoin protocol supports crypto payment transactions over a distributed network.
Characteristics of Bitcoin Protocol:
i. Every node has access to complete information on the blockchain.
Therefore, it is a decentralized one.
 ii. Users can conduct a nonreversible transaction without the need to
explicitly trust a third party.
Advantages of Bitcoins:
 Payment freedom
 Control and Security
 Very low fees
4.7.2 Ethereum
Ethereum is a public, open source, blockchain-oriented protocol. Ethereum
platform allows the use of the smart contract. Ethereum is the first prominent
platform that introduced the idea that blockchain technology can be used in
applications other than cryptocurrency.
Characteristics of Ethereum Protocol:
 This protocol enables developers to build and deploy distributed
applications
 It allows users to write their own applications
Advantages of Ethereum:
 The energy efficiency is high with the help of Proof of Stakes (PoS)
 The uptime of the network is high
 It is used to develop many decentralized applications
4.7.3 Hyperledger
Hyperledger is an open-source blockchain platform. It supports blockchain-based
distributed ledgers and cross-industry blockchain technologies.
Hyperledger protocol mainly supports business transactions. Hyperledger is used
to solve the problem of enterprise approval of blockchain. In Hyperledger, only
trusted entities can join the network and verify the transactions.
Characteristics of Hyperledger Protocol:
 Hyperledger blockchain technology is mostly used for business
applications
 It has a modular and versatile design
 It preserves privacy
Benefits of Hyperledger
 Productivity enhancement
 Handling of intellectual property
 Data on a need-to-know basis
 Rich querying capability
 Performance scalability and levels of trust
4.7.4 Ripple
Ripple is an open source blockchain platform. Ripple acts as both a
cryptocurrency and a digital payment network for financial transactions.
Characteristics of Ripple Protocol:
 Ripple protocol is known for its digital payment network
 It has its own cryptocurrency XRP (digital asset Ripple)
 Ripple transactions are confirmed in seconds
 Ripple transactions use less energy than bitcoin.
4.7.5 R3’s Corda
Corda is an open source blockchain protocol used for industries such as financial
services, insurance, healthcare, trade finance, and digital assets. This protocol is
used for storing, coordinating, and controlling financial agreements.
Characteristics of Corda:
 Corda allows businesses to transact securely and seamlessly
 This protocol organizes the business operation
Benefits of Corda:
 Privacy
 Agile and flexible
 Interoperability
 Open development
 Open design
Check Your Progress 6
In this section, you studied blockchain protocols, now answer the questions given
in Check Your Progress-6.
Note: a) Write your answer in about 50 words
b) Check your answer with possible answers given at the end of the unit
(1) Enumerate the characteristics of the Ethereum protocol. What are the
advantages of the Ethereum protocol?
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(2) Discuss the Ripple protocol.
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(3) What are the features of Blockchain protocols?
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4.8 SUMMARY
This unit discussed the basics of blockchain technology. The learners were
introduced to the working of blockchain. Further, the essential components of
blockchain were outlined to give better insight into the working of blockchain.
The applications of blockchain technology have seen penetration in various
sectors and industries. This unit explored a few applications in government, public
sectors, finance, healthcare, industry, and the Internet of Things. This unit also
discussed challenges like scalability, selfish mining and high energy consumption.
An overview of the evolution of blockchain technology was given to demonstrate
the power of blockchain technology in different sectors and industries. Blockchain
platforms and protocols showed how blockchain can accommodate other sectors
and industries.
4.9 KEYWORDS
API: API stands for an application programming interface. API is a software
intermediary that allows two applications to talk to each other.
Consensus algorithm: An algorithm that defines the way consensus will be
reached on the network to verify the transactions.
Dragonchain: Dragonchain is an enterprise and start up ready platform to build
flexible and scalable blockchain applications.
Ethereum: Ethereum is an open source software based on blockchain technology.
Genesis Block: The first block in any blockchain-based protocol is the genesis
block. It is the foundational block on which further blocks are added to form a
chain of blocks.
Hashing: A hash function is a complex mathematical function that processes
arbitrary input of any length into the output of a fixed length. Example of software
for hashing: MD family of software and SHA family of software.
Hyperledger: Hyperledger is an open source blockchain platform. It supports
blockchain-based distributed ledgers and cross industry blockchain technologies.
Industry 4.0: Industry 4.0 refers to the fourth revolution that has occurred in
manufacturing. Industry 4.0 technologies employ Artificial Intelligence, the
Internet of Things, Big Data etc.
Miners: Specific nodes which perform the block verification process before
adding anything to the blockchain structure are called miners.
Node: The user or computer within the blockchain architecture is a node.
Nonce: A unique number related to mining. A nonce is an abbreviation for
“number only used once”. It is a number added to a hashed block in a blockchain
that, when reshared, meets the difficulty level restrictions. The nonce is the
number that blockchain miners are solving for.
P2P architecture: Peer to peer (P2P) architecture is a network of interconnected
systems in which they are capable of sharing resources and information. Every
system connected to the network is called a node or peer.
Proof of Work: In the Proof of Work (PoW), the participating nodes are engaged
in high computational and mathematical work to reach a consensus.
Proof of Stake (PoS): In the Proof of Stake (PoS), the network randomly selects
the participating node based on its proportional stake in the network to approve
the transaction.
Proof of Authority (PoA): Proof of Authority (PoA) is a reputation based
consensus approach where the preselected validators attempt to validate by
leveraging the value of identities.
Protocol vs consensus algorithm: Bitcoin and Ethereum are protocols, whereas
Proof of Work (PoW) and Proof of Stake (PoS) are their respective consensus
algorithms. The protocol regulates what procedures are. The algorithm tells the
system what steps need to be taken to comply with these rules to produce desired
results.
Ripple: Ripple is an open source payment protocol. It acts as a cryptocurrency as
well as a digital payment network for financial transactions.
SHA-256: SHA-256 is a cryptographic hash function that takes an input of any
size and produces a fixed-sized output.
Smart contract: Smart contracts are translations of an agreement consisting of
terms and conditions into computational code (or program/script).
Wallet: Bitcoin wallet is a software program that stores bitcoins. It is used to send
and receive bitcoins.
4.10 CHECK YOUR PROGRESS 1 – POSSIBLE ANSWERS
1) Explain the working of blockchain technology.
Let a user ‘X’ wants to send money to user ‘Y’. For this monetary transaction to
happen, user ‘X’ should know the wallet address of user ‘Y’. The transaction gets
initiated as user ‘X’ sends the money to user ‘Y’. Every node of the blockchain
will have to verify this transaction. Only then will user ‘Y’ get money in his/her
wallet. Thus every node will record this transaction of money from user ‘X’ to
user ‘Y’. Hence, records will be stored in thousands of computers, but the user
may not like his/her transaction information on many computers. This issue is
resolved by blockchain by keeping the transaction anonymous. For maintaining
transactions’ integrity over the network, there is the need for consensus protocol,
cryptographic hashes, and digital signatures at nodes. Consensus protocol
guarantees that transactions recorded in public ledgers are exact copies. No
transaction record can be changed without accessing all the nodes of the network.
Thus making transaction records immutable. SHA-256 (Secure Hash Algorithm of
output size 256 bits), a cryptographic hashing algorithm, is used to assure that any
change in transaction leads to a new hash value being computed. Digital
signatures ensure that the transactions are initiated from genuine senders.
2) Discuss components of blockchain technology.
Blockchain technology is based on cryptographic concepts (e.g. hashing,
asymmetric key cryptography and digital signatures) and record keeping
principles. Some of the key components of Blockchain technology are as under:
 Hashing methods
 Transaction
 Public key cryptography
 Consensus Features
 Address and wallets
  Blocks
Check Your Progress 2 – Possible Answers
1) Discuss the evolution of Blockchain.
The first generation of Blockchain, i.e. Blockchain 1.0 originated from the concept
of Distributed Ledger Technology. Blockchain 2.0, i.e. the second generation of
Blockchain or Ethereum, is based on the concept of the smart contract along with
the Proof of Work consensus mechanism.
Blockchain 3.0 overcomes the setbacks of Blockchain 1.0 and Blockchain
2.0. What are the setbacks of Blockchain 1.0 and Blockchain 2.0? Blockchain 1.0
and Blockchain 2.0 are not scalable at all. Apart from that, these are mostly based
on Proof of Work. Apart from smart contracts, Blockchain 3.0 mainly involves
Decentralized Apps (dApps). A dApp can be thought of as decentralized software
code that gets executed across all the nodes in given blockchain architecture.
Blockchain 4.0 makes Blockchain technology usable to Industry 4.0 demands.
Industry 4.0 refers to the fourth revolution that has occurred in manufacturing.
Industry 4.0 technologies employ Artificial Intelligence, the Internet of Things,
Big Data etc.
2) What are the setbacks of Blockchain 1.0 and Blockchain 2.0?
Blockchain 1.0 and Blockchain 2.0 are not scalable at all. Apart from that, these
are mostly based on Proof of Work.
3) Compare different generations of blockchain technology on parameters
like principles and applications.
Comparison of different generations of blockchain technology based on principle
and application is as below:

Parameter Blockchain 1.0 Blockchain Blockchain 3.0 Blockchain 4.0

2.0

Principle Distributed Ledger Smart Decentralized Blockchain with

Technology (DLT) Contracts Apps (dApps) Artificial
Intelligence

Application Financial Sector Non-Financial Business Industry 4.0

Sector Platforms

Check Your Progress 3 – Possible Answers

1) Discuss Blockchain technology’s application in cryptocurrency.
Cryptocurrency is the first application of Blockchain technology. Bitcoin was the
first cryptocurrency developed in 2009. Since then, many cryptocurrencies have
come into existence to fulfil different needs and purposes.
2) Discuss Blockchain technology’s application in governance.
Typical problems faced by governments in many countries pertain to land registry
records. Keeping track of ownership of hundreds of years of land records is a
difficult task. The problems faced by land registry officials are: discrepancies with
paperwork, forged documents, and loss of documents. Blockchain technology can
take care of above mentioned problems in a cost-effective way. Blockchain
technology provides immutable records and secure access as well as storage.
3) Discuss Blockchain technology’s application in healthcare.
Blockchain technology provides data security and integrity. Patients, healthcare
providers (hospitals, doctors, lab technicians etc.), data analysts and insurance
providers are key stakeholders of healthcare. The Distributed Ledger
Technology/Blockchain technology in healthcare guarantees the security and
privacy of healthcare data of all stakeholders. These stakeholders can share
information without compromising data security and integrity.
Check Your Progress 4 – Possible Answers
1) What are the challenges associated with Blockchain technology?
Key challenges faced by blockchain technology are:
 Scalability
 Loss of privacy
 Selfish mining
2) What are the clean energy options for the transport sector?
In Bitcoin’s blockchain, the process of adding new blocks to the blockchain is
called mining, and the nodes that do the job of generating a new block are called
miners. Selfish Mining is a strategy where an over ambitious miner secretly keeps
his blocks without publishing it. It would be revealed to the public only if some
conditions were satisfied.
Check Your Progress 5 – Possible Answers
1) Discuss the impact of Blockchain technology in the financial sector.
It is the transaction that takes place in the Financial sector like banking, where the
introduction of blockchain technology can make its impact the most. A standard
practice of transactions in the Financial sector like banking is based on a trusted
third party. This role of a third party is the main source of worry for all
stakeholders. This trusted third party can be eliminated by the use of blockchain
technology in the Financial sector like banking. The architecture of the standard
banking system is based on a centralized server/clients model, and hence a copy of
the database is centralized at the server level only. As a blockchain technology-
based system gets introduced in the banking system, the peer-to-peer network
model will be there, ensuring multiple copies of transactions in a database.
2) Discuss the impact of blockchain technology in the supply chain.
When blockchain technology is used in Supply Chain, the following benefits can
be had.
 All information pertaining to supply and demand can be captured in real-
time
 The status of an item in transition/process can be known
 Smart contract management can be done (customized or individual
contract can be defined for each function)
 Operational efficiency in Supply Chain can be achieved
Check Your Progress 6 – Possible Answers
1) Enumerate the characteristics of the Ethereum protocol. What are the
advantages of the Ethereum protocol?
Following are the characteristics of the Ethereum protocol:
Characteristics of Ethereum Protocol:
 This protocol enables developers to build and deploy distributed
applications
 It allows users to write their own applications
Following are the advantages of the Ethereum protocol:
Advantages of Ethereum:
 The energy efficiency is high with the help of Proof of Stakes (PoS)
 The uptime of the network is high
 It is used to develop many decentralized applications
2) Discuss the ripple protocol.
Ripple is an open source blockchain platform. Ripple acts as both a
cryptocurrency and a digital payment network for financial transactions. Its native
currency is termed as a Ripple. Ripple enables instant, safe, and almost free global
financial transactions. The protocol supports tokens presenting
cryptocurrency. Ripple is the biggest cryptocurrency in terms of market
capitalization.
Following are the characteristics of ripple protocol:
 Ripple protocol is known for its digital payment network
 It has its own cryptocurrency XRP
 Ripple transactions are confirmed in seconds
 Ripple transactions use less energy than bitcoin.
3) What are the features of the blockchain protocol?
Following are the features of the blockchain protocol:
 Distributed ledgers
 Smart contracts
 Coins
 Tokens
 Trustlessness
 Decentralized
 Immutable
4.11 REFERENCES AND SELECTED READINGS
1. P. Raj, K. Saini, and C. Surianarayanan, “Blockchain Technology and
Applications”, CRC press, 2020.
2. S.K. Panda, A.K. Jena, S.K. Swain, and S.C. Satpathy, “Blockchain
Technology: Applications and Challenges”, Springer, 2021
3. S. K. Panda, A.A. Elngar, V.E. Balas and M. Kayed, “Bitcoin and
Blockchain: History and Current Applications (Internet of Everything
(IoE))”, CRC Press, 2020.
4. C. Alexis and K. Sok, “Blockchain and Distributed Ledger Technology
(DLT): What impact on the Financial Sector”, Digiworld Economic
Journal, 103, 2016.
5. M.H. Joo, Y. Nishikawa, and K. Dandapani, “Cryptocurrency, a
successful application of blockchain technology”, Managerial Finance,
2019
6. W. Yang, S. Garg, A. Raza, D. Herbert, and B. Kang, Blockchain: Trends
and Future”, In Pacific Rim Knowledge Acquisition Workshop 2018,
Aug 27 (pp. 201-210), Springer, 2018.
7. Benefits of blockchain, https://www.ibm.com/topics/benefits-of-
blockchain
8. Blockchain for Beginners: The complete step by step guide to
understanding blockchain technology, Author: Mark Watney, USA