Module 8

MODULE 8

BLOCKCHAINS, BITCOINS AND DECENTRALIZED COMPUTING
PLATFORMS

2.1. BLOCKCHAINS- INTRODUCTION

A blockchain is a tamper-evident, shared digital ledger that records transactions in a public or
private peer-to-peer network. Distributed to all member nodes in the network, the ledger
permanently records, in a sequential chain of cryptographic hash-linked blocks, the history of
asset exchanges that take place between the peers in the network.1

The term “BLOCKCHAIN” has been from its working and also from the manner in which it
stores data, namely that the information is packaged into blocks, which link to form a chain with
other blocks of similar information.

The act of linking blocks into a chain makes the information stored on a blockchain trustworthy,
unlike commodity based money. All the confirmed and validated transaction blocks are linked and
chained from the beginning of the chain to the most current block. It acts as a single source of
truth, and members in a network can view only those transactions that are relevant to them.

Instead of relying on a third party, such as a financial institution, to mediate transactions, member
nodes in a blockchain network use a Consensus Protocol2 to agree on ledger content, and
cryptographic hashes and digital signatures to ensure the integrity of transactions.3

The decentralized peer-to-peer blockchain network prevents any single participant or group of
participants from controlling the underlying infrastructure or undermining the entire system.


1Sloane Brakeville,, Bhargav Perepa (Published on March 18, 2018) , Retrieved from
https://developer.ibm.com/tutorials/cl-blockchain-basics-intro-bluemix-trs/, Last visited on 20/11/2018 at 6:10 pm
2 ‘Consensus’ in the context of Blockchain means that the nodes on the network agree on the same state of a
blockchain, in a sense making it a self-auditing ecosystem, Retrieved from https://lisk.io/academy/blockchain-
basics/how-does-blockchain-work/consensus-protocols, Last visited on 20/11/2018 at 4:04 pm
3 Sloane Brakeville,, Bhargav Perepa (Published on March 18, 2018) , Retrieved from
https://developer.ibm.com/tutorials/cl-blockchain-basics-intro-bluemix-trs/, Last visited on 20/11/2018 at 6:15 pm
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Participants in the network are all equal, adhering to the same protocols. They can be individuals,
state actors, organizations, or a combination of all these types of participants.

At its core, the system records the chronological order of transactions with all nodes agreeing to
the validity of transactions using the chosen consensus model. The result is transactions that
cannot be altered or reversed, unless the change is agreed to by all members in the network in a
subsequent transaction.

The key features of cryptographic security, decentralized consensus, and a shared public ledger
(with its properly controlled and permissioned visibility), blockchain technologies represents a
new way to transact business which can ardently change the way our economic, social, political,
and scientific activities are organized.

2.2. CHARACTERISTICS OF BLOCKCHAIN

The words of William Mougayar -“The blockchain cannot be described just as a revolution. It is a
tsunami-like phenomenon, slowly advancing and gradually enveloping everything along its way by
the force of its progression.”will be befitting in order to understand the importance and scope of
Blockchain technology.

§ INCREASED CAPACITY

The first and an important feature of Blockchain is that it increases the capacity of the whole
network because of the reason that there are a lot of computers working together which in total
offers a great power then few of the devices where the things are centralized. A perfect example of
increased capacity is a project started by Stanford University which created a supercomputer that
simulates protein folding for medical research.4

§ BETTER SECURITY

Blockchain technology has a better security because there is not even a single chance of shutting
down of the system. Even the highest level of the financial system are subject to get hacked.
Bitcoin in the second hand had never been hacked. the reason is that the blockchain network is


4 Retrieved from https://data-flair.training/blogs/features-of-blockchain/, (Published on 1/06/2018), Last visited on
20/11/2018 at 4:11 pm
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secured by a number of computers called nodes and these nodes confirm the transaction on this
network.5

§ IMMUTABILITY
One of the main values of Blockchain is creating immutable ledgers. Any database that is
centralized is subjected to get hacked and they require trust in the third party to keep the database
secure. Blockchain on the other hand keeps its ledgers in a never-ending state of forwarding
momentum.6

§ FASTER SETTLEMENT
Traditional banking systems can be slow, as they require a lot of settlement time which usually
takes days to proceed. This is one of the main reason why the banking institutes need to upgrade
their banking systems. Blockchain Technology tends to solve this prblem as it can settle money
transfer at really fast speeds. This ultimately saves a lot of time and money from these institutions
and provide convenience to the consumer also.7

§ DECENTRALIZED SYSTEM
Decentralized technology gives the power to store your assets in a network which further access
by the means of the internet, an asset can be anything like a contract, a document etc. Through this
owner has a direct control over his account by the means of a key that is linked to his account
which gives the owner a power to transfer his assets to anyone he wants. The Blockchain
technology proves to be a really effective tool for decentralizing the web. It does possess the
power to bring massive changes in the industries.8

§ DISTRIBUTED LEDGER

Blockchain technology comprises of a public ledger that provides information of all the
participants and all digital transactions that have ever been executed. A block is the “prevailing”


5 Ibid.
6 Ibid.
7 Retrieved from https://data-flair.training/blogs/features-of-blockchain/, (Published on 1/06/2018), Last visited on
20/11/2018 at 4:11 pm
8 Ibid.
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part of a blockchain which keeps the record of the recent transactions, and once they are
completed, it goes into the blockchain. Blocks are added in sequential manner with the next block
containing hash of the previous block. A new block is generated as soon as the previous block gets
entered in the blockchain database.

This technology helps in recording of each transaction and shares it across the network. Every user
in the network can validate transactions and has an identical copy of the ledger, to which the
encrypted transactions can be added. Any changes to the ledger are reflected in all copies in
minutes, or in some cases, seconds. Through the use of ‘keys’ and signatures the security and
accuracy of assets is maintained cryptographically and are controlled by the participant.9 The
shared information can easily be verified and its available to anyone on the network to access it.
This ensures that no data is lost and it syncs with other files. Most importantly, since the central
point is eliminated, the data cannot be corrupted or hacked.10The end result is a highly efficient
and secure method of performing transactions and it serves as an online ledger keeping record of
transactions that can’t be changed.

§ CORRUPTION FREE

Blockchain checks itself automatically after every 10 minutes. The continuous checking of itself is
similar to self-auditing and after every 10 minutes, it reconciles with the prior information stored.
Each information stored after self-auditing is referred to as a block. Every data within the same
network is shared with all the computers within the same network. This promotes transparency.
Also, this information cannot be corrupted because if the information is changed on one computer,
cannot be changed in other computers. In other words, it will require changing the information in
all the computers connected to the same network. It is impossible to corrupt or hack information
stored using blockchain.11

2.3. BITCOIN


9Retrieved from https://www.techracers.com/blogs/blockchain-key-features/, (Published on 03/09/2017) Last visited
on 20/11/2018 at 4:26pm
10 Aviv Lichtigstein, (Published on 24/05/2018), Retrieved from https://101blockchains.com/introduction-to-
bloackchain-features/, Last visited on 26/11/2018 at 4:34 pm
11 Retrieved from https://www.techracers.com/blogs/blockchain-key-features/, (Published on 03/09/2017) Last visited
on 20/11/2018 at 4:30 pm
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In the words of Eric Schmidt, CEO of Google- "Bitcoin is a remarkable cryptographic
achievement, and the ability to create something that is not duplicable in the digital world has
enormous value"

Bitcoin is a digital currency (also called crypto-currency) that is not backed by any country's
central bank or government. Bitcoins can be traded for goods or services with vendors who accept
Bitcoins as payment. Bitcoin-to-Bitcoin transactions are made by digitally exchanging
anonymous, heavily encrypted hash codes across a peer-to-peer (P2P) network. The P2P network
monitors and verifies the transfer of Bitcoins between users. Each user's Bitcoins are stored in a
program called a digital wallet, which also holds each address the user sends and receives Bitcoins
from, as well as a private key known only to the user. The Bitcoin network is designed to
mathematically generate no more than 21 million.

Bitcoins and the network is set up to regulate itself to deal with inflation. Bitcoins can be spent by
initiating a transfer request from a Bitcoin address in the customer's wallet to a Bitcoin address in
the vendor's wallet. As of this writing, one Bitcoin (also called a BTC) is worth $104 but just as
with stocks, the value of Bitcoins fluctuate quickly. 12

In distributed systems a particular form of client-server architecture exists, where the secondary
party only has a weak copy and is called a master-slave architecture. In a system of debt, one of
the two parties is always the slave. We are the client. We are not the server. The server doesn’t
really serve us ; they serve themselves because they’re the master. That is the architecture of
money we live in. That is the architecture of money we use in our civilization: an architecture of
money where you have no control; an architecture of money where every interaction is mediated
by a third party that has absolute control over that money. Today, if we go to an ATM machine
and put in our card, the bank may decide to give us our money. One day—as the people of Cyprus,
Greece, Venezuela, Argentina, Bolivia, Brazil, and a list of hundreds of countries over the last
several decades and even centuries have discovered—one day, we go to the bank and the bank
may not want to give us the money, because they don’t have to. That’s the essence of a master-
slave relationship. Bitcoin is fundamentally different because in bitcoin, you don’t owe anyone

Retrieved from https://whatis.techtarget.com/definition/Bitcoin, Last
12 Margaret Rouse, (Updated in June 2013), 5
visited on 23/11/2018.

anything and no one owes you anything. It’s not a system based on debt. It’s a system based on
ownership of this abstract token. Absolute ownership. An expression in the United States, which
is “possession is nine-tenths of the law.” In bitcoin, possession is ten-tenths of the law. If you
control the bitcoin keys, it’s your bitcoin. If you don’t control the bitcoin keys, it’s not your
bitcoin.13 There are almost 200 currencies of the world, but there’s only one international
currency. There are almost 200 currencies controlled by central banks and governments, but there
is only one mathematical currency today, and that is bitcoin. "Cryptographic currencies are going
to be a mainstay of our financial future. You cannot uninvent this technology. You cannot turn
this omelette back into eggs." Cryptographic currencies are going to be a mainstay of our financial
future. We already have over 100 competing currencies in the space, which

shows how quickly innovation has exploded, even beyond bitcoin the currency. There are many
other alternative currencies — altcoins, as they’re known, use the same basic technology of a
decentralized asset ledger using consensus in the network with Satoshi’s algorithm. Some of these
currencies are inflationary, some deflationary, some use demurrage or negative interest rates, some
are charitable and redistribute a proportion of the income to charitable organizations."At the end
of the day, bitcoin is programmable money. When you have programmable money, the
possibilities are truly endless."14 The architecture of bitcoin is peer-to-peer because every
participant in the network speaks the bitcoin protocol on an equal level. There are no special
bitcoin nodes; all nodes are the same.Peer-to-peer means that when you send out a transaction to
the network, every peer treats it the same. It has no context inside the peer’s system other than
what it gets from the network. An interesting issue in distributed systems is this issue of context
and state. If you log in to Facebook and you have an account with Facebook, you’re not using a
protocol. All of the state is controlled by Facebook. You have a login session and all of the data is
held by them. We call that architecture client-server. Bitcoin is different because it’s peer-to-peer,
just like email or TCP/IP.15

Starting in the 1970s, we have seen the world begin to adopt digital currencies. When people call
bitcoin a “digital currency,” they’re missing the point. Euro is a digital currency, the US dollar is a


13 Antonopoulos, Andreas M. , 2016, The Internet of Money, Page No. 33.
14 Antonopoulos, Andreas M , 2016, The Internet of Money, Page No. 19.
15Antonopoulos, Andreas M , 2016, The Internet of Money, Page No.30.
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digital currency. Less than 8 percent of these currencies exist in physical form; the rest is bits on
ledgers. But the fundamental difference is that these ledgers are controlled by centralized
organizations, whereas in bitcoin, they’re not. Bitcoin has a decentralized network, an open
network. Bitcoin isn’t a digital currency. It’s a cryptocurrency. It’s a network-centric money. A
network that allows you to replace trust in institutions, trust in hierarchies, with trust on the
network. The network acting as a massively diffuse arbiter of truth, resolving any disagreements
about transactions and security in a way where no one has control.16

2.4. SMART CONTRACTS

Smart contracts are lines of code that are stored on a blockchain and automatically execute when
predetermined terms and conditions are met. At the most basic level, they are programs that run as
they’ve been set up to run by the people who developed them. The benefits of smart contracts are
most apparent in business collaborations, in which they are typically used to enforce some type of
agreement so that all participants can be certain of the outcome without an intermediary’s
involvement.17
The key properties of smart contracts are:

§ Autonomy
§ Decentralization
§ Auto-sufficiency

Autonomy implies that after a smart contact launches, the deal initiator does not have to participate
any more in the process. Smart contracts are not focused on one central server but are distributed by
various network points so they can be referred to as being decentralized. Auto-sufficiency supposes
that contracts are able to collect money, realize transactions, distribute resources, issue and spend
funds to allow a larger capacity of storage and computation power.

The main advantages of smart contracts include:-


16 Antonopoulos, Andreas M , 2016, The Internet of Money, Page No. 42.
17 Nigel Gopie, (Published on 02/07/2018), Retrieved from https://www.ibm.com/blogs/blockchain/2018/07/what-are-
smart-contracts-on-blockchain/, Last Visited on 27/11/2018 at 11:41 am
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§ agent neutrality in signing deals;
§ automation in signing deals, time saving: excludes human participation in transactions,

everything is done by the prescribed programm code;
§ safety: data in the decentralized registry cannot be lost and cyber attacked;
§ precision: no mistakes can be made due to the absence of hand-filled forms.

Blockchain is the ideal space for smart contract storing. As a decentralized system it does not
require intermediaries to be present at the time of realizing transactions or signing deals. Smart
contracts are stored in the distributed registry as a one time written code. They carry out their work
thanks to a computer network which controls the blockchain. Thus, if a code is written in a proper
way, nobody will be able to change it.

The use of smart contracts has just begun to be popular. Existing limitations of the development of
such a type of deal signing due to some technical aspects can soon disappear To write and transfer
smart contracts in blockchain the system uses a powerful encryption system and has a language
specific completeness as per Turing. Just to compare, a Bitcoin protocol with its much narrower
functionality only permits monetary transactions and it does not offer the possibility to store smart
contracts or transfer assets.

Smart contracts can be used in lots of every day life situations, but its greatest potential is in the
financial sector. Smart contracts help solve the issue of mistrust between parties and business
partners. For example, if company ‘A’ sells shares or any other product to company ‘B’ and the
parties do not trust each other, they will choose an arbitrary who can help them in case of any
difficult situations. If company A sends shares (through the code they are encrypted in) through
blockchain storage it is only after company B pays money, that they will get the shares. It is
possible for you to write in the code as a transaction condition that the shares will be transferred to
the party after the money is deposited into the account. So, first, the algorithm checks the balance
and then the deal will be signed. Unfortunately, the smart contract potential in the financial sphere
is not unlocked to full working capacity. The main limitations are transaction time and cost. Also, it
should be mentioned that for various industries there are not enough specialized projects. One such
project is Red Pulse, a Chinese start-up in financial consulting. This is a decentralized information

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platform for exchanging up-to-date info and knowledge about market trading with the RPX token
bounty system.

Like any other technology, smart contracts have their own disadvantages:

§ The consumers are quite suspicious because it is a new technology and they do not
understand it yet.

§ Making changes. For example, you may change your mind about renting an apartment, but
the data is already registered and it is technically difficult to make corrections. This may
bring mistakes into the system and make it less safe.

§ One can keep and save data in smart contracts safely and it is void of any distortions, only
if the code is written perfectly and precisely. Humans can be tired or make clerical errors
and thus the whole system is endangered.

§ The third party agents do not disappear but start playing a different role. The need for
lawyers experienced in IT increases in the future because the programmers of smart
contracts will need consultations for making new kinds of contracts.18


18 Retrieved from https://hackernoon.com/advantages-and-disadvantages-of-smart-contracts-in-financial-blockchain-

systems-3a443145ae1c, Last visited on 27/11/2018 at 11:45 am
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