Blockchain 101

Blockchain 101
A Breakdown
By Suki Chana
01/12/2016
Esselltee Ltd, 521 Bath Road, Bristol BS3133HH; Telephone
07710 813601; Email Suki.74@gmail.com
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01/12/2016
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Executive Summary
Evers since the publication of Satoshi Nakamoto’s paper on
“bitcoin: A Peer-to-Peer Electronic Cash System” in 2008 the
world has been overrun by the term “Blockchain” . Much has
been written and many claim to understand it; and many to be
frank do. However for those who would like a simpler view of
blockchains and distributed ledgers this slide deck provides an
easy to follow guide on the basics.
Readers of this document will learn what a block is, how it gets
linked into a chain and why the chain is hard to break. Readers
will also learn about distributed ledgers and what they offer in
terms of process simplification. Finally this presentation will
review bitcoin and describing the salient point s of this
implementation.

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Forget what you have heard up to now
• BitCoin
• Ethereum
• Cypher Block
 These are not definitions of Blockchain
 They are specific implementations of
Blockchain
 A blockchain is not just for crypto
currency
 You can build a Blockchain from the
ground up

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What Is a Blockchain
A Blockchain
• Is a linked list of digital data items called blocks.
• Chronicles the events in the lifetime of a digital entity – e.g. a bank account, a coin, etc. –
recording all the events in that entities lifetime.
• Contains:
• A Genesis block – The first block in the chain which only points to a successor
• Link blocks – Subsequent blocks that are linked bi-directionally – they have a predecessor and a
successor
• A last block – one which doesn’t point to a next block, i.e. it only has a predecessor
• Links blocks sequentially, chronologically and Cryptographically – hard to break
• Can be
• Of infinite size
• Traversed in either direction – The links identify next and previous blocks
• Validated to check integrity – missing or altered blocks
• Public or private:
• Public blockchains can be accessed by any body
• Private blockchains can only be accessed by those within the a particular domain – e.g. employees of a
company
• Are:
• Stored within databases
• Best implemented over distributed networks There is no standard for the design of a
blockchain

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What is a Block
Individual blocks:
• Can be created by anyone in the blockchain’s domain -
according to the rules of the chain designer – These can be
called “Creators”
• Must be signed by the creator – Using their private key –
Part of the security mechanism
• Must contain the creators public key – For validation
purposes
• Must identify the predecessor and successor blocks – The
linking mechanism
• Use the signature of the previous block in the calculation of
the next block signature – The linking and integrity
management mechanism
• Contain at least one time stamp
• Can be strengthened by using Proof of Work – Added
security
• Contain a payload – e.g. a bank balance
• May include Smart Contracts
“There is no standard for block design” If viewed a block is just a blob of hexadecimal data

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Before we continue
Whilst blocks are the individual components of
a blockchain before we move on to looking at
how blockchains work it is worth pausing to
look at a few details like:
• Cryptographic Keys
• Digital Signatures
• Proof of work
• Smart Contracts
• Distributed ledgers
• Consensus
These are the things that extend the basic
blockchain increasing its strength and flexibility

01/12/2016
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Cryptographic Keys
• Digital cryptography is the application of
publically defined algorithms to produce an
output which hides the original data
(encryption)
• The original data can be recovered by reversing
the calculation (decryption)
• What stops unauthorised people from reversing
a cryptographic algorithm to recover the
original data is the use of secret numbers called
cryptographic keys
• Cryptographic keys are kept secret
• Without the correct key a cryptographic
algorithm cannot be reversed
• There are two types of cryptographic keys
• A symmetric key is one that can be used to
encrypt and decrypt a piece of data
• An asymmetric key comes in two parts, one
to encrypt data and the other to decrypt it
• The two parts of an asymmetric key are known
as the private and public keys. These are
mathematically joined and cannot swapped or
used with other asymmetric keys
• The owner of the Private Key must be keep it
secret whilst the public key can be shared with
people who the owners wants to communicate
with in a secure way
• Senders can use a person’s public key to
encrypt data in a way that only the owner of
the corresponding private key can open it
(decrypt) or use it to validate data that has
been signed by the owner using the matching
private key
• The owner of a private key can use it to decrypt
data encrypted with the corresponding public
key or sign data for validation with the
matching public key.

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Digital Signatures
• Digital signatures are the numeric results generated when a
recursive mathematical algorithm is applied to a block of
electronic data.
• SHA 1 is an example of a signing algorithm – no matter how big
the data block is, it always returns a 20 character result –
sometimes called a hash or a digest
• Digital Signatures are calculated using cryptographic keys – e.g.
the creators private key
• These keys are personal to a user which makes the digital
signature as personal as a written signature.
• Unlike written signatures if you change a single bit in the
original data the digital signature will be different - Even when
the same key is used – Hence digital signatures are used to
prevent people tampering with electronic data because they
are unique.
• Random numbers called nonces are often added to guarantee
uniqueness of the signature
• In normal operation you send the original data and the digital signature to the user. Users validate the
signature by executing a validation process over the data using the signatories public key and if the result they
get does not match the signature then this indicates that someone has altered the data on route.

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What Is Proof of Work
One way of implementing POW is to sign a data string created by concatenating the creator signatures from a collection of blocks using
an approvers private key. The resulting digital signature is then added to each block in that selection – Those blocks become approved
and can be added back to their respective chains.
Chain integrity is maintained by the creator and POW signatures.
Proof of work provides external
corroboration that an event took place
by validating a block and placing a
secondary seal on it.
There is no standard for POW so it can
be implemented using varying processes
– For a particular implementation this
can be defined in a smart code contract.
POW is performed after each block has
been validated using the creators public
key
POW is performed by “Approvers” using
their private key

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What are Smart Contracts
Smart Contracts are a dual concept
that needs to be viewed as two linked
components.
• Smart Code Contracts:
• Are executable code fragments – e.g.
servlets, applets, etc.
• Encapsulate permitted behaviour
• Can be executed when processing a block
• Are signed so they can’t be tampered with
• Smart Legal Contracts:
• Are human readable documents
• Specify those aspects of a Smart Code
Contract that are not behavioural - e.g.
Liabilities, compensation values, etc.
• Define how Smart Code contracts can be
used

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Distributed Ledgers
Traditional ledgers store collections of data;
e.g. bank ledgers are databases holding the
balances and transaction histories of all the
accounts held within that bank.
Bank ledgers can be implemented using
blockchains. Single chains represent each
account and the database holding all the
chains becomes the banks ledger – We can
refer to this as a blockchain ledger (BCL)
Distributed Ledgers are:
• A collection of databases (public or
private) that all hold identical copies of a
blockchain ledger
• Usually hosted by systems that expose
interfaces to blockchain ledger users
• Distributed over a network – LAN or WAN

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Distributed Ledgers & Consensus
Distributed ledgers work on the principle of consensus. Consensus is
reached when the majority of entities within a single environment
reach the same conclusion or have the same view.
In a distributed ledger if the majority of the databases have the same
view of a particular blockchain ledger then that is deemed to be the
truth.
The strength of consensus is that to attack the system an attacker must
have the power to attack a minimum of 51% of the blockchain ledgers
in a single distributed ledger in order to get the consensus and alter
the state of the blockchain ledger. This gets exponentially more difficult
as the to number of network nodes grow making consensus a powerful
component of distributed ledger security:
Total Nodes No of nodes to reach 51%
10 6
100 51
1000 510
10,000 5,100
100,000 51,000
1,000,000 510,0000
In the example opposite the truth is represented by the four nodes
that agree an account balance of 100. Consensus is delivered by 80%
of the network.
Acct Balance = 100 Acct Balance = 100
Acct Balance = 100
Acct Balance = 100 Acct Balance = 80

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How Does The Blockchain Work – Minimal Block
Structure
A minimal block should contain:
 Chain Identifier - Identifies the chain to which the block belongs
 Block Identifier – Identifies the block
 Block Sequence No - Specifies the position of the block in the chain – 0 or 1 for the genesis block
 Previous Block Identifier – Identifies the preceding block – blank for the genesis block
 Previous Block Sequence No – identifies the position of the preceding block in the chain
 Next Block Identifier – Identifies the next block in the chain – not populated within the last block of the
chains
 Next Block Sequence No – Identifies the sequence number that should be applied to the next block
 Nonce – A random value used as part of the signature generation algorithm – minimise risk of duplicate
signatures
 Creators Signature – Seals block
 Creators Public Key – Used to validate the signature
 Proof of Work – Double seal on block
 POW Public Key – Used to validate POW
 Timestamp
 Payload – Can be anything the application requires
“There are no hard and fast standards”

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How Does The Blockchain Work – Chain Propagation &
Distributed Ledgers
To be effective blockchain ledgers need to work over
a distributed networks that contain:
• Creator nodes
• Approver nodes
• A time server – to make sure all the timestamps
reference a common source.
Creator nodes:
• Work on a chain and build the next block – e.g. a
transaction on a bank account
• Broadcast the block to the network of approver nodes.
Approver nodes perform the proof of work:
• Validate it against their copy of the chain
• Calculate the POW hash & Add it to the block
• Timestamp the approved block
• Add the approved block to their copy of the Blockchain
• Transmit the approved block to all other nodes. Step 1 - Any node can be a creator or an approver – In
fact the roles switch dynamically. The network is in a
stable state

01/12/2016
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How Does The Blockchain Work – Chain Propagation &
Distributed Ledgers (2)
Step 3: All other nodes become approvers. The first node to
complete POW broadcasts the approved block to the network.
Step 4: All nodes add the approved block to their copy of
the chain – every node has identical data.
Step 2: A Node processes an event relating to the an
object on the blockchain and broadcasts it to all the
nodes on the network

01/12/2016
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How Does The Blockchain Work - Security
Blockchain security relies on:
1. The Creators signature to ensure the
block cannot be altered on the way to
approvers
2. The POW hash to validate the block
Blockchain doesn’t concern itself with the
security of the payload –
• If sensitive data is stored in there it must
be encrypted with additional payload keys
• These need not be shared if a singular
entity works on block creation
Blockchains are validated by sequentially
validating the creator signatures from the
genesis block to the last block – The longer
the blockchain the longer this operation
Additional validation can be performed by
validating the POW of each block.

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The Strength of Blockchain
Blockchains are strong because:
Each block is indelible
• Cannot be changed
• If deleted chain is invalidated
To alter a block you have to
• Redo the signatures of all the blocks proceeding the one you want to change – To do this you need
the private keys of all the block creators that built the blocks after the one you want to change
• Redo the proof of work for all the proceeding blocks – To do this you will need:
• The private keys of all the approvers of that approved the blocks after the one you want to change
• The other blocks they used to include in the POW.
To attack the Blockchain you must simultaneously attack all the instances of the chain
within the distributed ledger
Smart Contracts – Especially coded ones enforce how the blocks in a chain can be
manipulated
Consensus – The truth is always represented by 51% of the nodes on the network
Weight of Numbers – The more you distribute the harder it is to break (in theory)

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P2P Payments a Practical Example
Scenario – A sender needs to make a high value
payment using the CHAPS system. The sender has
an account with Bank A and the recipient has an
account with Bank B. Both Banks have a
settlement accounts with a central bank.
The purpose of the central bank is to provide
monetary transfers between banks and guarantee
the liquidity of the banking system by holding
capital reserves for member banks in their
respective settlement accounts.
When a transfer between Bank A and Bank B
needs to happen the central bank debits Bank A’s
settlement account by the transfer amount and
credit’s Bank B’s settlement account.
This is performed over the SWIFT network as
follows:
1. Bank A sends a payment request into the SWIFT Network.
2. SWIFT sends a settlement / authorisation request to the central banks Real Time Gross
Settlement System (RTGS).
3. The central Banks debits Bank A’s settlement account and credits Bank B’s settlement
account with the transfer amount.
4. The Central bank sends out a transfer approval – stating funds are settled.
5. The SWIFT network sends a settlement notification to both banks. Bank B can
immediately credit the recipients bank account with cleared funds.
SWIFT NetworkBank A Bank B
Central Bank
(RTGS)
Bank A Settlement
Account
Bank B Settlement
Account
Bank A Customer
Accounts Bank B Customer
Accounts
1
2
3
5
4
Recipients
5
Sender

01/12/2016
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P2P Payments with Distributed Ledgers
To replace CHAPs with a blockchain and distributed ledger
solution the public ledger shown opposite would be required.
The ledger would need to hold individual blockchains that
represent:
1. Each customer account made up of blocks that represent
the balance and transactions on each account.
2. Each settlement account made up of blocks representing
the balance and transactions on each account.
3. Smart contracts define the operations that can be
performed on the respective accounts.
Notes:
I. Capital reserves are still held in the central bank for
Bank A and B – Liquidity is not an issue.
II. The consumers capital is held by their bank individually
Bank A Customer
Account
Bank B Customer
Account
Distributed Transaction
Ledger
Bank A Settlement
Account Bank B Settlement
Account

01/12/2016
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P2P Payments with Distributed Ledgers
With the distributed ledger described on the
previous slide in place the CHAPS transaction
shown before could be completed by Bank A
alone as follows.
1. Bank A debits the sender’s account balance
by adding a new block on sender’s account
blockchain with the distributed ledger.
2. Bank A debits its settlement account by
adding a new block to its settlement
account blockchain on the distributed
ledger
3. Bank A credits Bank B’s settlement account
by adding a new block to its settlement
ledger
4. Bank A credits the sender’s account balance
by adding a new block on the recipient’s
ledger.
Bank A Bank B
Central Bank
Bank A Customer
Account
Bank B Customer
Account
Recipients
Distributed Transaction
Ledger
1
3
2
Bank A Settlement
Account Bank B Settlement
Account
4
The Distributed Ledger and blockchains make sure all transactions are recorded
indelibly.
Actions 1-4 can be performed simultaneously and in real time
The central bank can always reverse a transaction if regulatory rules are broken.
Smart Contracts ensure that the operations performed by bank A on the
distributed ledger are performed in a uniform way.
Sender

01/12/2016
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Now Think Back
For Example Bitcoin:
• Is an implementation of a Blockchain & DLT
• Is was developed by a Satoshi Nakamoto – Not a real guy
• The blocks represent collections of Bitcoins , record transactions made with them and define who owns them
• Creators and approvers are called Miners
• Mining uses complex CPU intensive algorithms.
• Any one can mine Bitcoins or perform POW as long as:
• They use official Bitcoin software – Complex algorithms – Hi computing power
• Can afford the power requirements involved in the mining process
• The miner gains possession of the Bitcoin and he has the right to use it and its inherent value
• POW miners are rewarded in Bitcoins for the work they do approving blocks
Value Hypothesis
• Mining is power hungry so miners don’t get them for free
• The theory is (like any work) you expend energy to create value – Value can later be exchanged for other goods and services
• To create Bitcoins you use a “powerful computers and lots of electricity” – That is what the miners input, the output is the coin
• The value of the coin then fluctuates based on normal economic rules like:
• Total coins in circulation
• What people are will to give you for them
Facts
• Bitcoins currently cost more to mine then they are worth in $US
• When Bitcoins are traded the block that represents it must be signed with the new owner private key
• If the owner of a Bitcoin loses their private keys the coin is lost as they cant prove they own it
• As of 6 February 2016, there were 15.2 million Bitcoins in circulation
• 1/3 of all Bitcoins mined to date may be lost
• There will only ever be 21m bit coins in circulation

Blockchain 101

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