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- Herausgeber: Packt Publishing
- Kategorie: Fachliteratur
- Sprache: Englisch
Blockchain is the backbone of cryptocurrencies, it has had a massive impact in many sectors, including finance, supply chains, healthcare, government, and media. It’s also being used for cutting edge technologies such as AI and IoT. This new edition is thoroughly revised to offer a practical approach to using Ethereum, Hyperledger, Fabric, and Corda with step-by-step tutorials and real-world use-cases to help you understand everything you need to know about blockchain development and implementation. With new chapters on Decentralized Finance and solving privacy, identity, and security issues, as well as bonus online content exploring alternative blockchains, this is an unmissable read for everyone who wants to gain a deep understanding of blockchain.
The book doesn’t shy away from advanced topics and practical expertise, such as decentralized application (DApp) development using smart contracts and oracles, and emerging trends in the blockchain space. Throughout the book, you’ll explore blockchain solutions beyond cryptocurrencies, such as the IoT with blockchain, enterprise blockchains, and tokenization, and gain insight into the future scope of this fascinating and disruptive technology.
By the end of this blockchain book, you will have gained a thorough comprehension of the various facets of blockchain and understand the potential of this technology in diverse real-world scenarios.
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Mastering Blockchain
Fourth Edition
Inner workings of blockchain, from cryptography and decentralized identities, to DeFi, NFTs and Web3
Imran Bashir
BIRMINGHAM—MUMBAI
Mastering Blockchain
Fourth Edition
Copyright © 2023 Packt Publishing
All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, without the prior written permission of the publisher, except in the case of brief quotations embedded in critical articles or reviews.
Every effort has been made in the preparation of this book to ensure the accuracy of the information presented. However, the information contained in this book is sold without warranty, either express or implied. Neither the author nor Packt Publishing or its dealers and distributors, will be held liable for any damages caused or alleged to have been caused directly or indirectly by this book.
Packt Publishing has endeavored to provide trademark information about all of the companies and products mentioned in this book by the appropriate use of capitals. However, Packt Publishing cannot guarantee the accuracy of this information.
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First published: March 2017
Second edition: March 2018
Third edition: August 2020
Fourth edition: March 2023
Production reference: 2040723
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ISBN: 978-1-80324-106-7
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Disclaimer: The information and viewpoints expressed in this book are those of the author and not necessarily those of any of the author’s employers or their affiliates.
This book is dedicated with immeasurable love and gratitude to my beloved father.The most affectionate, selfless, and hardworking man, who sacrificed everything for me.
Don’t worry, my son! Adversities come and go.
—Scientist Bashir Ahmed Khan
76 → 363 → 1245 → 1003 → 275 → 77 → 60 → 588 → 1 → 12 → 12 → 2215 →
Contributors
About the author
Imran Bashir has an MSc in Information Security from Royal Holloway, University of London. He has a background in software development, solution architecture, infrastructure management, information security, and IT service management. His current focus is on the latest technologies, such as blockchain and quantum computing. He is a member of the Institute of Electrical and Electronics Engineers (IEEE). He has worked in various senior technology roles for different organizations around the world.
I would like to thank Edward Doxey for his dedication and Packt for their support and guidance throughout this project. I also want to thank John Cornyn, who read the previous edition of this book and suggested some corrections, as well as the reviewers of this edition.
I want to thank my wife and children for their support while I was writing, especially during the time I was supposed to spend with them.
Finally, I want to thank my father, who has always been there for me and always will be. And my mother, whose encouragement makes difficult obstacles easy to surmount for me. My parents’ prayers and unconditional love for me have enabled me to achieve anything I desire.
Disclaimer: The information and viewpoints expressed in this book are those of the author and not necessarily those of any of the author’s employers or their affiliates.
About the reviewers
Brian Wu is a senior blockchain architect and consultant. Brian has over 20 years of hands-on experience across various technologies, including blockchain, big data, cloud, AI, systems, and infrastructure. He has worked on more than 50 projects in his career.
He has written nine books, published by O’Reilly, Packt, and Apress, on popular fields within the blockchain domain, including Learn Ethereum, First Edition; Learn Ethereum, Second Edition; Blockchain for Teens; Hands-On Smart Contract Development with Hyperledger Fabric V2; Hyperledger Cookbook; Blockchain Quick Start Guide; Security Tokens and Stablecoins Quick Start Guide; Blockchain By Example; and Seven NoSQL Databases in a Week.
Shailesh B. Nair is a computer engineer and has worked in software development for the last 21 years. He has been involved in blockchain development for about 8 years using different blockchain frameworks, like Ethereum (L1, L2, L3), Substrate, Polkadot, Solana, Cosmos (IBC), CasperLabs, Tezos, etc using various programming languages like C++, Rust, Golang, Ocaml, and Haskell.
He has worked with many different crypto startups since 2014 and as a blockchain consultant, he has worked with Mina Protocol, FTX, and others.
I would like to thank my friends who have worked with me on projects related to blockchain.
Join us on Discord!
To join the Discord community for this book – where you can share feedback, ask questions to the author, and learn about new releases – follow the QR code below:
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Contents
Preface
Who this book is for
What this book covers
To get the most out of this book
Get in touch
Blockchain 101
The growth of blockchain technology
Progress towards maturity
Rising interest
Distributed systems
CAP theorem
PACELC theorem
The history of blockchain
Bitcoin
Electronic cash
Introducing blockchain
Blockchain architecture
Blockchain by layers
Blockchain in business
Generic elements of a blockchain
Blockchain functionality
Benefits and features of blockchain
Limitations of blockchain technology
Types of blockchain
Distributed ledgers
Shared ledger
Public blockchains
Private blockchains
Semi-private blockchains
Permissioned ledger
Fully private and proprietary blockchains
Tokenized blockchains
Tokenless blockchains
Layer 1 blockchains
Monolithic and polylithic blockchains
Layer 2 blockchains
Sidechains
Summary
Decentralization
Introducing decentralization
Methods of decentralization
Disintermediation
Contest-driven decentralization
Quantifying decentralization
Benefits of decentralization
Evaluating requirements
Full-ecosystem decentralization
Storage
Communication
Computing power
Decentralization in practice
Smart contracts
Autonomous agents
Decentralized organizations
Decentralized autonomous organizations
Decentralized autonomous corporations
Decentralized autonomous societies
Decentralized applications
Criteria for a DApp
Operations of a DApp
Design of a DApp
Innovative trends
Decentralized web
Web 1
Web 2
Web 3
Summary
Symmetric Cryptography
Introducing cryptography
Services provided by cryptography
Cryptographic primitives
Keyless primitives
Random numbers
Hash functions
Symmetric key primitives
Message authentication codes
Secret key ciphers
Advanced Encryption Standard
Data Encryption Standard
How AES works
Encrypting and decrypting using AES
Summary
Asymmetric Cryptography
Foundational mathematics
Asymmetric cryptography
Public and private keys
Asymmetric cryptography algorithms
Integer factorization
Discrete logarithm
Elliptic curves
Integrated encryption scheme
Introducing RSA
Encrypting and decrypting with RSA
Introducing ECC
Mathematics behind ECC
Point addition
Point doubling
Point multiplication
The discrete logarithm problem
Generating keys with ECC
Digital signatures
RSA digital signature algorithms
Generating RSA digital signatures
The elliptic curve digital signature algorithm
Generating ECDSA digital signatures
Different types of digital signatures
Blind signatures
Multisignatures
Threshold signatures
Aggregate signatures
Ring signatures
Cryptographic constructs and blockchain technology
Homomorphic encryption
Secret sharing
Commitment schemes
Zero-knowledge proofs
zk-SNARKs
zk-STARKs
Zero-knowledge range proofs
Encoding schemes
Base64
base58
Verifiable random functions
Summary
Consensus Algorithms
Introducing consensus
Fault tolerance
FLP impossibility
Analysis and design
Model
Processes
Timing assumptions
Classification
Algorithms
CFT algorithms
Paxos
Raft
BFT algorithms
Practical Byzantine Fault Tolerance
Istanbul Byzantine Fault Tolerance
Tendermint
Nakamoto consensus
Variants of PoW
HotStuff
Choosing an algorithm
Finality
Speed, performance, and scalability
Summary
Bitcoin Architecture
Introducing Bitcoin
Cryptographic keys
Private keys in Bitcoin
Public keys in Bitcoin
Addresses
Typical Bitcoin addresses
Advanced Bitcoin addresses
Transactions
Coinbase transactions
The transaction lifecycle
Transaction validation
Transaction fees
The transaction data structure
Metadata
Inputs
Outputs
Verification
The Script language
Opcodes
Standard transaction scripts
Contracts
Transaction bugs
Blockchain
Structure
The genesis block
Stale and orphan blocks
Forks
Properties
Miners
Proof of Work (PoW)
Mining systems
CPU
GPU
FPGAs
ASICs
Mining pools
Network
Types of messages
Client software
Bloom filters
Wallets
Summary
Bitcoin in Practice
Bitcoin in the real world
Bitcoin payments
Innovation in Bitcoin
Bitcoin improvement proposals
Advanced protocols
Segregated Witness
Bitcoin Cash
Bitcoin Unlimited
Bitcoin Gold
Taproot
Extended protocols on top of Bitcoin
Colored coins
Counterparty
Altcoins from Bitcoin
Bitcoin client installation
Types of clients and tools
Setting up a Bitcoin node
Setting up the source code
Setting up bitcoin.conf
Starting up a node in the testnet
Starting up a node in regtest
Experimenting further with bitcoin-cli
Using the Bitcoin command-line tool
Using the JSON-RPC interface
Using the HTTP REST interface
Bitcoin programming
Summary
Smart Contracts
Introducing smart contracts
Definitions
Properties
Real-world application
Ricardian contracts
Smart contract templates
Oracles
Software-and network-assisted proofs
TLSNotary
TLS-N-based mechanism
Hardware device-assisted proofs
Android proof
Ledger proof
Trusted hardware-assisted proofs
Types of blockchain oracles
Inbound oracles
Outbound oracles
Cryptoeconomic oracles
Blockchain oracle services
Deploying smart contracts
The DAO
Advances in smart contract technology
Solana Sealevel
Digital Asset Modeling Language
Summary
Ethereum Architecture
Introducing Ethereum
Cryptocurrency
Keys and addresses
Accounts
Transactions and messages
MPTs
Transaction components
Recursive Length Prefix
Gas
Transaction types
Simple transactions
Contract creation transactions
Message call transactions
Messages
Transaction validation and execution
State and storage in the Ethereum blockchain
The world state
The account state
Transaction receipts
Ethereum virtual machine
Execution environment
The machine state
Blocks and blockchain
The genesis block
Block validation, finalization, and processing
Block difficulty mechanism
Nodes and miners
The consensus mechanism
Forks in the blockchain
The Ethereum network
Main net
Test nets
Private nets
Precompiled smart contracts
Programming languages
Solidity
Runtime bytecode
Opcodes
Wallets and client software
Wallets
Geth
Light clients
Supporting protocols
Whisper
Swarm
Summary
Ethereum in Practice
Ethereum payments
Innovations in Ethereum
Difficulty time bomb
EIP-1559
The merge and upcoming upgrades
Programming with Geth
Installing and configuring the Geth client
Creating a Geth new account
Querying the blockchain using Geth
Geth console
Geth attach
Geth JSON RPC API
Setting up a development environment
Connecting to test networks
Creating a private network
Starting up the private network
Experimenting with the Geth JavaScript console
Mining and sending transactions
Introducing Remix IDE
Interacting with the Ethereum Blockchain with MetaMask
Installing MetaMask
Creating and funding an account with MetaMask
Using MetaMask and Remix IDE to deploy a smart contract
Adding a custom network to MetaMask and connecting it with Remix IDE
Importing accounts into MetaMask using keystore files
Deploying a contract with MetaMask
Interacting with a contract through MetaMask using Remix IDE
Summary
Tools, Languages, and Frameworks for Ethereum Developers
Languages
The Solidity compiler
Installing solc
Experimenting with solc
Tools, libraries, and frameworks
Node.js
Ganache
ganache-cli
Ganache UI
Truffle
Drizzle
Other tools
Contract development and deployment
Writing smart contracts
Testing smart contracts
Deploying smart contracts
The Solidity language
Functions
Variables
Local variables
Global variables
State variables
Data types
Value types
Reference types
Control structures
Events
Inheritance
Libraries
Error handling
Summary
Web3 Development Using Ethereum
Interacting with contracts using Web3 and Geth
Deploying contracts
Using solc to generate ABI and code
Querying contracts with Geth
Interacting with Geth using POST requests
Interacting with contracts via frontends
Installing the web3.js JavaScript library
Creating a web3 object
Creating an app.js JavaScript file
Creating a frontend webpage
Calling contract functions
Creating a frontend webpage
Deploying and interacting with contracts using Truffle
Installing and initializing Truffle
Compiling, testing, and migrating using Truffle
Interacting with the contract
Using Truffle to test and deploy smart contracts
Deployment on decentralized storage using IPFS
Summary
The Merge and Beyond
Introduction
Ethereum after The Merge
The Beacon Chain
Beacon nodes
Consensus client
Execution client
Validator client
Proof-of-stake
P2P interface (networking)
The Merge
Sharding
The future roadmap of Ethereum
Summary
Hyperledger
Projects under Hyperledger
Distributed ledgers
Fabric
Sawtooth
Iroha
Indy
Besu
Libraries
Aries
Transact
Ursa
AnonCreds
Tools
Cello
Caliper
Domain-specific
Grid
Hyperledger reference architecture
Hyperledger design principles
Hyperledger Fabric
Key concepts
Membership service
Blockchain services
Smart contract services
APIs and CLIs
Components
Peers/nodes
Clients
Channels
World state database
Private data collections
Transactions
Membership Service Provider
Smart contracts
Crypto service provider
Applications
Chaincode implementation
The application model
Consensus mechanism
Transaction lifecycle
Fabric 2.0
New chaincode lifecycle management
New chaincode application patterns
Summary
Tokenization
Tokenization on a blockchain
Advantages of tokenization
Disadvantages of tokenization
Types of tokens
Fungible tokens
Non-fungible tokens
Stable tokens
Security tokens
Process of tokenization
Token offerings
Initial coin offerings
Security token offerings
Initial exchange offerings
Equity token offerings
Decentralized autonomous initial coin offering
Other token offerings
Token standards
ERC-20
ERC-223
ERC-777
ERC-721
ERC-884
ERC-1400
ERC-1404
ERC-1155
ERC-4626
Building an ERC-20 token
Building the Solidity contract
Deploying the contract on the Remix JavaScript virtual machine
Adding tokens in MetaMask
Emerging concepts
Tokenomics/token economics
Token engineering
Token taxonomy
Summary
Enterprise Blockchain
Enterprise solutions and blockchain
Success factors
Limiting factors
Requirements
Privacy
Performance
Access governance
Further requirements
Compliance
Interoperability
Integration
Ease of use
Monitoring
Secure off-chain computation
Better tools
Enterprise blockchain versus public blockchain
Enterprise blockchain architecture
Designing enterprise blockchain solutions
TOGAF
Architecture development method (ADM)
Blockchain in the cloud
Currently available enterprise blockchains
Enterprise blockchain challenges
Interoperability
Lack of standardization
Compliance
Business challenges
VMware Blockchain
Components
Consensus protocol
Architecture
VMware Blockchain for Ethereum
Quorum
Architecture
Nodes
Privacy manager
Cryptography
Privacy
Enclave encryption
Transaction propagation to transaction managers
Enclave decryption
Access control with permissioning
Performance
Pluggable consensus
Setting up a Quorum network with IBFT
Installing and running Quorum Wizard
Running a private transaction
Attaching Geth to nodes
Viewing the transaction in Cakeshop
Further investigation with Geth
Other Quorum projects
Remix plugin
Pluggable architecture
Summary
Scalability
What is scalability?
Blockchain trilemma
Methods for improving scalability
Layer 0 – multichain solutions
Polkadot
Layer 1 – on-chain scaling solutions
Layer 2 – off-chain solutions
Layer 2
Rollups
Data validity
Data availability
How rollups work
Types of rollups
Optimistic rollups
ZK-rollups
Technologies used for building ZK-rollups
ZK-ZK-rollups
Optimistic rollups vs ZK-rollups
Fraud and validity proof-based classification of rollups
Example
Layer 3 and beyond
Summary
Blockchain Privacy
Privacy
Anonymity
Confidentiality
Techniques to achieve privacy
Layer 0
Tor
I2P
Indistinguishability obfuscation
Homomorphic encryption
Secure multiparty computation
Trusted hardware-assisted confidentiality
Mixing protocols
CoinSwap
TumbleBit
Dandelion
Confidential transactions
MimbleWimble
Zkledger
Attribute-based encryption
Anonymous signatures
Zether
Privacy using Layer 2 protocols
Privacy managers
Privacy using zero-knowledge
Cryptographic Commitments
Zero-knowledge proofs
Building ZK-SNARKs
Example
Summary
Blockchain Security
Security
Blockchain layers and attacks
Hardware layer
Network layer
Blockchain layer
Attacks on transactions
Transaction replay attacks
Attacks on consensus protocols
Double-spending
Selfish mining
Forking and chain reorganization
Blockchain application layer
Smart contract vulnerabilities
DeFi attacks
Interface layer
Oracle attacks/oracle manipulation attacks
Attacks on wallets
Attacks on layer 2 blockchains
Cryptography layer
Attacking public key cryptography
Attacking hash functions
Key management-related vulnerabilities and attacks
ZKP-related attacks
Security analysis tools and mechanism
Formal verification
Formal verification of smart contracts
Model checking
Smart contract security
Oyente
Solgraph
Threat modeling
Regulation and compliance
Summary
Decentralized Identity
Identity
Digital identity
Centralized identity model
Federated identity model
Decentralized identity model
Self-sovereign identity
Components of SSI
Identity in Ethereum
Identity in the world of Web3, DeFi, and Metaverse
SSI-specific blockchain projects
Hyperledger Indy, Aries, Ursa, and AnonCreds
Other projects
Some other initiatives
Challenges
Summary
Decentralized Finance
Introduction
Financial markets
Trading
Exchanges
Orders and order properties
Order management and routing systems
Components of a trade
Trade lifecycle
Applications of blockchain in finance
Insurance
Post-trade settlement
Financial crime prevention
Payments
Decentralized finance
Properties of DeFi
DeFi layers
DeFi primitives
DeFi services
Asset tokenization
Decentralized exchanges
Flash loans
Derivatives
Money streaming
Yield farming
Insurance
Decentralized lending – lending and borrowing
Benefits of DeFi
Uniswap
Swap the token
Uniswap liquidity pool
Summary
Blockchain Applications and What’s Next
Use cases
IoT
IoT architecture
The physical object layer
The device layer
The network layer
The management layer
The application layer
Benefits of IoT and blockchain convergence
Implementing blockchain-based IoT in practice
Setting up Raspberry Pi
Setting up the first node
Setting up the Raspberry Pi node
Installing Node.js
Building the electronic circuit
Developing and running a Solidity contract
Government
Border control
Elections
Citizen identification
Health
Media
Blockchain and AI
Some emerging trends
Some challenges
Summary
Index
Landmarks
Cover
Index
Preface
The goal of this book is to teach the theory and practice of distributed ledger technology to anyone interested in learning this fascinating new subject. Anyone can benefit from this book, whether a seasoned technologist, student, business executive, or enthusiast. To this end, I aim to provide a comprehensive and in-depth reference of distributed ledger technology that serves the expert and is also accessible to beginners. I primarily focus on describing the core characteristics of blockchain so that readers can build a strong foundation on which to build further knowledge and expertise. The main topics include core blockchain principles, cryptography, consensus algorithms, distributed systems theory, and smart contracts. In addition, practical topics such as programming smart contracts in solidity, building blockchain networks, using blockchain development frameworks such as Truffle, and writing decentralized applications and descriptions constitute a significant part of this book. Moreover, many types of blockchains, related use cases, and cross-industry applications of blockchain technology are discussed in detail.
This book is a unique blend of theoretical principles and hands-on application. Readers will not only be able to understand the technical underpinnings of this technology, but they will also be able to write code for smart contracts and build blockchain networks. Practitioners can use this book as a reference, and it can also serve as a textbook for students wishing to learn this technology. Indeed, some institutions have adopted previous editions of this book as a primary textbook for their courses on blockchain technology.
This book has six new chapters on the latest topics in blockchain, including scalability, security, privacy, the Ethereum Merge, decentralized identity, and decentralized finance.
I hope that this work will serve well technologists, teachers, students, scientists, developers, business executives, and anyone who wants to learn this fascinating technology for many years to come.
Who this book is for
This book is for anyone who wants to understand blockchain technology in depth. It can also be used as a reference resource by developers who are developing applications for blockchain. It can also be used as a textbook for courses related to blockchain technology and cryptocurrencies, as well as being a learning resource for various examinations and certifications related to cryptocurrency and blockchain technology.
What this book covers
Chapter 1, Blockchain 101, introduces the basic concepts of distributed computing, which blockchain technology is based on. It also covers the history, definitions, features, types, and benefits of blockchains, along with various consensus mechanisms that are at the core of blockchain technology.
Chapter 2, Decentralization, covers the concept of decentralization and its relationship with blockchain technology. Various methods and platforms that can be used to decentralize a process or a system will also be introduced.
Chapter 3, Symmetric Cryptography, introduces the theoretical foundations of symmetric cryptography, which is necessary to understand how various security services such as confidentiality and integrity are provided.
Chapter 4, Asymmetric Cryptography, introduces concepts such as public and private keys, digital signatures, and hash functions with practical examples.
Chapter 5, Consensus Algorithms, covers the fundamentals of consensus algorithms and describes the design and inner workings of several consensus algorithms. It covers both traditional consensus protocols and blockchain consensus protocols.
Chapter 6, Bitcoin Architecture, covers Bitcoin, the first and largest blockchain. It introduces technical concepts related to Bitcoin cryptocurrency in detail.
Chapter 7, Bitcoin in Practice, covers the Bitcoin network, relevant protocols, and various Bitcoin wallets. Moreover, advanced protocols, Bitcoin trading, and payments are also introduced. Moreover, various Bitcoin clients and programming APIs that can be used to build Bitcoin applications are covered.
Chapter 8, Smart Contracts, provides an in-depth discussion on smart contracts. Topics such as the history, the definition of smart contracts, Ricardian contracts, Oracles, and the theoretical aspects of smart contracts are presented in this chapter.
Chapter 9, Ethereum Architecture, introduces the design and architecture of the Ethereum blockchain in detail. It covers various technical concepts related to the Ethereum blockchain and explains the underlying principles, features, and components of this platform in depth. Other topics covered are related to the Ethereum Virtual Machine, mining, and supporting protocols for Ethereum.
Chapter 10, Ethereum in Practice, covers the topics related to setting up private networks for Ethereum smart contract development and programming.
Chapter 11, Tools, Languages, and Frameworks for Ethereum Developers, provides a detailed practical introduction to the Solidity programming language and different relevant tools and frameworks that are used for Ethereum development.
Chapter 12, Web3 Development Using Ethereum, covers the development of decentralized applications and smart contracts using the Ethereum blockchain. A detailed introduction to the Web3 API is provided along with multiple practical examples and a final project.
Chapter 13, The Merge and Beyond, introduces the latest development in Ethereum, such as the Beacon Chain, sharding, and future upgrades.
Chapter 14, Hyperledger, presents a discussion about the Hyperledger project from the Linux Foundation, which includes different blockchain projects introduced by its members.
Chapter 15, Tokenization, introduces the topic of tokenization, stable coins, and other relevant ideas such as initial coin offerings and token development standards.
Chapter 16, Enterprise Blockchain, covers the use and application of blockchain technology in enterprise settings and covers DLT platforms such as Quorum.
Chapter 17, Scalability, is dedicated to a discussion of one of the challenges, that is, scalablity, faced by blockchain technology and how to address it. We focus on layer 2 solutions to address this problem, however, other solutions are also discussed.
Chapter 18, Blockchain Privacy, introduces the problem of lack of privacy in blockchains and explains various techniques to address this limitation. We cover solutions to achieve confidentiality and anonymity in blockchains using techniques such as ZK-SNARKs, mixers, and various other methods.
Chapter 19,Blockchain Security, introduces the various security challenges in blockchains and how to solve them. These include smart contract security, formal verification, security concerns, and best practices at each layer of the blockchain system.
Chapter 20, DecentralizedIdentity, covers one of the hottest topics in the blockchain world. Decentralized identity is a cornerstone of the Web3 ecosytem. In this chapter, we explore the methods, techniques, and ecosystems that underpin the Web3 and decentralized identity landscape.
Chapter 21, Decentralized Finance, covers the use and application of decentralized finance, its various aspects, the use cases of blockchain in fianance, and different DeFi protocols.
Chapter 22, Blockchain Applications and What’s Next, provides a practical and detailed introduction to the applications of blockchain technology in fields other than cryptocurrency, including the Internet of Things, government, media, and finance. It is aimed at providing information about the current landscape, projects, and research efforts related to blockchain technology.
Chapter 23, Alternative Blockchains, introduces alternative blockchain solutions and platforms as bonus content that is available online. It covers technical details and features of alternative blockchains and relevant platforms. This is a online chapter and you can read about it at the following link: https://packt.link/OceZK.
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Blockchain 101
It is very likely that if you are reading this book, you already have heard about blockchain and have some fundamental appreciation of its enormous potential. If not, then let me tell you that this is a technology that has promised to positively alter the existing paradigms of nearly all industries, including, but not limited to, the IT, finance, government, media, medical, and law sectors, by making them more efficient, trustworthy, and transparent.
This chapter introduces blockchain technology, its technical foundations, the theory behind it, and various technologies that have contributed to building what is known today as blockchain. The theoretical foundations of distributed systems are described first. Next, the precursors of Bitcoin are presented. Finally, blockchain technology is introduced. This approach is a logical way of understanding blockchain technology, as the roots of blockchain are in distributed systems and cryptography. We will be covering a lot of ground quickly here, but don’t worry—we will go over a great deal of this material in much greater detail as you move throughout the book.
In this chapter, we’ll focus on:
The growth of blockchain technologyDistributed systemsThe history of blockchainIntroducing blockchainTypes of blockchainThe growth of blockchain technology
With the invention of Bitcoin in 2008, the world was introduced to a new concept that revolutionized the whole of society. It was something that promised to have an impact upon every industry. This new concept was blockchain, the underlying technology that underpins Bitcoin.
Some describe blockchain as a revolution, whereas another school of thought believes that it is going to be more evolutionary, and it will take many years before any practical benefits of blockchain reach fruition. This thinking is correct to some extent, but, in my opinion, the revolution has already begun.
It is a technology that has an impact on current technologies too and possesses the ability to change them at a fundamental level.
Progress towards maturity
Around 2013, some ideas emerged regarding using blockchain technology for other applications instead of only cryptocurrencies. Then, in 2014, some research and experimentation began, which led to proofs of concept, further research, and full-scale trial projects between 2015 and 2017. In 2015, Ethereum was launched as the first smart contract programmable blockchain, which unlocked many possibilities. Interest in enterprise-grade blockchains originated around the same time. Around that time, we also saw several projects, such as Everledger, Quorum, and Corda.
In addition, the development of novel monolithic and multichain architectures rapidly evolved after 2018. Some key examples of novel protocols include Solana, Avalanche, and Polkadot, which we will discuss later in this book.
Currently, as of the second quarter of 2023, decentralized finance (DeFi), non-fungible tokens (NFTs), and tokenization in general are very popular applications of blockchain. They are already in mainstream usage by millions of users around the world who are engaging in DeFi services. It is expected that within three years or so, DeFi will stabilize into a mature mainstream technology. With all the activity and adoption in DeFi and NFT trading, we can say that to some extent blockchain is already part of our daily lives. Of course, further maturity is required, especially from a regulation and security perspective, but millions of users are already using blockchain regularly, either to make payments, trade NFTs, get loans, or play games.
See the following article for details on which platforms these millions are making use of: https://beincrypto.com/ethereum-defi-users-reach-new-highs-over-4m-growing-roughly-8x-in-a-year/
This trend is only expected to grow and, during 2022 and onwards, more and more research and development will be carried out. There will be more focus on the regulation and standardization of blockchain technology. Numerous projects are already production ready, and more adoption is expected in the coming years.
Progress in blockchain technology almost feels like the internet dot-com boom of the late 1990s.
Research in the scalability of blockchains, where blockchains can handle many transactions like traditional financial networks, has led to the development of layer 2 architectures and multi-chain architectures. Advancement in making zero-knowledge proofs practical helped tremendously in making layer 2 solutions a reality. Layer 2 solutions are under heavy research and development now, and many mechanisms have been introduced, such as Plasma, rollups, sidechains, Lightning Network, and many others.
As of 2022, blockchain is already something that many people use every day. With DeFi, NFTs, cryptocurrencies, and Metaverses, blockchain has attracted millions of users. Most of the attraction is because of financial incentives gained by the trading and investment of digital assets such as NFTs and other DeFi services; however, researchers and academics are also interested in studying and developing the theory of these applications and relevant protocols.
Undoubtedly, further maturation and the adoption of blockchain technology is expected in the coming years.
Rising interest
Interest in blockchain technology has risen quite significantly over the last few years. Once dismissed by some simply as “geek money” from a cryptocurrency point of view or as something that was just not considered worth pursuing, blockchain is now being researched by the largest companies and organizations around the world. Millions of dollars are being spent to adopt and experiment with this technology.
Also, the interest in blockchain within academia is astounding, and many educational establishments—including prestigious universities around the world—are conducting research and development on blockchain technology. There are not only educational courses being offered by many institutions, but academics are also conducting high-quality research and producing many insightful research papers on the topic. There are also several research groups and conferences worldwide that specifically focus on blockchain research. This research community is beneficial for the growth of the entire blockchain ecosystem. A simple online search of “blockchain research groups” would reveal hundreds, if not thousands, of these research groups.
There are also various consortiums, such as Enterprise Ethereum Alliance (EEA) at https://entethalliance.org and Hyperledger at https://www.hyperledger.org, that have been established for the research, development, and standardization of blockchain technology. Moreover, the Institute of Electrical and Electronics Engineers (IEEE) and the International Standards Organization (ISO) have also started their attempts to standardize various aspects of blockchain technology.
Many start-ups are providing blockchain-based solutions already. A simple trend search on Google reveals the immense scale of interest in blockchain technology over the last few years. Hot topics include decentralized autonomous organizations (DAOs), fully autonomous and transparent member-governed entities developed using smart contracts with no central authority. Meanwhile, NFTs, through which digital art is routinely bought and sold for millions of dollars, and Metaverses have been making the news.
A Metaverse is a computer-simulated three-dimensional environment. A convergence of our digital and real-world life, they provide a virtual world for the users to perform activities such as social interactions, engaging in business, and shopping. This virtual world is usually accessible via specialized hardware called VR headsets, enhancing the virtual world experience.
This is not a new concept; in the Web 2.0 days (the usual internet that we know and use daily), Second Life, World of Warcraft, and quite a few other similar platforms rose to prominence, as entities centrally owned by shareholders. In the Web 3.0 era (post blockchain), Decentraland and the Sandbox, among many others, are becoming popular, based on decentralized foundations and community governance.
In this book, we are going to learn what exactly blockchain technology is and how it can reshape businesses, multiple industries, and indeed everyday life by bringing about a plenitude of benefits such as decentralized trust, efficiency, cost savings, transparency, and security. We will also explore what decentralization is, smart contracts, and how solutions can be developed and implemented using blockchain platforms such as Ethereum.
While there are many benefits of blockchain technology, there are some challenges too that can cause hurdles in adoption and are being actively researched, such as scalability, privacy, and security. We’ll also take a critical look at blockchain and discuss its limitations and challenges.
We shall begin our exploration of blockchain by looking at distributed systems in the following section. This is a foundational paradigm on which blockchain is based, and we must have a good grasp of what distributed systems are before we can meaningfully discuss blockchain in detail.
Distributed systems
Understanding distributed systems is essential to our understanding of blockchain, as blockchain is a distributed system at its core. It is a distributed ledger that can be centralized or decentralized. A blockchain is originally intended to be and is usually used as a decentralized platform. It can be thought of as a system that has properties of both decentralized and distributed paradigms. It is a decentralized-distributed system.
A distributed system is a computing paradigm whereby two or more nodes work with each other in a coordinated fashion to achieve a common outcome. It is modeled in such a way that end users see it as a single logical platform. For example, Google’s search engine is based on a large distributed system; however, to a user, it looks like a single, coherent platform. It is composed of processes (nodes) and channels (communication channels) where nodes communicate by passing messages. A blockchain is a message-passing distributed system.
A node is an individual player (a computer) in a distributed system. All nodes can send and receive messages to and from each other. Nodes can be honest, faulty, or malicious, and they have memory and a processor. A node that exhibits arbitrary behavior is known as a Byzantine node after the Byzantine Generals problem.
The Byzantine Generals problem
In 1982, a thought experiment was proposed by Lamport et al. in their research paper, The Byzantine Generals Problem, which is available here: https://www.microsoft.com/en-us/research/publication/byzantine-generals-problem/
In this problem, a group of army generals who lead different parts of the Byzantine army is planning to attack or retreat from a city. The only way of communicating with them is via a messenger. They need to agree to strike at the same time to win. The issue is that one or more generals might be traitors who could send a misleading message. Moreover, the messenger could be captured by the city, resulting in no message delivery. Therefore, there is a need for a viable mechanism that allows agreement among the generals, even in the presence of the treacherous ones, and message loss, so that the attack can still take place at the same time. As an analogy for distributed systems, the generals can be considered as honest nodes, the traitors as Byzantine nodes (that is, nodes with arbitrary behavior), the messenger can be thought of as a channel of communication with the generals, and a captured messenger as a delayed or lost message. Several solutions were presented to this problem in the paper by Lamport et al. in 1982.
This type of inconsistent behavior of Byzantine nodes can be intentionally malicious, which is detrimental to the operation of the network. Any unexpected behavior by a node on the network, whether malicious or not, can be categorized as Byzantine.
A small-scale example of a distributed system is shown in the following diagram. This distributed system has six nodes, of which one (N4) is a Byzantine node, leading to possible data inconsistency. L2 is a link that is broken or slow, and this can lead to a partition in the network:
Figure 1.1: Design of a distributed system: N4 is a Byzantine node and L2 is broken or a slow network link
Two key challenges of a distributed system design are the coordination between nodes and fault tolerance. Even if some (a certain threshold dictated by the consensus protocol) of the nodes become faulty or network links break, the distributed system should be able to tolerate this and continue to work to achieve the desired result. This problem has been an active area of distributed system design research for many years, and several algorithms and mechanisms have been proposed to overcome these issues.
Distributed systems are challenging to design. It has been proven that a distributed system cannot have all three of the much-desired properties of consistency, availability, and partition tolerance simultaneously. This principle is known as the CAP theorem.
CAP theorem
The CAP theorem, also known as Brewer’s theorem, was introduced by Eric Brewer in 1998 as a conjecture. In 2002, it was proven as a theorem by Seth Gilbert and Nancy Lynch. The theorem states that any distributed system cannot have consistency, availability, and partition tolerance simultaneously:
Consistency is a property that ensures that all nodes in a distributed system have a single, current, and identical copy of the data. Consistency is achieved using consensus algorithms to ensure that all nodes have the same copy of the data. This is also called state machine replication (SMR). The blockchain is a means of achieving state machine replication.Availability means that the nodes in the system are up, accessible, and are accepting incoming requests and responding with data without any failures as and when required. In other words, data is available at each node and the nodes are responding to requests.Partition tolerance ensures that if a group of nodes is unable to communicate with other nodes due to network failures, the distributed system continues to operate correctly. This can occur due to network and node failures.A Venn diagram is commonly used to visualize the CAP theorem, as shown below:
Figure 1.2: CAP theorem
The preceding diagram depicts that only two properties at a time can be attained; either AP, CA, or CP.
In summary:
If we opt for CP (consistency and partition tolerance), we sacrifice availability.If we opt for AP (availability and partition tolerance), we sacrifice consistency.If we opt for AC (availability and consistency), we sacrifice partition tolerance.Note that AC does not really exist. The CAP theorem in practice means that in the case of a network partition, a distributed system is either available or consistent. As network partitions cannot be ignored, the choice is between consistency or availability when a network partition occurs.
We can explain this concept with the following example.
Let’s imagine that there is a distributed system with two nodes. Now, let’s apply the three theorem properties to this smallest of possible distributed systems with only two nodes:
Consistency is achieved if both nodes have the same shared state; that is, they have the same up-to-date copy of the data.Availability is achieved if both nodes are up and running and responding with the latest copy of data.Partition tolerance is achieved if, despite communication failure or delay between nodes, the network (distributed system) continues to operate.Now think of a scenario where a partition occurs and nodes can no longer communicate with each other. If newly updated data comes in now, it can only be updated on one node. If the node accepts the update, then only one node in the network is updated, and consistency is lost. If the node rejects the update, that will result in a loss of availability. This means that either availability or consistency is unachievable due to the network partition. This is strange because somehow, blockchain manages to achieve all these properties, violating the theorem (especially in its most successful implementation, Bitcoin)—or does it?
In blockchains, consistency is sacrificed in favor of availability and partition tolerance. In this scenario, consistency (C) in the blockchain is not achieved simultaneously with partition tolerance (P) and availability (A), but it is achieved over time. This is called eventual consistency, where consistency is achieved due to validation from multiple nodes over time. There can be a temporary disagreement between nodes on the final state, but it is eventually agreed upon. For example, in Bitcoin, multiple transaction confirmations are required to achieve a good confidence level that transactions may not be rolled back in the future. Eventually, a consistent view of transaction history is available in all nodes. Multiple confirmations of a transaction over time provide eventual consistency in Bitcoin. For this purpose, the process of mining was introduced in Bitcoin. Mining is a process that facilitates the achievement of consensus by using the Proof of Work (PoW) algorithm. At a higher level, mining can be defined as a process that’s used to add more blocks to the blockchain. We will cover more on this later in Chapter 6, Bitcoin Architecture.
PACELC theorem
An extension of the CAP theorem called PACELC was first proposed by Daniel J. Abadi from Yale University. It states that, in addition to the three properties proposed by CAP, there are also tradeoffs between latency and consistency. It states that tradeoffs between consistency and latency always exist in replicated systems, whereas CAP is only applicable when there are network partitions. In other words, it means that even if no network partitions occur, under normal operation the tradeoff between consistency and latency exists. For example, some databases may choose to give up consistency for lower latency, and some databases could pay the availability and latency costs to achieve consistency. This is true for replicated systems and presents a more inclusive picture of consistency tradeoffs in distributed systems.
PACELC was formally proved in a paper available here: https://dl.acm.org/doi/10.1145/3197406.3197420
With a better understanding of distributed systems, let’s now talk about blockchain itself. First, we’ll begin with a brief rundown of the history of blockchain and Bitcoin.
The history of blockchain
Blockchain was introduced with the invention of Bitcoin in 2008. Its practical implementation then occurred in 2009. Bitcoin will be explored in great depth in Chapter 6, Bitcoin Architecture. However, it is essential to refer to Bitcoin here because without it, the history of blockchain is not complete.
Now we will look at the early history of computing and computer networks and will discuss how these technologies evolved and contributed to the development of Bitcoin in 2008:
1976 – Diffie–Hellman work on securely exchanging cryptographic keys.1978 – Invention of public key cryptography.1979 – Invention of Merkle trees (hashes in a tree structure) by Ralph C. Merkle.1980s – Development of TCP/IP.1980 – Protocols for public key cryptosystems, Ralph C. Merkle.1982 – Blind signatures proposed by David Chaum.1982 – The Byzantine Generals problem.1985 – Work on elliptic curve cryptography by Neal Koblitz and Victor Miller.1991 – Haber and Stornetta work on tamper-proofing document timestamps. This can be considered the earliest idea of a chain of blocks or hash chains.1992 – Cynthia Dwork and Moni Naor publish Pricing via Processing or Combatting Junk Mail. This is considered the first use of PoW.1993 – Haber, Bayer, and Stornetta upgraded the tamper-proofing of document timestamps system with Merkle trees.1995 – David Chaum’s Digicash system (an anonymous electronic cash system) started to be used in some banks.1998 – Bit Gold, a mechanism for decentralized digital currency, invented by Nick Szabo. It used hash chaining and Byzantine Quorums.1999 – Emergence of a file-sharing application mainly used for music sharing, Napster, which is a P2P network, but was centralized with the use of indexing servers.1999 – Development of a secure timestamping service for the Belgian project TIMESEC.2000 – Gnutella file-sharing network, which introduced decentralization.2001 – Emergence of BitTorrent and Distributed Hash Tables (DHTs).2002 – Hashcash by Adam Back.2004 – Development of B-Money by Wei Dei using Hashcash.2004 – Hal Finney, the invention of the reusable PoW system.2005 – Prevention of Sybil attacks by using computation puzzles, due to James Aspnes et al.2009 – Bitcoin (first blockchain).These technologies contributed in some way to the development of Bitcoin, even if not directly; the work is relevant to the problem that Bitcoin solved.
Bitcoin
All previous attempts to create anonymous and decentralized digital currency were successful to some extent, but they could not solve the problem of preventing double spending in a completely trustless or permissionless environment. This problem was finally addressed by the Bitcoin blockchain, which introduced the Bitcoin cryptocurrency.
Bitcoin also solves the SMRproblem, introduced in 1978 by Leslie Lamport and formalized in 1980 by Fred Schneider. SMR is a scheme that’s used to implement a fault-tolerant service by replicating data (state) between nodes in a distributed system. Bitcoin solves the problem by allowing the replication of blocks at all correct nodes and ensuring consistency via its PoW mechanism. Here, the agreement is reached between nodes (or replicas) repeatedly to append new blocks to the blockchain.
Electronic cash
The concept of electronic cash (e-cash), or digital currency, is not new. Since the 1980s, e-cash protocols have existed that are based on a model proposed by David Chaum.
Just as understanding the concepts of distributed systems is necessary to comprehend blockchain technology, the idea of e-cash is also essential to appreciate the first, and astonishingly successful, application of blockchain, Bitcoin, and more broadly, cryptocurrencies in general. To create an effective e-cash system, two fundamental requirements need to be met: accountability and anonymity.
Accountability is required to ensure that cash is spendable only once (addressing the double-spending problem) and that it can only be spent by its rightful owner. The double-spending problem arises when the same money is spent twice. As it is quite easy to make copies of digital data, this becomes a big issue in digital currencies as you can make many copies of the same digital cash. Spending the same cash twice is known as the double-spending problem.
Anonymity is required to protect users’ privacy. With physical cash, it is almost impossible to trace back spending to the individual who actually paid the money, which provides adequate privacy should the consumer choose to hide their identity. In the digital world, however, providing such a level of privacy is difficult due to inherent personalization, tracing, and logging mechanisms in digital payment systems such as credit card payments. This is a required feature for ensuring the security and safety of the financial network, but it is also often seen as a breach of privacy.
This is because end users do not have any control over who their data might be shared with, even without their consent. Nevertheless, this is a solvable problem, and cryptography is used to address such issues. Especially in blockchain networks, the privacy and anonymity of the participants on the blockchain are sought-after features. David Chaum solved both problems during his work in the 1980s by using two cryptographic operations, namely, blind signatures and secret sharing. These terms and related concepts will be discussed in detail in Chapter 4, Asymmetric Cryptography. For the moment, it is sufficient to say that blind signatures allow the signing of a document without actually seeing it, and a secret sharing scheme enables the detection of double-spending.
In 2009, the first practical implementation of an e-cash system named Bitcoin appeared. The term cryptocurrency emerged later. For the very first time, it solved the problem of distributed consensus in a trustless network. It used public key cryptography with a PoW mechanism to provide a secure and decentralized method of minting digital currency. The key innovation is the idea of an ordered list of blocks composed of transactions that is cryptographically secured by the PoW mechanism to prevent double-spending in a trustless environment. This concept will be explained in greater detail in Chapter 6, Bitcoin Architecture.
Looking at all the technologies mentioned previously and their relevant history, it is easy to see how concepts from e-cash schemes and distributed systems were combined to create Bitcoin and what now is known as blockchain. This concept can also be visualized with the help of the following diagram:
Figure 1.3: The various ideas that supported the invention of Bitcoin and blockchain
With the emergence of e-cash covered, along with the ideas that led to the formation of Bitcoin and blockchain, we can now begin to discuss blockchain itself.
Introducing blockchain
In 2008, a groundbreaking paper, entitled Bitcoin: A Peer-to-Peer Electronic Cash System, was written on the topic of peer-to-peer e-cash under the pseudonym of Satoshi Nakamoto.
No one knows the actual identity of Satoshi Nakamoto. After introducing Bitcoin in 2009, Nakamoto remained active in the Bitcoin developer community until 2011, before handing over Bitcoin development to its core developers and simply disappearing.
The paper introduced the term chain of blocks, later to evolve into “blockchain”, where a chronologically ordered sequence of blocks containing transactions is produced by the protocol. The paper is available at https://bitcoin.org/bitcoin.pdf.
There are some different ways that blockchain may be defined; the following are two of the most widely accepted definitions:
Layman’s definition: Blockchain is an ever-growing, secure, shared recordkeeping system in which each user of the data holds a copy of the records, which can only be updated if a majority of parties involved in a transaction agree to update.Technical definition: Blockchain is a peer-to-peer, distributed ledger that is cryptographically secure, append-only, immutable (extremely hard to change), and updateable only via consensus among peers.Now, let’s examine things in some more detail. We will look at the keywords from the technical definition one by one:
Peer-to-peer: The first keyword in the technical definition is peer-to-peer, or P2P. This means that there is no central controller in the network, and all participants (nodes) talk to each other directly. This property allows transactions to be conducted directly among the peers without third-party involvement, such as by a bank.Distributed ledger: Dissecting the technical definition further reveals that blockchain is a “distributed ledger,” which means that a ledger is spread across the network among all peers in the network, and each peer holds a copy of the complete ledger.Cryptographically secure: Next, we see that this ledger is “cryptographically secure,” which means that cryptography has been used to provide security services that make this ledger secure against tampering and misuse. These services include non-repudiation, data integrity, and data origin authentication.Append-only: Another property that we encounter is that blockchain is “append-only,” which means that data can only be added to the blockchain in time-sequential order. This property implies that once data is added to the blockchain, it is almost impossible to change that data and it can be considered practically immutable. In other words, blocks added to the blockchain cannot be changed, which allows the blockchain to become an immutable and tamper-proof ledger of transactions.A blockchain can be changed in rare scenarios where collusion against the blockchain network by bad actors succeeds in gaining more than 51% of the authority. There may also be some legitimate reasons to change data in the blockchain once it has been added, such as the “right to be forgotten” or “right to erasure” (also defined in the GDPR ruling: https://gdpr-info.eu/art-17-gdpr/). The right to be forgotten is the right that mandates personal data about a person to be removed from internet records, organizational records, and other associated services. However, those are individual cases that need to be handled separately and that require an elegant technical solution.
Having detailed the primary features of blockchain, we are now able to begin to look at its actual architecture.
Blockchain architecture
We’ll begin by looking at how blockchain acts as a layer within a distributed peer-to-peer network.
Blockchain by layers
Blockchain can be thought of as a layer of a distributed peer-to-peer network running on top of the internet, as can be seen in the following diagram. It is analogous to SMTP, HTTP, or FTP running on top of TCP/IP:
Figure 1.4: The layered architectural view of a generic blockchain
Now we’ll discuss all these elements one by one:
The lowest layer is the Network layer, which is usually the internet and provides a base communication layer for any blockchain.A P2P (peer-to-peer) network runs on top of the Network layer, which consists of information propagation protocols such as gossip or flooding protocols.After this comes the Cryptography layer, which contains crucial cryptographic protocols that ensure the security of the blockchain. These cryptographic protocols play a vital role in the integrity of blockchain processes, secure information dissemination, and blockchain consensus mechanisms. This layer consists of public key cryptography and relevant components such as digital signatures and cryptographic hash functions. Sometimes, this layer is abstracted away, but it has been included in the diagram because it plays a fundamental role in blockchain operations.Next comes the Consensus layer, which is concerned with the usage of various consensus mechanisms to ensure agreement among different participants of the blockchain. This is another crucial part of the blockchain architecture, which consists of various techniques such as SMR, proof-based consensus mechanisms, or traditional (from traditional distributed systems research) Byzantine fault-tolerant consensus protocols.We then have the Execution layer, which can consist of virtual machines, blocks, transactions, and smart contracts. This layer, as the name suggests, provides execution services on the blockchain, and performs operations such as value transfer, smart contract execution, and block generation. Virtual machines such as Ethereum Virtual Machine (EVM), Ethereum WebAssembly (ewasm), and Zinc VM provide an execution environment for smart contracts to execute.Finally, we have the Applications layer, which is composed of smart contracts, decentralized applications, DAOs, and autonomous agents. This layer can effectively contain all sorts of various user-level agents and programs that operate on the blockchain. Users interact with the blockchain via decentralized applications.All these concepts will be discussed in detail later in this book in various chapters. Next, we’ll look at blockchain from more of a business-oriented perspective.
Blockchain in business
The current traditional business model is centralized. For example, for cash transfers, banks act as a central trusted third party. In financial trading, a central clearing house acts as a trusted third party
