PPT Class Blockchain - Validation and CASE.pdf

THE TRANSACTION
LIFECYLCE
(1) DIGITAL MONEY and the
PAYMENTS RIDDLE
(2) DISTRIBUTED LEDGER
TECHNOLOGY
(3) CRYPTOGRAPHY
(4) HASHING
(5) ADDING AND VALIDATING
TRANSACTIONS

THE ACCOUNTING MODEL
Date Sender Receiver Amount Signature
13 Oct 2024 SBIXXX ICIYYY Rs 1,000 SJ
Account/Balance Model keeps track of the balance of each account as a global state.
The balance of an account is checked to make sure it is larger than or equal to the
spending transaction amount.
Balance - SBIXXX
1 Oct 2024 Rs. 2500
13 Oct 2024 Rs. 1500
Balance - ICIYYY
1 Oct 2024 Rs. 200
13 Oct 2024 Rs. 1200
It create a separate record for each user. It must keep track of every account, and remember
every account's balance all of the time, and adjust be after/before transactions.

UNSPENT TRANSACTION OUTPUT (UTXO) MODEL
UTXO is the amount of digital currency someone has left remaining after executing a
transaction.
Each transaction in bitcoin has at least one input and one output
 Each input spends the BTC (satoshis) paid to a previous output.
 Each output then waits as an Unspent Transaction Output (UTXO) until a later input spends it.
i.e. each transaction spends output from prior transactions and generates new outputs
that can be spent by transactions in the future.
Source: https://developer.bitcoin.org/devguide/transactions.html

EXAMPLE (1/3)
1. Suppose the following bitcoins are received from the transactions. Each one of these
transactions is a UTXO.
2. Now I want to buy a car that costs 0.5 BTC.
3. In order to transfer 0.5 BTC, there is a need to choose one or multiple transactions (UTXOs)
as input.
4. Let’s choose 0.7 BTC from Sarah as input to purchase a car.
Source: GeeksforGeeks

EXAMPLE (2/3)
5. In the case of UTXO, the input amount can’t be left unspent, one can’t say that do
nothing with the remaining 0.2 BTC
6. The remaining 0.2 BTC, has to be used in one of the following 3 ways-
 A. Send the remaining amount back to your account (See image)
 B. Use the remaining amount as the transaction fee. In order to provide a transaction fee, nothing
needs to be mentioned, if you don’t send the remaining amount to anyone, it is assumed a transaction
fee.
 C. Send the remaining amount to someone else.

EXAMPLE (3/3)
7. If assumed to be transaction fee (not self)
8. Our UTXOs:

AS A MATHEMATICAL SET
The total UTXOs present in a blockchain represents a set and is being constantly
maintained by every bitcoin node. Each transaction consumes elements from this set and
creates new ones that get added to the set.
Thus, the set represents all of the coins in a particular cryptocurrency system.
UTXO set is updated every time a new block is accepted in the blockchain.
Every Bitcoin node in the network will have the exact copy of the UTXO set in their
local storage. The complete UTXO set can be summed to calculate the total supply
of a cryptocurrency at a given point in time.
In the case of a valid blockchain transaction, only unspent outputs can be used to
fund further transactions. The condition that only unspent outputs may be used in
further transactions is necessary to prevent double-spending and fraud.

EXAMPLE 2
Source: https://bitcoin.org
Multiple Inputs and Outputs
possible
Each user can have different
output addresses
Input and output addresses
are in form of “Scripts” (Using
public and private keys to
indicate that the input balance
is indeed ours to spend +
verify with a digital signature)

EXAMPLE 4
TxnId OutputNo OutputPubKey Amount
w23a 0 xx45 230
W45d 1 yy67 110
w91b 1 yy01 280
z15f 2 yy67 550
z40k 1 yb72 700
Block TxnId InputNo Input OutputNo OutputPubKey Amount
B b14a Miner Reward 0 xa15 125
B b20d 0 Output 1 of w45d 0 xz55 660
B b20d 1 Output 2 of z15f 0
Latest Block X
UTXO database →
New Block B (below)
Source: JRV

EXAMPLE 4 SOLUTION
w23a 0 Xx45 230
w45d 1 yy67 110
w91b 1 yy01 280
z15f 2 yy67 550
z40k 1 yb72 700
b14a 0 xa15 125
b20d 0 xz55 660
B b14a Miner Reward 0 xa15 125
B b20d 0 Output 1 of w45d 0 xz55 660
B b20d 1 Output 2 of z15f 0
Latest Block B
UTXO database updated →
Blockchain becomes X-B now
Source: JRV

VALIDATING BLOCKS ON THE CHAIN
Miners typically maintain a UTXO database, and whenever a UTXO is spent, its entry
is deleted from the database.
Therefore, if someone tries to spend that UTXO again, they'll get an error and reject
the transaction as the input UTXOs have already been spent elsewhere.
Prevents double-spending.

EXAMPLE 4 CONTD.
C c11q Miner Reward 0 Xt15 125
C c99f 0 Output 0 of w23a 0 xz55 230
C c22w 0 Output 2 of z15f 0 yb30 550
Latest Block B
New Block comes
Source: JRV
w23a 0 Xx45 230
w45d 1 yy67 110
w91b 1 yy01 280
z15f 2 yy67 550
z40k 1 yb72 700
b14a 0 xa15 125
b20d 0 xz55 660

EXAMPLE 4 CONTD.
w23a 0 Xx45 230
w91b 1 yy01 280
z40k 1 yb72 700
b14a 0 xa15 125
b20d 0 xz55 660
C c11q Miner Reward 0 Xt15 125
C c99f 0 Output 0 of w23a 0 xz55 230
C c22w 0 Output 2 of z15f 0 yb30 550
Latest Block B
Block C is invalid (double
spending). UTXO set remains
unchanged. Blockchain X-B
Source: JRV

PROS-CONS OF UTXO MODEL
Scalability: Since it is possible to process
multiple UTXOs at the same time, it
enables parallel transactions and
encourages scalability innovation.
Privacy: UTXO provides a higher level
of privacy, as long as the users use new
addresses for each transaction.
Simplicity: For developers of complex
smart contracts/other applications,
especially those that require state
information or involve multiple parties.
Efficiency: Each transaction only needs
to validate that the sending account has
enough balance to pay for the
transaction.
Source: Medium
PROS CONS

(I) BLOCKCHAIN CATEGORIZATION
1. Permissionless blockchain networks are open to anyone, without needing
permission from any authority.
 Anyone can read the blockchain as well as issue transactions on the blockchain (through mining)
 Malicious users may attempt to publish blocks in a way that subverts the system (therefore require
consensus mechanisms).
2. Permissioned blockchain networks are ones where users publishing blocks must be
authorized by some authority (be it centralized or decentralized).
 It is possible to restrict read access and to restrict who can issue transactions.
 They may be maintained using closed source software.
Source: NISTIR 8202

BLOCKCHAIN
CATEGORIZA
TION
Source: 101blockchains

BLOCKCHAIN INFRASTRUCTURE
The 5 Layers
(1) Data Layer
(2) Network Layer
(3) Consensus Layer
(4) Incentive Layer
(5) Application Layer
Source: SB

FIRST FOUR LAYERS
Layer 1: Data Layer – Validation, Transactions data
Layer 2: Network Layer
Layer 3: Consensus Layer (PoW, PoS etc.)
Layer 4: Mining (Hashing puzzle)

BEFORE OPENING THE FLOOR…
Smart contracts are simply programs stored on a blockchain that run when
predetermined conditions are met.
Essentially just if-then-else statements that are coded on block chain ledger.
Eg: In a future scenario, if a buyer wishes to purchase a used car they could use a smart contract that
registers the change in the ownership of the car as the transaction is made. Once the transaction is
verified and published on the Blockchain, the conditions of the contract have been met. The blockchain is
then updated when the transaction is completed. The transaction cannot be changed, and only parties
who have been granted permission can see the results. The whole network can verify its validity. The
state of ownership can now be verified by any device that is connected to the internet and the
Blockchain, which in this case, is the car. The car receives this information, geo-localizes its new owner via
the cellphone number attached to the mobile wallet and proceeds to make its way to the new owner.
Source: IBM, Kariappa Bheemah (2015)

SMART CONTRACT
Other Egs: Releasing funds to
the appropriate parties,
sending notifications, issuing a
ticket, escrow etc.
BCG identifies Smart contracts
as one biggest things to look
out for in blockchain
applications (Seven Trends at the
Frontier of Blockchain Banking, 2021)
Source: NASSCOM Community

CAN YOU THINK OF SOME
BLOCKCHAIN APPLICATIONS?

SOME APPLICATIONS (1/3)
1. Banking - Blockchain is disrupting the banking system by providing a peer-to-peer
payment system with the highest security and low fees.
2. Cyber security - Blockchain quickly identifies malicious attack due to the peer-to-
peer connections where data cannot be tampered with and every single piece of data
stored on the blockchain network is verified and encrypted using a cryptographic
algorithm
3. Supply Chain Management - Due to the lack of transparency, supply chain
management often had its challenges like service redundancy, lack of coordination
between various departments, and lack of reliability.

4. Healthcare - In the healthcare system, patients can connect to other hospitals and
collect their medical data immediately. Apart from the delay, there are high data
corruption chances since the information is stored in a physical memory system.
5. Government - Rigged votes is an illegal activity that occurs during most traditional
voting systems. Also, citizens who want to vote to wait a little longer in a queue and
cast their votes to a local authority, which is a very time-consuming process.

6. Disintermediate market arbitragers: By enabling greater transparency across the
network, blockchain could also disintermediate market arbitragers, price-reporting
agencies, benchmark providers, and others whose businesses create value by
capitalizing on information asymmetry.
7. Reduce manual reconciliation efforts: Blockchain’s structure and capabilities support
end-to-end automation and easy data sharing across companies, and greatly reduce
manual reconciliation efforts.
8. Improve regulatory and audit compliance: Anywhere, anytime access to complete
transaction histories can significantly improve regulatory and audit compliance,
decreasing the associated costs and boosting response times.
Source: BCG

WHAT BLOCKCHAIN BRINGS ?
28
Privacy
Balancing the confidentiality and traceability of activity
Governance
Redefining the “new normal” threat matrix for shared ledgers among
large banks
Implementation
Establishing standard tools or administration interfaces
Scalability & Latency
Finding solutions that can handle the required volume
Protection
Safeguarding against reorganization by one or more participants
CHALLENGES
Holistic View
A universal view of information from a single source
Transparency
Providence and greater transparency for regulatory reporting
Simplified
Decreased operational costs and complexity
Speed
Can enable faster data transfer times
Security
Data is immutable; logged transactions cannot be altered
BENEFITS
Blockchain technology enables decentralized and shared operations, there are key challenges to consider
and huge benefits to take into consideration

CREATE YOUR OWN BLOCKCHAIN
Joget : Joget is an open-source low-code/no-code application
Can create a blockchain app without coding
Uses Hyperledger Fabric plugin
You can learn more about Joget at https://www.joget.org/
You can learn more about Hyperledger Fabric at https://www.hyperledger.org/use/fabric
(Not part of the course: Many tutorials available online)

DEUTSCHE BANK: PURSUING
BLOCKCHAIN OPPORTUNITIES (A)
HARVARD
CASE STUDY

BACKGROUND (DB)
•Deutsche Bank AG is a financial services company with operations in over 70
countries and dollar 1.7 trillion in assets under management.
•DB provided commercial and investment banking, retail banking, transaction banking,
and asset and wealth management products and services to corporations,
governments, institutional investors, small and medium sized businesses, and private
individuals.
•In 2014 DB was following a mixed digital strategy of outsourcing and bringing it
back in-house. In early 2015 DB in its “Strategy 2020” committed to become a more
digital bank. It planned to spend EUR 1 billion by 2020 to capture new revenue
opportunities. A disruptive technology being considered was blockchain.

GENERATE AWARENESS
Find out if other areas in DB were already
exploring potential uses of blockchain
Community/ enthusiasts: Series of blogs, co-
hosted Distributed Ledger workshop

GOING TO THE COO AND GETTING FUNDS
Henry Ritchotte
(Chief Operating
Officer, DB)

KEY PIONEERS
Organizational structure

CORPORATE BOND AS A USE CASE
Initial focus was to identify a business case and business model for using and
delivering the automated DLT transactions
A corporate bond was selected as a security
 Why?
Smart contracts identified as a key to unlocking DLT efficiency potential

RISK MANAGEMENT
“Once you have created a smart contract, who verifies that it will execute as intended?

SUMMARY: LEARNINGS FROM THE CASE
Blockchain and DLT and the
importance of exploring its
application potential
Impact of blockchain
technology on business
models that are based on
trust and information
asymmetries
Importance of discovery,
incubation, and
implementation mechanisms
within incumbent
organizations to help them
make sense of disruptive
innovations such as blockchain
Critically reflect on the
blockchain news, reports and
literature to understand the
potential value of designing,
developing and implementing
blockchain-based systems
Role of executive leaders in
designing and implementing
blockchain initiatives in large,
established organizations and
industries
Importance of strategic
cooperation and identifying
the associated risks and
opportunities.

PPT Class Blockchain - Validation and CASE.pdf

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