BCSE324L - FOUNDATIONS OF BLOCKCHAIN TECHNOLOGY

Module 2: DISTRIBUTED LEDGER TECHNOLOGY

Dr. Senthil Prakash P.N.

Assistant Professor Senior Grade 1,
School of Computer Science and Engineering,
Vellore Institute of Technology,
Chennai – 600127
Distributed Ledger Technology
• DLT stands for Distributed Ledger Technology. It is also known as a “shared ledger” or
simply distributed ledger.

• It is a digital system that lets users and systems record transactions related to assets. A
distributed ledger technology stores the information at multiple locations at any given point
of time.

• DLT, unlike traditional databases, does not have any central place to store information.

• The decentralization feature also provides better security, transparency, and trust among
parties using it.
Origin of Ledger
• DLT originates from the peer-to-peer(P2P) network. In any P2P network, peers
communicate with each other without the need for a centralized entity. Technically, a
distributed ledger technology is possible through a peer-to-peer network.

• A consensus algorithm is utilized to make decentralization work.

Types of Distributed Ledger Technology
• Centralized Ledger: All parties reconcile their local databases with a centralized electronic
ledger that is maintained and controlled by a trusted central party.

Centralized Ledger
Types of Distributed Ledger Technology
• Distributed Ledger (Permissionless): Each node in a P2P network owns a full and up-to-
date copy of the entire ledger. Every proposed local addition to the ledger by a network
participant is communicated across the network to all nodes. Nodes collectively validate the
change through an algorithmic consensus mechanism. After validation is accepted, the new
addition is added to all respective ledgers to ensure data consistency across the entire
network.

Distributed Ledger (Permissionless)

Types of Distributed Ledger Technology
• Distributed Ledger (Permissioned): In a permissioned system, nodes need permission
from a central entity to access the network and make changes to the ledger. Access controls
can include identity verification.

Distributed Ledger (Permissioned)

Features of Distributed Ledger Technology
Distributed Nature of the Ledger:

• Recordkeeping has always been a centralized process that requires trust in the record
keeper. The most important innovation of DLT is that control over the ledger does not lie
with any one entity but is with several or all network participants – depending on the type
of Distributed Ledger.

• The removal of the central party can increase speed and potentially remove costs and
inefficiencies associated with maintaining the ledger and subsequent reconciliations.
Features of Distributed Ledger Technology
Consensus Mechanism:

• The distributed nature of the DL requires the participants in the network (‘nodes’) to reach
a consensus regarding the validity of new data entries by following a set of rules.

• A consensus mechanism is necessary to establish whether a particular transaction is

legitimate or not.

• The consensus mechanism is also important to handle conflicts between multiple

simultaneous competing entries - for example, different transactions on same asset are
proposed by different nodes.
Features of Distributed Ledger Technology
Cryptographic Hash Functions and Digital Signatures:

• Cryptography is at the core of DLT, in particular for blockchain implementations.

• Each new data entry, i.e. a transaction record, is “hashed”, which means that a cryptographic
hash function is applied to the original message.

• The blocks are signed with a digital signature, which binds the sender to the contents of the
block, akin to a signature on a contract. DLT uses ‘public key cryptography’ for digital
signatures
Features of Distributed Ledger Technology
Cryptographic Hash Functions and Digital Signatures:
Ecosystem of Distributed Ledger Technology
An ecosystem is a collection of stakeholders such as organizations and users in conjunction
with other entities, performing separate roles. There are four aspects of DLT ecosystems:

• Hardware aspect,

• Business aspect,

• Software development aspect and

• Protocol development aspect

To get a better understanding of distributed ledger technologies, we also need to learn about
its ecosystem.
Ecosystem of Distributed Ledger Technology
Hardware aspect of the DLT ecosystem:

The hardware aspect of DLT ecosystems is comprised of a large number of nodes where each
node could either be a computer, server, or storage device. Three modalities of nodes can
exist:

• block producing full validating nodes: participates in a consensus process and contains
an entire replica of the distributed ledger

• non‐block producing full validating nodes: does not participate in a consensus process
and contains an entire replica of the distributed ledger

• partial/light nodes: only a partial transaction list but must be connected in some way to a
full node
Ecosystem of Distributed Ledger Technology
Business aspect of the DLT ecosystem:

The business aspect of the DLT ecosystem consists of users, investors, block producers,
corporations, and developers.

• DLT users: engage with a DLT by using a DLT application, product or service.

• Investors: the people or organizations that provide capital to create the DLT ecosystem.

• Block producers: full validating nodes that actively participate in a given DLT network's
consensus mechanism.

• Corporations: utilize DLT for business activities and deliver technologies to a large group
of customers or end-users.
Ecosystem of Distributed Ledger Technology
Software aspect of the DLT ecosystem:

• DLT leverages various types of software applications.

• DLT applications can be written in a variety of languages including C++, Java, Go, Rust,
Solidity, JavaScript, Python, and many others.

• DLTs are not language-specific and can work with any programming language or tools based
on the requirement. The choice of the programming language depends on the language’s
weakness and strength.

• These applications generally fall into three categories: financial, semi‐financial, and non‐
financial applications.
Ecosystem of Distributed Ledger Technology
Protocol aspect of the DLT ecosystem:

• The protocol aspect of DLT ecosystems consists of developers and academia.

• Developers are involved with setting up DLT protocols that serve networks. The protocol
layer is concerned mostly with how cryptographic keys interact with the network.

• There are two kinds of protocols: open-source and closed-source.

• Researchers and academia aid in educating others on the implications of DLT systems and
defining its limitations.
Ecosystem of Distributed Ledger Technology
Implementation of Distributed Ledger Technology
Distributed ledger technology has seen multiple implementations over the years. However,
there are a few implementations that have more impact than others.

Blockchain:

• One of the prime examples of distributed ledger implementations is the blockchain!

• In 2008, Satoshi Nakamoto introduced bitcoin to the world. It utilizes blockchain

technology to the world, which enables peers to send and receive digital currency without
the need for a centralized entity.

• Immutability is one of the key features of blockchain.

• Another feature that makes blockchain so amazing is transparency. The transactions that
are done through the blockchain can be traced and validated if needed.
Implementation of Distributed Ledger Technology

Distributed ledger technology has seen multiple implementations over the years. However,
there are a few implementations that have more impact than others.

Ethereum:

• Ethereum is another amazing example of a distributed ledger technology implementation.

• One of the limitation of bitcoin is the use of the Proof of Work consensus algorithm as it
required a lot of energy to compute and validate transactions.

• Ethereum fixed it by providing an alternative consensus method known as Proof of Stake.

• It also introduced smart contracts, a way to automate tasks within the network. This also
gave rise to decentralized apps which can automate a large aspect of the requirement.
Implementation of Distributed Ledger Technology

Distributed ledger technology has seen multiple implementations over the years. However,
there are a few implementations that have more impact than others.

Corda:

• Corda is an open source blockchain project, designed for business from the start. Only
Corda allows you to build interoperable blockchain networks that transact in strict privacy.
Corda's smart contract technology allows businesses to transact directly, with value.

• Smart contracts that can be written in Java and other JVM languages.

• Enables the development of distributed apps called CorDapps.

Implementation of Distributed Ledger Technology
Distributed ledger technology has seen multiple implementations over the years. However,
there are a few implementations that have more impact than others.

Hashgraph:

• Hashgraphs don’t bundle data into blocks as blockchains do. Instead, hashgraph nodes use a
“gossip about gossip” system, wherein they organically transmit messages.

• Gossip protocol-In hashgraph, when sending information between nodes, "Alice" will choose
another member at random, such as "Bob". Then Alice will tell Bob all of the information
she knows so far. Alice then repeats this information with a different random member.

• The synchronization of information between two members through the gossip protocol is
called a gossip sync.
Implementation of Distributed Ledger Technology
Hashgraph: Cont…

Upon completion of a gossip sync, each participating member commemorates the gossip sync
with an event.

Each event on hashgraph contains the following:

• Timestamp
• Two hashes
Self-parent
Other-parent
• Transactions
• Digital signature
Implementation of Distributed Ledger Technology
DAGs:

• A directed acyclic graph (DAG) is a graphical representation of a series of activities. A series

of nodes and edges visually represent the order of these activities.

• Vertex (node), represents an activity that needs to be added to the decentralized network.
An edge, shows that a DAG moves only in a forward direction. There is no path back to a
previous vertex.

• Each new transaction must reference a previous one before getting into the network. Each
vertex represents a transaction. Each transaction is built on top of the other.

• Unlike a blockchain, transaction data is not collected and added to a block. Nodes must link
each transaction to previous transactions to ensure double-spend protection.
Public vs Private Ledgers
Public Ledger:

• Open Access: Anyone can join and participate in the network, making it highly transparent
and decentralized. Think of it as a giant, publicly readable spreadsheet.

• Security through Consensus: Complex cryptographic algorithms and consensus

mechanisms like Proof-of-Work ensure data integrity and tamper-proof records. No single
entity controls the network, fostering trust and security.

• Examples: Bitcoin, Ethereum, Litecoin - these blockchains are accessible to anyone,

allowing anyone to view transaction data and participate in mining or validating
transactions.
Public vs Private Ledgers
Private Ledger:

• Restricted Access: Only authorized participants, pre-approved by a central authority, can

access the network. This makes them ideal for businesses or organizations requiring
controlled data sharing.

• Enhanced Control and Scalability: Permissions can be set for different users, and the
network can be fine-tuned for specific needs. This flexibility allows for faster transaction
processing and tailored applications.

• Examples: Hyperledger Fabric, R3 Corda, Quorum - these permissioned blockchains are

used by enterprises for supply chain management, trade finance, and other confidential use
cases.
Public vs Private Ledgers
Feature Public Ledger Private Ledger
Accessibility Open to anyone Permissioned only
Transparency Highly transparent Controlled access and privacy

Strong through consensus High security with additional control

Security
mechanisms measures

Decentralization Fully decentralized Can be centralized or federated

Scalability Can be slower due to large network Potentially faster and more scalable

Supply chain management, trade

Use cases Cryptocurrencies, open data sharing finance, confidential business
applications
Public vs Private Ledgers
Ledger: It refers to chronological record of all transactions ever made on a blockchain.

Registries: Specific subsets of data within a ledger, focusing on a particular type of asset or
information.

Both ledgers and registries play crucial roles in building trust, transparency, and efficiency in
various applications of blockchain technology.
Keyless Signature Infrastructure
Merkle tree, also known as a binary hash tree, is a data structure used to summarize and
verify the integrity of large data sets efficiently. Merkle trees are binary trees containing
cryptographic hashes.

Merkle trees summarize all the transactions in a block, producing an overall digital
fingerprint of the entire set of transactions, and providing a very efficient process to verify
whether a transaction is included in a block.

A Merkle tree is constructed by recursively hashing pairs of nodes until only one hash, called
the root, or Merkle root.
Keyless Signature Infrastructure
Keyless Signature Infrastructure
• Keyless Signature Infrastructure (KSI) is a blockchain technology that provides massive
scale data authentication without the reliance on centralized authorities. It solely relies on
the security of hash functions and the blockchain.

• With the help of KSI or Keyless Signature Infrastructure we eliminate the need of symmetric
or asymmetric keys for the purpose of verification.

• KSI only makes use of hashes, so to verify whether the given data is the original data, all
we'd need to do is hash the original file and compare it with that of the given data's and if
they match, then the data isn't compromised
Keyless Signature Infrastructure
Keyless Signature Infrastructure
Keyless Signature Infrastructure (KSI) has four major components:

• Application

• Gateway

• Aggregator Network

• Core Cluster
Keyless Signature Infrastructure
Keyless Signature Infrastructure (KSI) has four major components:

• Application: The individual transaction requests are hashed using a cryptographic hash
function (SHA256) and sent to the gateway.

• Gateway: An extender in the gateway offers signature token verification services to the
users. A signature token is essentially a path to the Merkle root.

• Aggregator Network: The aggregators working in rounds of equal duration gather the
incoming requests to build a hash tree and pass the top hash values to their upstream
aggregators.

• Core Cluster: The top hash values are linked together in a globally unique hash tree called
the hash calendar
Keyless Signature Infrastructure
Keyless Signature Infrastructure (KSI) has four major components:
Practitioner Perspective - DLT
Transparency as a Strategic Risk:

• In many situations, transparency is a double-edged sword, and some of the parties that may
benefit the most from it and also suffered a lot from it.

• A host of research shows that institutional investors, in particular, are very concerned that
competitors might imitate their trading strategies.

• In addition to situations when some parties desire privacy, there are situations where
privacy is a necessity. A good example is blockchain based voting. The underlying idea of
using a blockchain for voting is to issue digital, single-use tokens to eligible voters.

• Existing blockchain technology can address many of the issues of transparency highlighted
here.
Practitioner Perspective - DLT
Transparency as a Strategic Risk:

Holdings of ether associated with a particular identifier

Practitioner Perspective - DLT
Transparency as a Strategic Assert ‐ Reputation and perceived integrity:

• A common approach of firms to increase trust is to publish the adopted ethical codes of
conduct, which makes it easier for employees to know what is expected and create
credibility in business dealings.

• A common approach of firms to increase trust is to publish the adopted ethical codes of
conduct, which makes it easier for employees to know what is expected and create
credibility in business dealings.

• Furthermore, sharing relevant information with partners and supply-chain members in a

timely manner improves trust, and can generally lift a firm’s brand.
Practitioner Perspective - DLT
Transparency as a Strategic Assert ‐ Reputation and perceived integrity:

As Tapscott outlines, there are five elements for firm success with increased transparency and
public scrutiny. Firms need to:

• Create true value that withstands the scrutiny that transparency brings about.

• Understand customers and build relationship capital.

• Protect customers’ privacy.

• Behave with integrity since lapses are caught quickly in a transparent world.

• Be candid as shortcomings can be seen quickly.

Practitioner Perspective - DLT
Transparency as a Strategic Assert ‐ Reputation and perceived integrity:

• An extreme case of transparency is the decentralized autononmous organization (DAO). Set

up as a venture fund, all DAO investments and its entire governance are transparent by
design, because the underlying code is open-source and visible to all.

• In the digital era, it is often impossible to credibly and efficiently reveal all of a
government’s relevant transactions and business dealings—but when all transactions and
contracts are recorded on a blockchain, nothing remains hidden
Practitioner Perspective - DLT
Transparency as a Strategic Assert – Disintermediation and improved governance

• Yermack highlights that the immutability of public blockchains improves (corporate)

governance. In the current system, land records can be forged, corporate income statements
can be manipulated, and option grants can be backdated.

• When all these data are recorded on a public blockchain, performing such manipulations
becomes prohibitively difficult and expensive.
Technological approaches to privacy in blockchains

Usage of multiple IDs:

• Hierarchical deterministic (HD) wallets algorithmically generate a new public key for every
piece of a larger trade.

• Generally, users must make a backup of each key whenever a new one is generated. That
said, if the wallet’s details are lost, all of the addresses and keys would also be lost.

• Hierarchical deterministic wallets took the place of JBOK wallets since users could back up
HD wallets using a single seed and greatly benefit from extended keys. Therefore, a wallet
that generates its public and private keys from a seed is referred to as a hierarchical
deterministic wallet.
Technological approaches to privacy in blockchains
Public & Private Blockchains
• Public and private blockchains differ in terms of accessibility, transparency, and
control. Public blockchains are open to anyone and operate on the principle of
transparency, allowing anyone to join the network, validate transactions, and contribute to
the consensus process. In contrast, private blockchains are restricted to authorized
participants, offering enhanced privacy and control.
Public & Private Blockchains
Zero Knowledge Proofs
Zero-knowledge proofs can be understood as a construct or a protocol through which a
‘prover’ can present proof to a ‘verifier’ that the prover knows a ‘secret’, without revealing any
information about the secrete.

The verifier, upon examining the presented proof, will be convinced that the prover indeed
knows the secret without learning anything else (zero-knowledge) about the secret.
Zero Knowledge Proofs
Zero-knowledge proofs must satisfy the following conditions.

• Completeness – If the prover’s claim is true, an honest verifier who is following the
protocol will be convinced that the claim is true.

• Soundness – If the prover’s claim is false, the protocol makes extremely difficult for a
prover to convince a honest verifier.

• Zero knowledge – The protocol will not leak any information about the secret. The verifier
learns nothing except that the claim is true.
Zero Knowledge Proofs
There are two categories of Zero knowledge proofs.

Interactive – Protocols are defined through which the verifier can send one or more
challenges to the prover and evaluate the responses to convince themselves that the provers
claim about the knowledge secrete is correct.
Zero Knowledge Proofs
There are two categories of Zero knowledge proofs.

Interactive – Protocols are defined through which the verifier can send one or more
challenges to the prover and evaluate the responses to convince themselves that the provers
claim about the knowledge secrete is correct.

Example: Ali baba cave

Zero Knowledge Proofs
There are two categories of Zero knowledge proofs.

Non interactive – There is no interaction is required between the prover and the verifier. The
prover creates a cryptographic proof of the claim that can be instantly authenticated by the
verifier.
Zero Knowledge Proofs
There are two categories of Zero knowledge proofs.

Non interactive – There is no interaction is required between the prover and the verifier. The
prover creates a cryptographic proof of the claim that can be instantly authenticated by the
verifier.

Example: Waldo Puzzle

Zero Knowledge Proofs
• ZK‐SNARKs, or “Zero Knowledge Succinct Non-Interactive Argument of Knowledge,” are
cryptographic proofs that allow one to validate the claim without repeating lengthy
computations and keeping some inputs private.

• ZK‐STARKs, or “Zero Knowledge Scalable Transparent Argument of Knowledge,” are a

specific type of zk-SNARKs. STARK protocols are ideal when working with witnesses of
large size. They also provide higher transparency.
Zero Knowledge Proofs
ZK-SNARK ZK-STARK
Low. Allow for EVM data
Proof Size High. Driving the costs up
availability
Trust Setup Requires a trusted setup Does not require a trusted setup
Faster times only with large
Verification Time Fast verification times
datasets
Quantum Security Not quantum-resistant Quantum-resistant
Less transparent due to trusted More transparent using public
Transparency
setup verifiable randomness
Scalability Less scalable, linear increase Highly scalable
Best for systems where proof size Best where transparency and
Use Cases
and speed are key quantum-resistance are priorities
Dapps
All the best . . .