ACKNOWLEDGEMENT I have taken efforts in this Report. However, it would not have been possible without the kind support and help of many individuals and organizations. I would like to extend my sincere thanks to all of them.I am highly indebted to Prof. Malaram Kumhar for their guidance and constant supervision as well as for providing necessary information regarding the Seminar & also for their support in completing it. I would like to express my gratitude towards my parents and friends for their kind co-operation and encouragement which help me in completion of this Seminar.
My thanks and appreciations also go to people who have willingly helped me out with their abilities. 5 ABSTRACT This report discusses the process of Blockchaining and how its possible uses in Financial Sector in future. We start by introducing Blockchain as holder of records , Hashing , Structure of a Block and their Components , various Mining and Consensus algorithm like Proof of Work , Proof of Stake.. , how Blockchains are made , Blockchain Characteristics , its Application in Financial sector like Smart Contracts , Distributed Ledger Technology , Know Your Customer etc.
. 6 TABLE OF CONTENTS Certificate 3 Acknowledgment 4 Abstract 5 Table of Contents 6 List of Figures Fig. 3.1 Blockchaining Process Diagram 11 List of Tables Table 4.1 Comparison of Consensus Algorithms 15 1 Introduction 9 1.1 General 9 1.2 Scope of Study 9 2 Literature Survey 9 2.1 General 9 3 Blockchaining 10 3.1 Hashing 10 3.2 Blockchains 10 4 Blocks ” Hashing and Mining 11 4.1 Hashing Algorithms 11 4.2 Inside a Blockchain Block 13 4.2.1 Block Number 13 4.2.2 Nonce 13 4.2.3 Timestamp 13 4.2.4 Data to be Recorded 14 4.2.5 Previous Block Hash 14 7 4.2.6 Hash String 14 4.3 Mining and Consensus Algorithms 14 4.3.1 Proof of Work 14 4.3.2 Proof of Stake 15 4.4 Comparison of Consensus Algorithms 15 5 Blockchains ” How are they made? 17 5.1 Basic Blockchain 17 6 Applications in Financial Sector 17 6.1 Distributed Technology 17 6.1.1 Distributed Ledger as Storage of Assets 17 6.2 Smart Contracts 18 6.2.1 Properties of Smart Contracts 18 220.127.116.11 Stored on the Blockchain 18 18.104.22.168 Traceable 18 22.214.171.124 Acts as a separate entity 18 126.96.36.199 Expresses logic as executable code 19 188.8.131.52 Works for all possible inputs 19 184.108.40.206 Activated by sending digital assets to it 19 220.127.116.11 Deterministic 19 6.3 Know Your Customer 19 6.3.1 Properties due to which KYC on Blockchain can help 19 6.3.2 Challenges 20 7 Summary and Conclusions 20 7.1 Summary 20 7.2 Conclusion 20 References 21 8 Appendix A ” List of Useful Websites 21 9 1 Introduction 1.1 General Blockchains are an immutable and auditable set of records that are cryptographically linked together. It is similar to an accounting ledger, previous records in the ledger cannot be changed and new records need to verified by a trusted party. The difference here being that in blockchains, new blocks(records) are verified by a decentralized set of nodes, each having a copy of the blockchain(ledger). There is no centralized party to verify the records. 1.2 Scope of Study The Study covers the basic foundational blocks of a blockchain and a discussion on algorithms to determine consensus in the network. These Mining and Consensus Algorithms are studied and compared based on a few defining traits. Blockchain technology can be used as distributed ledgers and smart contracts are which has application in Financial Sector. Lastly, a few other applications of Blockchains in Financial Sector are covered. 2 Literature Survey 2.1 General The Literature survey covered papers and books that introduced blockchains in detail and discussed the process of creating blockchains. Papers that focused primarily on the technology underlying Bitcoin were studied to determine the topics to be covered for the Seminar, subsequently those papers were chosen that aligned with the topics decided previously 10 3 Blockchaining 3.1 Hashing Before diving into blockchains, we need to understand the basics of hashing. A hashing algorithm converts or maps input data into a distinct set of integers or some alphanumeric string. A hash function must be so designed that every data given as input has a well-defined output. Hash functions are one-way functions, the output cannot be processed back to determine the input. Eg.SHA-256 (Secure Hash Algorithm 256 bit) hashes its input data to a 32-byte alphanumeric string. The hash of Karan is always: 5c5b6fa21080a9aa87ff8eaa32f3e765937b70d069e6b3bca553b16553b2f672 Blocks Each block in a general blockchain consists of: 1. A block number 2. An arbitrary number called a nonce 3. The data to be recorded 4. The hash string of the previous block 5. Its hash string Various consensus algorithms are used to determine if the block is valid, these algorithms run on other nodes in the network who are assigned the responsibility of block validation. When validated, the block is added to the ever growing blockchain. 3.2 Blockchains Blockchains are formed by linking valid blocks together by including the hash of the previous block in the next block. Doing so makes the blockchain traceable and resistant to change. Older blocks in a blockchain cannot be modified, if they are changed in any way, their hash would also change, one would need to remine all subsequent blocks to make the blockchain valid again. 11 A copy of the blockchain is available to every user in the network, hence any changes can be cross verified by the other users. These copies are updated with the addition of every block and everyone can see the block, depending on the permissions set up by the administrator. Fig. 3.1 Blockchaining Process Diagram Due to their resistance to change, blockchains can be applied to many business applications like bookkeeping, asset management and tracking transaction records of cryptocurrencies, where blockchains are extensively used by Bitcoin, Ethereum etc. A blockchain network has the following key characteristics: 12 Consensus: For a transaction to be valid, all participants must agree on its validity. Provenance: Participants know where the asset came from and how its ownership has changed over time. Immutability: No participant can tamper with a transaction after it’s been recorded to the ledger. If a transaction is in error, a new transaction must be used to reverse the error, and both transactions are then visible. Finality: A single, shared ledger provides one place to go to determine the ownership of an asset or the completion of a transaction.