Mastering blockchain distributed lodger technology, decentralization, and smart contracts explained 2nd edition

Mastering Blockchain
Second Edition
Distributed ledger technology, decentralization, and smart
contracts explained

Imran Bashir

BIRMINGHAM - MUMBAI


Mastering Blockchain
Second Edition
Copyright © 2018 Packt Publishing
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or by any means, without the prior written permission of the publisher, except in the case of brief quotations
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Acquisition Editors: Ben Renow-Clarke, Suresh M Jain
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First published: March 2017
Second edition: March 2018
Production reference: 1290318
Published by Packt Publishing Ltd.
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ISBN 978-1-78883-904-4

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Contributors
About the author
Imran Bashir has an M.Sc. in Information Security from Royal Holloway, University of
London, and has a background in software development, solution architecture,
infrastructure management, and IT service management. He is also a member of the
Institute of Electrical and Electronics Engineers (IEEE) and the British Computer Society
(BCS).
Imran has sixteen years' of experience in the public and financial sectors. He worked on
large scale IT projects in the public sector before moving to the financial services industry.
Since then, he has worked in various technical roles for different financial companies in
Europe's financial capital, London. He is currently working for an investment bank in
London as Vice President in the Technology department.
I would like to thank the talented team at Packt, including Ben Renow-Clarke, Suzanne
Coutinho, Alex Sorrentino, Gary Schwartz, and Bhagyashree Rai, who provided prompt
guidance and valuable feedback throughout this project. I am also extremely thankful to the
reviewer, Pranav Burnwal, who provided constructive and very useful feedback that helped
me tremendously to improve the material in this book.
I thank my wife and children for putting up with my all-night and weekend-long writing
sessions.
Above all, I would like to thank my parents, whose blessings have made everything possible
for me.

About the reviewer
Pranav Burnwal has a background in Research and Development, and he has been working
with cutting-edge technologies for the past few years. The technologies he works on range
from blockchain, big data, analytics (log and data), cloud, to message queues, NoSQL, web
servers, and so on. He has worked across various domains ranging from BFSI, HLS, FMCG,
and automobiles to name a few.
Pranav is an active community member in multiple communities. He is the Regional Head
for Blockchain Education Network (BEN), a registered NGO and a worldwide network of
people of blockchain. He has also organized multiple meetups and a start-up weekend in
India.
Pranav has also been an active trainer in the blockchain space for an exciting period of three
years now, for an audience ranging from junior developers to senior VPs. This has also
given him insights into how people understand a new and complex technology, which
helped him frame this book in the best interest of the readers.

Packt is searching for authors like you
If you're interested in becoming an author for Packt, please visit authors.packtpub.com and
apply today. We have worked with thousands of developers and tech professionals, just
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submit your own idea.


Table of Contents
Preface

1

Chapter 1: Blockchain 101
The growth of blockchain technology

Distributed systems
The history of blockchain and Bitcoin
Electronic cash
Blockchain

Blockchain defined

Peer-to-peer
Distributed ledger
Cryptographically-secure
Append-only
Updateable via consensus

Generic elements of a blockchain

How blockchain works
How blockchain accumulates blocks

Benefits and limitations of blockchain
Tiers of blockchain technology
Features of a blockchain

Types of blockchain

Distributed ledgers
Distributed Ledger Technology
Public blockchains
Private blockchains
Semiprivate blockchains
Sidechains

Permissioned ledger

Shared ledger
Fully private and proprietary blockchains
Tokenized blockchains
Tokenless blockchains

Consensus

Consensus mechanism
Types of consensus mechanisms
Consensus in blockchain

CAP theorem and blockchain
Summary
Chapter 2: Decentralization
Decentralization using blockchain

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Table of Contents

Methods of decentralization

Disintermediation
Contest-driven decentralization

Routes to decentralization

How to decentralize
The decentralization framework example

Blockchain and full ecosystem decentralization
Storage
Communication
Computing power and decentralization

Smart contracts
Decentralized Organizations

Decentralized Autonomous Organizations
Decentralized Autonomous Corporations
Decentralized Autonomous Societies
Decentralized Applications (DApps)
Requirements of a Decentralized Application
Operations of a DApp
DApp examples
KYC-Chain
OpenBazaar
Lazooz

Platforms for decentralization

Ethereum
MaidSafe
Lisk

Summary
Chapter 3: Symmetric Cryptography
Working with the OpenSSL command line
Introduction
Mathematics

Set
Group
Field
A finite field
Order
An abelian group
Prime fields
Ring
A cyclic group
Modular arithmetic

Cryptography
Confidentiality
Integrity
Authentication

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Table of Contents
Entity authentication
Data origin authentication

Non-repudiation
Accountability

Cryptographic primitives
Symmetric cryptography
Stream ciphers
Block ciphers

Block encryption mode
Electronic Code Book
Cipher Block Chaining

Counter mode
Keystream generation mode
Message authentication mode
Cryptographic hash mode

Data Encryption Standard
Advanced Encryption Standard
How AES works

Summary
Chapter 4: Public Key Cryptography
Asymmetric cryptography
Integer factorization
Discrete logarithm
Elliptic curves

Public and private keys
RSA

Encryption and decryption using RSA
Elliptic Curve Cryptography
Mathematics behind ECC
Point addition
Point doubling

Discrete logarithm problem in ECC
RSA using OpenSSL
RSA public and private key pair
Private key
Public key

Exploring the public key

Encryption and decryption
Encryption
Decryption

ECC using OpenSSL

ECC private and public key pair
Private key
Private key generation

Hash functions

Compression of arbitrary messages into fixed-length digest
Easy to compute
Preimage resistance
Second preimage resistance

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Table of Contents
Collision resistance
Message Digest
Secure Hash Algorithms

Design of Secure Hash Algorithms
Design of SHA-256
Design of SHA-3 (Keccak)
OpenSSL example of hash functions
Message Authentication Codes
MACs using block ciphers
Hash-based MACs

Merkle trees
Patricia trees
Distributed Hash Tables
Digital signatures

RSA digital signature algorithm
Sign then encrypt
Encrypt then sign

Elliptic Curve Digital Signature Algorithm

How to generate a digital signature using OpenSSL
ECDSA using OpenSSL
Homomorphic encryption
Signcryption
Zero-Knowledge Proofs
Blind signatures
Encoding schemes

Financial markets and trading
Trading
Exchanges

Orders and order properties
Order management and routing systems
Components of a trade
The underlying instrument
General attributes
Economics
Sales
Counterparty

Trade life cycle
Order anticipators
Market manipulation

Summary
Chapter 5: Introducing Bitcoin
Bitcoin

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Bitcoin definition
Bitcoin – a bird's-eye view

Sending a payment to someone

Digital keys and addresses

Private keys in Bitcoin
Public keys in Bitcoin

[ iv ]


Table of Contents

Addresses in Bitcoin

Base58Check encoding
Vanity addresses

Multisignature addresses

Transactions

The transaction life cycle
Transaction fee
Transaction pools

The transaction data structure
Metadata
Inputs
Outputs
Verification
The script language
Commonly used opcodes

Types of transactions

Coinbase transactions
Contracts

Transaction verification

Transaction malleability

Blockchain

The structure of a block
The structure of a block header
The genesis block

Mining

Tasks of the miners
Mining rewards
Proof of Work (PoW)
The mining algorithm
The hash rate
Mining systems
CPU
GPU
FPGA
ASICs

Mining pools

Summary

Chapter 6: Bitcoin Network and Payments
The Bitcoin network
Wallets
Non-deterministic wallets
Deterministic wallets
Hierarchical Deterministic wallets
Brain wallets
Paper wallets
Hardware wallets

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Online wallets
Mobile wallets

Bitcoin payments
Innovation in Bitcoin

Bitcoin Improvement Proposals (BIPs)
Advanced protocols
Segregated Witness (SegWit)
Bitcoin Cash
Bitcoin Unlimited
Bitcoin Gold
Bitcoin investment and buying and selling bitcoins

Summary
Chapter 7: Bitcoin Clients and APIs
Bitcoin installation
Types of Bitcoin Core clients
Bitcoind
Bitcoin-cli
Bitcoin-qt

Setting up a Bitcoin node
Setting up the source code
Setting up bitcoin.conf
Starting up a node in testnet
Starting up a node in regtest
Experimenting with Bitcoin-cli

Bitcoin programming and the command-line interface

Summary
Chapter 8: Alternative Coins
Theoretical foundations

Alternatives to Proof of Work
Proof of Storage
Proof of Stake (PoS)

Various stake types

Proof of coinage
Proof of Deposit (PoD)
Proof of Burn
Proof of Activity (PoA)
Nonoutsourceable puzzles

Difficulty adjustment and retargeting algorithms
Kimoto Gravity Well
Dark Gravity Wave
DigiShield
MIDAS

Bitcoin limitations

Privacy and anonymity
Mixing protocols

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Table of Contents
Third-party mixing protocols
Inherent anonymity

Extended protocols on top of Bitcoin
Colored coins
Counterparty

Development of altcoins

Consensus algorithms
Hashing algorithms

Difficulty adjustment algorithms
Inter-block time
Block rewards
Reward halving rate
Block size and transaction size
Interest rate
Coinage
Total supply of coins

Namecoin

Trading Namecoins
Obtaining Namecoins
Generating Namecoin records

Litecoin
Primecoin

Trading Primecoin
Mining guide

Zcash

Trading Zcash
Mining guide

Address generation
GPU mining

Downloading and compiling nheqminer

Initial Coin Offerings (ICOs)
ERC20 tokens

Summary
Chapter 9: Smart Contracts
History
Definition
Ricardian contracts

Smart contract templates
Oracles
Smart Oracles
Deploying smart contracts on a blockchain
The DAO

Summary
Chapter 10: Ethereum 101
Introduction

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[ vii ]


Table of Contents

The yellow paper

Useful mathematical symbols

Ethereum blockchain

Ethereum – bird's eye view
The Ethereum network
Mainnet
Testnet
Private net

Components of the Ethereum ecosystem
Keys and addresses
Accounts
Types of accounts

Transactions and messages

Contract creation transaction
Message call transaction
Messages
Calls
Transaction validation and execution
The transaction substate
State storage in the Ethereum blockchain
The world state
The account state
Transaction receipts

Ether cryptocurrency / tokens (ETC and ETH)
The Ethereum Virtual Machine (EVM)
Execution environment
Machine state
The iterator function

Smart contracts

Native contracts

Summary
Chapter 11: Further Ethereum
Programming languages
Runtime bytecode

Opcodes and their meaning
Arithmetic operations
Logical operations
Cryptographic operations

Environmental information
Block information
Stack, memory, storage, and flow operations
Push operations
Duplication operations
Exchange operations
Logging operations
System operations

Blocks and blockchain

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Table of Contents
The genesis block
The block validation mechanism
Block finalization

Block difficulty
Gas

Fee schedule

Forks in the blockchain
Nodes and miners

The consensus mechanism

Ethash

CPU mining
GPU mining
Benchmarking
Mining rigs
Mining pools

Wallets and client software

Geth
Eth
Pyethapp

Parity
Light clients
Installation
Eth installation
Mist browser
Geth
The geth console
Funding the account with bitcoin
Parity installation
Creating accounts using the parity command line

APIs, tools, and DApps

Applications (DApps and DAOs) developed on Ethereum
Tools

Supporting protocols
Whisper
Swarm

Scalability, security, and other challenges
Trading and investment

Summary
Chapter 12: Ethereum Development Environment
Test networks
Setting up a private net
Network ID
The genesis file
Data directory

Flags and their meaning
Static nodes

Starting up the private network
Running Mist on private net
Deploying contracts using Mist

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Table of Contents

Block explorer for private net / local Ethereum block explorer

Summary
Chapter 13: Development Tools and Frameworks
Languages
Compilers

Solidity compiler (solc)

Installation on Linux
Installation on macOS

Integrated Development Environments (IDEs)
Remix

Tools and libraries
Node version 7
EthereumJS

Ganache
MetaMask
Truffle

Installation

Contract development and deployment
Writing

Testing

Solidity language
Types

Value types
Boolean
Integers
Address

Literals

Integer literals
String literals
Hexadecimal literals

Enums
Function types

Internal functions
External functions

Reference types
Arrays
Structs
Data location
Mappings

Global variables
Control structures

Events
Inheritance
Libraries
Functions

Layout of a Solidity source code file
Version pragma
Import
Comments

Summary

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Table of Contents

Chapter 14: Introducing Web3
Web3

Contract deployment
POST requests
The HTML and JavaScript frontend
Installing web3.js

Example
Creating a web3 object
Checking availability by calling any web3 method
Contract functions

Development frameworks
Truffle

Initializing Truffle
Interaction with the contract
Another example
An example project – Proof of Idea

Oracles

Deployment on decentralized storage using IPFS
Installing IPFS

Distributed ledgers

Summary
Chapter 15: Hyperledger
Projects under Hyperledger
Fabric
Sawtooth Lake
Iroha
Burrow
Indy
Explorer
Cello
Composer
Quilt

Hyperledger as a protocol
The reference architecture

Requirements and design goals of Hyperledger Fabric
The modular approach
Privacy and confidentiality
Scalability
Deterministic transactions
Identity
Auditability
Interoperability
Portability

Rich data queries

Fabric

Hyperledger Fabric

Membership services

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Table of Contents

Blockchain services
Consensus services
Distributed ledger

The peer to peer protocol
Ledger storage
Chaincode services
Components of the fabric
Peers
Orderer nodes
Clients
Channels
World state database
Transactions
Membership Service Provider (MSP)
Smart contracts
Crypto service provider
Applications on blockchain
Chaincode implementation
The application model
Consensus in Hyperledger Fabric
The transaction life cycle in Hyperledger Fabric

Sawtooth Lake

PoET
Transaction families
Consensus in Sawtooth
The development environment – Sawtooth Lake

Corda

Architecture

State objects
Transactions
Consensus
Flows

Components

Nodes
The permissioning service
Network map service
Notary service
Oracle service
Transactions
Vaults
CorDapp

The development environment – Corda

Summary
Chapter 16: Alternative Blockchains
Blockchains
Kadena
Ripple

Transactions

Payments related
Order related
Account and security-related

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Table of Contents

Interledger

Application layer
Transport layer
Interledger layer
Ledger layer

Stellar
Rootstock

Sidechain
Drivechain

Quorum

Transaction manager
Crypto Enclave
QuorumChain
Network manager

Tezos
Storj
MaidSafe
BigchainDB
MultiChain
Tendermint

Tendermint Core
Tendermint Socket Protocol (TMSP)

Platforms and frameworks
Eris

Summary
Chapter 17: Blockchain – Outside of Currencies
Internet of Things
Physical object layer
Device layer
Network layer
Management layer
Application layer
IoT blockchain experiment
First node setup
Raspberry Pi node setup
Installing Node.js

Circuit

Government

Border control
Voting
Citizen identification (ID cards)
Miscellaneous

Health
Finance

Insurance
Post-trade settlement

Financial crime prevention

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Table of Contents

Media

Summary
Chapter 18: Scalability and Other Challenges
Scalability

Network plane
Consensus plane
Storage plane
View plane
Block size increase
Block interval reduction
Invertible Bloom Lookup Tables
Sharding
State channels
Private blockchain
Proof of Stake
Sidechains
Subchains
Tree chains (trees)
Block propagation
Bitcoin-NG
Plasma

Privacy

Indistinguishability Obfuscation
Homomorphic encryption
Zero-Knowledge Proofs
State channels
Secure multiparty computation
Usage of hardware to provide confidentiality
CoinJoin
Confidential transactions
MimbleWimble
Security

Smart contract security

Formal verification and analysis
Oyente tool

Summary
Chapter 19: Current Landscape and What's Next
Emerging trends
Application-specific blockchains (ASBCs)
Enterprise-grade blockchains
Private blockchains
Start-ups
Strong research interest
Standardization

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Table of Contents

Enhancements
Real-world implementations
Consortia
Answers to technical challenges
Convergence
Education of blockchain technology
Employment
Cryptoeconomics
Research in cryptography
New programming languages
Hardware research and development
Research in formal methods and security
Alternatives to blockchains
Interoperability efforts
Blockchain as a Service
Efforts to reduce electricity consumption

Other challenges
Regulation
Dark side

Blockchain research

Smart contracts
Centralization issues

Limitations in cryptographic functions
Consensus algorithms
Scalability
Code obfuscation

Notable projects

Zcash on Ethereum
CollCo
Cello
Qtum
Bitcoin-NG
Solidus
Hawk
Town-Crier
SETLCoin
TEEChan
Falcon
Bletchley
Casper

Miscellaneous tools

Solidity extension for Microsoft Visual Studio
MetaMask
Stratis
Embark

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Table of Contents

DAPPLE
Meteor
uPort
INFURA

Convergence with other industries
Future
Summary
Another Book You May Enjoy
Index

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[ xvi ]


Preface
This book has one goal, to introduce theoretical and practical aspects of the blockchain
technology. This book contains all material that is necessary to become a blockchain
technical expert. Since the publication of the first edition of this book, a lot has changed and
progressed further with regards to blockchain; therefore, a need to update the book has
arisen.
The multitude of benefits envisaged by the implementation of blockchain technology has
sparked profound interest among researchers from academia and industry who are
tirelessly researching this technology. As a result, many consortia, working groups, projects,
and professional bodies have emerged, which are involved in the development and further
advancement of this technology. The second edition of this book will provide in-depth
insights into decentralization, smart contracts, and various blockchain platforms such as
Ethereum, Bitcoin, and Hyperledger Fabric. After reading this book, readers will be able to
develop a deep understanding of inner workings of the blockchain technology and will be
able to develop blockchain applications.
This book covers all topics relevant to the blockchain technology, including cryptography,
cryptocurrencies, Bitcoin, Ethereum, and various other platforms and tools used for

blockchain development. It is recommended that readers have a basic understanding of
computer science and basic programming experience to benefit fully from this book.
However, if that is not the case then still this book can be read easily, as relevant
background material is provided where necessary.

Who this book is for
This book is for anyone who wants to understand blockchain in depth. It can also be used as
a reference by developers who are developing applications for blockchain. Also, this book
can be used as a textbook for courses related to blockchain technology and
cryptocurrencies. It can also be used as a learning resource for various examinations and
certifications related to cryptocurrency and blockchain technology.


Preface

What this book covers
Chapter 1, Blockchain 101, introduces the basic concepts of distributed computing on which

blockchain technology is based. It also covers history, definitions, features, types, and
benefits of blockchains along with various consensus mechanisms that are at the core of the
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 have also been introduced.
Chapter 3, Symmetric Cryptography, introduces the theoretical foundations of symmetric

cryptography, which is necessary to understand that how various security services such as
confidentiality and integrity are provided.
Chapter 4, Public Key Cryptography, introduces concepts such as public and private keys,

digital signatures and hash functions with practical examples. Finally, an introduction to
financial markets is also included as there are many interesting use cases for blockchain
technology in the financial sector.
Chapter 5, Introducing Bitcoin, covers Bitcoin, the first and largest blockchain. It introduces

technical concepts related to bitcoin cryptocurrency in detail.

Chapter 6, Bitcoin Network and Payments, covers Bitcoin network, relevant protocols and

various Bitcoin wallets. Moreover, advanced protocols, Bitcoin trading and payments is also
introduced.
Chapter 7, Bitcoin Clients and APIs, introduces various Bitcoin clients and programming

APIs that can be used to build Bitcoin applications.

Chapter 8, Alternative Coins, introduces alternative cryptocurrencies that were introduced

after the invention of Bitcoin. It also presents examples of different altcoins, their properties,
and how they have been developed and implemented.
Chapter 9, Smart Contracts, provides an in-depth discussion on smart contracts. Topics such

as history, the definition of smart contracts, Ricardian contracts, Oracles, and the theoretical
aspects of smart contracts are presented in this chapter.

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Preface
Chapter 10, Ethereum 101, introduces the design and architecture of the Ethereum

blockchain in detail. It covers various technical concepts related to the Ethereum blockchain
that explains the underlying principles, features, and components of this platform in depth.
Chapter 11, Further Ethereum, continues the introduction of Ethereum from pervious

chapter and covers topics related to Ethereum Virtual Machine, mining and supporting
protocols for Ethereum.
Chapter 12, Ethereum Development Environment, covers the topics related to setting up

private networks for Ethereum smart contract development and programming.

Chapter 13, Development Tools and Frameworks, provides a detailed practical introduction to

the Solidity programming language and different relevant tools and frameworks that are
used for Ethereum development.

Chapter 14, Introducing Web3, covers development of decentralized applications and smart

contracts using the Ethereum blockchain. A detailed introduction to Web3 API is provided
along with multiple practical examples and a final project.
Chapter 15, Hyperledger, presents a discussion about the Hyperledger project from the

Linux Foundation, which includes different blockchain projects introduced by its members.
Chapter 16, Alternative Blockchains, introduces alternative blockchain solutions and

platforms. It provides technical details and features of alternative blockchains and relevant
platforms.
Chapter 17, Blockchain – Outside of Currencies, provides a practical and detailed introduction

to applications of blockchain technology in fields others than cryptocurrencies, including

Internet of Things, government, media, and finance.
Chapter 18, Scalability and Other Challenges, is dedicated to a discussion of the challenges

faced by blockchain technology and how to address them.

Chapter 19, Current Landscape and What's Next, is aimed at providing information about the

current landscape, projects, and research efforts related to blockchain technology. Also,
some predictions based on the current state of blockchain technology have also been made.

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