Foundation of Blockchain (4361603) - Summer 2024 Solution

Question 1(a) [3 marks]

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Explain benefits of using distributed ledger systems.

Answer:

Table: Benefits of Distributed Ledger Systems

Mnemonic: “T-S-D-I” (Transparent, Secure, Decentralized, Immutable)

Question 1(b) [4 marks]

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Define: 1) Blockchain 2) Distributed systems

Answer:

Table: Key Definitions

Key Features:

• Blockchain: Uses hash pointers, consensus mechanisms, and merkle trees
• Distributed Systems: Fault tolerance, scalability, and resource sharing

Mnemonic: “Chain-Hash-Consensus” for Blockchain, “Network-Independent-Together” for Distributed

Question 1(c) [7 marks]

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Illustrate CAP theorem with the help of Blockchain network.

Answer:

Table: CAP Theorem Components

Diagram:

graph TD
    A[CAP Theorem] --> B[Consistency]
    A --> C[Availability] 
    A --> D[Partition Tolerance]
    B --> E[Bitcoin prioritizes C+P]
    C --> F[Some systems choose A+P]
    D --> G[Essential for blockchain]

Key Points:

• Trade-off: Can only achieve 2 out of 3 properties simultaneously
• Blockchain Choice: Most blockchains choose Consistency + Partition Tolerance
• Example: Bitcoin may become temporarily unavailable but maintains consistency

Mnemonic: “CAP-2-out-of-3” (Choose Any 2 Properties out of 3)

Question 1(c) OR [7 marks]

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List and explain applications of blockchain network.

Answer:

Table: Blockchain Applications

Key Benefits:

• Transparency: All transactions visible to participants
• Security: Cryptographic protection against fraud
• Efficiency: Reduced intermediaries and costs

Mnemonic: “C-S-H-V-R” (Crypto, Supply, Health, Vote, Real estate)

Question 2(a) [3 marks]

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Define and explain a permissionless blockchain in detail.

Answer:

Definition: A blockchain where anyone can participate without requiring permission from a central authority.

Table: Permissionless Blockchain Features

Key Characteristics:

• Consensus: Uses proof-of-work or proof-of-stake
• Examples: Bitcoin, Ethereum mainnet

Mnemonic: “Open-Public-Decentralized” (OPD)

Question 2(b) [4 marks]

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Draw a figure and provide a brief explanation of a data structure of a blockchain.

Answer:

Diagram: Blockchain Data Structure

Key Components:

• Previous Hash: Links blocks together creating chain
• Merkle Root: Summary of all transactions in block
• Timestamp: When block was created
• Nonce: Number used once for proof-of-work

Mnemonic: “P-M-T-N” (Previous, Merkle, Time, Nonce)

Question 2(c) [7 marks]

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Explain the core components of blockchain with suitable diagrams.

Answer:

Table: Core Components of Blockchain

Diagram: Merkle Tree Structure

graph TD
    A[Root Hash] --> B[Hash AB]
    A --> C[Hash CD]
    B --> D[Hash A]
    B --> E[Hash B]
    C --> F[Hash C]
    C --> G[Hash D]
    D --> H[Transaction A]
    E --> I[Transaction B]
    F --> J[Transaction C]
    G --> K[Transaction D]

Key Points:

• Immutability: Hash functions make tampering detectable
• Efficiency: Merkle trees allow fast verification
• Decentralization: Consensus mechanisms eliminate central authority

Mnemonic: “B-H-M-C-D” (Blocks, Hash, Merkle, Consensus, Digital)

Question 2(a) OR [3 marks]

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Define and explain permissioned blockchain in detail.

Answer:

Definition: A blockchain where participation requires explicit permission from a governing authority.

Table: Permissioned Blockchain Features

Key Characteristics:

• Privacy: Enhanced confidentiality for sensitive data
• Performance: Faster transactions due to fewer validators
• Examples: Hyperledger Fabric, R3 Corda

Mnemonic: “Restricted-Private-Centralized” (RPC)

Question 2(b) OR [4 marks]

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Explain types of wallets in the context of blockchain. Also discuss the factors to be considered while selecting wallet for the specific need.

Answer:

Table: Types of Blockchain Wallets

Selection Factors:

• Security Requirements: Higher value needs better security
• Frequency of Use: Regular use favors hot wallets
• Technical Expertise: Simple wallets for beginners

Mnemonic: “H-C-H-P” (Hot, Cold, Hardware, Paper)

Question 2(c) OR [7 marks]

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Explain sidechain in detail with suitable diagrams.

Answer:

Definition: A separate blockchain that is attached to a parent blockchain using a two-way peg.

Diagram: Sidechain Architecture

graph LR
    A[Main Chain] <--> B[Two-Way Peg]
    B <--> C[Sidechain]
    A --> D[Bitcoin/Ethereum]
    C --> E[Specialized Functions]
    E --> F[Smart Contracts]
    E --> G[Privacy Features]
    E --> H[Faster Transactions]

Table: Sidechain Benefits

Key Mechanisms:

• Two-Way Peg: Allows asset transfer between chains
• SPV Proofs: Simplified payment verification
• Federated Control: Multiple parties manage transfers

Mnemonic: “S-E-S-I” (Scalability, Experimentation, Specialized, Interoperability)

Question 3(a) [3 marks]

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With respect to transaction in a blockchain network, define the terms “Confirmation” and “Finality”.

Answer:

Table: Transaction States

Key Points:

• Confirmation Count: More confirmations = higher security
• Bitcoin Standard: 6 confirmations for high-value transactions
• Finality Types: Probabilistic (Bitcoin) vs Absolute (some PoS systems)

Mnemonic: “Count-Blocks-Security” for Confirmation, “Irreversible-Point” for Finality

Question 3(b) [4 marks]

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Differentiate Proof of Work and Proof of Stake.

Answer:

Table: PoW vs PoS Comparison

Key Differences:

• Mechanism: PoW uses mining, PoS uses validators
• Environmental Impact: PoS is more eco-friendly
• Barriers to Entry: PoS requires initial stake, PoW needs hardware

Mnemonic: “Work-vs-Stake” (Computational Work vs Financial Stake)

Question 3(c) [7 marks]

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With respect to blockchain network, explain 51% attack.

Answer:

Definition: An attack where a single entity controls more than 50% of the network’s mining power or stake.

Diagram: 51% Attack Scenario

graph LR
    A[Network Hash Rate] --> B[Honest Miners 49%]
    A --> C[Attacker 51%]
    C --> D[Can Create Longer Chain]
    D --> E[Double Spending]
    D --> F[Transaction Reversal]
    D --> G[Block Withholding]

Table: Attack Capabilities and Limitations

Prevention Measures:

• Diversified Mining: Encourage multiple mining pools
• Checkpoint Systems: Periodic finality markers
• Economic Incentives: Make attacks unprofitable

Impact:

• Network Disruption: Temporary service interruption
• Economic Loss: Reduced trust and value
• Recovery: Network usually recovers after attack ends

Mnemonic: “Majority-Control-Attack” (51% = Majority Control = Attack Power)

Question 3(a) OR [3 marks]

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Define the terms “Hard fork” and “Soft fork”

Answer:

Table: Fork Types

Key Characteristics:

• Hard Fork: Creates new blockchain branch, requires all nodes to upgrade
• Soft Fork: Tightens rules, old nodes can still operate

Examples:

• Hard Fork: Bitcoin Cash split from Bitcoin
• Soft Fork: SegWit activation in Bitcoin

Mnemonic: “Hard-Breaks-Compatibility” vs “Soft-Keeps-Compatibility”

Question 3(b) OR [4 marks]

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List various types of consensus mechanisms and explain any one in detail.

Answer:

Table: Consensus Mechanisms

Detailed Explanation - Proof of Stake (PoS):

Process:

• Validator Selection: Based on stake amount and randomization
• Block Creation: Selected validator proposes new block
• Validation: Other validators verify and attest to block
• Rewards: Validators earn fees and new tokens

Advantages: Lower energy consumption, reduced centralization risk Disadvantages: “Nothing at stake” problem, initial distribution issues

Mnemonic: “Stake-Select-Validate-Reward” (PoS Process)

Question 3(c) OR [7 marks]

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With respect to blockchain network, explain sybil attack.

Answer:

Definition: An attack where a single adversary creates multiple fake identities to gain disproportionate influence in the network.

Diagram: Sybil Attack Structure

graph TD
    A[Attacker] --> B[Fake Identity 1]
    A --> C[Fake Identity 2]
    A --> D[Fake Identity 3]
    A --> E[Fake Identity N]
    B --> F[Network Influence]
    C --> F
    D --> F
    E --> F
    F --> G[Consensus Manipulation]

Table: Attack Methods and Defenses

Impact on Blockchain:

• Network Partitioning: Isolate honest nodes
• Double Spending: Facilitate fraudulent transactions
• Consensus Failure: Prevent network agreement

Prevention Mechanisms:

• Resource Requirements: PoW/PoS make attacks expensive
• Identity Verification: KYC/AML procedures
• Network Monitoring: Detect suspicious behavior patterns
• Reputation Systems: Track node behavior over time

Real-world Examples:

• P2P Networks: BitTorrent, Gnutella vulnerabilities
• Social Networks: Fake account creation
• Blockchain: Potential threat to permissionless networks

Mnemonic: “Single-Multiple-Influence” (Single Attacker, Multiple Identities, Network Influence)

Question 4(a) [3 marks]

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Define the terms “Merkle Tree” and “Hyperledger”.

Answer:

Table: Key Definitions

Key Features:

• Merkle Tree: Enables efficient verification without downloading full blockchain
• Hyperledger: Enterprise-focused, modular architecture, multiple frameworks

Mnemonic: “Tree-Hash-Efficient” for Merkle, “Enterprise-Modular-Linux” for Hyperledger

Question 4(b) [4 marks]

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Explain classic Byzantine generals problem in detail.

Answer:

Scenario: Multiple generals must coordinate attack on a city, but some may be traitors.

Table: Problem Components

Solution Requirements:

• Agreement: All honest generals decide on same action
• Validity: If all honest generals want to attack, they should attack
• Termination: Decision must be reached in finite time

Blockchain Relevance: Ensures network agreement despite malicious nodes

Mnemonic: “Generals-Messages-Traitors-Consensus” (GMTC)

Question 4(c) [7 marks]

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Explain the process of Merkle tree creation with suitable example and supporting diagrams.

Answer:

Process Steps:

1. Hash each transaction individually
2. Pair hashes and hash the pairs
3. Continue until single root hash remains

Example: 4 Transactions

Table: Merkle Tree Benefits

Verification Process:

• To verify Tx A: Need Hash(B), Hash(CD), and Root Hash
• Path verification: Hash(A) + Hash(B) = Hash(AB)
• Hash(AB) + Hash(CD) = Root Hash

Applications:

• Bitcoin: Block headers contain Merkle root
• SPV Clients: Light wallets use Merkle proofs
• Git: Version control system uses similar structure

Mnemonic: “Hash-Pair-Repeat-Root” (Merkle Tree Creation Process)

Question 4(a) OR [3 marks]

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List various types of Hyperledger projects.

Answer:

Table: Hyperledger Projects

Categories:

• Frameworks: Core blockchain platforms
• Tools: Development and testing utilities

Mnemonic: “F-S-I-B-C-C” (Fabric, Sawtooth, Iroha, Burrow, Caliper, Composer)

Question 4(b) OR [4 marks]

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Explain Practical Byzantine Fault Tolerance algorithm in detail.

Answer:

Definition: Consensus algorithm that works correctly even when up to 1/3 of nodes are faulty or malicious.

Table: PBFT Phases

Algorithm Steps:

1. Client sends request to primary replica
2. Primary broadcasts pre-prepare message
3. Backups send prepare messages if valid
4. After receiving 2f+1 prepares, send commit
5. Execute after receiving 2f+1 commits

Key Properties:

• Safety: Never produces inconsistent results
• Liveness: Eventually produces results
• Fault Tolerance: Works with f < n/3 faulty nodes

Mnemonic: “Pre-Prepare-Commit” (3 Phases of PBFT)

Question 4(c) OR [7 marks]

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“Eventual consistency is evident in the context of bitcoin.” Justify the given statement.

Answer:

Definition: Eventual consistency means the system will become consistent over time, even if it’s temporarily inconsistent.

Bitcoin Implementation:

Table: Bitcoin Consistency Mechanisms

Scenarios Demonstrating Eventual Consistency:

1. Temporary Forks: When two miners find blocks simultaneously
2. Network Partitions: Isolated nodes may have different views
3. Double Spending Attempts: Conflicting transactions in different blocks

Resolution Process:

• Mining Continues: Miners build on their preferred chain
• Longest Chain Rule: Network adopts chain with most work
• Automatic Convergence: All nodes eventually agree

Diagram: Fork Resolution

graph LR
    A[Block N] --> B[Block N+1a]
    A --> C[Block N+1b]
    B --> D[Block N+2a]
    C --> E[Dies - Shorter Chain]
    D --> F[Becomes Main Chain]

Justification Points:

• Probabilistic Finality: Longer confirmation time = higher certainty
• No Immediate Consistency: New transactions aren’t instantly final
• Convergence Guarantee: Network will eventually agree on single chain
• Time-based Resolution: Consistency improves with time

Practical Implications:

• Merchant Waiting: Wait for confirmations before accepting payment
• Exchange Policies: Different confirmation requirements for different amounts
• Risk Management: Balance speed vs security based on transaction value

Mnemonic: “Time-Brings-Consistency” (Eventual Consistency = Time + Convergence)

Question 5(a) [3 marks]

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Explain advantages of ERC 20.

Answer:

Table: ERC-20 Token Advantages

Key Benefits:

• Developer Friendly: Simple implementation standard
• Market Adoption: Widely supported across platforms
• Smart Contract Integration: Easy DeFi integration

Mnemonic: “Standard-Interoperable-Liquid” (SIL)

Question 5(b) [4 marks]

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Describe working mechanism of a smart-contract in detail.

Answer:

Table: Smart Contract Workflow

Working Process:

1. Development: Write contract in Solidity/Vyper
2. Compilation: Convert to bytecode
3. Deployment: Upload to blockchain network
4. Execution: Triggered by transactions or events

Mnemonic: “Deploy-Trigger-Execute-Update” (DTEU)

Question 5(c) [7 marks]

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What is smart-contract? Explain features and applications of smart-contract in detail.

Answer:

Definition: Self-executing contracts with terms directly written into code, running on blockchain.

Table: Smart Contract Features

Diagram: Smart Contract Architecture

graph LR
    A[Smart Contract] --> B[Trigger Conditions]
    B --> C[Automatic Execution]
    C --> D[State Changes]
    D --> E[Event Emissions]
    A --> F[External Calls]
    F --> G[Other Contracts]

Applications:

Table: Smart Contract Applications

Advantages:

• Efficiency: Reduced processing time and costs
• Trust: No need for trusted third parties
• Accuracy: Eliminates human errors
• Global Access: Available 24/7 worldwide

Limitations:

• Immutability: Difficult to fix bugs after deployment
• Oracle Problem: Need external data sources
• Gas Costs: Execution costs can be high
• Complexity: Requires technical expertise

Development Considerations:

• Security Audits: Essential before deployment
• Testing: Extensive testing on testnets
• Upgradability: Design patterns for updates
• Gas Optimization: Minimize execution costs

Mnemonic: “Auto-Transparent-Immutable-Deterministic” (ATID) for features

Question 5(a) OR [3 marks]

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Explain disadvantages of ERC20.

Answer:

Table: ERC-20 Token Disadvantages

Key Issues:

• Transfer Limitations: Cannot handle complex transfers
• Approval Risks: Double spending vulnerabilities
• Network Congestion: High fees during peak times

Mnemonic: “Limited-Vulnerable-Dependent” (LVD)

Question 5(b) OR [4 marks]

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Describe steps for Launching of a Decentralized Autonomous Organization (DAO)?

Answer:

Table: DAO Launch Steps

Detailed Process:

1. Whitepaper Creation: Document vision and tokenomics
2. Technical Implementation: Deploy governance contracts
3. Initial Funding: Raise capital through token sales
4. Operations Launch: Begin decentralized operations

Mnemonic: “Design-Develop-Distribute-Deploy” (4D Launch)

Question 5(c) OR [7 marks]

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What is Decentralized Autonomous Organization (DAO)? Explain its advantages and disadvantages in detail.

Answer:

Definition: A blockchain-based organization governed by smart contracts and token holders rather than traditional management.

Table: DAO Structure

Diagram: DAO Governance Flow

graph LR
    A[Token Holders] --> B[Submit Proposals]
    B --> C[Community Discussion]
    C --> D[Voting Period]
    D --> E[Execution if Passed]
    E --> F[Smart Contract Updates]
    F --> G[Treasury Actions]

Advantages:

Table: DAO Benefits

Disadvantages:

Table: DAO Challenges

Types of DAOs:

• Investment DAOs: Collective investment decisions
• Protocol DAOs: Blockchain protocol governance
• Social DAOs: Community-driven organizations
• Collector DAOs: NFT and art collecting

Success Factors:

• Clear Purpose: Well-defined mission and goals
• Robust Governance: Effective voting mechanisms
• Community Engagement: Active member participation
• Technical Security: Audited smart contracts
• Legal Compliance: Regulatory compliance where applicable

Notable Examples:

• MakerDAO: Decentralized finance protocol
• Uniswap: Decentralized exchange governance
• Compound: Money market protocol

Future Outlook:

• Regulatory Clarity: Evolving legal frameworks
• Technical Improvements: Better governance tools
• Mainstream Adoption: Growing corporate interest
• Integration: Hybrid traditional-DAO models

Mnemonic: “Decentralized-Autonomous-Organization” (DAO = Democratic Automated Ownership)