PRIVATE BLOCKCHAIN

SYSTEM
Prepared By:
Palak Desai
Assistant Professor
SCET, Surat
 Outlines:
• Introduction
• Key characteristics of Private Blockchain
• Private Blockchain Examples
• Smart Contract in Private Environment
• State Machine
• Different Algorithms of Permissioned Blockchain
• Byzantine Fault

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 Introduction
• A private blockchain is one in which only specific users have access and abilities and is
generally used only by the entity it belongs to.
• A private blockchain is invitation only, anybody who wants to access it must ask for
permission first from the governing entity of the blockchain network. They allow various
levels of access to determine which user has which type of permission.

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 • Data and transactions are visible to participating entities.
• This type of permissioned blockchain system offers read, write and audit permission to the
participating users. So, the private blockchain assures a high level of security, confidentiality,
privacy and performance.
• This blockchain uses are internal to the company so companies will not want it to be accessible by
the public.
• Usually used in finance and government sectors.

Benefits:
- Enhanced Privacy:
Transactions are only visible to the users who have permission to access it.
- Greater Scalability:
Nodes can be easily added and removed by enterprise.

- Permissioned Blockchain:
The resources are controlled and accessed by only permissioned users.

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 Characteristics:
Security This blockchain uses identity to confirm membership and access privileges and typically only permit
known organization to join.

Performance Since the lesser number of nodes are there performance is increased as it takes less time to validate the
block.
This type of blockchain has higher throughput and lower latency become more significant as the
number of transaction grow.
Scalability A network that doesn’t host millions of users can easily implement the changes and features and hence
can increase scalability.

Throughput Since the number of users is limited this type of blockchain has higher throughput. This throughput
gives a more advantage as the business needs faster transactions which are easily provided by the
private blockchain.
Trust Users on the private network are not anonymous this increases the level of trust in the private
blockchain.
Private Blockchain is best suited for applications where it required the truth that a company can achieve
data privacy and control over data sharing.
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Characteristics (Conti…):
Cost-effective Private blockchains can be cost-effective for businesses because they don’t require the same level of
resources as public blockchains. Private blockchains can be operated on existing infrastructure, which
reduces the costs associated with setting up a new network.
Flexibility Private blockchains are highly flexible and can be customized to meet the specific needs of a business.
They can be designed to include only the necessary features and components, which makes them more
efficient.
Control Private blockchains provide businesses with greater control over their data and the blockchain
network.
Businesses can control who has access to the blockchain and can set rules and guidelines for how the
network is used.
Privacy Private blockchains provide greater privacy for businesses, as they can control who has access to their
data and can ensure that sensitive information is not shared with unauthorized parties.

Collaboration private blockchains can facilitate collaboration between businesses, as they can be designed to allow
multiple organizations to participate in the same network.

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 Public Vs Private Blockchain
Parameter Public Blockchain Private Blockchain
Access - Anyone can read, write and participate in a blockchain. - Read and write is done upon invitation
- Permissionless blockchain - Permissioned blockchain
- Public to everyone
Network Members Don’t know each other Know each other
Decentralized Partially Decentralized
Decentralized Vs Centralized

Transaction Cost High Low

Data Handling Read and Write access for anyone Read and Write access for a single organization

Immutability Full Partial

Transaction Speed Slow Fast

Energy Consumption - Consumes more energy than a private blockchain - Consumes a lot less energy and power
- Requires a significant amount of electrical resources to
function and achieve network consensus
- Bitcoin - R3 Corda
- Ethereum - Ripple
Examples - Litecoin - Hyper Ledger Fabric
- Stellar - B3i (Insurance)
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 Private Blockchain Examples
1. R3 Corda:
• R3 Corda is a distributed ledger technology (DLT) platform specifically designed for financial
services.
• It is an open-source project launched in September 15, 2015 by a consortium of over 200 banks,
financial institutions, and technology companies.
• It offers a “Know your Customer” policy.
• To be part of network, every new node has to reveal its identity to be authorized on the network.
The special nodes known as the Doorman are in charge of the approval of identities and
distribution of certificates to each node.
• There are one or many nodes are known as Notary nodes for the validation of uniqueness and
simplifies the transactions in sequence without broadcasting it globally.

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 • Corda us available with two consensus mechanisms to be reached:
- Validity
- Uniqueness
• The signer checks the validity and the notaries check for the uniqueness of the network. Corda
offers a smart contract facility and also supports the development of the decentralize application
(CorDapps).
• Corda is written in the Kotlin programming language and supports development both in Kotlin
and Java.
• Highly regulated enterprises need to be developed that offer privacy, security and scalability.

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 2. Hyperledger Fabric:

• Hyperledger Fabric is designed for use in enterprise-level applications, and it is characterized by

its modular architecture, permissioned network, and smart contract functionality, known as
“chaincode”.

• The platform provides a high degree of security, privacy, and scalability, and it supports the
development of custom blockchain solutions for various use cases across industries such as
finance, supply chain, and healthcare.

• Hyperledger Fabric operates as a network of nodes, where each node performs a specific
function, such as validating transactions, maintaining the ledger, and executing chaincode.

• Transactions are validated and ordered by a consensus mechanism, which ensures the integrity
and consistency of the ledger.

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 A fabric is a network of nodes that gets identities by a membership service provider.
These network nodes can be:

i. Client Nodes:
To put the order they can create transactions fir the execution and broadcast it.
ii. Ordering service nodes:
Initiate the order of all the transactions.
iii. Peer Nodes:
Maintain the ledger and the state of latter.
iv. Chain Nodes:
Those are smart contracts for implementing the application logic.
v. Endorsing Nodes:
As per the endorsement policy, a voting based consensus mechanism is used to execute
and validate the transactions.

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 3. Ripple:
• Ripple is a blockchain-based digital payment network and protocol that uses its
own cryptocurrency, XRP.

• The purpose of XRP is to serve as an intermediate mechanism of exchange between two

currencies or networks—as a sort of temporary settlement layer denomination.

• Ripple is an open-source XRP ledger and a pilot project of the private version used for the
public presents Central Bank flexibility, security and control over issuing, returning and
easy managing of digital currencies.

• Ripple transactions use less energy than Bitcoin, are confirmed in seconds, and cost very
little.

• Used by banks and financial intermediaries dealing across currencies.

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 • More than 80% of Central Banks are actively looking for sovereign-based cryptocurrency.
• New CDBC (Central Bank Digital Currencies) is abiding to come forward. New CDBC has its
different goals to deal with market challenges and new openings for its country to
enhance global trade and financial inclusion, leads to advancement in technology and
new implementations for CBDC solutions.
• XRP acts as a bridge for effortless transactions in other country’s currencies and CDBC.

• The CDBC private ledgers are reliable for performing tens of thousands of transactions
per second. Ripple payment settlement platform also performs the currency exchange
around the word on the network. It offers a facility to exchange verities of
cryptocurrencies like Bitcoin, fiat currencies and gold commodities as well.

• For doing the transactions over the Ripple network, it charges a small amount to do the
transaction as a fee.

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 Smart Contract in Private Environment
• The blockchain is evolving from offering payment systems to powering the platforms that
underpin decentralized applications.

• Ethereum was developing their platform they realized that the transfer of assets has a
story behind it, which can consist of different terms and conditions to be fulfilled for
transfer to be completed.

• Consequently, with further technological development blockchain users realized that

more than asset transfer was possible – and started to build various useful and even
funny decentralized applications.

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 • If we consider public blockchain, the main use cases are:
- Games
- Asset transfer
- Secure voting systems
- Crowdfunding platforms

• With the growth of adoption and popularity of public blockchain platforms, enterprise
companies understood that blockchain technology could actually be very efficient for
some of their business processes.
• That progress and focus on business needs had an influence on smart contract
development as well.

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 • Based on the experience shared with corporate customers, some of the popular use
cases in which smart contracts can be very much helpful in the private blockchain area
are discussed below:
1. Corporate document flow
2. Supply chain business processes
3. Insurance
4. Secure voting systems
5. Clearing of mutual settlements with suppliers
6. Leasing and rental equipment
7. Auctions of any type or complexity
8. Predictive analytics for blockchain data

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 Main differences between public and private blockchain are as follows:

1. Data operated by smart contracts is much more sensitive compared to public

networks.
2. A common case is that smart contracts should be able to operate with documents and
data stored outside of the blockchain, which is not possible for public blockchain
platforms. In a public network, there are oracles that are either trusted or can store
very limited data objects directly on the blockchain. In both cases, there are serious
limitations for private use.
3. Transactions which invoke smart contracts should be encrypted, if we are dealing with
private smart contracts in such a way that only authorized parties can decrypt and
execute the contract.

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 State Machine
• A state machine is a computer science concept whereby a machine can have multiple
states, but only one at any given time. There is a state, which describes the current state
of the system, and transactions, that trigger state transitions.
• Given a state S and a transaction T, the state machine will return a new state S'.

Apply(T)
S S’

• In practice, the transactions are bundled in blocks to make the process more efficient.
Given a state S and a block of transactions B, the state machine will return a new state S'.

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 • In a blockchain context, the state machine is deterministic.
• This means that if a node is started at a given state and replays the same sequence of
transactions, it will always end up with the same final state.

S S’
For each T in B: apply(T)

• The Cosmos is an open, scalable and interconnected economy of the future.

• The Cosmos SDK offers the developers a flexible platform to define the state of an
application, type of transaction and functions of state transaction.

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 Tendermint:
• The Cosmos has developed the platform to define the state machines and Tendermint to
replicate it over the network.

State-machine application Built with cosmos SDK

Blockchain
Node Consensus
Tendermint Core
Networking

• Tendermint (opens new window) is an application-agnostic engine that is responsible for

handling the networking and consensus layers of a blockchain. In practice, this means
that Tendermint is responsible for propagating and ordering transaction bytes.
Tendermint Core relies on an eponymous Byzantine-Fault-Tolerant (BFT) algorithm to
reach consensus on the order of transactions.

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 • The Tendermint consensus algorithm (opens new window)works with a set of special
nodes called Validators.
• Validators are responsible for adding blocks of transactions to the blockchain.
• At any given block, there is a validator set V.
• A validator in V is chosen by the algorithm to be the proposer of the next block.
• This block is considered valid if more than two thirds of V signed a prevote and a
precommit on it, and if all the transactions that it contains are valid.
• It creates an array of validated blocks and also changes of state-machine of these blocks.
• The validator set can be changed by rules written in the state-machine.

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 Different Algorithms of Permissioned Blockchain:
• Private blockchains are permissioned blockchain that need approval from a central
authority. This is useful for enterprises, banking systems, financial ledgers and
government-private institutions that are ready to obey the regulations and are very much
concerned with highly secured and confidential data.
• For managing the enterprise users and transactions, private blockchains are coming up
with various consensus algorithms.

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 1. Consensus based on Proof of Work (PoW):
• The cryptographic hash is produced in proof-of-work consensus. The concept was first
given by Cynthis Dwork and Moni Naor, later it is again re-introduced in bitcoin
whitepaper in 2008 by Satoshi Nakamoto.
• The PoW originally introduced by Hashcash in limiting the electronic mail spam and
denial of service attacks by Adam back in the networking system.

• In a PoW consensus, validator nodes must fetch data from a block header as an input and
runt it constantly by a cryptographic hash function.
• Validators hash is variable by adding an arbitrary number known as a nonce(number used
only once) every time the input data is run through the hash function. Specialized
computer nodes and a high level of electricity are required to calculate difficult
mathematical problems needed for the PoW system.

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 2. Consensus-based on Proof of Stake (PoS):
• The PoS is intended as an alternative to PoW in 2011. Both PoS and PoW are almost
similar. They have the main difference in terms of validating new blocks on the
blockchain.
• The proof –of-stake consensus algorithm can mine the consensus based on the stake of
the network participating user to validate.
• Instead of a hash function, validator nodes stake the resources in terms of tokens or
digital currency.
• After that validator of he block is chosen randomly from the list of stakeholders
depending on the computational resources assigned to it.
• The PoS system of the blockchain is secured by a pseudo-random selection process that
considers the node’s resource allocation.
• This is the reason that makes the PoS an efficient system. The Ethereum blockchain has
taken an initiative to switch from PoW to PoS system to improvise the scalability and to
minimize the wastage of electricity.

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 Consensus based Delegated Proof-of-Stake(DPoS):
• Delegated Proof Of Stake (DPoS) is a consensus algorithm which is an advancement of
the fundamental concepts of Proof Of Stake. Delegated Proof of Stake (DPoS) consensus
algorithm was developed by Daniel Larimer, founder of BitShares, Steemit and EOS in
2014.
• Delegated Proof of Stake is a blockchain consensus mechanism where network users vote
and elect delegates to validate the next block. Like a traditional proof-of-stake
mechanism, DPoS uses a collateral staking system.
• However, it also uses a specific democratic process designed to address POS’s
limitations. This allows it to offer a more affordable, efficient, and fair way to validate
transactions.

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 Proof of Authority:

• In PoA, rights to generate new blocks are awarded to nodes that have proven their
authority to do so. These nodes are referred to as “Validators” and they run software
allowing them to put transactions in blocks. Process is automated and does not require
validators to be constantly monitoring their computers but does require maintaining the
computer uncompromised. PoA is suited for both private networks and public networks,

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 Byzantine Fault
• A Byzantine fault is a condition of a computer system, particularly distributed computing systems,
where components may fail and there is imperfect information on whether a component has
failed.
• In a Byzantine fault, a component such as a server can inconsistently appear both failed and
functioning to failure-detection systems, presenting different symptoms to different observers. It
is difficult for the other components to declare it failed and shut it out of the network, because
they need to first reach a consensus regarding which component has failed in the first
place. Byzantine fault tolerance (BFT) is the resilience of a fault-tolerant computer system to such
conditions.

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 Types of Byzantine Failures:
There are two categories of failures that are considered. One is fail-stop(in which the node
fails and stops operating) and other is arbitrary-node failure.
Some of the arbitrary node failures are given below :
1. Failure to return a result
2. Respond with an incorrect result
3. Respond with a deliberately misleading result
4. Respond with a different result to different parts of the system

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 The Role of Byzantine Fault Tolerance in Blockchain Technology:

• BFT keeps the blockchain network continuously functional, even with some disagreeing
nodes.
• It keeps the network secure, preventing malice which can come in the form of a 51%
attack (or Sybil attacks) or double-spending.

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 So, for the fault tolerance in the distributed ledger following mechanism can be
implemented.

1. Simple fault-tolerant system:

• This is the simple mechanism of preventing the system from the fault like node is crashed or not
responding due to offline condition. This kind of system is not efficient in an uncontrolled
environment of blockchain.

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 2. Byzantine Fault Tolerance(BFT):

• Byzantine Fault Tolerance(BFT) is the feature of a distributed network to reach

consensus(agreement on the same value) even when some of the nodes in the network fail to
respond or respond with incorrect information. The objective of a BFT mechanism is to safeguard
against the system failures by employing collective decision making(both – correct and faulty
nodes) which aims to reduce to influence of the faulty nodes.

• Byzantine fault tolerance can be achieved if the correctly working nodes in the network reach an
agreement on their values. There can be a default vote value given to missing messages i.e., we
can assume that the message from a particular node is ‘faulty’ if the message is not received
within a certain time limit. Furthermore, we can also assign a default response if the majority of
nodes respond with a correct value.

• Leslie Lamport proved that if we have 3m+1 correctly working processors, a consensus(agreement
on same state) can be reached if atmost m processors are faulty which means that strictly more
than two-thirds of the total number of processors should be honest.

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 3. Practical Byzantine Fault Tolerance(PBFT):

• pBFT tries to provide a practical Byzantine state machine replication that can work even when
malicious nodes are operating in the system.

• Nodes in a pBFT enabled distributed system are sequentially ordered with one node being the
primary(or the leader node) and others referred to as secondary(or the backup nodes). Note here
that any eligible node in the system can become the primary by transitioning from secondary to
primary(typically, in the case of a primary node failure). The goal is that all honest nodes help in
reaching a consensus regarding the state of the system using the majority rule.

• A practical Byzantine Fault Tolerant system can function on the condition that the maximum
number of malicious nodes must not be greater than or equal to one-third of all the nodes in the
system. As the number of nodes increase, the system becomes more secure.

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 4. Proof of Work (PoW):
• PoW solves the Byzantine Generals Problem because it achieves a majority agreement
without a central authority, despite the presence of unknown or potentially
untrustworthy nodes and despite the network not being instantaneous.

5. Proof of Stake (PoS):

• PoS handles the Byzantine issues by mining the consensus based on the stake available.
• They also awarded for mining the consensus and also finds the presence of unauthorized
nodes or they are malicious.

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 References
1. Blockchain Technology By Chandramouli Subramanian, Asha George, Abhilash K A and Meena
Karthikeyan , Universities Press Publication.

2. https://www.geeksforgeeks.org/blockchain/

3. https://ethereum.org/

4. https://medium.com/

5. https://docs.cosmos.network/

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