SC-402
Applications of Cryptography
on the Blockchain
Prof. Manish K. Gupta
Rahi Krishna
201901446
201901446@daiict.ac.in
Prerak Modia
201901198
201901198@daiict.ac.in
Rohit Dubey
201901446
201901180@daiict.ac.in
Krish Vaghela
201901293
201901293@daiict.ac.in
Devesh Lakwal
201901249
201901249@daiict.ac.in
May 15, 2022
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Contents
1 Introduction
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2 Infrastructure
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3 Hash and Block Structure
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4 Public Key System and Bitcoin
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5 Digital Signature and Currency Trading
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6 Blockchain Consensus Mechanism
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7 Security Issues in Blockchain
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8 Conclusions
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Abstract
Blockchain can be looked at as a distributed, decentralized, traceable, non-tamperable, secure
and reliable database that practically guarantees user information security. The development
of cryptography technology such as encryption and hash functions has accelerated blockchain
growth. This paper outlines blockchain infrastructure as well as the principles of cryptographic
encryption, and shows the extent of cryptography usage in the blockchain. The existing security
problems are analysed and future improvements that can be made are touched upon.
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Introduction
Blockchain is a distributed, decentralized database that is shared within any computer network.
It stores information electronically in digital format and are known for a crucial role they play in
cryptocurrency systems (such as Ethereum and Bitcoin) for maintaining a secure record of transactions. The innovation with a blockchain is that it guarantees the fidelity and security of a record
of data and generates trust without the need for a third party.
One key difference between a typical database and a blockchain is data structure. A blockchain
collects information together in groups, known as blocks, that hold sets of information. Blocks
have certain storage capacities and, when filled, are closed and linked to the previously filled block,
forming a chain of data known as the blockchain.
All new information that follows that freshly added block is compiled into a newly formed block
that will then also be added to the chain once filled.
Blockchain integrates P2P (Peer-to-Peer) protocol, digital encryption technology and a consensus
mechanism together. Such cryptosystems adopt the method of mutual maintenance by multiple
users, realizing information supervision among multiple parties, thus ensuring the credibility and
integrity of the data.
The blockchain stores all user transaction information on the internet, which has high requirements
for its security performance. In such systems, nodes (or blocks) do not need to trust each other,
and are independent of one another, having no central node. Transaction information must be able
to be sent over unsecured channels, securely, requiring heavy encryption techniques.
We shall briefly introduce a few cryptography techniques such as hash algorithm, asymmetric encryption algorithm and digital signature.
We shall also elaborate the blockchain structure, and explain how cryptography technology protects
privacy and transaction maintenance in the blockchain in detail.
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2
Infrastructure
Blockchain has progressed from being just a simple multi-technology portfolio represented in currencies such as Bitcoin to obtain the ability to tranfer digital assets securely in the Ethereum
era. Typical applications of blockchain include cyptocurrencies and hyperledgers.
The blockchain platform can be divided into five distnct layers: Network layer, Consensus Layer,
Data layer, Contract layer and Application layer.
Platform Level
Bitcoin
Ethereum
Hyperledger
Application Layer
Bitcoin trading
Ethereum trading
Enterprise blockchain
Network Layer
TCP-based P2P
TCP-based P2P
HTTP/2-based P2P
Contract Layer
Script
Solidity/Script EVM
Go/Java Docker
Consensus Layer
PoW
PoW/PoS
PBET/SBFT
Data Layer
Merkle tree
Merkle-Patricia rree
Merkle-Bocket tree
Data Layer
The data layer mainly uses the ’block’ data structure to ensure data storage integrity. Each node
in the network encapsulates the data transactions completed over a certain period of time into a
time-stamped data block called a ledger, and then links the block to the current longest main
blockchain for storing. This involves the usage of Merkle trees and hashing algorithms to encrypt
the data in the storage block.
Consensus Layer
The consensus layer mainly includes a consensus mechanism, which enables each node in the
system to ensure the validity of the blockchain in the decentralized system. This layer deals with
the enforcement of network rules that describe what nodes within the network should do to reach
consensus about the broadcasted transactions.
A few consesnsus mechanisms are: PoW (Proof-of-Work), PoS (Proof-of-Stake) which regulate the
creation of blocks and the state of the blockchain as well as delegate control of the network to
owners.
PBFT (Practical Byzantine Fault Tolerance) and SBFT (Simplified Byzantine Fault Tolerance) are
used to widen the performance bottlenecks for the data transmission and storage of such blocks in
the blockchain.
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Network Layer
The network layer includes various data transmission protocols and verification mechanisms. The
blockchain is a typical P2P network. All nodes are connected through a planar topology and have
no central nodes.
Any two nodes can be freely traded, and any node can join or leave the network at any time. The
P2P protocol in the blockchain is mainly used for information transmission between nodes.
Application Layer
Smart contracts, chain code and decentralized applications make up the application layer. The
application layer protocols are further subdivided into the application and the execution layers.
This layer comprises the programs that end-users utilize to communicate with the blockchain network. Scripts, application programming interfaces (APIs), user interfaces and frameworks are all
part of it. This includes cryptocurrency systems and hyperledgers.
Contract Layer
The contract layer works with the contract itself. Since there are financial repercussions to a
poorly defined or executed contract layer, great care must be utilized to ensure that the contract is
issued correctly and free of potential weaknesses. The software also needs to be verifiable, secure
and reliable., the contract must be executed correctly and be free of potential weaknesses. The
software needs to be verifiable, secure, and reliable.
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Hash and Block Structure
Hash Algorithm is a function that converts a sequence of messages of any arbitrary length to
a shorter fixed-length value. The hashes used in Block-chain are one-way, and hence can’t be
reversed or altered. Data integrity is ensured by hash functions, hence it can be easily verified if
the data has been tampered.
Even if it is in unsafe environment (public), the integrity of the data can be detected based on
the hash value of the data. When the data changes so does it’s hash value. Cryptographic hash
function’s properties are used as a consensus mechanism by block-chain. Cryptographic hash acts
as a digest and digital fingerprint for a definite quantity of data.
SHA (Secured Hash Algorithms) is a type of cryptographic hash function issued with general characteristics of a cryptographic hash function. The SHA256 algorithm is a part of SHA-2 algorithm
cluster, which generates a 256-bit message. Primarily 2 phases are involved in algorithm’s calculation process: message preprocessing and main loop. In Message preprocessing stage, binary bit and
message length are filled irrespective of message size. Later the message is divided into several 512
bit message blocks. Later in main loop phase, each message block is processed by a compression
function. The input of the current compression function is the output of the previous compression
function, and the output of the last compression function is the hash value of the original message.
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As the SHA series function, the first step RIEPEMD, the first and most important stage is message complement. The complement method is identical to the SHA series algorithms.
Core of RIEPEMD is compression function (which is loop), where each loop consists of 16 step
functions. Using different original logic functions in each loop, the processing of the algorithm is
divided into two different cases, with five of the two original logic functions running in reverse order.
After all 512-bit packet processing is completed, the resulting of 160-bit output is the hash value of
the original message.
Hash functions can be used for performing block and transaction integrity verification. In
blockchain, header of a each block contains hash value of the information of previous block. Any user
can compare calculated hash value with the stored hash value. This helps in calculating integrity
of the information of previous block. Similarly, hash functions are used to generate public-private
key pairs.
A data structure called hash pointer contains some data information and password hashes associated
with the information. Hash pointer is used to verify that the information is tampered. As shown
in the picture below, the blockchain is a list of hash pointers, each of which is connected by using
a hash value. It is verified according to the hash value whether the data contained in the block is
changed, thereby ensuring the integrity of the block information.
Figure 1: Block Chain Structure
The blocks contain all the data information of the whole network, composed of headers containing
metadata and block body containing all the transaction data. The header encapsulates the hash of
previous block, current block solution random number, Merkel root, timestamp and current block’s
difficulty target. Block body contains a list of transactions for storing transaction information.
Previous Hash
Block hash is a key segment of the blockchain. The hash field is the value of the data information
of the previous block, and all the nodes that are sequentially connected. A main chain from the
creation of the block to the current block is formed. Not only information of previous block, but
each block can also verify the data contained in the block according to the previous block hash.
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Nonce
The header information of each data block contains a random number whose initial value is 0. The
node running the bitcoin mining machine continuously performs a SHA256 operation on the overall
data of the block. When the SHA256 value calculated by the current random number does not meet
the requirements, then the random number is increased by one unit, and the SHA256 operation is
continued.
Until the SHA256 value is less than the current data block SHA256 value, then a new data block is
generated and the P2P network accepts the new data block. Therefore, the process of generating a
new block is actually a process of calculating the SHA256 value and comparing it with the target
value.
This process of bitcoin data block generation is called Proof-of-Work.
Timestamp
Write time of the block data is stored in the timestamp of the current data block header. Blocks
on the main chain are chronologically ordered.
Timestamp can be used as a proof of the existence of block data, helping to create a database that
is not tamper able and unforgettable.
Target
Target is used to make the computing power of entire network approximately the difficulty level
required to generate 1 block every 10 minutes. Target is automatically re-valuated on the results of
the past 2 weeks.
Target is determined by the SHA256 value in the block. The value in the block header should fall
within the controller target range to increase or decrease the target.
Merkle Root
Merkle Tree was first introduced to verify the integrity of large scale data. The Merkle tree typically contains the transaction database for the block, the root hash of the block header, and all
branches along the underlying block data to the root hash. Tree operation groups the data of the
block and inserts the generated new hash into the Merkle tree.
Until the last root hash is left and recorded as the Merkle root of the block header, it is finally
constructed into a tree structure. Bitcoin uses a double SHA256 hash function, which is to pass two
SHA256 hash operations on the original data of arbitrary length, and use 256-bit binary digits for
unified storage and identification.
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Figure 2: Merkle Tree
Transaction List
Transaction list contains many details of transaction record, including the transaction number, time
of each transaction, bitcoin amount, payer and many other information. Each Bitcoin is written
and received together, so each bitcoin can be traced back.
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Public Key System and Bitcoin
The main use of cryptography in blockchain technology has to do with encryption of two types:
Symmetric and Asymmetric. Symmetric encryption uses a single key that needs to be shared
among all the people who need to receive the message. Asymmetric encryption, also called Public
Key encryption uses a pair of public key and a private key to encrypt and decrypt messages when
communicating.
Asymmetric encryption is prevalent in the modern day, even though it has comparatively lower
processing speed and encryption strength. The ledgers that are stored in the common blockchain
generate a private key using an inbuilt algorithm, that can only be decoded by the public key available with the users that need to access their storage block.
Elliptic Curves Cryptography is a common public key encryption algorithm. The security depends on the difficulty of the elliptic curve discrete log problem.
The public key encryption algorithm used in the blockchain is SECP256K1 in the elliptic curve.
SECP256K1 is based on an elliptic curve over a finite field. Due to its special construction, its
optimized implementation can achieve a 30 percent improvement over other curves.
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New encryption mechanism such as SHA256, SECP256R1, SECP256K1, KECCAK-256
(Ethereum) can effectively avoid the possibility of backdoors. These cryptic methods require
unimaginable amounts of time and energy to crack them via brute-force. The key pair (private
key, public key) is generated by public key encryption. In the payment link of bitcoin transactions,
the recipient’s address is generated by a public key, called the bitcoin address, which is the payee.
As shown in the figure below, the private key is a number, usually randomly selected, and the
public key is generated by encrypting the private key by elliptic curve multiplication. A singleentry encrypted hash function is used to generate the bitcoin address through the public key.
Figure 3: Bitcoin Address Generation
Elliptic Curve Cryptography (ECC) is a key-based technique for encrypting data. ECC focuses
on pairs of public and private keys for decryption and encryption of web traffic.
ECC is frequently discussed in the context of the Rivest–Shamir–Adleman (RSA) cryptographic
algorithm. RSA achieves one-way encryption of things like emails, data, and software using prime
factorization.
In contrast to RSA, ECC bases its approach to public key cryptographic systems on how elliptic
curves are structured algebraically over finite fields. Therefore, ECC creates keys that are more
difficult, mathematically, to crack. For this reason, ECC is considered to be the next generation
implementation of public key cryptography and more secure than RSA.
It also makes sense to adopt ECC to maintain high levels of both performance and security. That’s
because ECC is increasingly in wider use as websites strive for greater online security in customer
data and greater mobile optimization, simultaneously. More sites using ECC to secure data means
a greater need for this kind of quick guide to elliptic curve cryptography.
When a user wishes to generate a public key using their private key, they multiply their private
key, a large number, by the Generator Point, a defined point on the SECP256K1 curve. Thanks
to the Discrete Log Problem, dividing a public key by the Generator Point cannot yield a private key.
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All elliptic curves are equations with a specific template:
y 2 = x3 + ax2 + b
Because the y component of the equation is squared, this elliptic curve is symmetric across the
x-axis, and for each value of x, there are two values of y, one of which is odd while the other is
even. This allows public keys to be identified simply by the x-coordinate and the parity of the
y-coordinate, saving significant data usage on the blockchain.
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Digital Signature and Currency Trading
Signature Algorithm and Verification Algorithm forms digital signature system. Signature
Algorithm generates digital signature on the message which is controlled by signature key. Signature key is kept secret by the signer which is verified by the Verification Algorithm. Verification
Algorithm and it’s controller verification key are public, so anyone who needs to verify the signature can easily verify it.
Blockchain which is underlying technology in a Cryptocurrency system involves the digital currency
owner hashing the content of the previous transaction order of the digital currency and the address
of the next owner. The data is signed with its own private key is appended to the end of the
transaction list and sent to the recipient who verifies the received information, and then verify the
owner of the transaction. Each transaction in the blockchain is recorded with its previous owner,
current owner and next owner of the currency. This enables tracing back of money, avoiding
double payment, false transactions and other discrepancies.
Figure 4: Signing and Verification of the transaction
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From the above figure we can understand that user 2 performs transaction with user 3. Let’s say
that user 2 pays 50 bitcoins to user 3, the amount and the source of the bitcoin are recorded on the
transaction slip. The 50 bitcoins which user 2 has are from user 1, and therefore to complete the
transaction of user 2 to user 3, it is necessary to record the source of the bitcoin, the amount of the
payment and the digital signature of the user 2.
Signature is mainly completed by the player, by hashing the transaction data information of the
previous transaction to obtain its hash value. Then the payer encrypts this obtained hash value
with its own private key. The encrypted data is sent to the recipient simultaneously as the digital
signature of the previous transaction data message and the previous transaction data. After receiving the information, the receiver will verify it by using the same hash function as the previous step
to obtain the hash summary. Finally, the payer’s public key is used to decrypt the additional digital
signature of the previous step to obtain another hash digest. Validity is ensured by comparing the 2
summaries. If the contents of both are same than recipient can confirm the order is valid.
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Blockchain Consensus Mechanism
Accounting nodes in the blockchain network which are used to confirm the transaction information,
thereby ensuring the consistency of the data which is determined with the consensus mechanisms.
Proof of Work was used by early Bitcoin Blockchain. This mechanism heavily relies on the computing power of the nodes to determine the consistent accounting for the bitcoin network distributed
accounting.
Each node in PoW mechanism needs to rely on its own power to solve the SHA256 calculation
problem to find a suitable random number Nonce, so that the SHA256 hash value of the block
header is smaller than the setting value of the difficulty target in the block header:
H(n||h) ≤ t.
H is the SHA256 hash function; n is the random number Nonce; h is the block header data, mainly
including the previous block hash, Merkle root, etc.; t is the difficulty target - the smaller the t
value, the more complex is the n value found. Node that is first found obtains the accounting rights
of the new block. The consensus process of PoW is the blockchain process is as follows:
1. Every new transaction is broadcast to all nodes in the blockchain network.
2. Each node gathers all the transactions received since the previous block was generated to
calculate the Merkle’s root of the block header based on these transactions. This method is
followed to create a new block. Nonce of the block header is increased from 0 to 1 until twice
the SHA256 hash value of the block header are less than or equal to set value of the target.
3. Calculations are performed simultaneously at whole network’s nodes. Node which finds the
correct random number first will gain the billing rights of the new block and mining reward
and broadcasts the block to the entire network.
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4. After receiving the block, other nodes verify the validity of the transaction and the random
number Nonce encapsulated in the block. If correct, the block is added to the local blockchain
and the next block is built based on the current block.
With never ending development in these fields and emergence of new cryptocurrencies, researchers
have proposed various mechanisms that can be used to get the results without being restricted by
computing power. For Example: PoS and DPoS, as well as some distributed consistency algorithms
such as Raft, PBFt etc. have their own pros and cons while having different application scenarios.
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Security Issues in Blockchain
Any node that joins the blockchain network can obtain a complete copy of the global ledger that
stores the transaction information publicly. Potential attackers pose threat to users transaction
privacy and identity privacy by analyzing transaction records. For example, the fund balance and
transaction details of a specific account, flow of funds and so on can easily be interpreted from
the public transaction records. The identity privacy threat means that the attacker can obtain the
identity information of the trader by combining some background knowledge based on analyzing
the transaction data.
Coinjoin, ring signature, Zero-Knowledge Proof etc. are used to counter this privacy attack.
Dash uses coin measure where a coin node consolidates multiple transactions into single transaction, hiding the relationship between the payment address and the payer’s details. However,
the effect of coin depends on the number of users participating in the coin, and high number of
transactions make the system susceptible to threats. Also the mechanism of coin is easy to crack
and analyst can easily analyze the private information using certain methods which prevents coin
measure producing desired results. Therefore, a cryptographic mechanism is added to ensure the
security of mixed currencies.
Identity information of sender is hidden by ring signature which recognizes the verification signature without knowing identity information.
Zero-Knowledge proof proves the verification of the transaction without leaking the transaction and
additional information.
Data security and privacy protection in the blockchain are severely challenged, and advanced cryptography techniques can effectively solve such problems, but there are still weak links. The private
key is generated by the random number generator in the computer system, which is called pseudorandom, has certain regularity, and has the threat of being cracked. SHA-2 algorithm doesn’t
have an effective method to crack all these algorithms, but once its cracked, the privacy and security
of all data in the blockchain will cease to exist.
In future research, it is necessary to develop a coin-rich mechanism under the protection of cryptography mechanisms, and to minimize the performance requirements. A more secure and reliable
cryptographic encryption algorithm may be needed to improve and guarantee the security of the
blockchain.
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Conclusions
This study introduces the main applications of cryptography in the blockchain and analyzes a few
existing problems. From the blockchain infrastructure, the blockchain technology is simplified and
analysed.
The cryptography technology is introduced to elaborate the blockchain and the existing security
problems in the blockchain are looked at. We observe that digital encryption technology runs
through the blockchain backbone and is the core technology of the system. This paper emphasizes that the research of cryptography plays a decisive role in the development of blockchain, and
prospects the future research direction of blockchain technology.
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