Blockchain: Revolution in TRUST

Abstract

TRUST is the cornerstone of our relationships;
whether in business, society, or with the institutions
that govern us. As Internet has extended the sphere
of our ability to do business and conduct personal
interactions across the world, its trustworthiness has
come under stress in past two decades. Our collective
journey through the Internet seems inalienable now
as almost all the services that we use today rely on it.
Anyone who controls the Internet or the information
flowing through it, controls and manipulates our access
to online services. It had been a continuous quest to
bring trustworthiness to the Internet and the services
it enables. Invention of blockchain seems to have
quenched that quest.

Full text

Review Article
Blockchain: The Revolution in Trust Management
R K SHYAMASUNDAR and VISHWAS T PATIL*
IIT Bombay
*Author for Correspondence: E-mail: ivishwas@gmail.com
Proc Indian Natn Sci Acad 84 No. 2 June 2018 pp. 385-407
 Printed in India.DOI: 10.16943/ptinsa/2018/49340
Introduction
TRUST is the cornerstone of our relationships;
whether in business, society, or with the institutions
that govern us. As Internet has extended the sphere
of our ability to do business and conduct personal
interactions across the world, its trustworthiness has
come under stress in past two decades. Our collective
journey through the Internet seems inalienable now
as almost all the services that we use today rely on it.
Anyone who controls the Internet or the information
flowing through it, controls and manipulates our access
to online services. It had been a continuous quest to
bring trustworthiness to the Internet and the services
it enables. Invention of blockchain seems to have
quenched that quest.
Since Gutenberg invented the printing press more
than 500 years ago, making books and scientific tomes
affordable and widely available to the masses. In
current times, no other invention empowered
individuals and transformed access to information as
profoundly as Google. Access to information, to
combined with global supply and demand, is reshaping
the established conventions and destroying old
definitions of doing trade. Technology does not create
prosperity any more than it destroys privacy. In this
digital era, technology is at the heart of just about
everything — the good and the bad. The explosion in
online communications for social interactions, online
financial transactions and commerce has lead to
enormous opportunities for cyber crime. While there
had been serious efforts to solve Internet’s issues of
security and privacy via cryptographic technology,
there had always been information leaks due to the
underlying trusted third parties (TTP). TTPs have
evolved as facilitators of e-transactions. They act as
trusted intermediaries between two transacting
parties. For example; banks, DNS servers, search
engines, news outlets, government registries for land
or voters, et al. — some interchangeable, others
enforced. By definition, TTPs wield enormous power
over the transactions they facilitate, since they are at
the centre of all the transactions between two or more
relying parties. This centralized power constitutes
knowledge of information about the transactions, their
inclusion and exclusion from ledgers (as in the case
of bank’s ledgers) or just plain rent-seeking (as in the
case of digital certificate issuance by PKIs). Even
paying online with credit cards reveals too much
personal details with the added issue of high
transaction cost. TTPs can quickly turn from
facilitators to controllers, at times, with the blessings
of the regulators that are statutorily entrusted by the
people through their elected governments. The role
TTPs play is undeniably important. However, it is
equally important to be able to verify the trust enshrined
in them is not being abused. So far, we have taken
refuge in legislation to do the verification and we have
failed miserably time and again as we have tried to
solve a technological challenge through non-
technological tool, which itself is subject to misuse,
favoritism, and malfeasance. Thus, one of the
challenging engineering quest had been to build a Trust
Protocol1, that would naturally blend with the trust
as conceived in our society. The underlying protocol
of Bitcoins referred to as Blockchains is expected to
disruptively revolutionize the notion of Trust among
citizens and governments with respect to currency,
societal transactions, finance, asset management, etc.
Blockchain — a new type of database that is
immutable, auditable, and distributed — is expected
to overcome persistent structural and systemic
obstacles confronting people with limited means in
getting societal benefits by bringing in transparency
to actions by the stakeholders (that includes, among
others, government as well) of asset and financial
1Or as Nick Szabo termed it The God Protocol
Published Online on 12 June 2018

386 R K Shyamasundar and Vishwas T Patil
systems — thus leading to overcoming excessive
bureaucracy, cultural snobbery and corruption. In this
exposition, we shall address the possible impact of
these concepts in various social sectors for realizing
trust and transparency, particularly in the Indian
context.
Societal History of Trust
The notion of “trust” as conceived in the society
demands a glance at the history of money and
currency. Historically, those who had the strongboxes
and those who had strong moral fiber emerged as the
custodians of people’s money and other forms of
wealth [Pitroda and Desai, 2010]. Wealth requires
protection. In the era of kings, who had armies to
protect the wealth, people used to store their produce/
wealth against receipts issued by the kingdom. These
receipts were used as a medium of exchange for
trade. Scarce metals like gold and silver2 were also
used as a medium of exchange in the form of coins
having additional benefits of divisibility, unit of value,
fungibility, and universal store of value (being
acceptable across kingdoms). However the precious
metal coins suffered by debasement. With the
invention of printing, paper notes were introduced as
currency. Classically, sovereign states appoint central
banks to perform this task. In 1609, the Bank of
Amsterdam was guaranteed by the City of
Amsterdam (major commercial center at that time)
and was tasked with bringing order and efficiency
to the wide range of coinage in circulation in
Amsterdam. The Bank accepted local, foreign and
debased coins, valued them according to common
standards, and then gave credit in an account with a
common value, bank currency, for which it issued
receipts (and charged a small administrative fee.) This
standardization of values significantly diminished the
incentives to debase money (and the profitability of
doing so) and was an important step in making money
more efficient. The act of state becoming a guarantor
of a bank for the protection of wealth is an act of
transitive flow of trust from the state to a bank (a
public or private entity.) The Bank of Amsterdam,
initially operated solely as a depository institution, on
a 100% reserve basis. In other words, none of the
precious metals on deposit were loaned out to other
parties. Each receipt issued by the Bank of Amsterdam
had equivalent amount of metal deposits in its vault;
thus maintaining a full convertibility of receipts into
precious metals and vice versa. However, the Bank
of Amsterdam started lending money to the Dutch
East India Company, initially on a short-term basis,
out of the deposits of others and this activity is known
today as fractional reserve banking. This was one
of the earliest steps toward modern fiat currency,
generating notes that were only fractionally backed
by metal deposits.
In 1694, the Bank of England was founded as a
private bank, incorporated to allow William III to
borrow 1.2M Sterling that the city goldsmiths could
not support. In exchange, for the share rights offer of
1.2M Sterling (that was then lent to the government),
the bank gained the right to issue notes, including
against the government bonds it had received. This
was an important right and another step towards
modern fiat currency. In time, through a succession
of Acts restricting its competitors, the Bank of England
came to monopolize bank note issuance in England
and Wales, and effectively became the Central Bank
of UK. Pound Sterling became the world reserve
currency during the period of British East India
Company dominating the world trade.
By the 20th century, the US dollar (USD) had
replaced the pound Sterling (GBP) as the most
important reserve currency in the world and, as a
consequence, the Federal Reserve became the key
Central Bank in the world. Like the GBP, the USD
exhibited a long history of fluctuating through periods
of convertibility and non-convertibility to precious
metals throughout its history. The US adopted the gold
standard in 1879. Having a currency backed by an
actual precious metal helped lend credibility to the
governments that issue it. It facilitated the trust these
institutions needed to make their financial system
work.
In 1933, President Roosevelt and Congress
began taking the US off the gold standard with a
resolution3 nullifying the right of citizens to demand
payment in gold for their currencies. People were
also required to deliver all gold coins, gold bullion, and
gold certificates owned by them to the Federal
Reserve at a pre-set price of USD 35. By hoarding
all of the gold and controlling its price, the Federal
2Money must be a store of value and maintain its purchasing
power over long periods of time. 3an authoritative order or official decree — known as fiat.

Blockchain: The Revolution in Trust Management 387
Government effectively controlled how much money
was in circulation. The irony of the situation is that
abandonment of the gold standard was done to build
confidence in the economic system of that time of
The Great Depression. This introduced the Keynesian
model of stimulating economy in recession through
state spending.
In 1971, President Nixon announced that the
US was no longer in the business of converting dollars
to gold at the fixed value of USD 35 per ounce, and
thus the gold standard was abandoned completely.
With the absence of a gold-backed dollar, US citizens
inherited a fiat currency system backed by nothing
but the trust in the government.
Today, the USD is a 100% fiat currency, with
no redeemability into any commodity assets, managed
by the Federal Reserve. Almost all national currencies
that exist today are fiat currencies managed by their
respective central banks. US law allows foreign
central banks and several international organizations
to maintain dollar-denominated deposit accounts at
the Federal Reserve. The Federal Reserve is the
fiscal agent of the US Treasury. Major outlays of
the Treasury are paid from the Treasury’s general
account at the Federal Reserve. Similar relationships
exist between national treasuries (i.e., the
governments) and national central banks across the
globe.
Thus, the societal trust has moved from gold
deposits to fiat currency system in each country and
also among the countries that are often linked through
the US dollar. In other words, for a functional
monetary (currency) system to work, citizens need
to keep trust in it, mediated/guaranteed by its elected4
government. A point to be seriously noted is that
citizens may lose the trust due to excessive
bureaucracy, cultural snobbery and corruption. Thus,
if citizens don’t trust a government to represent their
interests, they won’t trust its currency—or better put,
they won’t trust the monetary (currency) system
around which their economy is organized. So when
given a chance, they will sell that currency and flee it
for something they regard as more trustworthy, whether
it is the US dollar, gold, or some other safe haven
[Vigna and Casey, 2016]. The question is where does
the Trust flee? Trust needs an anchor. And a
government’s fiat as a foundation for anchoring trust
is as credible as the government. As the proverb goes:
trust, but verify; the promise of fiat cannot be verified
in present but only in future, since fiat is a promissory
note on future good and it is backed by the strength
and stability of a geopolitical system, legal system,
and the economy.
Trust in the Internet Era
In the recent history, with the increase in online
transactions, and e-commerce, there is naturally a
significant increase in privacy leaks and financial fraud
— mostly due to the negligence/malfeasance of the
TTPs. Thus, started a huge effort on arriving at a
cohesive trust protocol to overcome these issues. One
of the main impediments for electronic cash a la
currency was double-spending that reflects the
capability of spending the spent cash again and again
— arising due to copying coming for free in the digital
world. In 1993, a brilliant, secure, anonymous payment
system over the Internet, called eCash [Chaum et al.,
1988] by Chaum, Fiat, and Naor, was invented
mimicking the societal traits and solving the problem
of double-spending in digital currency. As perhaps
the e-commerce volume had not yet reached its tipping
point, the scheme did not go far. Also, centralization
of trust became a contentious issue with the
Cypherpunks5, since to check the double-spending
efforts of the eCash in circulation a central trusted
server was required. eCash solved the problem of
double-spending and brought anonymity to buyers
from the merchants but the central server verifying
the double-spend efforts would know behavior of its
clients. Cypherpunks wouldn’t settle for this
drawback. And thus, the quest of a universal,
decentralized trust protocol continued.
In the meantime, the relevance of the quest for
universal trust protocol seemed urgent in light of the
following events [Vigna and Casey, 2016]:
1. The remittance of money had increased
enormously (the transaction cost and the
settlement time remaining quite high.)
4Election is a process of entrusting a set of people, for a stipulated
period of time, to carry out an agenda that is agreed upon by the
majority of the people — irrevocable transfer of trust from the
people to the elected.
5An informal group, since late 1980s, aimed to achieve privacy
and security through proactive use of cryptography. PGP (by
Phil Zimmermann) was one of the first notable tools from this
movement. David Chaum was also part of this movement.

388 R K Shyamasundar and Vishwas T Patil
2. The privacy issues involved and the (hidden!)
cost of transactions of credit cards had increased
significantly (both in the developed and the
developing world.)
3. While the overall literacy in the world increased,
a vast majority of the population in poor countries
and a large fraction in middle income countries
did not have bank accounts. The important point
to note is that the reason for not having bank
accounts was not education or literacy but due
to persistent structural and systemic obstacles
[RBI, 2015; Force, 2016]6 confronting people
with limited means; in other words, it was due
to undeveloped systems of documentation and
property titling, excessive bureaucracy, cultural
snobbery and corruption.
4. In past decades, hyper-inflation had been
experienced in countries like Zimbabwe,
Venezuela, Greece, etc. as an outcome of
systemic deficiencies in their respective
monetary/financial systems. This shows that the
elected governments are susceptible to tread a
financially disastrous path at the expense of
populist decisions. It is understandable that no
government would like to undertake arduous
path of fiscal prudence to rectify the inherited
financial mess, instead they tend to pass it on to
the next government, thus increasing the severity
of the economic consequences in future. Hyper-
inflation, once set in motion, can gradually
debase7 the fiat currency of respective state.
5. In 2008, the global financial system collapsed.
It was an epic outcome of lack of transparency
in evaluation of toxic assets with banks, failure
of (or abuse by) regulators (entrusted legal
entities) to identify discrepancies in audits. In
hindsight, it appeared to be a collusion between
auditors and regulators.
Around the same time (end of year 2008), arrived
a new decentralized protocol for peer-to-peer digital
currency system, using standard cryptographic
functions, called bitcoin [Nakamoto S, 2008] by a
pseudonymous person or a group of people under the
name Satoshi Nakamoto. This digital currency, due
to the use of cryptographic functions, also referred
as cryptocurrency, is different from the fiat currencies
as it is neither created nor controlled by any country
but is governed by cryptographic algorithms. Bitcoin
established a protocol involving distributed
computations by the disparate stakeholders that
collectively ensure integrity of the data exchanged
among billions of subjects without involving a trusted
third party. The data created is essentially a distributed
ledger denoting the actions (history of transaction) by
the stakeholders. This collective data about
transactions among subjects, generated periodically
as blocks, is referred to as “blockchain”. Note that
blockchain is cryptographically protected, and resides
on distributed network and not on some central
database that is under the purview or control of some
organization like central bank and hence public! Each
stakeholder can see every transaction (transfer of
currency from one subject to the other) on the network
and terms it to be valid only if it is unspent. Thus an
immutable, append-only, global database of spends is
generated and maintained by the subjects without any
single stakeholder being able to manipulate the entries
in the database, also called as ledger. Therefore,
blockchain can be termed as a special type of
database in which entries only can be appended and
old entries in the database cannot be updated. Thus
giving its transactions immutability, integrity,
transparency.
In the digital era, all transactions are recorded
in ledgers, i.e., in the local ledgers of transacting peers
and a copy in the ledger of the TTP who facilitate
these transactions. Integrity of these ledgers is of
prime importance. Transacting peers implicitly trust a
third-party who is tasked with maintenance of the
transaction ledgers. To understand the importance of
provable guarantees on immutability of transaction
data in ledgers we need to first understand the
shortcomings of digitally-signed entries in ledgers
prevalent in pre-bitcoin internet era.
Triple-entry Accounting and Digital Ledgers
Databases play an important role of accounting in the
6Excessive KYC requirements can hinder financial inclusion as
providers might find it too onerous to deal with the poor. The
Goal: Design KYC rules that are adequate to the task of
maintaining financial integrity, yet do not create unnecessary
barriers to financial inclusion. Or get rid of KYC altogether? We
shall see one such possibility in the later part of this report.
7In 1609, Bank of Amsterdam had done away with the problem
of debasement of precious metals by introducing paper currency.
Inflation (beyond a moderate level, usually above 2%) is a way of
debasing a currency by its issuer! So, how do we control such a
potential manipulation of currency? In other words, such a control
is a desired property of a digital currency.

Blockchain: The Revolution in Trust Management 389
Internet era. They have replaced traditional paper
based ledgers with double-entry8 accounting (a
balance sheet equation matching the two columns of
assets and liabilities — a correct entry must refer to
its counterparty) that helps in identifying unintentional
human errors in the ledgers and correct them. In paper
based ledgers an attempt to fudge the ledger leaves a
physical trail of evidence which later could help in
investigation of source of malfeasance. By intrinsic
nature of digital records, it is not possible to rely on
physical evidence of tampering. That is, there is a
need for an out-of-the-ledger system to be deployed
again in digital form – for which again the same issue
applies. The challenge is to terminate the recursion at
a level acceptable to the stakeholders. This is resolved
through notion of signed-receipts, which is captured
below.
Double-entry accounting using ledgers is
prevalent in all organization including governments as
they give an auditable state of movement of assets.
Similarly, inter-connected double-entry ledgers give a
state of movement of assets across organizations.
Unlike the physical ledgers, digital ledgers are remotely
accessible and thus can be altered by an attacker
without leaving a physical trail. Therefore, while
transitioning from physical ledgers to digital ledgers,
integrity of ledgers was an important requirement.
Double-entry book-keeping provides evidence of intent
and origin, leading to strategies for dealing with errors
of accident and fraud. The invention of the signed-
receipt in the field of financial cryptography brought
in these above-mentioned benefits of double-entry
book-keeping to digital ledgers. Signed receipts are
the digitally signed proofs of transactions — at a given
point in time, this information was seen and marked
by the signing computer. Digital signatures introduced
a new way to create reliable and trustworthy entries,
which can be constructed into accounting systems.
There are three parties to such transactions: sender
of a value, receiver of the value, and the contract
manager of this transfer — receipt issuer; a trusted
party. For example, when Alice wishes to transfer
value to Bob in some unit or contract managed by
Ivan, she writes out the payment instruction and signs
it digitally, much like a cheque is dealt with in the
physical world. She sends this to the server, Ivan, and
Ivan presumably agrees and does the transfer in his
internal set of ledgers. He then issues a receipt and
signs it with his signing key. As an important part of
the protocol, Ivan then reliably delivers the signed
receipt to both Alice and Bob, and they can update
their internal ledgers accordingly. This results in three
active agents who are charged with securing the
signed entry as their most important record of
transaction. In evidentiary terms, the signed-receipt
is more powerful than double-entry records due
to the technical qualities of its signature. Triple-
entry accounting is a logical arrangement of three-
by-three entries, which is a meld of signed-receipts
(providing evidentiary power) with double-entry
accounting (providing convenience as well as the
power to cross-check records locally).
Triple-entry accounting was one of the
fundamental contributions of financial cryptography
that paved way for modern digital ledgers that not
only provide ACID (atomic, consistent, isolated, and
durable) properties to the transactions but also the
evidentiary property through signed-receipts.
Perils of Centralization of Trust
In this era of globalization, processes, workflows,
supply-chains often span across many organizations.
Therefore, ledger of an organization gets interfaced
with the ledgers of its collaborators. For example, a
purchase transaction on Amazon’s online store not
only leads to an entry in Amazon’s ledger but also in
the ledgers of sellers, couriers, and also in buyers’s/
seller’s respective bank ledgers. A curious look around
us will lead us to realize that everything around us is
recorded in ledgers somewhere down the line, the
phone calls, travel commutes, payments, property
titles, share markets, remittances, et al. — almost
everything spanning from personal finance to
businesses! Whoever controls a ledger9, wields an
enormous power over the subjects of the ledger.
8More than 500 years ago a new accounting technique, later known
as double-entry bookkeeping, emerged in northern Italy. It was a
big step in the development of the modern company and economy.
Werner Sombart, a German sociologist who died in 1941, argued
that double-entry bookkeeping marked the birth of capitalism. It
allowed people other than the owner of a business to keep track
of its finances [Economist, 2017].
9There are ledgers about ledgers that are usually maintained by
entities that are positioned at the top of our communication
infrastructure — ISPs, telcos, Governments, PKIs, DNSs — do
collect data about data called meta-data, which constitutes the
ledgers about ledgers.

390 R K Shyamasundar and Vishwas T Patil
Digital ledgers with triple-entry feature, which are
ubiquitous in our current digital economy are deficient
in following aspects:
1. Efficiency: In a distributed setup, to preserve
the atomicity of a transaction, each entity needs
to wait for a signed-receipt before updating the
local ledger. Usually, a highly-available, trusted
third-party assists the transacting peers to settle
transaction efficiently. This leads to a hierarchy
where a TTP is at the top and has a view of all
transactions being settled through it, which leads
to generation of meta-data (data about data) that
again forms a new proprietary ledger owned by
the TTP!
2. Cost: TTPs facilitating online transactions do
charge a fee. The problem arises when a TTP
achieves a dominant market position (e.g.,
Western Union, Visa, Uber), the cost of
facilitation appears exorbitant. The facilitation
is not necessarily be always charged in legal
currency, it could be recovered [Patil and
Shyamasundar, 2017] by aggregating
transaction’s meta information and using such
information to earn legal currency (e.g.,
OpenDNS, JustDial.) Despite charging a fees
on transaction settlement, there is nothing that
stops a TTP from monetizing the transactions’
meta-information. Another input to the
transaction cost is the cost of dispute resolution.
3. Transparency: TTPs tasked with managing a
centralized ledger, against which the state/
existence of transactions can be checked, derive
an implicit trust of relying parties. Thus, TTPs
derive an enormous power over sanctity of past
transactions and inclusion/exclusion of on-going/
future transactions. In a distributed setup of inter-
connected ledgers, a deliberate or accidental
modification or suppression of transaction
adversely impacts entries in connected ledgers
(e.g., propagation of toxic loans in 2008 US
mortgage crisis). Transparency is a trust
enhancing property and improves accountability.
4. Control: Being the middleman for transactions
TTPs have quasi-control over whose
transactions can go through their system (e.g.,
2010 financial blockade against WikiLeaks) and
at what fee. Furthermore, as our digital identities
have become our primary identities, TTPs can
accidentally or maliciously may annihilate an
individual’s digital presence. The most serious
impact of control is on the personal data front.
In the data-driven economy, end users interact
with online services that are run by algorithms,
which in turn make decisions based on the
supplied user data. An error, omission of user
data affects the algorithms behavior. Though
users are coerced/compelled to share personal
data, their interaction with services generate
meta-data, which is generated collectively but
aggregated and controlled by the service
provider without any curative interface for users.
This has created a huge information inequality
in the ecosystem. This stifles competition among
incumbent service providers and puts high entry
barrier for the new ones.
These problems stem from our reliance on
centralized, trusted third-parties; such as banks,
clearing-houses, telcos, credit-rating agencies,
government departments and many other big players
of our digital economy like Google, Amazon, Facebook
that collect and control personal data to provide
personalization and convenience. Computational and
communication advances are enhancing the speed of
transactions and reduction in cost of transactions. But,
on the fronts of transparency, fraud-prevention, and
control over the data, we have not seen much
advancement. The reasons are two-fold: i) in digital
economy, data and meta-data is equivalent to gold. It
is a compelling differentiator and there is an on-going
rush to hoard and control as much of it as possible, ii)
lack of a global platform to orchestrate data life-cycle
management.
In a stark comparison with old economy, where
trust was under strain due to central banks and
governments, new digital economy has further
aggravated the strain on trust due to the necessity of
trusted-third-parties to facilitate online services. Trust
is eroding from public sphere in light of large-scale
data breaches and a continued diffusion of businesses
in personal sphere. At times the regulators appeared
to be in collusion with the businesses.
Having foresight of impact of data economy on
privacy and digital payment being the Achilles heel,
Cypherpunks continued their journey beyond eCash

Blockchain: The Revolution in Trust Management 391
to build an electronic payment system based on
cryptographic proofs instead of fiat trust, allowing any
two willing parties to transact directly with each other
without the need for a trusted third party.
Bitcoin: A Currency System without Fiat
In response to the above mentioned impediments to
achieve verifiable trust, an experimental, decentralized,
P2P platform called Bitcoin was proposed by Satoshi
Nakamoto in 2008 (of course, perhaps worked over
the years.) The platform was specifically designed
for keeping track of cryptocurrency called bitcoin,
which is generated by the platform itself. It is a self-
breeding platform that generates its own currency to
keep itself running. The currency is issued
transparently and is continuously accounted for. That
is: new bitcoins are generated to represent some work
done by someone in the network and they are
rewarded to the worker by making an entry in the
public ledger of the network. Later, the worker is
allowed to spend those earned rewards (i.e., bitcoins)
at will, provided such a will to spend is broadcasted to
the network and recorded in the public ledger of the
network. Similarly, a recipient of bitcoins from a worker
is allowed to spend them at will, provided such a will
to spend is again broadcasted to the network and
recorded in the public ledger of the network. And this
goes on. Any node in the network can read the ledger
and thus can precisely know the owners of bitcoins
at any given time. Therefore, there is transparency
and freedom to verify each bitcoins origin and its
traversal to current owner. Who (among the many) is
authorized to write to the ledger is the challenge that
Satoshi solved i.e., consensus in distributed system.
Remember that whoever controls a ledger wields
enormous power over the subjects relying on the
ledger.
In a nutshell, Bitcoin is a global ledger of values
that is collectively owned and governed by rules that
cannot be amended without a global consensus. The
Bitcoin system [Nakamoto, 2008] consists of two
intertwined components:
lblockchain: the protocol to maintain the global
ledger, and
lbitcoin: the currency to incentivise the
maintenance of the global public ledger.
Since the ledger is maintained collectively there is no
dependence on a TTP — thus not inheriting the perils
of relying on a TTP. Being a global, collectively
maintained ledger, everybody can read & validate the
transactions in the ledger. The issuance of currency
is done as per the ledger maintenance work called
mining. Each peer in the Bitcoin network can read
the ledger and be assured of ownership of currency
at any point in time — thus transparent and publicly
auditable, which are trust evoking features.
The root problem with conventional
currency is all the trust that is required
to make it work. The central bank must
be trusted not to debase the currency,
but the history of fiat currencies is full
of breaches of that trust. Banks must
be trusted to hold our money and
transfer it electronically, but they lend
it out in waves of credit bubbles with
barely a fraction in reserve. We have to
trust them with our privacy, trust them
not to let identity thieves drain our
accounts. — Satoshi Nakamoto
Through Bitcoin, Satoshi showed an alternative
currency system without a central trusted party. The
anchor for trust is rooted in cryptographic proofs rather
than in governments’ fiat. Therefore, very quickly,
this currency received a global appeal and acceptance.
Satoshi managed to engineer the concepts of
economics; like scarcity, supply, demand, unit of work,
incentive, into computer science. At the core of all
these concepts is unit-of-work: a universally
acceptable and verifiable method to quantify a unit of
work using computers. Borrowing from the works of
Dwork and Naor [Dwork and Naor, 1993], and Adam
Backs [Bucks, 2002], Satoshi resorted to SHA256
cryptographic hash function10, which is usually
available on all computing devices, to define unit-of-
work. SHA256 function takes an input string and
produces a 256-bit long output. Therefore, given an
input string, all computers in the world will produce
the same 256-bit long output using SHA256.
Successive invocations of this function constitutes
amount of work. And to define the unit of work itself,
Satoshi resorted to a simple condition of having first
10It is a mathematical algorithm that maps data of arbitrary size
to a bit-string of a fixed size; 256 in the case of SHA256.

392 R K Shyamasundar and Vishwas T Patil
n bits of the output string to be zero, where n is a
measure of determining hardness/difficulty of the
work. In a given time period, a computer that can
invoke SHA256 more number of times than other
computers in the network has a higher chance of
completing the work. How this definition of work is
used to build an incentive-based, global, decentralized,
ledger management system, we should understand
the notion of proof-of-work. Proof-of-work is a
method to tie an entity to its successful completion of
work before the others and therefore claiming a
reward from the system for successfully completing
the work. The work is: to extend the ledger with
previously unrecorded transactions. The extension is
periodic and is constructed as a block consisting of a
subset of valid transactions during that period. A block
is a unit of successfully completed work — therefore,
a sequence of blocks aptly named as blockchain.
Proof-of-Work
It is the algorithmic crux of Bitcoin system, where
nodes are incentivized to do work. The first node that
publishes a proof of doing a unit of work is rewarded
by a pre-determined amount of bitcoins. Once a node
broadcasts its proof of work to the network, all other
nodes give up their efforts to complete that work (upon
verifying the correctness of winning node’s
broadcasted proof). If the broadcasted proof is
correct, a new round to do new work starts. Nodes
put efforts to complete the new work before others
in order to claim the associated reward. The algorithm
adjusts the hardness of work such that, on an average,
for every 10 minutes, a unit of work is done by
someone in the network.
To collect rewards from the system, nodes need
to be identified, which is done by allowing the nodes
to independently generate a cryptographic key-pair
where the public-key part of the key-pair is node’s
identifier and the associated private-key is the guardian
of the rewarded bitcoins. Rewards (bitcoins) are
issued to a public-key iff the corresponding node
submits a valid proof-of-work. A node that receives
bitcoins as reward is free to transfer these bitcoins
(as payment/gift/donation) to others. To transfer a
bitcoin, a node composes a transaction that consists
of information about how it has received the bitcoin
and to whom it wants to transfer that bitcoin. Similar
such transactions constructed by other nodes are
observed by all nodes and are used as input to generate
proof-of-work in the hope of receiving reward from
the system. Thus, the consecutive submissions of
proofs-of-work that are peer validated and universally
accepted, produce a series of blocks as depicted in
Fig. 5.1. Each block represents a proof-of-work and
its reward is assigned to the respective worker’s (aka
winner/miner) public key. A block contains
transactions that were submitted for confirmation
before the creation time of that block. Blocks being
of a fixed size, i.e., less than 1MB, it is not guaranteed
that all the unconfirmed transactions floating around
in the Bitcoin network will be accommodated in
current block. Unaccommodated (unconfirmed)
transactions may get accommodated in subsequent
rounds of proof-of-work. Transactions may optionally
offer a fees as a premium so that its inclusion in
current block can be prioritized. The creator of a block
collects transaction fees on top of the pre-determined
reward.
Programming the Concepts of Economics
Through proof-of-work we saw how Satoshi
succeeded in defining a universally acceptable unit of
work and a mechanism to irrevocably tie the proof to
a public-key. In the following we shall see how
ingeniously Satoshi encapsulated the other concepts
of economics using computational engineering.
Engineering scarcity, supply, and demand: In
order to induce value in something, it has to be scarce
and known to be limited in supply. Satoshi fixed the
total number of bitcoins, to be ever generated by the
Bitcoin network, to 21 millions. New bitcoins come to
existence approximately every 10 minutes upon a
successful proof-of-work round (in other words, upon
creation of a new block). For the first 210,000 blocks
Fig. 5.1: Genesis block as the first block of blockchain
(Credit: Stefan Dziembowski)

Blockchain: The Revolution in Trust Management 393
the reward was 50 bitcoins/block. For the next 210,000
blocks it halved to 25 bitcoins/block. At present
(November 2017) it is 12.5 bitcoins/block.
Alternatively,
210,000 * (50 + 25 + 12.5 + 6.25 + ...) 21,000,000
where the last block to be mined is expected in year
2140. Thus, there is a constant but reducing supply of
bitcoins from the network. So far, 80% of the total
bitcoins have been mined and each trading at USD
11,000 (November 2017) on global bitcoin exchanges.
Whereas, it was trading at USD 376 and USD 742 in
November 2015 and November 2016 respectively;
this highlights the increase in demand of bitcoin. Each
bitcoin is divisible up to 108 Satoshis — the indivisible
unit of bitcoin currency.
Engineering fairness, integrity, and incentive
(through proof-of-work): The indivisible unit of
work in Bitcoin system is SHA256 — a cryptographic
hash function. By definition, a cryptographic hash
function maps an arbitrary sized input to a fixed size
output such that it is infeasible to determine the input
from a given output string. In other words, there is no
efficient way to determine an input value mapping to
a specific output value. Therefore, the only way to
find an input value leading to a specific output value
is by repeatedly trying out different input values. The
time required to find an input value leading to a specific
output value using SHA256 function is directly
proportional to the number of invocations of SHA256
function with different inputs. These properties are
exploited to construct the proof-of-work algorithm,
where the input string consists of 3 elements (2 fixed
and 1 random), which are: i) Merkle-root of
unconfirmed, valid transactions viewed in the network,
ii) hash of most recent block in the blockchain, and iii)
a random value (aka salt/nonce), producing an output
string of length 256-bits. Proof-of-work algorithm
demands the output string conform to a pattern in
which first n bits of the 256-bit string are zeros. The
algorithm invokes SHA256 function recursively until
an acceptable target string is not obtained. This is
depicted in the equation below and in Fig. 5.2.
H(salt, Hi, transactions) = target
such that target starts with n zeros
where n is the hardness parameter for proof-of-work
algorithm for a period of time, which is approximately
2 weeks. Hardness parameter is periodically adjusted
because the computing power of nodes11 changes.
The hardness adjustment is automatic, and depends
on how much time it took to generate the last 2016
blocks (i.e., 2016 x 10 mins = 14 days). If the previous
2016 blocks took more than two weeks to find their
respective targets, the hardness is reduced. If they
took less than two weeks, the hardness is increased.
Fairness: The probability of finding an acceptable
target value for a successful proof-of-work is directly
proportional to the disposable hash power of a miner.
Miners sell their bitcoins (in open in market for USD
to purchase new hardware) in order to increase their
hash power so that their probability to find proof-of-
work increases. The system takes care of potential
spike in computational power in the network by
adjusting the hardness value (depicted in Fig. 5.3) in
finding a target value.
Integrity: The computational cost of changing any
transaction in old blocks is compounded by each new
block that gets appended to the chain. When a new
block is being created, it contains the hash of the one
before it. Any changes in old blocks will result in invalid
hashes for all subsequent blocks. Therefore, it is
impossible to insert bogus modifications into a previous
block without having to repeat all the work that was
performed after that block.
Incentive: Proof-of-work produces a block containing
a special transaction (coinbase) that transfers the
reward to the miner. Reward provides incentives to
be a miner. It also makes the miners interested in
broadcasting new block as soon as possible. On top
of this, a specification in Bitcoin states that “from
Fig. 5.2: PoW Construction, H is SHA256 (Credit: Stefan
Dziembowski)
11Nodes having relatively large dedicated hash power are called
bitcoin miners. Analogy of miners for nodes is derived from gold
miners who voluntarily spend their efforts to find gold in mines
with the hope of finding gold. Finding gold is rewarding and vice
versa is penalizing.

394 R K Shyamasundar and Vishwas T Patil
two blocks of equal length, mine on the first one that
you received”, which brings sense of urgency in
broadcasting successful proof-of-work to the network
at the earliest.
Engineering financial inclusion (through
pseudonymity): Owners of bitcoins are identified by
their public keys. Public keys are a very peculiar type
of identifiers. They can be generated by anyone and
are always associated with its corresponding private
key which is generated simultaneously. As an analogy,
if public key is considered as login, private key is its
permanent password — and it can be used without
providing it to its verifier. This is in stark contrast with
other identifiers like email, bank account, mobile
number, because these type of identifiers are
generated by and assigned to subjects. And, a copy
of passwords associated with these identifiers is stored
with its issuer in order to perform authentication.
Therefore, subjects using such identifiers can be
identified and revoked (excluded from respective
systems) by the identity issuer as the issuer owns the
identifiers in its namespace. Whereas, a public key is
an identifier generated and issued by a subject to self
along with its corresponding private key. This helps a
subject to remain pseudonomous as long as it desires.
Engineering transparency and auditability
(therefore accountability): The chain of blocks at
any given time provides the list of verified transactions
accepted by the network. In its simplest configuration,
the protocol allows any peer to scan through these
verified transactions. The participants can trust the
integrity of the network verified transactions because
it is computationally infeasible for an adversary to
change any network verified transaction. This is so
because changing any transaction in a block will
change the block’s output hash, which will impact the
proof-of-work value of the next block in the chain.
Note that each block’s creation requires previous
block’s hash value as an input to generate the proof-
of-work. Furthermore, availability of all the previous
transactions to each participant of the network brings
non-repudiation to transactions and transparency in
the network.
Bitcoin is the first real-world application of
blockchain protocol where proof-of-work is used as
a type of consensus algorithm. It is a trusted, self-
regulating, transparent application of global transfer
of money where the transactions listed in the chain
of blocks are equivalent to the ledger entries of any
traditional bank. Today’s value-transfer systems rely
on central ledgers. Banks, governments, telcos et al.,
have a big computer (database) that keeps track of
who owns what. And when one makes a payment,
the central ledger is updated. Bitcoin updates the ledger
in a completely different way. It does not have a
centrally controlled ledger. Instead, everybody who
runs the (full node) software has their own copy of
the ledger. Hundreds of thousands of people have a
full copy of the ledger. This means no single person/
entity can deny availability of the ledger, confiscate
the value/asset marked against an identity, or charge
an unfair fee for transactions to go through. And the
genius of Bitcoin was to figure out a way to encourage
people to maintain these ledgers collectively by
consensus and with no trusted third parties.
This new way of deriving trust and transparency
in a distributed environment like Internet has
tremendous potential to re-engineer all the prevalent
systems and applications that are under stress due to
a lack of trust and transparency. Bitcoin is one such
attempt to put forward an alternative financial system
Fig. 5.3: Hardness determines the target value for proof-of-
work in a given period (Credit: Patricia Estevão)

Blockchain: The Revolution in Trust Management 395
where trust is anchored in cryptographic algorithms
instead of the fiat of a government. The technology
worked on the principle that currency is just an
accounting tool — a method for abstracting value,
assigning ownership, and providing a mean for
transacting. It turns out that such a system may be
useful for much more than just currency.
Bitcoin
By forcing miners to provide proofs and then
rewarding them for their work, Satoshi created the
first viable peer-to-peer digital currency. But he also
solved a more general problem that had vexed
computer scientists for decades — consensus.
Consensus in distributed systems has been rigorously
studied in Computer Science for past few decades as
Byzantine Generals Problem or Chinese Generals
Problem, in which two generals have to come to a
common agreement on whether to attack or retreat,
but can communicate only by sending messengers
who might never arrive.
Reliable computer systems must handle
malfunctioning components that give conflicting
information to different parts of the system. This
situation can be expressed abstractly in terms
of a group of generals of the Byzantine army
camped with their troops around an enemy city.
Communicating only by messenger, the generals
must agree upon a common battle plan.
However, one or more of them may be traitors
who will try to confuse the others. The problem
is to find an algorithm to ensure that the loyal
generals will reach agreement. It is shown that,
using only oral messages, this problem is solvable
if and only if more than two-thirds of the generals
are loyal; so a single traitor can confound two
loyal generals. With unforgeable written
messages, the problem is solvable for any
number of generals and possible traitors.
Achieving reliability in the face of arbitrary
malfunctioning is a difficult problem, and its
solution seems to be inherently expensive. The
only way to reduce the cost is to make
assumptions about the type of failure that may
occur. For example, it is often assumed that a
computer may fail to respond but will never
respond incorrectly. However, when extremely
high reliability is required, such assumptions
cannot be made, and the full expense of a
Byzantine Generals solution is required BGP
[Lamport et al., 1882].
Bitcoin system through its proof-of-work
algorithm solved this long standing problem of
consensus in distributed system. Bitcoin is at its core,
a technology that enables a series of achievements
that were not possible before, and not just a global
cryptocurrency. Decentralized consensus can create
more robust systems in a multitude of ownership or
attestation related roles. Currency should be
considered as the first application of this technology.
Since BGP is a general problem in distributed systems,
the same concept can be employed for other purposes.
Motivated by Bitcoin, there is a flurry of projects
tweaking components of the system and solving
different problem of practical importance, which were
not addressable before due to lack of a practical
consensus method. We shall not get into the details of
the tweaks but broadly categorize them into two
verticals: permissioned and permissionless — both as
types of trust management system with an increasing
degree of underlying trust. Some variants built for the
want of speed of transaction at the cost of trust, some
built for the want of capturing value representation
other than currency like land records. This whole
family of variants is conveniently called as blockchains,
each differing from the other based on the underlying
consensus mechanism. There is a subset of variants
that use BFT (Byzantine Fault Tolerance) algorithm
to construct their consensus algorithm. We briefly
mention the prominent ones below.
Fig. 5.4: Illustration of performance and scalability of
different families of PoW and BFT protocols as
discussed in [Vukolic, 2016]
′

396 R K Shyamasundar and Vishwas T Patil
So far, Bitcoin is the most successful deployment
of blockchain protocol with proof-of-work (PoW) as
its consensus algorithm. Similar to bitcoin, several
alternative cryptocurrencies (altcoins.com) were
deployed with slight improvements in objectives.
Projects like Stellar (stellar.org), Ripple (ripple.com)
are using concept of blockchain to perform global
inter-bank settlements with their own private
cryptocurrencies; lumens and XRP respectively. An
interesting proposal of programmable (Turing-
complete; unlike Bitcoin, which has limited set of
operations) blockchain called Ethereum [Buterin 2013,
Wood 2014] was floated in year 2013, which is
gathering momentum recently in business domain
[ConsenSys (consensys.net), Corda (corda.net),
Augur (augur.net), et al.] Ethereum is inspired by
Bitcoin and presented an alternative consensus
forming algorithm called proof-of-stake (PoS) to
assuage the concerns of power consumption and
latency in verification of transactions in Bitcoin. A
prominent permissioned variant called Hyperledger
Fabric (https://www.hyperledger.org) is an open-
source project championed by IBM et al that uses
PBFT (practical Byzantine fault tolerance) [Castro
and Liskov, 1999] as its consensus algorithm. Several
other noteworthy consensus algorithms in this space
are: Paxos/RAFT [Ongaro and Ousterhout, 2014],
Hashgraph [Baird, 2016], Algorand [Micali, 2016],
PoET (Proof of Elapsed Time), Blockstack [Ali et
al., 2016]. Fig. 5.4 illustrates a comparison between
Proof-of-Work and BFT (Byzantine fault tolerance)
types of consensus algorithms for performance and
scalability. And, in Table 5.1 their high level feature-
wise comparison is presented.
Bitcoin ushered a completely revolutionary
consensus protocol through blockchain. It is
revolutionary because it showed a way to handle trust
without TTPs and suddenly there is an invigorating
stock-taking of all prevalent trust management
frameworks (in business, society, or with the
institutions that govern us). Old ways of doing
transactions are being re-engineered and a completely
new set of applications are being engineered — with
blockchain, at their core, as a service that offers trust,
similar to cloud service that offers on-demand
compute, storage, network. In the following we take
an abstract view of blockchain and treat it as a
machine that provides trust as a service!
Blockchain: The Trust Machine
Conceptually, a blockchain as a machine;
1. stores data (in a shared, distributed ledger),
2. performs some computation (read data from
ledger, append data to ledger),
3. reach consensus about the both (through
algorithms like PoW), and
4. at each epoch changes its internal state to
a new state.
Fig. 5.5 depicts the Bitcoin blockchain protocol
as a simple state machine, where “code” starts with
Table 5.1: High-level comparison between PoW and BFT blockchain consensus families for a set of important blockchain
properties. Entries in bold suggest desirable features and highlight advantages of one consensus family over the other
[Vukolic, 2016]
PoW consensus BFT consensus
Node identity open, entirely decentralized permissioned, nodes need to know IDs of all
management nodes
Consensus finality no yes
Scalability (# of nodes) excellent (thousand of nodes) limited, not well explore
Scalability (# of clients) excellent (thousands of clients) excellent (thousands of clients)
Performance (throughput) limited (due to possibility of chain forks) excellent (tens of thousands tx/sec)
Performance (latency) high (due to multi-block confirmations) excellent (matches network latency)
Computational requirement high moderate
Network synchrony assumptions physical clock timestamps (e.g., for block none for consensus safety (synchrony
validity) needed for liveness)
Correctness proofs no yes
′

Blockchain: The Revolution in Trust Management 397
a state fetched from the “storage” and the new state
is written back (i.e., appended) to the “storage.” Fig.
5.6 shows a simplified version of the bitcoin script
responsible to transfer value from sender “S” to
receiver “R”. In an abstract way, blockchain is trusted
for correctness but not for privacy since it exposes
internal state to everyone, at least in its primitive form.
Bitcoin can be said as a special purpose program
running on blockchain. Functionally it serves only one
purpose — transfer of value. The underlying
technology blockchain ensures users’ trust in the
system by thwarting double-spending attempts from
malicious users. In Bitcoin system, bitcoin (the
currency) and blockchain (the algorithm) are
inseparable. Bitcoin (the currency) creation requires
blockchain and blockchain requires bitcoins to
incentivize PoW. The elegance of the protocol is in
delivering trust without a TTP. It is a self-sustained,
self-regulating, transparent “trust machine.” Anyone
can rely on it but for only one functionality, that is,
transfer of value.
In year 2013, Ethereum was proposed as a new
general purpose blockchain that promised more than
“transfer of value”. It proposed a Turing-complete
language to write code that not only does “transfer of
value” but also any functionality that can be digitally
controlled/interfaced (e.g., transfer of shares, real-
estate, etc.).
To put Bitcoin and Ethereum in perspective;
Bitcoin is a special-purpose blockchain (like a stand
alone Calculator) whereas Ethereum is a general-
purpose blockchain (like Android - on which Calculator
is an app along with many other apps). Ethereum uses
Proof-of-Stake as its consensus algorithm, which is
bootstrapped from Proof-of-Work initially. Ether is
the currency on Ethereum platform that can be used
to buy “stake”. Stake provides proportionate voting
(consensus) rights. Gas is another concept introduced
in Ethereum. A pre-defined amount of gas is required
to execute a smart contract, which is nothing but a
program having its own code and storage, that is, its
own state. Gas measures how much “work” an action
or set of actions takes to perform. Every operation
that can be performed by a transaction or contract on
the Ethereum platform costs a certain amount of gas,
with operations that require more computational
resources costing more gas than operations that
require few computational resources. The reason gas
is important is that it helps to ensure an appropriate
fee is being paid by transactions submitted to the
network. By requiring that a transaction pay for each
operation it performs (or causes a contract to
perform), we ensure that network doesn’t become
bogged down with performing a lot of intensive work
that isn’t valuable to anyone. This is a different
strategy than the Bitcoin transaction fee, which is
based only on the size in kilobytes of a transaction.
Since Ethereum allows arbitrarily complex computer
code to be run, a short length of code can actually
result in a lot of computational work being done. So
it’s important to measure the work done directly
instead of just choosing a fee based on the length of a
transaction or contract.
Fig. 5.7 shows a simplified notion of two states
in Ethereum “trust machine”. Smart contracts have
their local state, which is also recorded in the
underlying blockchain and the system as a whole has
a global state on which all other smart contracts rely
upon.
Smart Contracts — the Code on the Machine
A Smart Contract is a contractual agreement that is
implemented using software. Unlike a traditional
Fig. 5.5: Bitcoin code interacting with immutable storage
Fig. 5.6: Change of state upon incovation of Transfer function

398 R K Shyamasundar and Vishwas T Patil
contract where parties may seek remedial action
through the legal system, a smart contract is self-
enforced (possibly also self-executed), depending on
whether specific conditions, that are monitored
through software, are met. Smart contracts may
provide several benefits, for instance:
lautomatically enforce power equality of all
parties involved,
lprotect an individual’s rights by enforcing
reasonable expectations for the signee,
leliminate the possibility of any signatory
defaulting on their obligations.
Most financial instruments are essentially
contracts between two or more parties with a set of
rules or dependencies agreed upon by them. In
regulated markets, authorities monitor the compliance
of the contract/instrument to the rules-set. What if
we could back these contract clauses with
cryptographic guarantees? Oracles [Buterin, 2013],
in this case, can act as the authority that determines
compliance and adherence to the rules set — done
objectively, transparently and without trust between
contractual parties.
Like Bitcoin, Ethereum uses a blockchain that
has its own currency, called ethers. Unlike Bitcoin,
Ethereum uses transactions that are miniprograms,
called smart contracts, that can be written with an
unlimited amount of complexity. Users can then
interact with programs by sending them transactions
loaded with instructions, which miners then process.
In practice, this means that anyone can embed a
software program into a transaction and know that it
will remain there, unaltered and accessible for the
life span of the blockchain.
In other words, a smart contract is an event
driven program, with state, which runs on a distributed,
shared ledger and which can take custody of assets
on that ledger [Weber et al., 2016]. An abstract smart
contract model under Ethereum has:
1. Shared public ledger
2. Replicated states (smart contracts)
3. Cryptocurrency as reward for contract
execution
4. Contracts that involve financial gains or losses
5. Event driven execution flow
6. Consensus (smart contract state change and
recording in global ledger)
7. Participants are not trusted (can read contract
before execution)
8. Inter-dependent contracts communicating via the
global ledger
Business processes vying for efficiency,
transparency, reliability of actions and deliverables upon
fulfilling a task are exploring this space. In our
globalized economy, almost all workflows span across
boundaries of disparate collaborating organizations.
The whole workflow loses its efficiency if any of the
participating entity acts maliciously or does not
perform as expected. It causes litigation and have
cascading effects on other organizations. The logic
of existing business processes/workflows can be
Fig. 5.7: Ethereum Trust Machine: local and global state interaction

Blockchain: The Revolution in Trust Management 399
captured and automated through smart contracts and
the underlying “trust machine” keeps track of state
changes for continuous auditable visibility of the
workflow for all users of the machine.
Smart contracts promise to change the economy
more than any other feature of the blockchain. They
could take over most routine business processes. Some
companies could be no more than a bundle of smart
contracts, forming true virtual firms that live only on
a blockchain [Economist, 2017]. DAO (decentralized
autonomous organization) is an example of formation
of such virtual venture-capital fund where stakes in
the firm can be purchased using ether. ICOs (initial
coin offerings) is yet another simpler version of such
structures of automated crowd-funding for startups
whose functionality is publicized as a whitepaper or
prospectus for investors in the form of smart
contracts. Investors can then send ether to the smart
contract, which automatically creates “tokens” that
can be traded like shares.
DAOs and ICOs are a type of permissioned or
private blockchains that can be realized on
permissionless Ethereum platform. There is another
form of private or permissioned blockchain that can
be realized using Ethereum source code in which the
genesis block (zeroth block) of the realized blockchain
is shared among select group of participants.
Triggers & Signals – the Interrupts to the Machine
Smart contracts are capable of taking inputs from
external sources. This makes them extremely useful
in addressing and integrating external data sets and
proprietary business interfaces that cannot be readily
ported to the trust machine either due to legacy issues
or privacy concerns. Programmers have to be aware
of the fact that each action listed in the code of a
smart contract has an associated execution cost. If
all of the business logic is as it is imported into the
smart contract the gas cost of running the contract
increases. Smart contracts should be used as special
code snippets of business logic that are critical in
communicating state change in the workflow to all
other stakeholders in a verifiable, non-repudiable
fashion. Non-critical part of the business logic should
be off-loaded from the blockchain to reduce the cost
of running a smart contract on the “trust machine”.
The shared global ledger among the participants
acts as a shared communication bus from/to which
each participant receives/sends triggers to others via
recording a local state change. Fig. 5.8 depicts the
inter-contract communication using shared ledger.
Special smart contracts can be written that specifically
act as triggers to other contracts by capturing events
in the environment in which they are deployed [Weber
et al., 2016]. For example, a stock price tracking
contract can trigger a sell/buy contract automatically.
In [Azaria et al., 2016], smart contracts on blockchain
are used to specify access control policies for medical
records of patients. Actual medical records are stored
in an encrypted fashion off-blockchain to reduce cost,
latency and for privacy preservation. Whereas who
can access the data and the keys to decipher are
delivered via blockchain as “signals” to the legacy
database systems holding actual medical records.
Ability of smart contracts to integrate traditional
IT system interfaces into the “trust machine” has
brought benefits of automation, efficiency, integrity,
continuous auditability, transparency, optimization, etc.
to traditional IT systems. IoTs can pave way for
similar impact on cyber-physical systems like physical
Fig. 5.8: Ethereum Inter-Contract Communication
assets (vehicles, houses, smart-grid) by facilitating the
trigger & signaling interface to the “trust machine”.
IoT – The Peripherals of the Machine
The advances in networking protocols and miniature,
power-efficient computational chips have made our
ambience intelligent and interactive through IoTs.
Current deployments (c.f. Fig. 5.9) are cloud-centric
[Purueswaran and Brody, 2015] and derive their
intelligence from cloud, which is by design privacy
invasive. This is largely because of lack of alternatives
to deploy and manage IoTs in a naturally ambient

400 R K Shyamasundar and Vishwas T Patil
fashion. The potential of disruption because of this
technology alone is summarized in Fig. 5.10 by IBM
[Purueswaran and Brody, 2015].
The sort of programmability Ethereum offers
does not just allow people’s property to be tracked
and registered. It allows it to be re-engineered in new
ways. Imagine a digitized car-key (password that is
needed to start the engine) embedded in the Ethereum
blockchain could be sold or rented out in all manner
of rule-based ways — enabling new P2P schemes
for renting or sharing cars (bypassing TTPs like Avis,
Hertz.) Imagining further, smart contract enabled self-
driving cars can be self-owning [Economist, 2015 a].
Such vehicles could stash away some of the digital
money they earn from renting out their keys to pay
for fuel, repairs and parking spaces; all according to
preprogrammed rules as smart contracts, where IoTs
are acting as peripheral devices (interfaces to)
connected to the “trust machine”.
With respect to the future of IoT, as highlighted
in [Purueswaran and Brody, 2015], blockchain is a
suitable platform for facilitating transaction processing
and coordination among interacting devices. Each
managing its own role and behavior, resulting in an
“Internet of Decentralized, Autonomous Things” —
and thus the democratization of the digital world and
cutting the cloud’s disproportionate control over
ubiquitous, autonomic computing. As a consequence,
plausibly reigning back privacy; since IoTs are going
to be the most ingrained computational sensors in our
immediate surroundings in near future.
Applications of the Trust Machine
Blockchains are clunky databases, so why would you
want to use one? Traditional systems have inherent
flaws that make them easy targets for corruption of
data either by technical error or by human intention.
When financial firms do business with each other, the
hard work of synchronizing their internal ledgers can
take several days, which ties up capital and increases
risk. All sorts of companies and public bodies suffer
from hard-to-maintain and often incompatible
databases and the high transaction costs of getting
them to talk to each other. Distributed ledgers that
settle transactions in minutes or seconds could go a
long way to solving such problems and fulfilling the
greater promise of digitization and automation with
trust and transparency.
A list of efforts to solve business and social use
cases is enumerated at: http://dcg.co/portfolio/. These
efforts give a taste of what will be possible. Table 5.2
gives a domain-wise list of applications where the
“trust machine” has a promise to play revolutionary
role.
Blockchain Applicability Test
Can’t computers already execute transactions based
upon pre-programmed conditions? Indeed they can;
however, several intermediaries are often needed to
verify and validate the details of the transaction. If
the intermediaries fall under a single administrative
domain, they inherit trust from the same source. If
the intermediaries are from disparate administrative
Fig. 5.9: IoT progressing towards decentralization [Pureswaran and Brody, 2015]

Blockchain: The Revolution in Trust Management 401
a blockchain use case or pure classical database use
case. He states:
“If you replace the word Blockchain by
Database and the implementation deliverables remain
the same, then the use case does not require a
Blockchain”.
Blockchain practitioners should use this test,
further elaborated in Fig. 5.11, as a guiding principle,
while evaluating blockchain as a solution to the
problem at hand, apart from the judicious
consideration of other aspects like efficiency, integrity,
non-repudiation, and potential for collusion in the
proposed solution.
Challenges in Deploying the Blockchains
As blockchain applications have evolved from potential
to actual use cases, we can see that particular use
cases will raise specific governance questions best
answered at the level of each use case (e.g.,
payments, contracts, securities clearance, insurance,
etc.) There will not be a single blockchain but many,
some of which may serve specific industries and/or
geographies.
Fig. 5.10: Five vectors of disruption: How the IoT will increase
our leverage of physical assets [Pureswaran and
Brody, 2015]
Table 5.2: Blockchain (the Trust Machine) Applications
Domain/Class Examples
General Escrow transactions, bonded contracts, third-party arbitration, multiparty signature transactions, messaging
(Whisper), carbon credit, personal data ecosystem
Financial transaction Remittance, trade settlement, stock, KYC/AML, private equity, crowdfunding, micro-lending, P2P lending,
bonds, mutual funds, derivatives, prediction market, annuities, pensions, insurance
Businesses Transparent and efficient workflow composition, trade settlement, shareholder agreements, continuous compliance
and audit, efficient deterministic composition of services and business processes
Governance Tendering, auctions, judiciary, regulation, agile taxation (GST), national digital currency economist-national-
currency, accountability and transparency (RTI), platform for citizen engagement
Public services Smart-grid metering, traffic congestion management, direct benefit transfer, dynamic pricing of services
Agriculture Livestock digitization for collateral, organic food provenance, supply chain formation, community-driven shared
resources (equipments, warehouses), crop insurance, targeted subsidy disbursement, soil & crop management
Public records Land and property titles [Economist, 2015a], vehicle registrations, business licenses, marriage certificates, death
certificates
Semi-public records Degree, vocational certifications, learning outcomes, grades, HR records (salary, performance reviews,
accomplishment), healthcare (performance tracking of doctors)
Private records IOUs, loans, contracts, bets, wills, trusts, escrows, tax returns, credit score, medical records
Identification Driver’s licenses, identity cards, passports, voter registrations, federated authentication platform (Aadhaar V2)
Attestation Proof of insurance, proof of ownership, notarization
Physical asset keys Home (Airbnb), hotel rooms, rental cars, automobile repair access
Intangible assets Patents, trademarks, copyrights, reservations, domain names
domains and are susceptible to external breach,
influence, malice, laxity, etc., then blockchain brings
all domains to a common immutable ledger. Andreas
M. Antonopoulos, the author of book “Mastering
Bitcoin” [Antonopoulos, 2014], has coined a simple
test to identify whether an application use case is really

402 R K Shyamasundar and Vishwas T Patil
1. Interoperability: At the highest level, we need to
focus on interoperability. Commercial blockchain
applications are taking off, and governance will
be critical to their success. For example, Ripple’s
global payments steering group, a blockchain
bankers network with defined rules and
governance, has been a major step forward in
terms of adoption and industry acceptance. In
Fig. 5.11: Blockchain Applicability Test [Peck, 2017]

Blockchain: The Revolution in Trust Management 403
case of organizations from different functional
domains where their collaboration is ad-hoc, a
token based approach to interoperability will help
[Tapscott and Tapscott, 2017].
2. Privacy: Blockchains are open ledgers where
all past transactions are recorded thus posing a
dilemma of constructing transactions in either a
transparent way or obfuscated way. In case of
smart contracts closely resembling an
organizations business process flow and logic,
which at times is a trade secret, the issue of
privacy becomes a serious challenge. Privacy
and transparency run orthogonal to each other.
Deriving trust while balancing privacy and
transparency will be a challenge worth
addressing.
3. Regulation: Drawing up regulations for
blockchains at this early stage would be a
mistake: the history of peer-to-peer technology
suggests that it is likely to be several years before
the technology’s full potential becomes clear. In
the meantime regulators should stay their hands,
or find ways to accommodate new approaches
within existing frameworks, rather than risk
stifling a fast-evolving idea with overly
prescriptive rules [Economist, 2015b].
4. Testing: These technologies introduce a novel
programming framework and execution
environment, which are not satisfactory
understood at the moment and have faced some
major glitches in their nascent lifespan
[Economist, 2016a, Atzei et al., 2017].
Multidisciplinary and multifactorial aspects
affect correctness, safety, privacy,
authentication, efficiency, sustainability,
resilience and trust in smart contracts. Existing
frameworks, which are competing for their
market share, adopt different solutions to issues
like the above ones. Merits of proposed solutions
are still to be fully evaluated and compared by
means of systematic scientific investigation, and
further research is needed towards laying the
foundations of Trusted Smart Contracts (http://
fc17.ifca.ai/wtsc/).
5. Scalability: Industries also differ in their need
for speed. For the bitcoin blockchain network,
the process of clearing and settling transactions
takes about 10 minutes, which is far faster end
to end than most payment (e.g., remittance)
mechanisms today. But clearing transactions at
the point of sale instantaneously is not the issue;
the real problem is that 10 minutes is simply too
long for the IoT where devices need to interact
continuously. Former core developer Gavin
Andresen said solving for a trillion connected
objects is a different design space from bitcoin,
a space where low latency is more critical and
fraud is less of an issue or where parties could
establish an acceptable level of trust without the
bitcoin network [Tapscott and Tapscott, 2016].
6. Standardization: Like Internet, blockchain is
being treated as a global resource. There are
already efforts underway to steward this
resource for standardization on the lines of what
IETF/ICANN does for the Internet. Without
standardization and stewardship invisible powers
could emerge.
7. Digitization of Resources: Full potential of this
technology cannot be reaped unless the
resources around us can interact with the digital
world. In many of the developing and under-
developed countries, where this technology will
have the highest impact, yet do not have
governmental records in digital form. Without
this availability of resources in digitized form it
will be extremely difficult to realize the full
potential of this technology.
8. User Interface: User interface will remain as
Achilles heel given the fact that even a
sophisticated user finds using crypto-wallets as
a daunting task.
Blockchain in Indian Context
Investments in blockchain start-ups are similar in scale
to that happened for dot-coms in the 1990s. While
the invention was for creating a currency, there has
been a widespread belief that the underlying trust
protocol lends itself for reconfiguring our institutions
and economy. Though there are certainly great
challenges in creating such a future for which some
of the emerged principles over this short period are:
(i) networked integrity, (ii) distributed power (by
consensus), (iii) value as incentive, (iv) security-by-
design, (v) pseudonymity, (vi) preservation of rights,

404 R K Shyamasundar and Vishwas T Patil
and (vii) democratic platform for inclusion with
efficiency and transparency. Breakthroughs in these
will lead to a great impact on building viable
democratic societal applications, and a smart economy.
Sector-wise Potential
Some of the sectors that will have a positive impact
of using such a technology are briefed below:
1. Policy: Management thinker Peter Drucker is
often quoted as saying that “you cannot manage
what you cannot measure.” Drucker means that
you can’t know whether or not you are
successful unless success is defined and tracked.
What best can give a platform other than
blockchain to define KPIs and triggers/conditions
to track their progress in real-time?
2. Judiciary: A growing pool of empirical studies
suggests that slow court systems discourage the
growth of new businesses. With 2.8 crore of
pending cases, blockchain’s smart contract
technology can be used to resolve the cases
involving economic contract breaches, as a first
step to experiment with. With the advances in
AI (machine learning) and NLP technologies,
effort can be made to resolve cases that have a
clear precedent to rely on.
3. National Identity Platform: Identity is a critical
part of a modern, progressive nation. Identity
plays a vital role in correct identification of
individuals for various purposes: for economic,
public service delivery, etc. Duplication of
identities without holistic view gives rise to
leakages as each department/institution
maintains its own database — resulting in parallel
expenses for same goal. Malfeasance to such
databases create situations where genuine
individuals are excluded from being identified.
Issues arising out of privacy violations generate
resistance to evolution of a cohesive platform.
Blockchain can provide a cohesive registry of
identities and associated attributes that can be
accessed by authorized entities under well-
defined circumstances and contexts with
appropriate authentication loop involving the
subject being identified. Smart contracts can help
improving Aadhaar framework into an
intelligent, privacy-preserving national identity
platform. Such a system will save cost of doing
KYC for financial institutions and provide
uniform view and control over data to end users.
4. Public Distribution System & DBT: Blockchain
can reduce the number nodes through which a
benefit/value traverses from issuer to receiver
to zero. Thus the traditional intermediate nodes
in value transfer to beneficiary will have the role
of actuators only in which they have to just
verify the validity of eligibility conditions for a
beneficiary. Eligibility of a beneficiary can be
evaluated in real-time instead of current periodic
evaluation. Having a inter-connected national
identity platform will greatly help in accurate
evaluation of any beneficiary. Blockchain plays
a role of a universal, all-knowing database to
which any authorized entity can make a query.
5. Governance & Service Delivery: In a
democratic country like India, health of the
democracy is dependent on the active
participation of its populace. Government spends
huge amount of money on public welfare projects
where the project executioner and the project
auditor are exclusive of populace supposed to
be the beneficiaries of or affected by the project.
We can borrow the idea championed by ixo
Foundation (http://ixo.foundation) to use
blockchain for measuring impact of UN SDG
(sustainable development goals) by making the
populace as an auditor of the projects being
implemented. Upon completion of execution of
a project the affected people vote or provide
feedback about the quality and degree of
completion of the project. Thus making it difficult
for the project executioner to influence or bribe
the auditor.
6. Energy: With a huge potential of roof-top solar
power generation, the national power grid will
have to be equipped with an ability to
dynamically adjust its transmission and
distribution capacities. Reporting inaccurate data
by error or malice can have cascading effect
on the grid’s stability. It will be of paramount
importance to bring unified view across the grid
for import/export of electricity. IoT-enabled
controllers & meters with blockchain as an
underlying data reporting, billing system will be

Blockchain: The Revolution in Trust Management 405
a natural fit.
7. Agriculture: In a country like ours where a large
population is engaged in agriculture, any gains
in matching the produce with the best market
will benefit the farmers. APEDA actively assists
farmers to sell their produce in foreign markets
by certifying the produce. Authenticity of these
certificates and time taken to issue them is
critical for perishable items. Integration of
blockchain in supply chain consisting of certifiers
like APEDA, cold-storage chains, port
authorities, shipping lines will be a game
changer. Another great benefit of blockchain in
this sector would be a system that digitizes
immovable assets and livestock of marginal
farmers who have Jan Dhan Account but no
credit profile thus excluded from formal financial
services. Representation of livestock, ancestral
property in shared custody of undivided joint
family onto a blockchain will build their credit
profile for NBFCs.
This technology has great potential to transform
almost all sectors fundamentally. With a proper action
plan and strategy, government can nurture and promote
this technology by becoming its promoter and user.
Design & Deployment Considerations
While constructing a “trust machine” for a national
(governamental) initiative a few subtle decisions need
to be made in line with the spirit of Bitcoin highlighted
below:
1. Permissioned vs Permissionless blockchain: It
is going to be a great conundrum because by
relevance it has to be a permissioned blockchain
at global level, whereas it has to be a
permissionless blockchain at national level.
Identity-cum-authentication will help
segregating the users interacting with the national
level blockchain. Luckily, India has a national
level identification mechanism for its citizens and
businesses. It will be an interesting proposition
to build such a blockchain also because
businesses operating out of India will have their
workflow spanned across the world. How do
we provide the interoperability will be an
important design criteria.
2. Evoking the Trust: Being a national blockchain,
either backed by the Indian government or by a
consortia of public-private partnership, the
obvious fact will be the ownership of the setup.
Blockchain is a P2P system in its original form
with no entry or exit barrier for the nodes and
no ownership of the whole. Whereas, having a
owner of the permissioned setup does not bode
well for evoking public trust into the system.
Pragmatic approach like setting up an
independent statutory body similar to Election
Commission of India will assuage the concern.
3. Choice of the consensus algorithm: PoW is the
only proven practical consensus algorithm that
scales for a large number of nodes, as seen in
case of Bitcoin. PoS of Ethereum is
bootstrapped from PoW in the beginning to
denote generated currency units as “Stake” or
Ether. Choosing PoW type of consensus
algorithm has to be extremely careful while
making the choice of one way hash function to
perform actual PoW construction. Bitcoin
miners have reached to such gigantic levels of
hashing power that the biggest miner on Bitcoin
can easily overwhelm combined power of all
supercomputers in the world put together. A
different hash function has to be chosen while
keeping in mind the sophistication of existing
Bitcoin miners for SHA family of hash functions.
PoS without PoW for bootstrapping could be a
good option since the national blockchain will
have option of using Aadhaar-unique-IDs to
offer a pre-determined stake to each individual
a priori.
Takeaways
Bitcoin is the first application of a technology that
paves the way forward, revealing an opportunity for
innovation that was not apparent before. Bitcoin is
wholly open source (an important trust evoking
aspect), so every element of it can be tweaked,
modified, altered and tested for potentially improved
iterations, just like evolution.
1. Blockchain is an idea of making trust a matter
of coding, rather than of democratic politics,
legitimacy and accountability. The blockchain
lets people, who have no particular confidence
in each other, collaborate without having to go

406 R K Shyamasundar and Vishwas T Patil
through a neutral central authority. Simply put,
it is a machine for creating trust. In essence it is
a shared, trusted, public ledger that everyone
can inspect, but which no single user controls.
2. Ledgers that no longer need to be maintained
by a company or a government may in time spur
new changes in how companies and
governments work, in what is expected of them
and in what can be done without them.
3. A realization that systems without centralized
record-keeping can be just as trustworthy as
those that have them may bring radical change.
4. People and institutions today can solve hard
problems and change the world for the better
when they have a reliable framework to build
on.
5. Systems that are honest free up dead capital.
The transparency provided by blockchain can
help eliminate forgery and provide efficient
service delivery.
6. Blockchain is an important technology of Internet
era and has global appeal. Any nation embracing
this technology (e.g., Estonia, Singapore, Japan)
will have a competitive advantage over the
laggards. Industry (through innovation) as well
as government (through calculated policy
oversight, being promoter of common standards
for interoperability) have a responsibility to invest
in this potentially revolutionary technology for
trust management in our digital economy.
“One reason why this technology works is that
it has socially engineered the game mechanics based
on one assumption, that there are more good people
than bad people. This is the underlying hope on which
blockchain resides”. — Pindar Wong, VeriFi.
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