The Blockchain’s Security: How Does It Prevent Fraud?

The Blockchain’s Security: How Does It Prevent Fraud?

Blockchain
April 12, 2022 by Diana Ambolis
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If you know anything about cryptocurrencies, you’ll know two things: first, they’re digital and don’t have a physical form, and second, they’re decentralized, meaning a bank or other centralized entity does not control them. Crypto aficionados now extol several benefits of the currency’s decentralized character, such as protection from third-party involvement like banks or governments,
The blockchain platform is being used to manage judicial bonds and deposits

If you know anything about cryptocurrencies, you’ll know two things: first, they’re digital and don’t have a physical form, and second, they’re decentralized, meaning a bank or other centralized entity does not control them. Crypto aficionados now extol several benefits of the currency’s decentralized character, such as protection from third-party involvement like banks or governments, speedier transaction times, and so on. However, it raises numerous questions in the mind of a layperson. Despite their numerous flaws, banks play a vital part in our day-to-day financial lives, and their absence may raise concerns about the stability of such an economic system.

One of the most critical responsibilities of a financial organization, such as a bank, is to keep an accurate record, including account balances and transaction histories. Any of these things can be inquired about at a bank, and precise information will be provided. On the other hand, Cryptocurrencies are decentralized, self-regulating systems with no central authority. DLT, as the name implies, is a ledger or database that is distributed in a completely transparent manner to all of its users. Now, for a cryptocurrency to function correctly, all of its users must agree to this ledger as the sole source of truth, as all subsequent transactions will depend on the data contained on the blockchain. Cryptocurrencies employ consensus procedures to achieve such agreement among users.

Also, read – Can Decentralized Technologies Promote Privacy Protection

Consensus mechanisms aren’t a brand-new concept. They’ve been used to achieve distributed system consensus for a long time. In the case of blockchain and cryptocurrencies, they’re utilized to agree on the network’s “state,” or the ledger shared among all users. Consensus mechanisms also help defend the blockchain from malicious attacks like the 51 percent attack and the Sybil attack and solve the problem of double-spending. The endeavor to spend the same unit of currency more than once is known as double-spending. It’s nearly difficult to achieve with a fiat currency like the dollar or rupee. If you spend a $5 bill to pay for a service, you no longer have control of that bill, making it impossible to use it again. Double spending is prohibited in digital currencies like Bitcoin, which do not have a central authority, by keeping track of each and every transaction since the currency’s inception. The user balances are adjusted as a result of that record being generally acknowledged. Any attempt to spend a unit that has already been paid will be refused since it does not match the widely accepted form.

Now that it’s evident that consensus mechanisms are at the heart of blockchain technology, let’s look at the various types of consensus mechanisms, their goals, advantages, and disadvantages, as well as a high-level overview of each of its use cases.

Proof-of-Work

Transactions are recorded in blocks rather than individually on the blockchain. Each block contains a number of transactions that have been validated. When a new partnership is created and published on the blockchain, it becomes irreversible on the existing chain of blocks (hence the term blockchain), which serves as the currency’s sole source of truth. As a result, block publishers, also known as miners, are critical to be rewarded for maintaining the blockchain’s integrity rather than destroying it. Particular blockchains do this by requiring miners (block publishers) to solve a highly challenging mathematical problem of a specific difficulty each time they try to construct and publish a block. They can print the block and collect their prize once they’ve solved the mathematical issue.

So, what exactly is the mathematical problem, and what does it have to do with cryptocurrency? As previously stated, a block is made up of a number of validated transactions as well as additional information such as the block number, timestamp, and hash value of the previous block. The mathematical difficulty is to discover a number or nonce that, when coupled with the rest of the block’s data and passed through a hash function, produces an output that meets the predetermined requirement. The hash algorithm employed in Bitcoin, for example, is SHA-256, and the satisfied condition is to get a work with a specific number of leading zeroes. The unique feature of SHA-256 is that it always produces the same output with the same input, and even the slightest change in the information can result in a vastly different outcome. The miners are constantly competing with one another to solve the challenge first because the one who creates the block first wins the rewards. The reward is effectively a specific quantity of the same cryptocurrency, which can then be used to create more of the currency.

The main thing to remember about Proof-of-Work is that it is computationally costly to solve the mathematical issue, and it takes a lot of energy and time. Because each block contains information about the previous block, any attempt to change anything in the chain will invalidate the following blockchain for the attacker, forcing them to re-do the entire mining process for each block, which will be computationally very expensive. As a result, all miners are motivated to maintain the blockchain’s integrity.

The main advantage is a proven and accurate method that can withstand all types of security threats. Proof-of-Work is now used by two of the most popular blockchains, Bitcoin and Ethereum. However, the problem is that this entire process loses a tremendous amount of energy. Ethereum, for example, uses 73.2 TWh of electricity each year, which is about equivalent to Austria’s energy production.

Proof-of-Stake

Proof-of-stake work’s energy usage is a major environmental problem. As a result, blockchains such as Ethereum are adopting a new consensus method known as Proof-of-Stake. Rather than relying on a race between miners, proof-of-stake distributes the ability to publish new blocks among validators at random. Validators put down a stake (32 ETH for Ethereum) and are then chosen at random to publish new blocks. They’re also in charge of attesting to the blocks that other validators have constructed. Validators place a stake in the ground as an incentive for good behavior. Any misbehavior or collaboration might result in the entire stake being slashed.

Proof-of-Stake is used by blockchains such as Cardano, Avalanche, Polkadot, and Solana. While Proof-of-Stake is good for the environment (it is estimated that it will cut Ethereum’s energy consumption by 99.5 percent) and is a very secure mechanism against a 51 percent attack (an attacker will need to hold 51 percent of the total stake), it has its own drawbacks. It’s far more challenging to implement than PoW, with a slew of drawbacks like “long-range attack,” “nothing at stake,” “stake grinding,” and so on. As a result, choosing between the two primary consensus models becomes a trade-off exercise.

Delegated Proof of Stake (DPoS) is a type of trusted proof-of-stake protocol.

The stake is a Proof of Stake variation in which users stake their coins and vote for delegates. The value of a user’s vote is determined by the amount of money he or she has invested. Finally, the representative with the most votes will have the opportunity to publish the following block. This system is also called “Democracy in Blockchain” because of its voting premise.

The quickness and scalability of this approach are its most significant advantages. It uses less energy and does not necessitate as much hardware as Proof of Work. It is one of the fastest consensus processes available, and it is unquestionably the best option in a system where speed is critical. The major disadvantage is that this technique jeopardizes the blockchain’s decentralized nature. Because it concentrates power in the hands of a few individuals, it is more vulnerable to a 51 percent attack and the risk of delegates collaborating and forming a cartel.

Delegated Proof of Stake is used by blockchains like EOS.

Proof of Capacity is a variant of proof-of-work that emphasizes memory above computing power. Proof of Capacity is an advance over PoW in that it forces nodes to store precomputed hashes before mining begins. Plotting is the term for this procedure. Thanks to plotting, proof of capacity is a faster mechanism than Proof of workg. Another advantage of this method is that, unlike the Proof of Work process, it saves a lot of energy; in contrast to Proof of Work, where many manufacturers construct specialized circuits that perform nothing else, but mining, every technological improvement in the capacity of a hard drive to carry more hashes will also improve the system for individuals who aren’t in the blockchain.

While this technique has potential, it has not been tested extensively enough to see how it would fare against various types of security attacks. Chia is an excellent example of a blockchain that uses Proof-Of-Capacity.

Unique Node Lists (UNL)

A Unique Node List is a consensus technique used in blockchains such as Ripple and Stellar. UNLs let specific nodes sign off on transactions, and any user may simply verify the signed blocks to bring the system up to current. The essential question in this consensus process is determining which nodes will be able to sign off on transactions. How can we avoid a Sybil attack, in which a single user impersonates a number of nodes in order to maximize their chances of signing off on transactions?

UNLs are similar to certificate authorities that issue digital certificates to websites, except that instead of asserting that the nodes in the UNL are legitimate, they claim that each node is unique, as in it is being managed by a separate entity minimizing the risk of a Sybil assault. The UNL consensus technique is also one of the quickest available.

The most significant downside is that it is a considerably more centralized blockchain system than other consensus processes. Ripple and Stellar, for example, come with a predetermined Unique Node List. Many studies have indicated that in order to avoid any blockchain divergence, all users must agree to at least 60%-90% of the UNL. As a small, well-known business, UNL’s nodes are far more vulnerable to subpoenas and other forms of interference.

Proof of Elapsed Time

This consensus technique focuses on randomization to replace the inefficiencies and waste-inducing competitiveness of Proof-of-Work systems. Proof of Elapsed Time is a mechanism used in blockchains like Hyperledger Sawtooth to randomly assign a timer object to its nodes. The obligation for publishing the next block is given to the node whose timer expires first.

The Random Leader Selection component of the Byzantine Generals Problem is effectively solved with this technique. However, Intel’s partner technology SGX has been demonstrated to have some serious weaknesses, making it difficult to trust the consensus method. Not to add, it’s critical to ensure that each node receiving a timer object is distinct and that no user is posing as several nodes in order to maximize their chances of getting chosen.

Proof of Authority

Proof of Authority is similar to Proof of Stake as a consensus technique. The primary distinction between the two is that, whereas validators in Proof of Stake staked currency, in Proof of Authority, they stake their reputation. Because the number of validators in the blockchain is relatively low, it is best suited for use as a private blockchain.
This technique is both rapid and scalable, as well as energy-efficient. However, as the name implies, this consensus process does not adhere to decentralization principles. Because the number of validators is so minimal, things like censorship and fund freezing are simple to implement.

Directed acyclic graph

A directed acyclic graph is a well-known data structure in the field of computer science. In reality, because it has a defined direction, is devoid of cycles, and is a graph, a blockchain is also an example of a DAG. Tangle is a type of DAG consensus mechanism that IOTA employs. Each block must have two parents in this process. As a result, a user must verify its prior two transactions in order to execute a transaction using the DAG consensus process. The ability of this technique to reduce latency and transaction fees is its most significant benefit. On the other hand, this consensus architecture provides little to boost scalability and is exceedingly vulnerable, as any attack only needs 34% of the hashing power to bring the system down.

Understanding the trade-offs involved in selecting a proper consensus method is essential. Blockchain technology is still in its infancy, and no consensus process is without flaws. However, there is a lot of intriguing research going on, and a lot of exciting new blockchains are pushing the boundaries of what’s possible with different consensus algorithms.