Blockchains, Digital Assets, Smart Contracts, Decentralized Autonomous Organizations
Discover what may be the superior alternative to Bitcoin.
Most people have heard about Bitcoin by now. It's just one of the several cryptocurrencies that have gained attention recently. Cryptocurrencies are frequently promoted as the next great thing in finance, but only some people genuinely grasp how they operate. In reality, the technology that drives these currencies, known as blockchain technology, has potentially revolutionary potential.
Blockchains provide so many benefits that banks may someday become obsolete. Others believe they represent the future of contracting and safe data storage. Others think this technology is a passing trend that will soon fade away.
After reading these summaries, you'll understand what blockchain expert Henning Diedrich believes and why it's still too early to predict where Ethereum will lead us.
In this summary, you will find
Why was B-money only a few years ahead of its time?
Which country uses as much electricity in a year as one Bitcoin blockchain?
Why Ethereum may eclipse Bitcoin as the preferred blockchain.
1. Cypherpunks developed digital currency in response to concerns about online privacy.
In the 1980s, the globe entered the computer age, with PCs becoming commonplace in many households and organizations. However, some people were not pleased with this development. To them, it looked to anticipate the advent of a total surveillance state, similar to something from George Orwell's 1984. So, a small group of computer programmers decided to strike back, and their weapon was code.
Thus, in the late 1980s, the cypherpunk movement emerged. Their main goal was to defend people's privacy in the digital environment.
American programmer Eric Hughes, one of the founders, documented their ideals and intents in the 1993 book A Cypherpunk's Manifesto. The cypherpunks aspired to see secure, encrypted communication in the digital world, allowing people to conduct anonymous transactions. Unlike credit card transactions, which can identify the payer and the sender, cypherpunks wanted a digital currency that lets users send and receive money without being monitored, similar to paying with cash at the local corner store.
They took the first step toward a private communication system in 1997 when they launched the Cypherpunks Distributed Remailer (CDR), a decentralized, anonymous email system. Not long after, an individual who goes by the online moniker "Wei Dai" created the first form of cryptocurrency, b-money.
Surprisingly, b-money functioned similarly to bitcoin today. All currency users retained a copy of the transaction log, ensuring that each payment was visible to all and potentially approved or disputed. The fundamental distinction between b-money and bitcoin is that there was no decentralized means to keep track of accounts before then.
Nonetheless, more attempts at cryptocurrencies followed, but they all failed when the dot-com bubble burst at the turn of the century.
There was nearly a decade of stillness that followed. Then, in 2008, Bitcoin emerged as the world's first decentralized digital money.
Bitcoin's creator is known as "Satoshi Nakamoto," although his real name remains unknown. However, Nakamoto made his intentions known. He wished to render the concept of a traditional bank - a central financial institution - obsolete. This is why Bitcoin does not employ a central register, and users do all transactions directly.
Now that you've learned about cryptocurrencies' origins let's look at how they work.
2. A blockchain is a robust, secure, decentralized database for tracking and managing transactions.
If you've read anything about Bitcoin, you've probably encountered the term "blockchain" and wondered what it means.
The simplest way to grasp a blockchain is to see it as a secure and shared database of transactions.
Blockchains can be used for various reasons, with Bitcoin being the most well-known. The blockchain is utilized in this digital currency to store transactional information, such as how many bitcoins are transferred between two accounts. So the data would look like this: "Account A transfers 10 bitcoins to Account B."
The database is termed a blockchain because the data is saved in parts known as blocks, which are ordered precisely to form a data chain.
The genesis block is the first block of data, and each subsequent block provides information about the preceding block, forming a chain. A better analogy would be a succession of Russian nesting dolls, with each block having information from the previous blocks.
The fundamental distinguishing aspect of a blockchain database is that it is decentralized.
This is a crucial feature for various reasons, the most important of which is to prevent deceit. In general, most digital items may be simply replicated; for example, consider how simple it is to email someone a JPEG or an MP3. However, to be valuable, digital money must be secured from duplicates.
Blockchain technology solves this problem by decentralizing the database. So, if you have five bitcoins, the data is not saved on a single central computer; instead, it is constantly synchronized across a network of computers. If you try to go in and quickly modify your bitcoin amount from five to fifteen, the change will appear on everyone's copy of the blockchain, and anyone may dispute it and prevent it from taking effect.
Blockchain's cryptography adds another layer of protection, which is why "cryptocurrency" refers to Bitcoin and other blockchain-based digital currencies.
Cryptography enables secure communication and information storage while providing additional authentication levels within the blockchain. Every transaction requires a digital signature, which employs cryptography to validate and prevent tampering with previous ones.
3. Blockchains work based on consensus, which requires a significant amount of energy and time.
We must examine the step-by-step procedure of one transaction to better understand how cryptocurrencies operate without the assistance of a central banking body.
Blockchains use a consensus protocol known as proof-of-work. This protocol ensures that each transaction on the blockchain is appropriately represented.
This works by having the network's various computers, or nodes, agree on a single "true" version of the blockchain. Miners or validators are nodes that actively engage in establishing consensus.
Obviously, it can be difficult for all nodes to agree on everything, from the sequence in which transactions should be handled to the design of the next block. It is not uncommon for nodes to face competing and occasionally contradicting recommendations for the next block.
Aside from the several suggestions, there is always a "longest chain" or "heaviest chain." This chain is finally authorized and regarded as "true" by the consensus process. It's known as the "world state."
All of this effort and the development of the blockchain require a lot of energy. In fact, running the Bitcoin blockchain for a year requires as much energy as the entire country of Ireland does in the same time frame.
Miners and validators might receive 12 bitcoins for each block they add to help them cover their electricity costs.
As you may expect, blockchain's decentralized structure makes the process slower than traditional databases. A new entry takes milliseconds in a conventional database, such as MySQL or VoltDB. However, on the Ethereum blockchain, today's most advanced blockchain, a new entry takes an average of three minutes.
Nonetheless, blockchains are a thousand times faster than stock market transactions, which often take three days to complete. Compared to credit card payments, which take roughly four months, a blockchain transaction is 100,000 times faster.
4. Blockchains can also be used for contracts due to their ability to conduct automated activities.
However, blockchains are more than just a database of digital cash. They can also form a legally enforceable agreement between two or more parties.
In the world of contracts, various factors might cause one or more parties to fail to meet their contractual commitments. This can lead to unending and arduous litigation.
On the other hand, blockchains can potentially eliminate many contractual difficulties by managing intelligent contracts.
A smart contract not only maintains the contents of an agreement but also can carry out its conditions.
Intelligent contracts are legal texts written as computer programs and stored on a blockchain. And, because blockchains never forget anything, a smart contract is guaranteed to run on schedule.
Thus, a blockchain smart contract can trigger a payment at a specific moment, whether made in bitcoin or with a standard credit card. Alternatively, it might ensure that digital items, such as music or video files, are sent to a party's email address.
Blockchains enable decentralized autonomous organizations) operation by utilizing innovative contracts. Bitcoin and Ethereum are just two examples of this type of organization.
A decentralized autonomous organization (DAO) is formed from computer code and governed via blockchain. It operates through a network of smart contracts that communicate with one another to fulfill certain operations.
Consider a DAO to be a car that drives itself, tunes itself up, and cares for itself regularly. Some smart contracts work as the engine, keeping it running, while others pay for gasoline or charge the battery. While the automobile represents its own business, it might also be part of an Uber-style network.
However, while things can operate smoothly in a DAO, there may come a moment when a problem occurs, raising the question of who should be held responsible.
5. Blockchains have some issues that are still being addressed.
One thing is clear: blockchains are not a fad. It has already been demonstrated that blockchain can transform business and banking. However, several flaws need to be resolved.
One of the most serious issues is that blockchains may lose data. Although this is not a common or likely situation, it has already occurred on the Bitcoin blockchain.
This occurs when two or more significant groups in the computer network, which are in charge of keeping the information, cannot agree on the blockchain's current status. When this happens, the network forks or divides.
So, if you ask two nodes about your Bitcoin account, and each node is on a separate side of the split network, you may receive two distinct account statements. Obviously, this would be a nightmare for any financial institution employing blockchain.
A split can also occur when the connection between the nodes is severed. This would lead to the development of separate groups inside the network. However, such a split would be resolved after the connection was reconnected.
The network will always accept the group with the most computing power as the "true" state of the blockchain. This is because the "longest" chain requires the most energy and is deemed modern. Unfortunately, all transactions on the smaller, rejected chain will be lost.
Another difficulty with blockchains is the inability to be entirely anonymous or confidential.
Every transaction requires both a sender and a receiver address. These addresses, often known as pseudonyms, are simply a long string of letters and numbers, such as "17fHXHDB8." However, everyone can see the specifics of each transaction. If someone pays careful attention, the patterns and details of your transactions may reveal your genuine identity.
This lack of anonymity, mainly when dealing with susceptible data like medical information, may hinder blockchain from becoming extensively adopted. However, there is hope that the situation will be fixed shortly.
6. Ethereum provides an alternative to the Bitcoin blockchain and currency.
Unless you're familiar with blockchain or digital currencies, you haven't heard of Ethereum. But first, let's look at the most recent blockchain advancement.
Bitcoin may be the first blockchain, but it has limitations. It focuses solely on money, but Ethereum is a general-purpose blockchain, making it more adaptable. In addition to cryptocurrencies, Ethereum allows you to create land title registries and rating systems similar to those used on eBay and Amazon.
Vitalik Buterin founded Ethereum in 2013 to avoid the problems that highly specialized blockchains face when used for various purposes. So, even at its inception, Ethereum was designed to accomplish many things well, which is why it is the most advanced blockchain to date.
Ethereum, like other DAOs, is not owned by anyone. It is also free and widely available, thanks to the intuitive programming language Solidity.
Ethereum has its own digital money, or "bitcoin," known as ether. This cryptocurrency is used on the Ethereum blockchain to pay for transactions, calculations, and data storage.
While Bitcoin is currently the monarch of the cryptocurrency world, ether, with its more versatile blockchain, has the potential to become the favored digital payment mechanism of the future.
7. Ethereum has numerous potential applications, yet there are still worries.
Now that we've looked broadly at Ethereum, let's go further into its specifics.
The Ethereum blockchain has many possible uses and concepts, which makes it quite fascinating. For example, it might almost eliminate tampering with voting.
Every voter could use their signature to create an entry on the blockchain indicating their vote. No one could update this system because the proof-of-work procedure prohibited it. Furthermore, the procedure of counting votes would be totally transparent.
Another application for Ethereum is the maintenance of land titles, particularly in underdeveloped nations where misunderstanding over land ownership has hampered the economy. The Ethereum blockchain would make this procedure completely transparent and clear.
And then there is banking. It's no surprise that most large banks have been sponsoring blockchain research. Blockchains' transparency and programmability could improve the financial market and stock and asset trading.
But this is only the tip of the iceberg. Ethereum might also help with escrow payments, social networking, ridesharing, job services, crowdfunding platforms, etc.
However, because Ethereum is open-source software with no assurances, there are concerns about its trustworthiness.
This is a critical issue for large organizations, as they will only consent to utilize something that is entirely trustworthy and full of bugs. In this regard, Ethereum's developers have yet to make significant attempts to make it suitable for business use.
Finally, there is the matter of future government restrictions.
Blockchains can be used for illicit activities such as money laundering or black market sales, prompting some governments to impose strict laws or even forbid blockchain technology.
However, blockchains have the potential to transform our world in ways similar to how the Internet did. As it stands today, Ethereum may be the blockchain of the future, as it is by far the most advanced we've seen to date.
Final Summary
Blockchains are not a fad. They can drive significant change, and Ethereum is the most advanced blockchain to emerge. This is because it is not overly specific but a general-purpose blockchain that can be utilized in various social and commercial contexts.