A blockchain is essentially a system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network.
Blockchain – the second generation of the internet?
Blockchain is undeniably an ingenious invention and has even been described as the ‘second generation of the internet’.
According to an article published on Raconteur, ‘The first generation brought us the internet of information. The second generation, powered by blockchain, is bringing us the internet of value; a new, distributed platform that can help us reshape the world of business and transform the old order of human affairs for the better. But like the internet in the late-1980s and early-1990s, this is still early days.’
By allowing digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet. Originally devised for the digital currency, Bitcoin, the tech community is now finding other potential uses for the technology.
Like the internet (or your car), you don’t need to know how the blockchain works to use it. However, having a basic knowledge of this new technology shows why it’s considered revolutionary.
So, what is blockchain exactly?
It is essentially a technology that allows for fast, secure and transparent peer-to-peer transfer of digital goods. These include money and intellectual property. In cryptocurrency mining and investing, it’s an important topic to understand. Blockchain is completely disrupting the way digital transactions are conducted and could eventually change the way many industries conduct their daily business.
Origins of blockchain
Blockchain ultimately made its first appearance in 2009, the brainchild of Satoshi Nakamoto, for use in the cryptocurrency bitcoin. However, since then, it has evolved into something greater, and everyone is asking: What is Blockchain?
The invention of the blockchain for bitcoin made it the first digital currency to solve the double spending problem without the need of a trusted authority or central server. The bitcoin design has been the inspiration for other applications. However, its origins can be traced back much further. A 1976 paper on New Directions in Cryptography discussed the idea of a mutual distributed ledger. This is what the blockchain effectively acts as. That was later built upon in the 1990s with a paper entitled “How to Time-Stamp a Digital Document
Three generations of blockchain: money, assets and contracts
With blockchain you can reliably make transactions without the need for a third party. Since the blockchain works on top of the internet, transactions are independent of country borders and national currencies. That’s why blockchain is seen as the greatest invention since the Internet.
Since its invention, the blockchain was developed further and has been applied to varying degrees in products. Ethereum is currently the most mature general-purpose blockchain to develop decentral application. Similar to Ethereum, Cardano is a smart contract platform. However, Cardano offers scalability and security through layered architecture.
In essence, there are broadly three generations of blockchain as follows:
With each generation, both its capabilities and its complexity increase.
Cryptocurrencies – the first generation blockchain
The first application of blockchain is money. For the first time it is possible for two parties to transfer money directly to each other: secure, worldwide and without third-party intervention. The blockchain transfers ownership and records the transaction. This type of money is called cryptocurrency, the first generation of blockchain.
Cryptocurrencies, such as Bitcoin, exists outside the current financial system. It derives its value from guaranteed scarcity and new use cases enabled by its programmable nature.
Assets – the second generation blockchain
The use of cryptocurrencies brought the idea to apply the blockchain ledger to broader use cases, by offering the administration of assets in general. In this generation anyone can issue shares on the blockchain. These shares may receive dividends and voting rights can be granted to owners of the shares. All on the blockchain.
This blockchain generation facilitates crowd ownership: shared property on a small scale with control for the owners via voting and distribution of profits via dividends. This fits perfectly with current trends of crowdfunding and the sharing economy.
Contracts – the third generation blockchain
In addition to money and assets, agreements can also be registered on the blockchain. Such a digital contract enforces the participants to keep their promise.
Smart contracts have the potential to transform commercial and financial agreements, facilitate faster securities settlement, new insurance products, better compliance solutions, and more transparency. However, for smart contracts to reach their full potential key issues, both technical and legal, will need to be addressed.
The three generations of blockchain according to Charles Hoskinson: Bitcoin, Ethereum & Cardano
Charles Hoskinson has re-defined the three generations of blockchains outlined above, as follows:
Hoskinson took the positive elements from the first two generations of blockchain and added some elements of his own. What came about from that was Cardano.
The three elements that Cardano wanted to solve were:
Cardano is unique in the sense that it is built on scientific philosophy and peer-reviewed academic research. All the engineering that goes into it has the ultimate goal of being “High Assurance Code”. This is done to make sure that there is much higher belief in the quality of the code used. This, according to Hoskinson, will prevent future cases like the ETH-ETC split from happening.
How does blockchain work?
Bitcoin and blockchain are often used interchangeably even though they shouldn’t be. While they are related in a sense, these terms refer to two very different things.
Bitcoin is a form of virtual currency, more commonly known as cryptocurrency, which is decentralized and allows users to exchange money without the need for a third-party. All bitcoin transactions are logged and made available in a public ledger, helping ensure their authenticity and preventing fraud. The underlying technology that facilitates these transactions and eliminates the need for an intermediary is the blockchain.
One of blockchain’s main benefits lies in its transparency. Each time a transaction takes place, such as one party sending bitcoin directly to another, the details of that deal – including its source, destination and date/timestamp – are added to what is referred to as a block.
In this example the block contains the transaction along with other similar types of transactions that have been recently submitted, usually within the past ten minutes or so when you’re dealing with bitcoin in particular. Intervals may vary depending on the specific blockchain and its configuration.
The validity of the transactions within the cryptographically-protected block is then checked and confirmed by the collective computing power of miners within the network in question.
On an individual basis, these miners are computers which are configured to utilize their GPU and/or CPU cycles to solve complex mathematical problems, passing the block’s data through a hashing algorithm until a solution is found. Once solved, the block and all of its respective transactions have been verified as legitimate. The rewards (bitcoin in this example) are then divvied up among the computer or computers that contributed to the successful hash.
Once the transactions within a block are deemed valid it is attached to the most recently verified block in the chain. This, in turn, creates a sequential ledger.
This process continues indefinitely. It expands upon the blockchain’s contents and provides a public record that can be trusted. In addition to being constantly updated, the chain and all of its blocks are distributed across the network to a large number of machines This ensures that the latest version of this decentralized ledger exists virtually everywhere, making it almost impossible to forge.
Other uses for blockchain
As well as its role in the distribution of cryptocurrencies like bitcoin, the possibilities for blockchain implementation seem endless. Its underlying technology can be leveraged in virtually any sector to perform a number of important tasks including:
safely buying and selling intellectual property
distributing important medical information
ensuring that voting in elections is incorruptible
Public v private blockchains
What Are Public Blockchains?
Public blockchains, including Bitcoin, Ethereum, Hyperledger, and most altcoins, are built to be accessible by anyone with adequate technology. This has meant, so far, a computer and access to the internet.
Ripple is technically a public blockchain. However, although it is built with a public-based architecture, it is privately controlled through centralized ownership of the underlying currency and closed-source software
The data on public blockchains are public by default. However, it is common to hide the actual identity of all associated participants on them like Bitcoin does. This openness comes with advantages that have never existed before, such as the ability to resist hacking or capital controls from oppressive regimes. They derive their security by their very “public-ness.” Essentially, every participant can see all account balances and the movement of all transactions.
What Are Private Blockchains?
Private blockchains are secured by the ancient model of user rights and secrets that we’ve become so comfortable with ever since the first lock was invented. The fewer people who know about your database, the safer it is in this model. This can work great if you don’t plan on sharing it with many people. However, throughout history, there have been countless examples of this approach to security failing. Keys can be designed to be very smart. However, there is always a hacker out there who is smarter!
This goes not just for the contents of the blockchain, but the rules governing it, as well. The more private a blockchain is run, the more likely the rules governing the blockchain can be changed.
While simple user rights management secures private databases, cryptoeconomics is the method that keeps public blockchains secure.
Private blockchains will allow companies to revolutionize their own internal processes. Meanwhile, public, open-source variations will continue to change the way we handle business in our daily lives.
In conclusion, blockchain is the most exciting, revolutionary innovation of the last decade!