Understanding the Technology
What is Blockchain Technology?
Satoshi Nakamoto in his work ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ described Blockchain technology as peer-to-peer version of electronic cash between two parties can be exchanged through online without going through financial institution or a third-party approval (Nakamoto).But the basic understanding of the Blockchain technologies and cryptocurrencies can be differed by saying “the technology underlying Bitcoin and other virtual currencies is known as the blockchain” (Trautman, 2016).
Blockchain Technology is anticipated to further disrupt the digital economy of today. As there are so many implications of this technology on various industries, there are various distributed platforms where this technology can be used.
In the developing world many technologies have disrupted the market in a very less time. There are creative minds which created financial revolutions in the last few decades which changed the economy on how they operate in the world of business.
Evolution of Blockchain Technology.
Over the past years the block chain concept is been evolving fast from Bitcoin protocol to Ethereum platform to today where in the process of building the third generation of block chains. In this evolution we can see how the technology is evolving from its original form as essentially just a database to becoming a fully-fledged globally distributed cloud computer.
Beginning of Bitcoin – Generation 1.0
The first blockchain was conceptualized in 2008 by an anonymous person or group known as Satoshi Nakamoto. The concepts and technicalities are described in accessible white paper termed ‘Bitcoin a peer-to-peer electronic cash system’. These ideas were implemented in 2009 as a core component supporting Bitcoin where it served as the public ledger for all transactions. The invention of the blockchain for Bitcoin may be the first digital currency to solve the double spending problem without the need of a trusted authority or central server (Swan, 2015). It was only later that we came to really separate the concept of blockchain from that of its specific implementation as a currency in Bitcoin where to see whether the underlining technology has the general application beyond digital currencies in its capacity to function as a distributed ledger tracking and recording the exchange of any forms of value. The Bitcoin design has been the inspiration for other applications and has played an important role as a large-scale proof of concept. The emergence of Blockchain technology emerged with introduction of blockchain which the decentralised crypto-currency of the internet was. Through Bitcoin, Blockchain technology provided the answer to digital trust it reads information on public space and doesn’t allow anyone to remove (Fromhart, Trujillo, & Srinivas, 2017).
To ensure that only legitimate transactions are recorded into a blockchain, the network confirms that new transactions are valid, given the history of transactions recorded in previous blocks. A new block of data will be appended to the end of the blockchain only after the computers on the network reach consensus as to the validity of all the transactions that constitute it. Thus, the transaction only becomes valid once it is included in a block and published to the network. In this manner the blockchain protocols are able to ensure that transactions on a blockchain are valid and never recorded more than once, enabling people to coordinate individual transactions in a decentralized manner without the need to rely on a trusted authority to verify and clear all transactions (CHRISTIDIS & DEVETSIKIOTIS, 2016).
Ethereum Rises: Smart Contracts – Generation 2.0
Within few years second generation of block chains emerged designed as a network on. Which developers could build applications. The beginning of its evolution into a distributed virtual computer this was made technically possible by the developments of the Ethereum platform. Ethereum is an open source public blockchain based distributed computer platform featuring smart contract functionality. It provided a decentralized Turing-complete virtual machine, which can execute computer programs using global network of nodes. Ethereum was initially described in a white paper by Vitalik Buterin(co-founder) in late 2013 with a goal of building distributed applications. The system went live two years later and has been successful and dedicated community of developers, supporters and enterprisers. The important contribution of Ethereum as the second generation of blockchains is that it worked to extend the capacity of the technology from primarily being a database supporting Bitcoin to becoming more of a general platform for running decentralized applications and smart contracts (BlockChannel, 2017).
As of 2018 Ethereum is the largest and most popular for building distributors applications on many different types of applications have been built in it from social networks to identity systems to prediction markets and many types of financial applications. Ethereum has been a major step forward and with this advent it has become ever more apparent where we’re heading with the technology which is development of a global distributed computer a massive globally distributed cloud computing platform on which we can run any application at the scale of speed of today’s major websites with the assurance that it has the security, resilience and trustworthiness of today’s blockchains. However, the existing solutions we have are like extremely inefficient computers the existing blockchain is really bad computer that is not able to do much expect proof of concepts getting to next level remains huge challenge that involves some original and difficult computer science, game theory and mathematical challenges (Wright & Filippi, 2017).
Current Limitations:
The mining required to support the Bitcoin currently consumes more energy than many small nations being equal to that of Denmark and costing over 1.5 billion dollars a year in the lectures deem a lot of this is being fuelled by cheap but by coal energy in China where 60% of the mining is currently being done. This high energy is simply not scalable to mass adoption. Ethereum and Bitcoin uses a combination of technical tricks and incentives to ensure that they accurately record who owns what without a centralized authority the problem is its difficulty to preserve this balance was also growing the number of users. Currently blockchain requires global consensus on the order an outcome of all transfers. In Ethereum all smart contracts are stored publicly on every node of the blockchain which has its trade-offs the downside is that performance issues arise in that every node is calculating all the smart contracts in real time which results in speeds (Scott, 2016).
Another issue is that of cost the fact that it costs some small amount to run the network so as to pay the miners for maintaining the ledger. It is hard to operate these kinds of economies which cannot small exchanges, but this is exactly what many people will want to use the blockchain for in the future.
Blockchain Scaling on the Horizon
Since currently, every computer in a blockchain network processes every transaction, it can be very slow. A blockchain scaling solution would determine how many computers are necessary to validate every transaction in a way that doesn’t compromise security. Scalability remains at the heart of current stage in the journey that we are on and this is what the third generation of blockchain technologies are trying to solve.
Proof of stake – Generation 3.0
In response to the above constraints a third generation of blockchain networks are currently under developments. Many different organizations are currently working on building this next-generation blockchain infrastructure such projects include different approaches. In order to explain these approaches, we will be explaining two of them.
Lightning network: The lightning Network is one such project that seeks to extend the capacities of existing blockchains. The main idea is that small and non-significant transactions do not have to be stored on the main blockchain this is called off chain approach because small transactions happen off of the main blockchain. It works by creating small communities wherein transactions can take place without each of those transactions being registered on the main blockchain. A payment channel is opened between a group of people with the funds been frozen on the main blockchain those members can then transact between each other using their private key to validate the transactions. This only requires two transactions on the main blockchain one to open the transaction channel and one to close it. All other transactions happen just within the network without it being registered on the main blockchain. This both reduces the work load on the main blockchain and makes it possible to run a very many very small transactions within the sub network (Cocco, Pinna, & Marchesi, 2017).
IOTA: IOTA is another example whereas existing blockchain are sequential chains where blocks are added in a regular, linear and chronological order. The data structure if the IOTA system is able to achieve high transactional throughput by having parallel operations. The data structure is more like a network rather than a liner chain wherein processing and validation can take place alongside each other. The other big difference is that there are no specialized miners in this network every node that use the network functions as a miner. In the IOTA network every node making a transaction also actively participates in forming the consensus that is to say everyone does mining, this means no centralization of mining within the network which is what creates bottlenecks and demands lots of energy. Likewise, with this network there are no transaction fee for validation and with IOTA because it is more user generated the more people that use the network the faster becomes which is the opposite of the existing systems and obviously makes it is very scalable (IOTA).
There are lots of other approaches to overcoming existing constraints but suffice to say the blockchain should be understood as an emerging technology whose existing implementation is like a large-scale proof-of-concept running on a very inefficient system but through lots of experimentation and iteration hopefully in the coming years evolve into this global distributed computer.
As Melanie Swan writes in her book “First, there was the mainframe and Personal computer paradigms, and then the internet revolutionized everything. Mobile and social networking was the most recent paradigm. The current emerging paradigm for this decade could be the connected world of computing relying on blockchain cryptography” (Blockchain. Blueprint for a New Economy. Sebastopol, CA: O'Reilly).
Works Cited
Atzori, M. (2016, June 13). Blockchain Technology and Decentralized Governance: Is the State Still Necessary? Retrieved from SSRN: https://ssrn.com/abstract=2731132
BlockChannel. (2017, June 15). Understanding the Ethereum ICO Token Hype. Retrieved from Medium: https://medium.com/blockchannel/understanding-the-ethereum-ico-token-hype-429481278f45
CHRISTIDIS, K., & DEVETSIKIOTIS, M. (2016, June 3). Blockchains and Smart Contracts for the Internet of Things. Retrieved from IEEE Access: https://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=7467408
Cocco, L., Pinna, A., & Marchesi, M. (2017, June 27). Banking on Blockchain: Costs Savings Thanks to the Blockchain Technology. Retrieved from https://www.mdpi.com/1999-5903/9/3/25
Crosby, M., Nachiappan, Pattanayak, P., Verma , S., & Kalyanaraman, V. (2016, June). BlockChain Technology: Beyond Bitcoin. Retrieved from Apllied Innovation review: https://j2-capital.com/wp-content/uploads/2017/11/AIR-2016-Blockchain.pdf
Fromhart, S., Trujillo, J. L., & Srinivas, V. (2017, November 6). Evolution of blockchain technology. Retrieved from Deloitte Insights: https://www2.deloitte.com/insights/us/en/industry/financial-services/evolution-of-blockchain-github-platform.html#endnote-sup-4
IOTA. (n.d.). What is IOTA. Retrieved from IOTA: https://docs.iota.org/introduction
Nakamoto, S. (n.d.). Bitcoin: A Peer-to-Peer Electronic Cash System . www.bitcoin.org.
Scott, B. (2016, February). How can cryptocurrency and blockchain technology play a role in building social and solidarity finance? Retrieved from Econstor: https://www.econstor.eu/bitstream/10419/148750/1/861287290.pdf
Swan, M. (2015). Blockchain: Blueprint for a New Economy.
Trautman, L. J. (2016, May 8). Is Disruptive Blockchain Technology the Future of Financial Services? Retrieved from SSRN: https://ssrn.com/abstract=2786186
Wright, A., & Filippi, P. D. (2017, July 25). Decentralized Blockchain Technology and the Rise of Lex Cryptographia. Retrieved from Papers SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580664