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Blockchain technology is a cryptographic chain of peer-to-peer transactions. Blockchain transactions are stored in a trustless manner, thanks to decentralized nodes that validate and secure them.
Bitcoin, the first cryptocurrency, introduced blockchain technology and the concept of the blockchain ecosystem to the world. When we look at the history of the blockchain, we need to go back to 2009. Unveiled in 2009 by Satoshi Nakamoto, the Bitcoin White Paper detailed a solution to the problem of double spending around digital peer-to-peer payments.
Nakamoto conceived of transactions as untrustworthy entities, eliminating the need for an intermediary.
Nakamoto’s white paper presented the problems of traditional finance, stating that the ecommerce space (e-commerce) has come to rely almost entirely on intermediaries (third parties) to process digital transactions. Among other issues raised, it was argued that these intermediaries should spend time and money mediating transactions, increasing costs for the parties making transactions and limiting the potential for smaller, day-to-day transactions.
This solution involved the immutable timestamping of computational evidence transactions and the hashing of these transactions into a “continuous chain of hash-based working evidence.”
Such a chain would exist in a decentralized manner – as a timestamp server distributed between the participating nodes voluntarily. If the nodes left and returned, they would take a copy of the longest existing chain and continue from there.
The decentralization of the transaction process has allowed the implementation of the concept of peer-to-peer interactivity without trust, eliminating the need for third party involvement and, ideally, offering cheaper and faster transactions to all. However, once the technology was implemented, users needed a way to trade, and that’s where Bitcoin came into play.
So when we ask ourselves who was the first, the Bitcoin currency or the blockchain, we now know that the answer is the blockchain.
Blockchain technology has evolved beyond simple peer-to-peer transactions. Innovations have led to the construction of decentralized applications (DApps) on top of the blockchain, and solutions for speed and security have increased. Much of this innovation is due to smart contracts.
Since the introduction of the first generation Bitcoin blockchain, or blockchain 1.0, the blockchain ecosystem has come into play. Ethereum (ETH), for example, is what many enthusiasts consider to be the future of the blockchain.
This name comes from the fact that Ethereum focuses more on blockchain applications and the exploitation of smart blockchain contracts than on its mere existence as a decentralized currency.
Ethereum founder Vitalik Buterin envisioned the platform as a replacement for the traditional online experience, which will decentralize all digital processes. Why stop revolutionizing peer-to-peer payments when you can revolutionize financial lending, gaming, and social networking?
Buterin used smart contracts to put his vision into practice. Unlike real-life contracts, smart contracts are digital agreements between two or more parties. Also, compared to a smart contact, a real contract requires the involvement of a lawyer or a similar intermediary in order to work, complicating the process.
A smart contract is implemented through an immutable set of rules agreed upon before its design. These rules are coded in the Ethereum block, ensuring that no one can change them once the contract is performed and eliminating the need for an intermediary. The contract will be performed when both parties fulfill their part of the contract.
Decentralized applications are not based on trust in a third party, ensuring that users can leverage their skills without involving an intermediary.
While Bitcoin has a simple version of smart contract technology, Ethereum has taken it to the next level, providing developers with a platform on which to build DApps, while using the power of smart contracts.
Ethereum can be considered a second generation blockchain or blockchain 2.0, due to its capabilities, which extend beyond Bitcoin (a first generation blockchain). After all, Ethereum allows users to create cryptocurrencies on its platform, leveraging the Ethereum blockchain for security and speed purposes.
For example, developers could build an application to borrow money using only smart contracts. In this case, smart contracts would act as an escrow and keep the funds safe before facilitating the granting of the loan and serving as a space for borrowers to repay the loan.
However, despite the innovations offered by smart contracts and decentralized applications, Ethereum still suffers from severe scalability issues, which means that it struggles to validate transactions when its network becomes too busy. This fight is due to the consensus method used by both Bitcoin and Ethereum: proof-of-work (PoW).
PoW asks miners to validate blocks by leveraging their computer power to solve complex equations. However, the limited number of miners cannot keep up with the need to validate transactions. If too many people try to make transactions, the miners will be overwhelmed, and the validation process will take much longer. To solve such problems, Ethereum will move to a consensus method known as Proof-of-stake (PoS). The implementation is expected to take place in the upgrade of the network called Ethereum 2.0.
Let’s talk now about the third generation blockchain or blockchain 3.0.
Blockchain 3.0 further evolves the concepts introduced by blockchain 1.0 and blockchain 2.0, introducing interoperability solutions and new consensus methods.
A third-generation blockchain ecosystem addresses many of the issues that have affected blockchain 1.0 and blockchain 2.0 networks, such as scalability and interoperability. Blockchain 3.0 networks usually solve the problem of scalability with a new consensus algorithm: Proof-of-stake (PoS).
Instead of mining, PoS requires users to bet or block their chips to become validators. Validators ensure that the received transactions are valid before engaging them in the blockchain network, earning transaction fees for their efforts.
The idea is that users who have a stake in a network would like what is best for it and would make greater efforts when it comes to validating transactions. Also, transaction validation is faster than mining, ensuring that a network can expand as more validators join.
Then there are blockchain 3.0 interoperability solutions. Despite the large number of blockchain ecosystems, many of them are isolated from each other. Converting funds from one blockchain ecosystem to another through a cryptocurrency exchange is time consuming and costly, keeping users away from true financial freedom.
A common blockchain 3.0 interoperability solution is that of bridges. Bridges connect two or more blockchain networks, allowing users to convert assets from one network to another. In doing so, bridges unify all types of blockchain ecosystems, truly capitalizing on the concept of financial freedom.
Blockchain networks run on permission-based consensus methods, with different levels of usage depending on user needs and permission level.
In addition to blockchain generations, there are different types of blockchain when viewed from a permission-based angle. Some of these types of permissions are public, authorized, or private blockchains. Each of these types offers a different use case for the needs of a company or the user.
A public blockchain is the basic form of a blockchain ecosystem. A public blockchain is available to anyone who wants to use their database. Bitcoin and Ethereum are considered public blockchains.
In addition to being open to all, these networks exist without a central authority. Instead, upgrades and other changes are being implemented by developers around the world, and anyone can use the infrastructure of a public blockchain to build DApps.
An authorized blockchain, also known as a consortium blockchain, restricts some or all parts of the database to nodes with special permission. For example, suppose a centralized team is working to develop a public blockchain network for the rest of the world. In this case, that team may have exclusive permissions to view network-centric information.
While blockchain technology is essentially a distributed decentralized registry, sometimes that registry does not have to be public. A corporation’s employee database, for example, should not be shared, but it can still benefit from the efficiency of blockchain technology.
In this case, a corporation could use a private blockchain. This organization can then use its private blockchain just like a traditional database. It may have some information available to the entire workforce, while more private information is only open to corporate executives.
(i) Check the list of cryptocurrencies updated according to market capitalization.