These last few months Bitcoin and cryptocurrencies have been making headlines in the media all over the world, and as usual, it fueled the heated discussion between supporters and detractors. Price volatility, environmental concerns and financial speculation are topics in these debates, leaving the debate about the value of the technology itself on the sides. Let’s take a better look at the blockchain technology to understand what it is, where is at and where is going.
What is blockchain?
In simple terms, is a series of blocks tied together by a cryptographic hash (or in even simpler terms, fancy math). Each block acts like a record containing some information, and the information is stored in such a way that is immutable once it has been added to the blockchain. These properties allow the creation of distributed ledgers, these ledgers are databases that can track the history of transactions done in a blockchain. What is the main benefit of these distributed ledgers or databases? That in combination with a peer-to-peer network and a consensus algorithm, transactions and information can be processed, validated and stored without the need of a centralized authority that is responsible for it.
Evolution of blockchain
Blockchain 1.0, the Nakamoto Consensus
Before moving forward let’s take a minute to understand a problem that is inherent to any digital asset and that is not present with physical money: the double spending problem. Without a centralized authority is very difficult to move digital assets from account A to account B without the risk of account A simply replicating the digital asset and spending it multiple times. This is why in traditional finances, banks are responsible for processing transactions, they are the central authority that assumes liability and moves the money from A to B and provide guarantees to both parts about the integrity and validity of that transaction. On October 31, 2008, an anonymous and enigmatic figure called Satoshi Nakamoto published a white paper called “Bitcoin: A Peer-to-Peer Electronic Cash System” that described a distributed ledger, a peer-to-peer network and a consensus algorithm using Proof of Work (a series of mathematical calculations that require computing power) to create the first decentralized network that solved the double spending problem, and the rest is history.
Fun facts: The Bitcoin white paper has been translated to over 30 languages and people are pushing for the anonymous Satoshi Nakamoto to be considered for the Nobel Prize in Economics.
Blockchain 2.0, the era Smart Contracts
Bitcoin ignited a revolution: coders, mathematicians and cryptographers all around the world were fascinated by this weird magic internet money, but they quickly started to realize that while Bitcoin was very secure and reliable, it was too simplistic, it only allowed the basic transaction of moving a digital asset from point A to point B. Let’s say that person A wants to pay some money to person B if and only if some conditions are meet (for example person B does some sort of work beforehand for person A), we simply can’t do that with Bitcoin. On 2013, a 17-years old college dropout from Russia called Vitalik Buterin published the Ethereum White paper, a new blockchain protocol that introduced the concept of programmable transactions called smart contracts.
This white paper attracted the interest of several people around the world, most notably Gavin Wood and Charles Hoskinson, who came together with Vitalik and helped build the Ethereum blockchain, the EVM (Ethereum Virtual Machine) and Solidity, the programming language to write these smart contracts.
Blockchain 3.0, Sustainable Scaling
Ethereum sparked a new era of innovation, people quickly realized that decentralized blockchains were capable of much more than just simply moving money from point A to point B, they were capable of providing decentralized solutions to many of humanity problems, removing the need for centralized authorities ridden with inefficiencies and inequalities, and sensible to corruption and manipulation.
Projects to create decentralized insurance services allowing, for example, farmers in underdeveloped countries in Africa to get coverage for their crops, secure and inviolable birth registries to fight identity falsification and people’s trafficking, decentralized medical databases, decentralized and censor resistant platforms for artists and journalist, decentralized finance (DeFI), etc, the possibilities were endless but we quickly faced a harsh reality: while powerful, these blockchains weren’t capable of scaling for mass worldwide adoption, they couldn’t process transactions fast enough and the Proof of Work consensus algorithms required a lot of energy which raised some (very debatable, but nevertheless valid) environmental concerns.
The industry quickly came up with alternatives to replace the Proof of Work consensus with faster and more efficient Proof of Stake algorithms that don’t require energy-intensive computing, implement sharding strategies to allow further scaling of the peer-to-peer network while maintaining the level of decentralization and security, new clever math with zSNARKs, etc. Currently, there are many different projects working on these “3.0 solutions”, but these are the three more popular leading the charge: Ethereum 2.0, Polkadot and Cardano (these last two lead by Gavin Wood and Charles Hoskinson respectively, who parted ways with Ethereum and decided to take a different approach on how to solve these new challenges).
We don’t know what is going to happen with each specific project or cryptocurrency and is not my place to speculate with prices or predict how the markets are going to react moving forward, but there is one thing that we can be sure at this point: blockchain is here to stay, is not going anywhere.
It has the potential of creating a technological revolution of the magnitude of the one done by the Internet and telecommunications. Now more than ever those who work in technology need to remain open-minded and curious, embrace disruptive technological changes with pragmatism in the way we have always had and never lose track that the main goal of technology is only one: make peoples’ lives better.