Blockchain: From A Humble Experiment To A Decentralised Future
As the price action of cryptocurrencies has drawn new eyes into the blockchain space, I have frequently been asked to summarise the state of affairs in this space. I hope this article presents a succinct summary of what I believe has transpired in this space since its humble beginnings in 2009.
Many new blockchain protocols have been developed since Bitcoin’s inception in 2009. The easiest way to categorise them is by dividing them up into three different categories. We will explore each of these generations to better understand the current state of affairs in this space. We will focus primarily on infrastructure (perhaps dApps can be talked about another time).
First Generation
The inception of Bitcoin took place in 2009 as a way of putting a decentralised programmable money in the hands of the masses (Bitcoin: A Peer-to-Peer Electronic Cash System). Decentralised meaning it was not controlled by any central entity but instead is governed by the rules of the protocol. Programmable in the sense that you could instruct computers to manipulate it according to certain rules.
And from there the rest is history, with Bitcoin growing from a fledgeling toy currency to a universally accepted store of value. Although much of Bitcoin’s initial utility as a medium of exchange has been lost due to its increase in price, the introduction of layer two infrastructure such as the Lightning Network has the potential to bring back this functionality.
Bitcoin was first and foremost an experiment. As an experiment, it aimed to test the boundaries of money in our modern society by introducing a digitised version of it. The scope of the experiment had to be limited greatly to increase the likelihood of its success. Bitcoin’s development procedure is also upheld to a similar degree of strictness — each new BIP (Bitcoin Improvement Protocol) is tested rigorously before being integrated into the protocol.
First generation protocols like Bitcoin were designed to be used as currency (whether it be as a store of value or a medium of exchange). These protocols come in different flavours such as Litecoin ($LTC), Monero ($XMR), ZCash ($ZEC) and they all share similar characteristics. They have different design goals and have used different techniques to reach them. As an example, Monero and ZCash are two different coins both working on the confidentiality of transactions through different cryptographic techniques. Monero tries to achieve this using ring signatures whereas ZCash uses ZK-Snarks.
Second Generation
Although the restrictive nature of first generation blockchain protocols has allowed them to flourish safely as a currency, it greatly limits their ability to perform complex tasks. This has led a team of developers to build the protocol that we currently know as Ethereum, a blockchain that can be described as a decentralised world computer. Put simply, Ethereum allows users to run complex computations in a way that would be nontrivial on Bitcoin.
You can think of second generation blockchains as first generation blockchains that have evolved to improve capability by enabling complex business logic in a way that does not require a central server to run through something called a “smart contract”. These smart contracts can be used to manipulate digital assets in an automated and decentralised fashion. Existing real world applications tend to require a fee to access the application (think SaaS) or a fee to access a particular service (think Uber or Airbnb). Decentralised smart contracts turn this model on its head by making the applications open source such that anyone can run it provided they pay the cost of running the application on the network.
Second generation blockchains also come in several flavours such as NEO and ETC which also have different focuses such as scalability or immutability. Although these second generation blockchains have increased the capability provided by blockchains, they also have a larger attack surface. You should also keep in mind that Ethereum began its development in 2014, a whole 5 years after Bitcoin. These systems are still very much experimental technologies.
Third Generation
As second generation blockchains have matured, it became clear that there were several important issues that needed to be resolved. The three key ones in my opinion are privacy, scalability and formal verification. To get a better understanding of why these things are important, we’ll take a look at each of these individually.
In the blockchain space, all transactions are broadcasted to all users and are publicly viewable on the ledger. This means that in every transaction, the sender and receiver are not fully anonymous but are pseudo-anonymous (as they hide behind an address). For many mainstream transactions, maintaining privacy of the sender and receiver is important which makes privacy a going concern for public blockchains.
Another issue is scalability. First generation blockchains have one primary use case — currency. This means that only throughput related to currency mattered. Second generation blockchains can have millions of applications running on top of them, which could cause the network to grind to a halt, as we saw with CryptoKitties late last year. It is important for this issue to be resolved if blockchains are to be adopted into mainstream use.
The last issue refers to the large attack surface of second generation blockchains that we have described earlier. Formal verification is a procedure that developers can use to prove or disprove the correctness of an algorithm, thereby allowing you to be certain that the algorithm will behave exactly as you expect it to. This will allow developers to guarantee the safety of the contracts they develop, significantly reducing the attack surface of their application.
Third generation blockchains such as EOS, Cardano, Tezos, Hashgraph and Corda, to name a few, all attempt to solve variations of these problems by making different tradeoffs, whether it be centralisation or the use of exploration of cutting edge technology. Strictly speaking, Corda is a distributed ledger technology (DLT) and not a blockchain as such but I mention it here for completeness. Given that we know Ethereum’s inception was in 2014, we can expect these technologies to be less reliable. It’s important to remember that these projects are still very new in the grand scheme of things and all have potential to succeed as well as fail.
Summary
In summary, we have reviewed the history of blockchains starting from first generation blockchains that led the charge with programmable money. Then we realised that if we wanted to run complex applications in a decentralised manner, we would need to greatly expand the capability of the blockchains that we used which led to the birth of the second generation blockchains. After having used these newer blockchains for a while, we realised there were still many hurdles ahead of us — scalability, privacy and application correctness. This led to the race to develop the first of the third generation of blockchains which is where we are at today.
Hopefully this article has helped you better understand the evolution of blockchains over the last decade. Although many of the second and third generation blockchains are new, I expect there to be many improvements over the current system in the future. Each success and failure will teach us new things, bringing us closer to a future where decentralised applications could be commonplace.
