Blockchain Technology Through the Eyes of a Complete Beginner
Mending the Trust Gap in a Web 3.0
This is not going to be a “ XX to the Mooon” post, don’t worry. But to explain where I am coming from I think I need to give you a bit of a back story.
In 2017, I did something I usually try to avoid like the plague.
I jumped onto the hype train and bought into this big new thing called, you guessed it, Cryptocurrency.
In hindsight, you could praise me for being an early adopter.
But honestly, I had no idea what I was doing and didn’t really up to a couple of weeks ago. All I did was create an account on several exchanges, proceeding to buy a bunch of crypto-based on fancy names and random social media posts.
I was an idiot.
I also lost over 90% worth of my investment in the span of 2 weeks.
Too stubborn to admit defeat I didn’t sell but simply held on to it. In the years to come those assets would always take a special place of shame on my portfolio shelf. Not necessarily because I lost money (which, thankfully I now recovered). I invested in something I didn’t have the slightest clue how it worked. I completely went against Warren Buffets famous words:
Never invest in a business you cannot understand.
I decided to do what I keep preaching to friends when they ask me for investment advice. I sat my a** down and did some thorough research. Because buying into something without knowing how it works can generally be considered a very bad idea.
So I used the first week of my vacation for a deep dive into blockchain technology.
And boy, was I in for a ride.
So what exactly is Blockchain?
A blockchain is best described as a public database that is updated and shared across many computers in a network.
“Block” refers to the fact that data and state are stored in sequential batches or< “blocks”. […]
“Chain” refers to the fact that each block cryptographically references its parent. A block’s data cannot be changed without changing all subsequent blocks, which would require the consensus of the entire network.
Each new block and the chain as a whole must be agreed upon by every computer in the network. These computers are known as “nodes”. This is so everyone has the same data. To accomplish this distributed agreement, blockchains need a consensus mechanism.
Great, moving on.
What real-world problems does it solve?
The Trust Gap
As Richie Etwaru put it in a TED Talk, blockchain technology mends the so-called Trust Gap in the age of the internet.
In a sea of scams and counterfeit products, we have to rely on third-party operators to verify whether what we buy is actually what we get. While this makes it more secure than going to a market and simply trust in the authenticity of the products offered, it still leaves a lot of room for scams and fraudulent data. That is because the data is usually stored in a central place or at least with one central operator.
If I send money to a friend, I have to tell my bank to send it and trust that everything gets executed the way I want it to be. Although this is generally a proven system, it still leaves the option for human error.
Now, if I would send that money through a blockchain, the transaction would be verified and distributed in a (best-case) fully decentralized network of computers.
This eliminates the need for a third party because everyone in the network can check what amount of money went where and when at all times, rendering fraud or error close to impossible.
Smart Contracts, basically computer programs running on a blockchain, process and execute any request based on the rules programmed into them without any bias. The program code is immutable. So there is no need for third-party entities like judges or lawyers to make sure a contract is fulfilled truthfully anymore.
Democratization of the internet
It is downright scary that global conglomerates like Amazon, Google, Facebook, and many more have the power to simply shut down large parts of the internet.
An internet dominated by companies that provide services in exchange for your personal data.
This version of the internet is commonly known as Web 2.0.
Information is stored with centralized organizations and can easily be censored or even deleted.
Blockchain technology could help to resolve that problem by distributing data through a global network of nodes, making it impossible for one entity alone to shut it down (Web 3.0).
Information can’t be censored and anyone part of the network can use its service without the risk of being blocked (assuming you abide by the rules of the network protocol).
The bigger that network is, the harder it is to shut it down.
Power to the people.
Dismantling Fake News
Sadly, the term “Fake News” grew to be a frequently used buzzword in today's internet culture. You can spread unverified conspiracy theories at the click of a button and rarely suffer any real-world consequences.
In a world of Social Media, this “News” will then spread rapidly, with Social Networks trying to play catch up and delete them or put some kind of warning on the posts. By the time that happens the damage is usually already done.
Another way is to simply take only part of a story and redistribute it out of context to twist the truth (“alternative facts”).
Cryptography allows you to encrypt data, prove data was signed by someone, etc. Blockchain, on the other hand, allows you to prove that a piece of data was not published.
- Vitalik Buterin
One notable project tackling that issue was kickstarted by one of the most acclaimed newspapers in the world, the New York Times.
The question was whether metadata added to photos, saved in a blockchain, and shared through a private network to verify any new post with that photo would help to “fight against misinformation in news photos”.
The conclusion was that it helped users to be able to track the authenticity of photos in a social media feed. Metadata like the source and time the photo was taken helped the users to make informed decisions about the authenticity and contextual correctness of a photo.
While it is still hard to transparently verify news before they are saved into a blockchain, it makes it impossible to tamper with data after it is stored in a distributed network of ledgers.
As Benjamin Gievis pointed out in an interview about a similar blockchain project:
We’re not here to say if this is good news or fake news, we’re here to say this is authentic news. It’s been recorded, it’s being tracked, here’s where it came from, here’s it’s value. It’s a new way of seeing the story.
So blockchain won’t save quality journalism by itself, but it will make the spread of disinformation a lot harder.
New Age of Privacy
In Web 2.0, internet giants can basically track, use and sell your data however they see fit (I know, it’s more complicated than that).
In a Web 3.0 environment, all data going into a blockchain network along with its accounts is encrypted, making it hard or impossible to track any specific user. While the data stored in the blocks, like cryptocurrency transactions, can be read, the connected accounts are anonymous as long as the public keys are kept private. This means that you take back control over which data relating to your digital identity is saved when and where.
There is a downside to this, but we’ll get to that later.
So where do cryptocurrencies come in?
Store-of-value
Some of the most commonly known cryptocurrencies have been adopted as a form of value storage, similar to gold.
The network ensures the transparency of the available market capitalization through distributed and verified blocks of data. Additional coins can’t be printed out of thin air, they have to either be mined or forged and publicly saved into the blockchain. Various methods, like the burning of coins with each transaction or a fixed maximum supply, ensure that a lot of cryptocurrencies are inherently deflationary, aggregating worth over time, unlike fiat currencies.
A lot of people still try to pit a solely digital store of value in the form of code against real-life assets like gold or silver. They argue that a piece of code can’t have the same value as a real-life object.
Yet, the value of an object, whether digital or “real” is measured by society.
Gold only became the haven of wealth storage it is today because someone, at some point, decided to put a value on it and our global society adapted that thinking.
Also with gold, there are a lot of issues surrounding human rights violation, slavery, and extortion. You can pretty easily melt gold mined from dubious sources like war zones and pretend it’s legit.
With Bitcoin, you can’t because every coin ever created is accounted for in a distributed ledger.
Fuel
In blockchain projects like Ethereum, Cardano, or Polkadot the currency is leveraged as a kind of fuel to power the network.
It’s essentially only a side-effect of the intended use.
Ether (generally called Ethereum) was never meant to be a currency you can pay your oat milk flat white with. It was always meant as a reward to people offering their computing power (or soon their stakes which dramatically reduces its energy consumption) to keep the network running, by verifying and recording blocks of data into the chain.
Ethereum is basically a massive, decentralized computer that saves all state transitions into a blockchain.
Logically, the more the network is used, the more the underlying cryptocurrencies are worth because of the supply and demand dynamic.
Security
The currency tokens are used as an incentive to keep the network secure and honest, as anyone holding the respective cryptocurrency token of a network would simply lose a lot of money by undermining its authenticity through malicious attacks or the implementation of fraudulent data blocks.
So-called 51% attacks, where entities gain control of the blockchain by controlling over 51% of all nodes is close to impossible for the bigger networks, as it would go hand-in-hand with a massive amount of investment into mining or staking (which, in turn, would again incentivize the nodes to keep the network as sound and safe as possible or to lose a lot of money).
There are a lot more ways to attack a blockchain network, but the more a network matures and updates its protocol, the harder it gets to find a loophole.
All that really changed the way I think about cryptocurrencies.
In a network enabling the use of smart contracts, Non-Fungible Tokens (NFTs), and more, the native tokens are used to fuel it.
So while a lot of people argue that cryptocurrencies can’t be compared to stocks, the economics are very similar.
Holding tokens, at least when you use them to help create new blocks of data means that you do, quite literally in PoS networks, have a stake in the network. One of the main differences is that not one board of directors or CEO decides how to develop the product, but the whole network by consensus.
For a lot of people (past-me included) these currencies are seen as a form of asset investment to make a lot of money and speculate on.
But in the long run the currencies themselves won’t determine their worth through rampant speculation, but the application of the service the encompassing blockchain network offers.
The value of a currency will be dictated by the general acceptance of the network it is used in. The bigger the value the network provides to real-world applications, the bigger the value of its native cryptocurrency tokens.
