The Rise of Blockchain and Decentralised Applications and What This Means for the Future of the Tech Industry
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Cryptocurrencies such as Bitcoin and others have been the highlight of the news recently with prices fluctuating from records high to some cryptocurrencies losing almost half of their capitalizations within hours. This has caused a lot of uncertainty and raised many questions as to why there is cryptocurrencies, why we need them and if they will ever last. In order for us to give reasonable answers to these questions, we must first understand what advantages do these cryptocurrencies offer us and how they might change the state of the world that we live in today. I assume that the audience reading this article have no experience in cryptocurrency and blockchain technology which is the technology that underpins Bitcoin and many other cryptocurrencies. I will try to give a brief overview of the main concepts. The article will be divided into 4 sections as follows:
- Cryptocurrencies: Coins vs Tokens: I try to explain what the term Cryptocurrency means and the difference between coins and tokens and how they are useful to us.
- The Rise of Blockchain Technology: I try to explain how blockchain works, what benefits it brings and why it is rising so fast. This section can be a little technical.
- Decentralised Applications and What This Means for the Future of the Tech Industry: In this section I try to explain why the token economy and decentralised applications is on the rise, and why decentralised applications will be part of the future of application development and how this can transform our world.
- The Real Value of Blockchain Based Cryptocurrencies: In this section I try to explain what value do Blockchain cryptocurrencies have and how they compare against other mediums that we currently use like Gold, Silver, and FIAT money.
1. Cryptocurrencies: Coins vs Tokens
A Cryptocurrency is a relatively new term referring to the use of Digital Assets or Virtual Money as a store of value as well as a medium of exchange. The first cryptocurrency was Bitcoin, its whitepaper was released in 2008 and its software was released in 2009 as an Open Source Software by someone with the pseudonym of Satoshi Nakamoto. The success of Bitcoin sparked the interests of many companies and individuals around the world to investigate the implications of this technology more deeply.
As a result, many companies have started creating their own versions of cryptocurrencies or what can also be known as Altcoins (Alternative Coins). Altcoins use the original Bitcoin source code with slight variations, some of these coins include Litecoin and Dodgecoin. Some other Cryptocurrencies were built using their own separate blockchcains and protocols. For example, Ethereum gives us the ability to create our own Tokens and is therefore considered a Protocol Cryptocurrency. A token is basically a representation of a particular asset such as Utility, Security, loyalty points etc.. that can be tradeable and exchangeable for other currencies. With Ethereum we can build tokens simply by using the Ethereum ERC20 Token Standard and our token can live on top of the Ethereum blockchain. This gives us the ability to create a cryptocurrency asset pretty quickly without having to create our own separate blockchain. Ethereum also gives us also give us the ability to write these tokens in a Turing-complete way or what can also be known as Smart Contracts. Smart Contracts can help us transfer or store these tokens based on programmatic conditions that we write in a programming language called Solidity. These smart contracts allow us to automatically execute programs on the blockchain when certain conditions that we specify are met, for example we can write a very simple program in solidity on the blockchain to transfer the equivalent of $500 in ETH (Ethereum) from account A to account B if account B is empty.
Having these Smart Contract protocols and APIs available for developers as Open Source Software has led to an explosion in the number of cryptocurrencies in the market as well as the technologies employed in creating them. Each of these coins serves a different purpose and builds a complete and independent ecosystem on its own. The development groups behind these cryptocurrencies usually raise their funds through ICOs or Initial Coin Offerings. This is where investors invest their money into whatever crypto asset in the hopes of making some financial gain once the product is live in the market and trade-able on the cryptocurrency exchanges. This is a good way to make money but it can be very risky as people need to carefully choose the companies they invest in and read the whitepapers, check the team, and the hype around it, just like you would do with any other investment.
Smart Contracts give us endless possibilities of applications to solve real world problems as we can govern interactions and agreements between nations, organisations, communities, and individuals in a transparent way. An example of a real world application leveraging smart contracts is the popular cryptocurrency exchange Binance which has become the number one exchange in the market. Binance rolled out their own token code BNB using Smart Contracts, powered by the Ethereum network. Users of the Binance exchange usually buy this token to help them get 50% discount on transaction fees when using the Binance website. Similarly Smart Contracts have found their way to many other fields such as Retail, Healthcare, Banking, Education, Hospitality, Insurance, Transport and Logistics and Government, these contracts are all stored on a blockchain
2. The rise of Blockchain Technology
A blockchain is a decentralised public ledger which allows the transfer of money between different entities on a network without the need for a central authority to verify the transaction (i.e. a Bank, government etc..). A ledger can be thought of as the book where the transactions between different entities on the network are recorded and totalled. A typical blockchain transaction sent from entity A to entity B has to first be validated by the Miners on the network before it can be stored on the blockchain. Miners are a specific set of users on the blockchain network who have a copy of the public ledger and who computationally verify and validate transactions before locking them with a hash and storing them in blocks inside a blockchain. Miners receive financial incentives for verifying transactions and keeping the network alive.
A Bitcoin blockchain transaction life-cycle will look something like the image below:
Furthermore, blockchain technology offers huge benefits over the way we currently store and transfer virtual money, those benefits include Transparency, Decentralisation, Immutability and Security. Below, I will try to explain what each of these terms actually mean for us:
Transparency
Blockchain is Transparent because all the transactions that have ever happened on the network are publicly available for anyone to download and verify using message signature, and this acts as a safeguard against fraud and other malicious activities. Another feature of blockchain is the decentralisation of authentication, with decentralised applications we no longer have to authenticate with a central server (VISA or Master Card), instead we authenticate with the blockchain itself. This gives a level of accountability and transparency that is unprecedented. This is good for financial institutions as well as people in social environments where they are worried about their online security and privacy.
Decentralisation
Blockchain is Decentralised in the sense that there is no single point of failure on the network. If one of the mining nodes is down, the network can continue to operate and transactions can continue to happen without problems as other nodes on the network will be available to verify the transactions. This is a huge difference to the way your local banks handle it, you would have at least experienced it once that your bank would send you a message saying you cannot send or receive money from and to your bank account from this date to this date due to maintenance, system problems, etc..
The second problem with transferring money using your local bank is transactions could sometimes take a lot of time to be validated and verified, that is if you are sending money to someone that uses a bank different than yours or if the transaction is happening on the weekends. While many people can get around these time limitations by simply waiting for 1 or 2 days for the transactions to be confirmed, others especially in business may find this quite problematic to their business cash flow and Payroll management. The good news, blockchain solves all of these problems for us in a very simple and easy way. With blockchain we can now send and receive money to any person anywhere around the world within a very short confirmation time and for a very little cost.
Immutability
Blockchain Immutability means that once the transaction is included into a block on the blockchain it cannot be modified without winning a consensus of at least 51% of the mining power on the network. Blockchain technologies such as Bitcoin and Ethereum deploy distributed consensus algorithms to protect against tampering and double spending.
Security
The reason blockchain offers huge Security benefits is because it relies on public-key cryptography for security. In blockchain each user usually has two keys, one is public key (long random string of numbers and letters) that the user shares with everyone, and this acts as the address of the user stored on the blockchain. The second key is a private key which acts as a password to access the assets stored on the blockchain that the user has to keep secret. By design, the security of public-key cryptography is ensured by the long time it takes to break the private key hashes and the message signature. It would take months, or even years for a private key to be broken by any computational power that we have today. Usually, Blockchains such as Bitcoin use a hash algorithm called double SHA-256 to create the hashes. SHA-256 is a one way function that encodes a piece of data of any length into a hash value of a fixed length. A Hash function is not encryption as you cannot decrypt the hash back to its original value. There are multiple applications for hash functions, those are integrity verification, challenge handshake authentication, digital signatures etc…
The only way to verify the original value of the hash is by implementing a brute force strategy. This is where we guess what was hashed and encode it with the same function and see if the two hashes match.
Satoshi went a bit further and implemented the proof of work algorithm as a governance algorithm for the Bitcoin network. To verify Bitcoin transactions using this algorithm, miners must do significant amount of work (brute force) to verify blocks which are created in a specific time periods, usually about 10 minutes. Each block must also calculate a nonce value for the new block that will be created given the content of the previous block which is usually very time intensive and this is in short how the mining process works in Bitcoin. Once a block is mined it will be broadcast to all the nodes on the public blockchain ledger with a hash to the block before it, which contains a hash to the block before it, hence the name Blockchain. Due to the fact that we have a linked list of hashed blocks, it is hard to change the content of a particular block (double spend) without changing the content of all the previous blocks as the hash function will result in a wrong value.
This is why it’s hard to break the security of the blockchain with the classical computers that we have today and will likely continue to be hard for years to come. Even if someone managed to break the security and tried to tamper with the blockchain to fake transactions, they will be faced with another layer of security we spoke about earlier which is decentralisation. The governance algorithm will quickly invalidate any tampering and fake transactions and will always favor the work of the nodes that constitute a hashing power of more than 50% of the network. However, if a malicious miner manages to reach a hashing power of more than the 50% threshold then they may be able to launch what is known as 51% attack or double spending attack which is what Bitcoin proof of work algorithm was designed to solve in the first place.
There is a rising threat for the current cryptographic standards such as public-key cryptography, and that is Quantum Computers. Quantum Computers are theorised to be able to process data 100 million times faster than the classical computers that we have today. If Quantum computers become a viable approach to factorisation, then the cryptographic standards underlying Bitcoin and other Cryptocurrencies will need to use a different way of signing and verifying transactions as it becomes feasible to compute and get a hashing power of more than the 50% threshold using polynomial time. In which case even the private key of a particular bitcoin address can be computed by using the same brute force technique and that is by guessing all the possible private keys and encoding them using the same hash function used to create the keys and compare the result of the hash to see if it matches with the public key of a particular Bitcoin address. However, there are already various scientific groups working on developing blockchains that are Quantum resistant such as QRL. It’s important to note that Quantum computers do not only threaten blockchain technology but all the computer systems around the world that rely on cryptography, therefore the arrival of Quantum computers means most or all cryptographic standards today will need to evolve.
3. Decentralised Applications and What This Means for the Future of the Tech Industry
Previously we used to write applications with the strict limitations of the FIAT currencies that we mentioned in the earlier sections. Now with blockchain we are able to incorporate the currency into the product development or what I also like to call the Token Economy. This gives us endless possibilities to re-imagine and redefine the business models of today and ultimately change the world that we live in. It’s important to note that the applications of blockchain technology are not limited to cryptocurrencies and the financial industry alone but every other field will be affected. For example governments can use blockchain technology for Identity Management, what this means is that blockchain will allow governments to verify that someone is who they claim to be as the consumer will be the only person in-hold of their private keys and is responsible for digitally signing all transactions and messages. Governments can record citizen details from the moment they are born and this can act as a form of identity verification in the future, there will be no need for paper based certificates.
With proper Identity Management, consumers will have greater control over their personal data, they will be able to access various services instantaneously such as new bank accounts, driver’s licenses or utilities. With blockchain, there is no need for a Justice of The Peace to verify physical papers and stamp them to verify that someone is who they claim they are, this will save people so much time and effort. Each person on the blockchain will have their own digital signature just like they have their signature in real life except it’s a more robust way of verification that cannot be forged like the real signature. Businesses can benefit from identity management solutions by rapidly on-boarding consumers onto their services, manage compliance and reduce data breach.
In addition to that, businesses who wish to decentralise their systems and make them more transparent will have the option to use one of the protocols available in the market. For example, we could soon see big corporations like McDonalds, Walmart, etc.. launching their own utility tokens to power their global systems and incentivise their consumers with loyalty points. What we may also see in the near future, is big tech companies like Facebook, Amazon and Google to start writing their own blockchain protocols to enable businesses to build decentralised applications. The popular encrypted messaging service Telegram recently announced the launch of the biggest ICO to create a blockchain platform for developers to build decentralised applications on top of.
4. The Real Value of Blockchain Based Cryptocurrencies
Blockchain based cryptocurrencies are often perceived to have no value like Gold, Silver and cash money. However, that perception is mainly due to two reasons, first is we can not feel or touch cryptocurrencies with our hands like we do with Gold, Silver and Cash money. Second, cryptocurrencies are not utilised in the mainstream as much as they are speculated and this causes price fluctuations that drives people off. The real value of cryptocurrencies actually lies in the Trust element, no where in the history of finance have we ever come close to this level of trust that we have with blockchain. Despite the fact that we live in a digital age, there is no trust in almost everything we do online. There is so much online fraud especially in the e-commerce and telecommunications sectors which result in millions of dollars of losses to ordinary people and businesses every year.
Furthermore, with blockchain we can guarantee that the currencies are always capped. This is different to FIAT money such as USD where there is no cap to the supply of the USD, which means the more money the bank supplies the more inflation there is in the economy. This is not saying that we do not need FIAT money, it just means that it does not make economical sense to keep flowing more FIAT money into the economy as the only thing this does is increase the prices of goods and services.
Moreover, with Gold and Silver, we cannot easily verify if what we have is real or fake without having an expert checking the assets for us, let alone the fact it is a difficult medium of exchange to use that is indivisible. With blockchain, we have a solid system that verifies if something is indeed what it claims to be and the assets are easily divisible and transferable.
A question can be asked which is can we use blockchain without the monetary aspect of it? Yes, we can but that would not be successful, because the monetary aspect is there as an incentive to the miners that power the network which gives the network a level of Trust. Mining cryptocurrency comes with a cost and without the miners the entire network would collapse and we would lose all the security elements mentioned above such as decentralisation.
Conclusion
Blockchain technology is a solid system that is difficult to hack and provides so much privacy and transparency that we have not seen before. Blockchain is a mechanism that has the potential to modernise the monetary system that we currently have as well as many other applications to solve real world problems. However, until these cryptocurrencies become more utilised in the mainstream there will always be price fluctuations and uncertainty. What we are witnessing right now in the cryptocurrency market is a technological arms race between blockchain development groups around the world. In the near future, we may see big companies such as Facebook and Amazon building protocols to allow developers to build decentralised applications. Blockchain is the new signature, except it is a digital signature, this brings many benefits to consumers, businesses as well as regulators. Despite the advancements of online systems around the world, yet we still rely on paper based certificates to verify identity and to do business, this takes up a lot of our time and effort and is simply not practical. Blockchain is the transition from the semi-digital world that we currently live in to the entirely digital as it provides us with a level of Trust that we currently lack in almost everything that we do online.
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