Blockchain 101 Chapter III: Where do we go from here
By Mikko Mielonen on The Capital
So now that you know the basic principle of the blockchain from the previous chapter, we can have a further discussion on what this means. The possibilities of this technology are huge. There have already been new ideas built on top of the blockchain. You can even read about blockchain 2.0 and blockchain 3.0, maybe even further generations of it.
What in the world are those later generation blockchains then? I will explain how these new “upgraded” chains could work in a simplistic way with some use-cases.
Blockchain 1.0
This is the idea described so far. One can store data and archive it in a secure ledger. A great example of it is Bitcoin. You can only store transaction data in it (at least at this point).
Let’s imagine something different for our user-case. Something we might be able to build on top of later on in the 2.0 version of it.
You could have a government upheld blockchain of property ownership (it could also be distributed ledger, but it is easier to skip the laws and regulation countries might have by just giving it to the government). As an example, you could have a datasheet of ownership of land, history of the ownership, coordinates for the corners, information on construction permits, renovation history, and such information in the blockchain. It would be easy to validate your ownership if you want to use it as collateral for a loan or sell the land, property, or pieces of one or the other. It would also be easier and more transparent for estimating the value of your property to have all of this data available to a government-mandated form.
Photo by Juan Cruz Mountford on Unsplash
With this blockchain, the exchange of property can be as simple as buying a jug of milk from a grocery store.
If needed, the blockchain data could also have encrypted parts that could only be seen by some government or law enforcement entities. For example, it could hold information on property taxes, possible future city planning information. It would help in determining if the construction permits are exceeded.
Some other use cases for the technology would be, for example, supply chain management. This could be used as a universal fully transparent managing tool for the supply chains. Because of the nature of blockchains, it would have a timestamp embedded in all the events on the blockchain and could be used as an audited trail of the product. This would also provide the next to real-time tracking of the goods. There would be no way to backdate any stamp.
Blockchain 2.0
How is this system then improved upon? Well, these second-generation blockchains (there are many already, the most famous at the time of writing is called Ethereum) can also run code inside the blockchain. This opens up a world of new possibilities for use cases. You can build smart contracts that execute themselves after set parameters are met.
You can build decentralized applications to run within the blockchain.
What does this mean? Let’s imagine, for example, a trading contract between two parties who don’t trust each other. You could make it as a smart contract where both parties have to send their part of the deal, then the transaction is executed automatically and both parties will receive their share of the deal. It eliminates a trusted middleman from the equation by giving a string of code to be the escrow service.
Simply put, you can code your money to do anything.
Then what is a decentralized application or DApp? This is the most basic form is just a frontend interface tied with a backend that is run as smart contracts in a blockchain. So the application is run by the blockchain, and thus the recordkeeping is as decentralized as the blockchain itself.
One of the first games that were done on Ethereum blockchain was CryptoKitties proving once again that the internet is made for cat pictures.
There is a very good definition for DApp in the paper “The General Theory of Decentralized Applications, Dapps” by Johnston et al.
For an application to be considered a Dapp (pronounced Dee-app, similar to Email) it must meet the following criteria:
- The application must be completely open-source, it must operate autonomously, and with no entity controlling the majority of its tokens. The application may adapt its protocol in response to proposed improvements and market feedback, but all changes must be decided by a consensus of its users.
- The application’s data and records of operation must be cryptographically stored in a public, decentralized blockchain in order to avoid any central points of failure.
- The application must use a cryptographic token (bitcoin or a token native to its system), which is necessary for access to the application and any contribution of value from (miners/farmers) should be rewarded in the application’s tokens.
- The application must generate tokens according to a standard cryptographic algorithm acting as a proof of the value nodes are contributing to the application (Bitcoin uses the Proof of Work Algorithm).
So what does all of this mean for our use case of property ownership? How is this going to help with it?
To make this more understandable, let’s imagine that your house has already been added to the blockchain we talked about in Blockchain 1.0. Now it is moved to a second-generation blockchain that can run smart contracts.
With smart contracts, you can make your property to be an investment asset with ease. Let’s say you need some money, but you are the owner of your house. You could go to the bank of course, but you might not need to. You can execute a smart contract where you will pawn a part of your property towards it and set an interest rate of your liking. Now it is possible for people to purchase your smart contract. They will now receive your payments until the debt and interest are done, or they will get the pawned part of your house. It would also be possible for you to sell small parts of the house or any property. The rent the tenant pays is automatically shared to the holders of the contract.
So let’s imagine you have a property worth 100,000€ and you need a loan of 2,000€. You could make an interesting offer for a loan contract backed by your house. Anyone who has currency in this blockchain could participate and after the loan is paid back the house is again yours.
These are some examples and ideas on how to use the 2nd generation blockchain. The underlying idea of storing strings of code that execute itself within the blockchain will allow you a huge amount of different use cases. You could even form Decentralized Autonomous Organizations (or DAO) where the rules are set transparently in the code, and it will be controlled by the shareholders. This might be one of the new ways of controlling your identity and personal data.
One of the creators of Ethereum Vitalik Buterin has written some comprehensive proposals on how it would work.
Blockchain 3.0 and further
There is no real single definition for blockchain 3.0 yet, but people are clustering different new ideas and principles to loosely mean it. It might even not be a blockchain, to begin with, but let’s lay out some further problems on the current systems to figure where to go.
The progress from 1st generation to 2nd was quite a leap, so the next generation blockchain has to offer something quite huge to earn the title. There are a lot of proposals to fix the inherent problems with blockchains now, but the new solution could be something that is not thought about yet. Here are some of the problems still facing the 2nd generation blockchains:
- Scalability
- Interoperability
- Governance
- Privacy
- Sustainability
- Adoption & Familiarity
Scaling is going to be a problem if blockchain wishes to be decentralized. Since all of the transactions need to be verified by all of the nodes in the network. This is not the fastest way of confirmation since some nodes are bound to be slower than others. You can discard the slow nodes, but the problem is that it is not decentralized anymore if only set people can join to maintain it. Also, the blockchain is a chain where you add block after block so it will become bigger and bigger by every new block. This means that in order to participate in maintaining it, you have to download the whole blockchain before you can start mining it. There are some solutions proposed but more on it in the next chapter.
Interoperability, in this case, means that there are a lot of different blockchains running and being developed. But none of them has a working solution where the blockchains can interact with one another. This will be game-changing to let smart contracts interact with other smart contracts run in the different blockchain.
Governance for the blockchain is in most of the projects done by the creators of it. There already are some blockchains that have protocols for making the governance of the blockchain a community-based meaning voting for the best direction for the project to take.
Privacy is a problem that has some solutions already proposed and in active use for various blockchain projects. These so-called privacy blockchains mask the transactions made in the chain to be untraceable or aim for it. Some blockchains have also introduced zero-knowledge proofs that allow one user to prove the other that they have a piece of information without revealing any of the actual information. This might be a very important factor later on with having self-executing contracts made in blockchain once set parameters have been met. For example, payments for a project will be paid immediately on delivery without the client having seen the results. This, of course, works better in some fields than others, depending on how you can mathematically describe the product and its readiness.
Sustainability issue is put nicely in a nutshell by the following quote:
“Sustainability is defined as meeting the needs of the present without compromising the ability of future generations to meet their needs”
So while developing a new blockchain, you have to be able to think ahead on how to implement new utilities to existing projects without causing huge amounts of problems.
Adoption & Familiarity are problems of the blockchains due to the young age of the technology. The use cases and user interfaces will become more streamlined and available to the masses. Currently using any of the blockchains will require you to understand the underlying technology at least to some extent to not get scammed by other people. What I mean is the same process as the internet, for example. At the start of it, it was very complicated for a normal person to use, but now we don’t have to know how it works behind the browser, we just use it (to look at the cat pictures).
Other routes
One of the ideas that could elevate already existing blockchain technology to the next level is to add an additional layer on working blockchains. This means to add something outside of the blockchain to an existing one. There are additional layers built on and presented for the blockchains to fight the scaling issue. As an example, Bitcoin has an extra layer called Lightning Network, which allows you to trade Bitcoins without using the blockchain immediately.
Photo by Michał Mancewicz on Unsplash
The Lightning Network allows you to open channels to another user and send and receive Bitcoins through an external layer. This also means that you have to send actual Bitcoin to a mutual address, which is controlled by the Lightning Network so that you can’t cheat the system. When the link is closed the transactions are added up, and the final version is sent to the Bitcoin blockchain.
As an example let’s say you have opened a channel between A and B, the transactions are as follows:
A and B send 0,5 Bitcoin to open a channel between them to the Lightning Network
A sends B 0,5 Bitcoin
B sends A 0,2 Bitcoin
A sends B 0,1 Bitcoin
The link is closed and everything is added up
A gets 0,1 Bitcoin back in the actual Bitcoin network
B gets 0,9 Bitcoin back in the actual Bitcoin network
So it is essentially free to go back and forth until you decide to close this link, and the end result of exchanges is sent to the Bitcoin network. This is a hugely simplified version of what happens and why it is safe to do so, but it captures the basic principle of it.
