Blockchain recently has become another word that seems to be dominating every conversation about the future of technology, money, investing, digital assets, gaming, value exchange, and many others. That’s mainly due to the popularity of many cryptocurrencies, like Bitcoin, Ethereum, and emerging trends in the space such DeFi, GameFi, and NFTs. Blockchain Technology powers all these and many others. But what is Blockchain?
What is Blockchain ?
A Public Blockchain is also known as a Distributed Ledger Technology (DLT); at its most basic definition is a particular type of database. A database that anyone can add to (append), nobody can change existing records, and no organization (legal entity) or person can control it. A copy of the database is given to a network of computers that anyone can join and is spread out to multiple geographic locations. These computers, also called Nodes, Validators, or Miners, are responsible for making any changes to the Blockchain and securing the network using advanced cryptography, game theory, and consensus mechanisms.
That’s the primary innovation behind Blockchain and what people usually mean when they refer to it as Decentralized. Not a single person or entity controls the network or the underlying data. Instead, the network distributes the data among the thousands of nodes of the Blockchain network. Anyone can use the network, and anyone can become a validator.
Blockchain finds applicability to many industries and use-cases. The most popular Blockchain Network is Bitcoin. Bitcoin was designed as a peer-to-peer electronic cash system, digital cash, or Cryptocurrency. The Bitcoin network allows the users to exchange value (money in this case) without the need of any intermediary or central authority while remaining anonymous. Unlike the traditional financial systems, you don’t need to reveal your information to create an account. You can create a Bitcoin wallet, transfer some funds to it, start sending and receiving Bitcoin with your friends and family, or pay for goods and services. No one can block your account (wallet), and no one can intercept your transactions.
So you might be thinking… “Nice, I can join the Bitcoin network as a validator and send a couple of millions to myself”. This is not that easy. Any blockchain like Bitcoin has the proper mechanism in place to re-enforce positive behavior in a rather trust-less environment. The whole point of using a blockchain is to let people—in particular, people who don’t trust one another—share valuable data in a secure, tamper-proof way. Someone can achieve this only by taking control of over 51% of the network. Although, in theory, this is possible, in practice is extremely expensive and difficult to achieve, especially for massive and decentralized networks.
Furthermore, the fact that blockchain networks are decentralized, prevents them from having a single point of failure that will cause the whole network to shut down. If, for any reason, one node of the network experiences problems and is down, the remaining nodes of the network hold a copy of the database and keep the network in operation.
How does a Blockchain work?
The Blockchain, from a data perspective, has three main elements, transactions, blocks, and the Blockchain. The transactions are grouped into blocks, and blocks subsequently are linked together one after the other creating the Blockchain. As a train analogy, you can think of the transactions as the passenger seats of the train, the blocks as the carriages (or train cars) that have multiple seats inside, and the Blockchain as the whole train that links together various carriages.
You have two main actors interacting with the Blockchain from a network perspective. The first one is the user, any user who wants to use the services of the blockchain network, like you and me. The second actor interacting with the network is the validator (aka node or miner). The validators, as we said above, are the machines run by individuals (or entities) that form the blockchain network and are responsible for securing the network and making any changes to the Blockchain.
Let’s consider the case where two people want to exchange money. For this example, Alice wants to send Bob 2 Bitcoin.
- Alice initiates the transaction of sending 2 BTC to Bob, using her wallet. The wallet is where any user holds her funds. Once Alice clicks send, the wallet will send the transaction to the blockchain network.
- Once the transaction is issued to the network, it is not executed immediately. It is rather placed in a transaction pool with all pending transactions. The pending transactions are all transactions sent by the users, waiting for validation. You can think of the transaction pool as the waiting area where the network prioritizes the transactions before execution. Up to that point any user can cancel the transaction.
- Afterward, one network validator will pick up Alice’s transaction, together with transactions from other users, and group them into a single block. Once the block is created, is linked to the blockchain and then propagated to the network so that all the nodes get a copy of the newly created block.
- The validator who created the block is rewarded for providing his/her services to the network.
- Once this is done, confirmation of the successful execution of the transaction is sent back to Alice, and Bob receives the 2 BTC. The transaction cannot be reverted.
That’s a high-level process that most blockchains out there follow. However, due to the massive innovation in this space, there are many different types of specialized and general-purpose blockchains. Below you will see two very common blockchain classifications.
What are the different types of Blockchain Technology?
A public blockchain is more or less what I have been describing in this article thus far. It is a permissionless network that allows different parties that usually don’t trust each other to exchange value. It gives the users anonymity while using the network and transparency at the same time.
The networks track any users’ actions on the ledger for everyone to see. No personal information is required to be shared or stored on the network. Nevertheless, if someone knows your wallet, then he will be able to see all the transactions you executed in the past with this specific wallet.
The most important attribute of public blockchains is their decentralized nature. Not a single entity or organization controls the network.
From a technology perspective, private blockchain networks are very similar to public blockchain networks. Imagine taking a public blockchain network and running it within an organization. That is a private blockchain. One organization governs the network, controls who is allowed to participate, executes a consensus protocol, and maintains the ledger’s state.
Some may argue (myself) whether there’s any value or meaning for using a private blockchain, considering its centralized nature. That’s a big topic that deserves a separate article.
Consortium or Federated Blockchain
Consortium or Federated blockchain networks can be seen as a hybrid model between public and private blockchain networks. Instead of having one organization governing and controlling the network, consortium blockchains allow a group of organizations to share the responsibility of the network. They control who joins and who uses the network. There is a certain level of decentralization in Consortium blockchains, but not to the same level as the public ones.
What are the different generations of Blockchain Technology?
First – Blockchain Generation
The first blockchain generation refers to the first version of Bitcoin and the other cryptocurrencies that came along. These blockchains were explicitly designed to improve the monetary system we have in place. As a monetary-based system, the blockchain network’s capabilities limit to just sending and receiving funds. Although we use Bitcoin here as an example of the first blockchain generation, it is fair to say that Bitcoin is also transitioning to the second generation with the latest updates.
Second – Blockchain Generation
One name usually comes to mind when talking about the second generation of blockchains – Ethereum. What this generation brought to the whole space, are smart contracts and tokenization. Tokenization is the process that allows you to create your Cryptocurrency (token) without the need to deploy a new blockchain network. Many different cryptocurrencies or tokens can live on the same underlying network.
On the other side, smart contracts allow blockchains to be used more like general-purpose decentralized operating systems instead of a single application. As an analogy, you can think of these blockchains as smartphones. Smartphones provided a standardized platform to the user, where they could download and use apps from different vendors and developers. Similarly, smart-contract-enabled blockchains offer users a plethora of applications and allow vendors and developers to build decentralized apps (dApps) that run on the Blockchain.
A more simplified explanation would be: First-generation blockchains allow the users to send and receive funds. The second-generation enables them to specify also the terms and conditions of the transaction in a digital contract.
Third – Blockchain Generation
Although the first and second generations of blockchains are exceptional in innovation, they suffered from a couple of fundamental problems.
The most challenging issue is scaling. As more and more people started using the first and second generation of blockchains, the networks could not sustain the high demand with good quality of service. This issue caused both transaction processing time and fees to go up. Also, a not scaling network prevents the technology from getting wider adoption.
You can think of the scaling problem as follows: You are starting a small bakery shop. As more and more people realize how amazing your cakes are, the demand grows, and more and more customers are creating queues outside your shop to buy your cakes. To serve all your customers efficiently, you need to scale your operations. Either improve the efficiency in the current Baker or open more Bakeries. That’s the same problem blockchains of the first and second generations were facing.
Another major problem was the problem of interoperability. Interoperability is the ability of systems be able to interact with one another. The first two generations could not interact with one another. Why is this important? You cannot have one blockchain network solving everything. Projects build their services or dApps on many different blockchain networks or on their own specialized Blockchain. However, there might be services or capabilities that can be leveraged made by other projects and teams on different networks.
Scalability and interoperability. The third generation of Blockchain is solving these two problems. Thus far, in 2021, we see many scaling solutions going live. 2022 will be the year of interoperability. Polkadot, Cosmos, and Avalanche are among the many third-generation blockchain networks emerging in 2022.