Bringing you up to speed: Blockchain basics explained
Over the course of the years, you’ve likely come across the terms “blockchain”, “cryptocurrency” and “Bitcoin”. If you’re residing in Malta, you’ve probably heard about “The Blockchain Island” more so than anything else. But what’s the hype all about exactly?
This article seeks to ameliorate some of the confusion surrounding the emergent asset class and the technology that underpins it.
Among other things, it’s no secret that the next generation of internet is being driven by the primal principles of Bitcoin’s decentralised technology. Indeed, the developing DLT-based web 3.0 is in the process of solving the age-old question of trust by providing the bedrock code for a system that has no need for third party intermediaries or fiduciaries. It is a peer to peer network of computers (or nodes) that run on the same blockchain protocol, forming an unbreakable layer of consensus.
In most blockchain-denominated projects, nodes in the network store a publicly available record of transactions that is constantly updated through an algorithm which uses cryptography to maintain the network’s integrity.
Bitcoin is the first ever digital currency to successfully implement this technology as a functioning alternative to fiat currency. As opposed to deflationary currencies like the U.S. dollar, BTC has a maximum supply of 21 million coins, so ‘quantitative easing’ can never be an option in this ecosystem. Limited supply was in part achieved by tackling “The Byzantine Generals’ problem”, which is to say how do you solve the problem of trust without relying on a centralised intermediary?
Early blockchain pioneers like Scott Scornetta and world-renowned Satoshi Nakamoto set out to solve these problems of trust and double spending, and in doing so breathed life into the 21st century blockchain we know today.
In its most primitive form, the original Bitcoin blockchain is a shared and public ledger of transactions that records and stores all data from the first block and every single block that comes after it.
Any individual with access to the internet can view this shared, immutable public ledger of transactions to inspect the chain if they so choose. From a technical standpoint, the ledger is comprised of a linked list of chained blocks wherein every block contains a certain number of timestamped transactions that were cryptographically validated and added to the existing chain. The protocol consensus layer that follows regulates the behavioural rule sets and incentive mechanisms of stakeholders, forming the basis for the tokenomics of the coin. Each token in the token economy represents a unit of value which can be transacted to any peers within the network through an algorithm that ensures validity via nodes in the network (also known as miners). At the same time, ‘tokenomics’ is also influenced by hard-coded elements – like Bitcoin’s supply cap at 21 million coins. This ensures scarcity in the market, which plays into immovable stakeholder perceptions about Bitcoin’s fundamental nature and the broader ecosystem it operates in.
In some ways it’s like an online shared document – users need to reach an agreement before affecting changes to it. However, as opposed to having the document stored on a centralised server, each user keeps a copy of the shared ledger – recording all transaction history.
Machine consensus replacing the middle-Man
Whereas legacy services like most banking systems operate using a trusted third party to validate transactions, a P2P network running on a blockchain variant requires the approval of the entire network before passing any transaction through. As such, the Blockchain protocol sets fixed rules for validating transactions on the network which all participants must abide by.
To take the most familiar cryptocurrency, a transaction through Bitcoin works as such: First, a signed request to send value to another wallet is scanned and validated by “mining” nodes on the network. Once the value is confirmed to be in the wallet making the request, the transfer of ownership of an amount of Bitcoin to another Bitcoin address is initiated. The process is normally completed in under 20-minutes provided the network isn’t overloaded.
Here’s a quick infographic by Patricia Estevao:
DLT protocol transitions into smart contracts
With the creation of Bitcoin came the idea that blockchain technology can be utilised in ways other than just moving money; and thus, the Ethereum project was born. In essence, ETH decoupled the contractual layer from the blockchain layer, meaning transactions could only be triggered once a set of pre-defined conditions were met. This provided a more flexible development environment for those who wished to adapt the technology for other world-applications using what are known as ERC-20 tokens.
The addition of Ethereum to the cryptocurrency universe made it possible to imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases that cannot be tampered with, deleted or revised. Every agreement, process or task would be programmable and unalterable, which is to say that lawyers, bankers and public administrators could have their jobs facilitated, if not eventually replaced.
Still, it might just be the case that blockchain zealotry dwarfs its reality. At the same time, there are clearly great fundamental reasons to be optimistic about the future of this budding space.
Still can’t quite put it together? Join me at the Malta Blockchain Summit on November 1st and 2nd where we can discuss things with experts in the field!