The Ultimate Guide to Blockchain For Beginners
Most people have heard of Blockchain and Bitcoins. These are hot topics in the media and trends. Even people who have never heard of cryptocurrencies or understood how they work are discussing them. Non-technical friends are more common than technical, and they’ve been asking me for years to explain the new buzzword. There are likely many others who feel the exact same. When that happens, it’s time to write about Bitcoin technology in a way that is understandable by regular Internet users.
Blockchain Technology: Why do we even need something so complex?
Instead of defining Blockchain first, we will understand what it does.
This is how it would look. Joe is your best friend. He is traveling overseas. On the sixth day of his vacation, he calls you and tells you: “Dude, I am running out of money.” Please, could you please help me?”
You respond: “I will send some money immediately, and hang up.”
You then call your account manager to ask him to send $1000 from mine to Joe’s account. “
Your account manager replies, “Of course, sir.”
He checks your account balance and opens the register to verify that you have enough. He enters the register as follows:
Joe calls you and says: “I have sent you $1000. Next time, you should go to your bank and withdraw the money I just sent.”
What did you just see? Because Joe and you both trusted the bank with your money, there was no movement of money. All that was required was an entry into the register. Or, to be more specific, an entry that neither Joe nor you control or own.
This is the problem with today’s system.
Trust between us and third parties is dependent on
These middlemen have been our trusted friends for many years. You might be asking, “What’s the problem with relying on them?”
They are not all the same and if there is to be chaos in society, it only takes one person or organization to become corrupt, either intentionally or unintentionally. These are the situations you can imagine:
- The transaction log gets burned to the register.
- By mistake, your account manager wrote $1500 instead $1000
- Or he did it intentionally.
Is there any way to send money from another account without having to contact the manager?
We need to dig deeper and ask a better question in order to answer this question.
What does it mean to transfer money? Take a moment to think about it. It’s just an entry into the register. The better question would be:
Could there be a way for us to keep the register together, rather than relying on others to do it? “
This is a fantastic question. The answer to this question is, as you may have guessed, the Blockchain.
It’s a way to keep that register between us.
Are you still with me? Great! You may have a few questions. Good! We will now learn more about how this distributed register works.
What Does It Do?
This method requires that enough people want to not rely on third parties. Only then can the register be maintained by these individuals.
Satoshi Nakamoto stated in 2009 that it may make sense to just get Bitcoin to see if it takes off. If enough people believe the same, it becomes a self-fulfilling prophecy.
How many people are enough? Three minimum. For our example, we will assume that ten people want to stop using banks and any other third-party. They know each other’s identities but have access to their accounts at all times.
- An Empty File
Everybody has an empty folder to begin with. All ten of them will continue to add pages to their empty folders. This collection of pages will form the register that tracks transactions.
- When a Transaction Happens
Everybody in the network has a pen and paper in their hands. They are ready to make any transaction within the system.
Example: #2 would like to transfer $10 to #9.
#2 shouts to everyone and says, “I want $10 to #9 so, everybody, please make a note on your pages.”
Everyone checks to see if #2 has enough money to send $10 to #9. If she does, everyone makes a note on their blank pages.
This transaction is considered complete.
- Transactions Keep Happening
As time goes by, more people feel the need for money transfers to others. They announce transactions to all members of the network whenever they wish to do so. Once everyone has listened, he/she then writes it on their page.
The exercise continues until everyone has exhausted the page. Assuming a page can record ten transactions at once, everybody will run out of room as soon as the tenth transaction occurs.
Now it’s time for you to remove the page from the folder and create a new page. Then, go back to step 2.
- Removing the Page
Before we can put it in our folders, seal each page with a unique key that everyone in the network agrees on. We will ensure that nobody can change it after all copies are put in the folder. It will stay in the folder until it is sealed. Everyone trusts the contents of the pages if they are sealed. The sealing of the page represents the core of this method.
[Jargon Box] This is what it is called when you secure it. We’ll continue to call it “sealing” because it’s so simple.
The middleman/third-party gave us the trust earlier that whatever they have written in the register will never be changed. Instead, this seal will give us the trust in a distributed and centralized system such as ours.
Interesting! How is the Page Sealed?
Before we learn how to seal the page, we’ll first understand how seals work. Before we get to that, let me tell you about something I love to call…
The Magic Machine
Imagine a machine enclosed by thick walls. If you send it a box with something inside, it will produce a new one.
[Jargon Box] The machine is known as ‘Hash Function’ but for today we will call them ‘The Magic Machines’.
Let’s say you place the number 4 inside the box from the left. It would then produce the following word to its right: ‘dcbea.
Although no one knows the exact mechanism, it is irreversible. It is impossible to determine what the machine was feeding on the left using the word ‘dcbea’. However, the machine will still spit out the same word every time it receives the number 4.
Let’s send in another number, 26.
Interesting! Interesting!
Let me ask you this question:
“How do I send a message from the left side to get a word that starts with three leading zeroes on the right side? 000fa or 00098 or 000ab or any combination thereof?“
Please take a moment to think about this question.
The machine, as I have said before, has a property where it can’t be calculated the amount it must send from the left once we’re given an expected output on the right. With such a machine, how can we answer my question?
One method comes to mind. You can keep trying each number until you get a word that starts with three leading zeroes.
We can be optimistic and we will get the number that produces the desired output after many thousand attempts.
Although it was difficult to calculate the input and output, it is easy to check if the expected input produces the desired output. Every time, the machine will give you the same word for a number.
What is the difficulty of the following question?
Simply enter the number and wait to see the result.
It is very difficult to calculate an input from such machines. This is the most important property of such machines. It is easy to check if the input leads directly to the output if you have the input and output.
How to Seal A Page Using These Machines
This magic machine will create a seal on our page. We’ll start with an imagined situation, just like before.
Imagine that you receive two boxes from me. The first one contains the number 20893. Then, I ask you to answer the following question: “Can you find a number that when added to the number found in the first box, and fed to the machine will produce a word that starts with three leading zeroes?”
Similar to our previous experience, this is the same situation. It is impossible to find such a number by trying every possible number in the universe.
After many thousands of attempts, we’ll finally find a number, 21191. When this number is added to 20893 (i.e. This number, when added to 20893 (i.e.
In such a case, the seal for number 20893 is created by this number, 21191. Let’s say there is a page with the number 20893 on it. To seal the page, we will place a badge with the inscription ‘21191’ above it (i.e. It is impossible to change its contents. Once the seal number (i.e. Once the sealing number (i.e. 21191) has been stuck to it, the page is sealed.
[Jargon box] The sealing number can be referred to as ‘Proof of Work’. This number proves that it was calculated. We prefer to call it the sealing numbers .’
To verify if the page has been altered, simply add the contents to the page along with the sealing number to the magic machine. If the machine returns a word that includes three leading zeroes, its contents are unaltered. If the word that comes out isn’t what we need, or its contents are compromised, then we can discard the page.
We will seal all pages with a similar sealing method and then arrange them in the appropriate folders.
Sealing the Page
To seal the page that contains transactions from the network, we will need to find a number that can be added to the transaction list and fed to it.
Notice: The expression “word that starts with three leading zeroes” is only an example. This illustrates the workings of Hashing Functions, but the real problems are far more complex.
After calculating that number, you can seal the page with it. If someone attempts to alter the content of the page, the sealing number allows anyone to verify its integrity.
It’s now time to return to the moment when we had written the tenth transaction. We ran out of room to write more.
Everyone in the network will indulge in computing the sealing number for each page as soon as they are done writing transactions.
Everyone immediately verifies the number sealing the envelope. If it does, everyone labels the pages and puts it in their folders.
What if the sealing number announced does not yield the desired output for #7? These cases are not uncommon and could have a number of possible causes.
- It is possible that transactions announced on the network were miswritten.
- It is possible that transactions announced on the network were misunderstood.
- He might have written transactions to cheat or be dishonest in order to benefit himself or another member of the network.
#7 can only choose one option: to throw out his page and have it copied from another person so that he can also put it in the folder. If he does not put his page into the folder, he cannot write any more transactions. He is now out of the network.
So why not wait and watch for the announcement?
This is where the incentives come into play. Everybody who participates in the Blockchain can receive rewards. The first person to calculate the sealing number is rewarded with money (i.e. he has used CPU power and electricity.
Imagine #5 getting $1 for calculating the page’s sealing number. Money is created out of thin air and #5’s account balance gets increased by $1, without any decrease in anyone else’s account balance.
This is how Bitcoin was created. It was the first cryptocurrency to be traded on a Blockchain. To keep the effort going in the network, people were given Bitcoins in return.
When enough people have Bitcoins, they grow in value. This leads to other people wanting bitcoins, which makes Bitcoins even more valuable.
After everyone has tucked the page away, they each bring out a blank page. This process continues for as long as they like.
[Jargon Box] A single page can be thought of as a block of transactions. You can also think of the folder like a Chain of pages (Blocks), which will transform it into a Blockchain.
This is how Blockchain works.
There’s one thing I have yet to tell you.
Imagine that there are already five pages in the folder. Each page is sealed with a number. The sealing number allows anyone to see inconsistencies in transactions if they go back to the first page. What if I calculate a new sealing amount for the modified transactions, and then use that number to label this page?
A sealing number has a twist. It is used to protect against someone altering a page (Block).
Protecting Modifications to Sealing Numbers
Remember when I said that I had given two boxes to you? One contained the number 20893, while the other was empty. Instead of having two boxes, you have three to use for the Sealing Number in a Blockchain. One is already filled and two are to be calculated.
When all three boxes are added to the machine, the answer on the right must match the requirements.
One box will hold the sealing number. The other box will include the list of transactions. The third box will have the output from the magic machine that produced the page before.
This little trick has ensured that each page is dependent on the previous one. If someone needs to make changes to a page in the past to keep it consistent, they would need to do so by changing the contents and sealing number of any pages that follow.
One person could cheat and alter the contents of Blockchain (the folder that contains the pages with the transaction list), but he would need to adjust pages and calculate new sealing numbers. Because we all know how difficult it can be to calculate the sealing numbers, the one dishonest person in the network cannot defeat the nine honest ones.
The dishonest person will create another chain within the network from the page he cheats. But, the cumulative efforts of nine people cannot match one’s speed and efforts. This would mean that the chain would never catch up to the honest chain. The honest chain is the longest chain in any network.
Did you hear it?
What if Six People Turn Dishonest instead of One?
In this case, the protocol will fail to function. If the majority of network members cheat others, the protocol will be ineffective. This is called the “51% Attack”.
This is the only reason Blockchains could collapse. However, it is highly unlikely. We must be aware of the vulnerabilities of the system as it was built on the assumption of an majority being honest.
Who will use the Blockchain?
Blockchain is not something you need to know in order to make it useful in your daily life.
The strongest application cases for blockchain technology are currently in finance, such as international remittances. At the moment, there is a great demand for blockchain developers. According to the World Bank, more than $430 billion in money transfers were made in 2015.
The blockchain could be used to eliminate the middleman for these types of transactions. The invention of the Graphical User Interface, or GUI (Graphical User Interface), made personal computing accessible to everyone. It took the form of a desktop. The most popular GUI for blockchain is the “wallet” application. They are used to buy Bitcoin and store it with other cryptocurrencies.
Online transactions are closely linked to identity verification processes. It is possible to see wallet apps evolving in the future to incorporate other forms of identity management.
Is the Blockchain a New Web 3.0 Web?
Blockchain gives you the power to create value and authenticate digital information. What new business applications can we expect?
The sharing economy
Companies like Uber and AirBnB are already making the sharing economy a success. People who wish to use ride-sharing services must rely on an intermediary like Uber. Blockchain opens up the possibility of direct interaction between parties through peer-to-peer payment. This is a decentralized sharing economy.
OpenBazaar (https://openbazaar.org/) is an early example. It makes peer-to-peer eBay by using blockchain. OpenBazzar vendors can be transacted without transaction fees. You can download the app to your computer device. The protocol’s “no rules” ethos will make business relationships more important than they are on eBay.
Smart Contracts
Distributed ledgers make it possible to code simple contracts. When certain conditions are met, this will execute. It is a free open-source blockchain project that can harness the power of blockchains to make a real difference in the world. This was the purpose of its creation.
Smart contracts can be programmed in a way that performs simple functions, depending on the current technology level. A derivative could be paid when a financial instrument meets certain criteria, thanks to the automation of the payout using blockchain technology and Bitcoin.
Governance
Distributed database technology can bring transparency to elections and other types of poll taking. It makes the results transparent and easily accessible for all. With the help of smart contracts that are ethereum-based, this process can be automated.
Boardroom is an app that allows organizations to make decisions on the blockchain. This means that when digital assets, equity, or information are managed, company governance becomes transparent and verifiable.
Crowdfunding
Gofundme and Kickstarter are crowdfunding sites that do the work to advance the peer-to-peer market. The popularity of these sites indicates that people want direct involvement in product development. Blockchains bring this interest to the next level. This could lead to crowd-sourced venture capital funds.
One such experiment raised $200 million USD in less than two months in 2016. It was the Ethereum–based DAO, Decentralized Autonomous Organization. Participants purchased “DAO tokens”. Participants were able to vote on smart contract venture capital investment projects by purchasing “DAO tokens”. Their voting power was proportional to how many DAO they had. The project’s funds were hacked and the disastrous results were revealed. It was launched without due diligence. The blockchain, however, has the potential to bring about “a new paradigm in economic cooperation,” as this DAO experiment demonstrated.
File storage
There are clear benefits to decentralizing file storage over the internet. Files can be protected from being hacked or lost through the distribution of data across the network.
IPFS (Inter Planetary File System), makes it easy to imagine how a distributed web might work. IPFS eliminates the need for central client-server relationships (i.e. the current web), much in the same way that bittorrent transfers data around the internet. A decentralized internet can speed up file transfer and streaming times. This is a significant improvement to the internet’s overloaded content-delivery system.
Supply chain audit
Distributed ledgers allow people to verify that the backstories behind the products they purchase are true. Transparency is possible with blockchain-based timestamping that matches a product number.
Provenance, a UK-based company that offers supply chain auditing services for a variety of consumer goods, has launched a pilot project to ensure that sushi restaurants in Japan use sustainably harvested fish from Indonesia by Provenance.
Protection and use of intellectual property
Digital information is now easily reproduced and distributed worldwide thanks to the internet. Web users have access to a wealth of free content. However, copyright owners are not so happy. As a result, they lost control of their intellectual property and are now financially insolvent. Smart contracts are able to protect copyright and automate online sales of creative works. This eliminates the possibility of file copying or redistribution.
Mycelia (https://mycelium.com/) is founded by the UK singer-songwriter Imogen Heap. It uses blockchain to establish a peer-to-peer music distribution system. This allows musicians to sell songs directly through the internet. Producers can also license samples and distribute royalties to songwriters. These functions were automated by smart contracts. Blockchains have the ability to issue fractional cryptocurrency amounts (micropayments), which suggests that this use case has great potential.
Prediction markets
Crowdsourcing predictions about event probabilities has shown high accuracy. Prediction markets that pay according to event outcomes have been active for some time and averaging opinions cancels any unexamined biases that might distort judgment. Blockchains are a “wisdom-of-the-crowd” technology that will have other applications over the next few years.
Still, in Beta, Augur (https://www.augur.net/), the prediction market application, makes share offerings on the outcome of real-world events. Participants can make money by buying shares in the correct prediction. The higher the payout, the more shares will be bought in the correct outcome. If a participant has less than one dollar, they can ask questions and create a market.
AML and KYC
The blockchain has the potential to adapt to know your customer (KYC), and anti-money laundering practices (AML). Financial institutions currently have to perform multiple steps, which is labor-intensive, for every new customer. Cross-institution client verification KYC could reduce costs and improve monitoring and analysis efficiency.
Startup Polycoin offers an AML/KYC solution. This involves analyzing transactions, and suspicious transactions are sent to compliance officers. Tradle, another startup, is currently developing Trust in Motion (TiM) which can be described as an “Instagram to KYC”. The application allows users to snap a picture of their key documents (passports, utility bills, etc.). Once verified by the bank, this data is cryptographically saved on the blockchain.
Internet of Things
IoT refers to the network-controlled management and operation of certain electronic devices. Smart contracts allow remote system management to be automated. A combination of sensors and software allows for the exchange of data between devices and mechanisms. This improves system efficiency and cost monitoring.
Samsung, IBM, AT&T, and IBM are the biggest players in tech, manufacturing, and telecommunications. IoT applications will cover everything from predictive maintenance of mechanical components to data analytics and management of large-scale automated systems.
Identity management
Online transactions are dependent on your ability to prove your identity. Therefore, it is imperative that you have a better way of managing your identity online. The problem is that web commerce presents security risks. Distributed ledgers allow you to digitize your personal documents and provide enhanced ways of proving your identity. Online transactions will require you to have a trusted identity. A good reputation is essential for online transactions.
It is a complex task to develop digital identity standards. The development of universal online identity standards requires collaboration between government and private entities. Add to this the difficulty of navigating legal systems across different countries, and the problem becomes exponentially more complex. The SSL certificate (the little green lock) is required for secure transactions via the internet. Netki, a startup that hopes to create an SSL standard for blockchain technology, expects a product launch in 2017.
Neighborhood microgrids
Blockchain technology allows you to purchase and sell renewable energy produced by your local microgrids. Smart contracts based on Ethereum automatically distribute excess energy to solar panels. Similar types of smart contract automation are possible when the IoT is a reality.
Consensys (https://consensys.net/about/) is located in Brooklyn and it is one of the foremost companies globally that is developing a range of applications for Ethereum. Transactive Grid, which they collaborate on with the distributed energy company, LO3, is one of their projects. One prototype project that is currently in operation uses Ethereum smart contracts to automate monitoring and redistribution of microgrid energy. This so-called “intelligent Grid” is an early example of IoT functionality.
Stock trading
Blockchains can be used to increase efficiency in share settlement. This makes them a compelling option for stock trading. Peer-to-peer trade confirmations are almost instantaneous. This could mean that intermediaries are removed from the trade process.
Many stock and commodities exchanges are developing blockchain applications to provide their services. These include the JPX (Japan Exchange Group), Deutsche Borse, Frankfurt’s stock exchange, and the ASX (Australian Securities Exchange). Because it is considered the first to move in the region, the Nasdaq’s Linq has the highest profile. This platform allows private market trading, typically between investors and pre-IPO startups. In 2015, Linq announced its first share trade thanks to a partnership with Chain, a blockchain tech company. Nasdaq also announced that a blockchain-based project was being developed for proxy voting at the Stock Market in Estonia.
Registration of land title
Blockchains are publicly-accessible ledgers that can be used to make record-keeping easier. One example is property titles, which are vulnerable to fraud. They can also be costly and labor-intensive to administer.
Many countries are currently using blockchain-based land registry systems. Honduras, the first country to launch such an initiative, announced it in 2015. The current status of this project is not clear. The Republic of Georgia has signed a contract with Bitfury Group this year to develop a blockchain system that can be used for property titles. According to reports, Hernando De Soto will be consulting on the project. He is a prominent economist and advocate for property rights. Sweden also announced that it is experimenting with blockchain technology for property titles.
Data Management
People can now use social media platforms such as Facebook free of charge in return for their personal information. In the future, they will be able to sell and manage the data that their online activities generate. Because it is easy to distribute in small amounts, Bitcoin or something similar will be most commonly used for this type of transaction.
This guide is free and will help you track whales and influencers in order to get alpha information.
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Enigma, the MIT Project, knows that privacy is the most important precondition to creating a personal data marketplace. Enigma employs cryptographic techniques to allow data sets to be divided between nodes. Enigma also runs bulk computations on the entire data group at once. Enigma can also be broken down into smaller pieces, which makes it more scalable. A Beta launch is expected within the next six-months.
That’s all there is to know about Blockchains. You can help someone feel left behind and ask, “What is Blockchain Technology?”
Blockchain Wiki: A Comprehensive Guide to the Many Colorful Faces Of Blockchain
This guide will help you understand the differences between the families and trees of Blockchains.
What types of Blockchains exist?
What are the differences among the hundreds of existing blockchains and what are crypto blockchains and private blockchains?
What’s a Blockchain?
It can be difficult to understand the Blockchain proposition. Sometimes you might read a blockchain, other times the blockchain, and sometimes just blockchain technology. Sure, we could state, that the written word is unclear, and that language simply needs its time to catch up since blockchain is a new thing, but this would ignore that fact that Blockchain-technology is an emerging, organically growing business that has created a vivid ecosystem with a lot of “Blockchains”.
This guide will provide a comprehensive overview of the blockchain families and trees. This guide is not intended to introduce Blockchain. I assume readers are familiar with the concepts of Blockchain and cryptocurrency. Blockchain can be described as a public record of all Bitcoin transactions executed. If you are interested in learning more about Blockchain technology, this article is a good place to start.
This guide distinguishes Blockchains by their applications and properties.
Cryptocurrency-Blockchain
Cryptocurrencies are the most common, successful and tested Blockchain-application so will start with them. Cryptocurrencies create consensus around a shared ledger that contains all financial transactions and use this to establish a decentralized monetary system. Cryptocurrencies create a system to regulate the distribution of monetary units, and process transactions. They do this in a decentralized manner with no authority to trust.
Every blockchain hosting a cryptocurrency has two important characteristics: transparency and openness.
- Transparency The public ledger of transactions from the past, also known as blockchain, can be viewed by everyone.
- Openness This property has two meanings. First, it means that the code is free to download and secondly, it is permissible. Everyone can download the software and join the network. This means that anyone with internet access can download the source code to verify validity of transactions and test it.
Bitcoin is the most well-known and popular of all blockchains. These features allow you to remove a trusted third-party from an electronic cash system, and replace trust in institutions or individuals with trust in a protocol. A blockchain that is open and permissive allows everyone to see everything he needs to sign or verify a payment.
A cryptocurrency can change almost any other characteristic than transparency and openness. Two powerful factors have led to the creation of many Blockchain families and trees that are fundamentally different: anonymity in transactions and the mechanism for establishing a consensus.
Blockchains with Different Mechanisms to Establish Consensus
There is a lot of talk about how public blockchains will change the world. To function globally, a shared public blockchain must have a secure, efficient, and functional consensus algorithm.
The basic feature of all Blockchains is that they can only organize data in a block chain and add blocks to it. This allows the system to reach a consensus on a single valid block chain and, thus, a single set and history for data.
The data-adding entities are often called miners. This task requires them to proof something, which can only be done by any other entity on the network. For this work, miners receive units of cryptocurrency. This mechanism is a key factor in distinguishing cryptocurrency families.
Proof Of Work (PoW
A consensus algorithm, like bitcoin’s Proof of Work (https://www.coindesk.com/information/how-bitcoin-mining-works/), does two things: it keeps powerful adversaries from derailing the system and successfully forking the chain, and it ensures that the next block in a blockchain is the one and only version of the truth.
PoW is a competition between miners to add blocks to the chain. They race to solve a very difficult cryptographic puzzle. The winner of the lottery is the first one to solve it. Each participant can verify that the answer is correct. The network sets the difficulty of the riddles. As a reward, the miner will receive 12.5 newly-minted bitcoins and a small transaction fee.
Although bitcoin’s PoW is a great invention, it has its flaws. To keep the network safe, it requires a lot of energy. Bitcoin, for instance, consumes almost as much energy than Denmark or Scotland.
Bitcoin isn’t the only PoW Blockchain and there are many blockchains that use multiple PoW-algorithms, other than SHA 256 which is used by Bitcoin.
There is a family that uses
- Cryptonote (Bytecoin, Monero), X11 (Dash)
- X11 (Dash), Scrypt – Dogecion, Litecoin and Feathercoin
- Equihash (Zcash), and many more
- Equihash (Zcash), Ethash, Ethereum Class) and many more
A new algorithm is designed to make it hard to create special-purpose hardware for mining. It will also keep mining decentralized.
Proof Of Stake (PoS
Proof of Stake is the most popular alternative to Proof of Work. Proof Of Stake is where a validator invests in the coins and not in expensive equipment to mine blocks. Mining is like a lottery. In Proof of Stake, you can lock your token with a ticket, while Proof of Work requires you to allow your hardware to create tickets.
Because there is no coin creation in PoS, the term validator should be noted. All coins are available from the first day, and validators receive transaction fees.
Your chance of creating the next block in PoS depends on how many coins you have. Three times more chance of being chosen for a validator with 300 coins than one with 100 coins.
A validator can create a block but it still must be committed to the Blockchain. Different PoS systems have different ways of doing this. In Tendermint, for example, every node within the system must sign off on a block to ensure that a majority vote can be reached. In other systems, however, a random number of signers are chosen.
We now have a problem. How can a validator stop signing two blocks and making two sets of transaction fee claims? This has been called the ‘nothing-at-stake’ (https://www.coindesk.com/ethereum-casper-proof-stake-rewrite-rules-blockchain/) problem, since a participant with nothing to lose has no reason not to behave badly.
Blockchain engineers are trying to find ways to tackle this and other issues in the burgeoning field of ‘crypto-economics’ (https://www.coindesk.com/ethereum-economics-gets-spotlight-vitalik-buterin-edcon-keynote/), and one answer is to require a validator to lock their currency in a type of virtual vault.
If the validator attempts to double-sign or fork the system, those coins will be slashed.
Proof of Work has many advantages over Proof of Stake:
- It reduces the electricity the network requires.
- This reduces the initial investment and keeps mining more centralized.
- It has lower volatility time intervals between blocks, and thus better-scaling properties.
- It is protected against many attacks that are based on the distribution and use of the hardware.
Peercoin was the first coin to implement PoS. NXT and blackcoin followed. Currently, Ethereum is dependent on PoW. It is however planning to move to PoS early in 2018.
All PoS coins currently in circulation have one thing in common: they all need an initial trusted setup to maintain a consensus. Although this is problematic for Blockchain purists, it seems to work in practice. PoS’s economic context is perhaps even more problematic. It encourages hoarding of coins by giving an interest that isn’t dependent on economic action.
The BitShares Delegated Proof Of Stake branch of PoS is interesting. This is where a majority of delegates (99 in total) are elected by the economic majority. These delegates then stake for other members of the network. After BitShares’ initial implementation of this concept, Lisk was created. Steem established the subjective pow model with another tree of Delegated PoS. You can allow a small number of mining nodes to decide subjectively when a work meets the conditions for proof. Steem created a coin by creating a social network, earning upvotes, and mining with funds and not using computer power.
Proof Of Burn
Proof of Burn allows you to ‘burn’ coins instead of putting money into expensive computers. By committing your coins in a never-never country, you earn a lifetime privilege of mining on the system.
Depending on the proof of the burn process, miners might burn native currency or alternative currency, such as bitcoin. The more coins you burn, you have a better chance of being chosen to mine the next block.
Over time, your stake in the lottery system will decrease. To increase your chance of winning the lottery, you’ll need to spend more coins. This is similar to bitcoin’s mining process. To maintain your hashing power, it is necessary to invest in new computing equipment.
PoW is not an option. Proof of burn can be an alternative. The protocol is still wasteful and mining power goes to those who can burn more money.
The only cryptocurrency that uses proof-of-burn is Slimcoin. It’s a peercoin-based cryptocurrency. It uses PoW, PoS, and proof of burn. However, it is only semi-active (https://www.reddit.com/r/slimcoin/comments/4su0ti/slimcoin_is_dead/) at this time.
Evidence of Storage
Siacoin, Maidsafecoin, and the currently developed KopperCoin make file storage a condition for miners to find blocks. This makes the Blockchain an instrument to create decentralized cloud storage. The cryptographic processes involved can be complex and insecure. There might be issues with ensuring that nodes or miners keep files after they receive a reward, and that you can always download files that you have uploaded to the network. This system should also allow for almost unlimited scaling. This is however difficult to realize.
Time Elapsed
Proof of Elapsed Time (https://www.coindesk.com/intel-winning-blockchain-critics-reimagining-bitcoins-dna/) is Intel’s alternative consensus protocol that works similarly to PoW, but consumes far less electricity.
To ensure that blocks are produced randomly, the algorithm uses a trusted execut environment (TEE), such as SGX, instead of participants solving a cryptographic puzzle.
Intel’s approach to wait time is based on a TEE guarantee. According to Intel, Proof of Elapsed Time scales to thousands of nodes. It will also run efficiently on any Intel processor with SGX support.
Important to remember that this protocol requires that you trust Intel. That’s the problem. It doesn’t trust third parties as well, which is what we wanted to avoid with public blockchains.
Proof of Research
Primecoin was an interesting effort to make the work of miners useful. It began in February 2014. Sunny King, an architect and developer of Peercoin discovered a way to reduce the search for prime numbers to a PoW. The Primecoin-project was successful in finding many new record prime numbers. It demonstrated that it was possible to combine the work of miners with scientific tasks. Curecoin and Gridcoin combine the work of miners with the scientific computing tasks at the BOINC network to improve this approach. Gridcoin was a major contributor to BOINC, even though there are still questions about its security.
Proof Of Capacity (PoC
Many of these alternative protocols use a pay-to-play system. Proof of Capacity is no exception. You ‘pay’ by donating hard drive space. The more hard drive storage you have, the greater your chances of mining the next block, and getting the block reward.
Before mining in Proof of Capacity systems, the algorithm generates large data sets called ‘plots’. These plots can be stored on your hard disk. The more plots you have the greater your chances of finding the next block in a chain.
By investing in Terabytes of hard disk space, you can increase your chances of creating duplicate blocks and forking the system. PoC is still a problem because there’s nothing to stop bad actors.
Burstcoin is the only cryptocurrency that can use PoC. Variations of PoC include Proof of Space (https://eprint.iacr.org/2013/796.pdf) and Proof of Storage.
Evidence of Activity
To avoid hyperinflation, bitcoin will never produce more than 21 million bitcoins. This means that the bitcoin block reward subsidy will eventually end, and bitcoin miners will receive transaction fees.
Some people have speculated this might cause security problems resulting from a ‘tragedy of the commons’ (https://en.wikipedia.org/wiki/Tragedy_of_the_commons). For that reason, Proof of Activity (https://eprint.iacr.org/2014/452.pdf) (a hybrid approach that combines both PoW and PoS) was created as an alternative incentive structure for bitcoin.
Proof of Activity is a PoW-style mining system. Here, miners race to solve a cryptographic problem. Blocks mined are not able to contain transactions depending on how they were implemented. The winning block will contain only a header and the reward address of the miner.
At this point, the system switches to PoS. Based on the information in the header, a random group of validators are chosen to sign the new block. The more coins a validator has in the system, the more likely they are to be selected. Once all validators have signed it, the template is a fully-fledged block.
If any of the validators selected are unavailable, the next block is chosen. The next group of validators will be chosen. This continues until the block has received enough signatures. The fees are split between the miner and the validators who signed on to the block.
Decred is the only coin that uses a variant of Proof of Activity.
The criteria for proof of activity are the same as those for PoS (nothing to deter validators from double signing) or PoW (too much energy is needed to mine blocks).
Blockchains with Improved Privacy Property
The basic features of a cryptocurrency-blockchain – transparency and openness – are bad for privacy. Because all transactions are stored in a public database, anyone can see them. Companies have already begun to analyze the Bitcoin blockchain in order to detect criminal activity and help exchanges and governments track transactions. Many cryptocurrencies are working to create advanced privacy properties.
Cryptonote-Family
Bytecoin was the first cryptonote. Today, it is most well-known for Monero. Quazarcoin and Digital Note are just a few of the many implementations. The only cryptocurrency-design that implemented strong privacy as a default is Cryptonote. Cryptonote implements Ring Signatures, an advanced mining algorithm. These Ring Signatures hide the identity of the sender as well as receiver of transactions.
CoinJoin
CoinJoin was implemented by Dash, formerly Darkcoin. This is a Bitcoin procedure that combines the inputs and outputs from multiple transactions into one transaction. To allow CoinJoin to be used optionally, Dash created MasterNodes. MasterNodes make money and are the only way to encourage non-mining nodes to a cryptocurrency.
Zero Knowledge
Zcash is one of the most recent cryptocurrencies. It has a zero-knowledge proof. This proof allows users to publicly prove that their transaction is valid, without having to reveal any transactional data. Zcash does not reveal the identities of the participants, but it also hides the amount sent. This makes Zcash the only cryptocurrency that guarantees anonymity in transactions.
Non-cryptocurrency Blockchain-applications
Things get confusing if we leave the space of cryptocurrency-blockchains. There are some people who doubt that there is any useful blockchain-application other than a decentral cryptocurrency. However, most people see a wide scope of applications for blockchain-technology in general, ranging from financial assets to land-registries, tax control, and energy trading. As some believe, these applications will have a greater and more lasting impact on society and the economy than cryptocurrencies.
Non-cryptocurrency applications, while they may be more than an idea, are not best-practices, success stories, or standards. At best, there are experiments, proof of concept, studies, reports and whitepapers. At worst, nothing more than shiny websites and persuading consultants.
It is not surprising that the top-ranked open-source and public cryptocurrency blockchain application for non-currency is this one.
Also, there are experiments and ideas to create so-called sidechains to leverage the powerful consensus mechanism of this cryptocurrency-blockchain. When we look at blockchains specifically designed for non-currency purposes, there are a variety of interesting approaches and architectures. Some, like Ethereum, retain the currency-blockchain properties of transparency and openness. Some, however, sacrifice these properties, either in part or as a whole to create new features and properties.
Non-Cryptocurrency Applications on top of Cryptocurrency Blocks
What would happen if we could use a currency blockchain such as Bitcoin to transfer other items than Bitcoin? Meta-information can be included in Bitcoin transactions, just like a message written on a banknote. You could use this information to say “This is a share in company X.”
Colored Coins (Omni), Mastercoin (Omni), Counterparty, and Factom are all protocols that add a layer to Bitcoin. This allows you to use a fraction of Bitcoin to create tokens for other purposes, e.g. This allows you to create a token for another asset, such as gold, shares, or other assets. These protocols are in use. After a hack, BitFinex used Omni to issue shares representing the debts of users. Mycelium, a wallet developer, also issues shares on future profits through crowdfunding.
Although these different protocols are competing to be the standard for tokens issued on top of Bitcoin, none of them could become the standard. These protocols all suffer from high transaction fees and Bitcoin scalability restrictions. This indirect injection requires additional data outside of the blockchain to verify the validity.
Sidechains
Sidechains are a crucial innovation in cryptocurrency. They also increase and encourage cryptocurrency mining opportunities.
Sidechains allow you to take assets from one blockchain and transport them on another. This allows the legacy blockchain to remain strong and “hard”, but also allows for innovation and risk on the Sidechain.
Sidechains have been around since the beginning of time. The idea is to expand the decentralization in trust to other sectors and other digital assets. It sounds great in theory. In practice, however, it can have some problems. However, people continue to try. Blockstream and other groups are looking into the idea. Blockstream created the sidechain prototype Alpha. They used many Bitcoin Exchanges in order to test sidechain Liquid. It is possible to make non-monetary applications. Bitcoin Blockstream currently only focuses on monetary applications to get around the privacy and scaling restrictions.
Paul Sztorc, Blockchain-startup Bloq, created a sidechain-based prediction marketplace (Truthchain), and he plans to create a sidechain with the power of Bitcoin. Participants compete to guess the outcome of future events in this sidechain.
Rootstock also co-created the Sidechain. This enabled Bitcoin and Litecoin execute smart contracts without having to change the core software. Rootstock is an example. To transfer assets from one blockchain to another, the parent user must first send their coins to a special output address. SPV confirms the transaction across all chains once it is complete. After waiting for a contest period to complete the transaction, the equivalent amount will also be credited and available for use on the Sidechain.
All of these efforts have the problem that Bitcoin-Blockchain cannot see sidechain activity. All side chains must work together with a trusted network of nodes. Lisk’s side chains are decentralized.
Blockchains are specifically designed for non-monetary applications
The vibrant ecosystem of cryptocurrency has led to many attempts to create Blockchains that can be used for non-currency purposes. The Blockchain token, a cryptocurrency application, is what sets the monetary incentives for building a blockchain that can serve non-currency apps.
Namecoin, the first fork of Bitcoin, is an example of Blockchains. It’s a cryptocurrency that stores small strings of data and acts as a DNS-System. Although Namecoin is not a very popular cryptocurrency, it allows for decentralized hosting.
Namecoin was soon followed by Bitshares, Next, and others. They also integrated a marketplace mechanism into their scripting system and so in their consensus-mechanism. This category also includes Siacoin and Maidsafecoin. All these Blockchains share one thing with Bitcoin: their scripting-systems are hardcoded and have a very limited range of operations.
With the advent of Ethereum, the internal scripting system for a Blockchain was made turing-complete for the first time. This has become the new standard for non-monetary blockchain-application. In its short history, the Ethereum-Blockchain has been home to an amazing number of tokens, shares, and smart contracts. These have been widely used to crowdfund projects. Ethereum makes it possible to do many things that were impossible with other blockchains. You can either create complex, self-executing Smart Contracts that become the foundation of Decentralized Autonomous Organizations, (DAO), or build tokens that pay out regularly when certain conditions are met. There are many more possibilities than you could ever imagine.
Ethereum does have its downsides. Its openness and complexity are part of its design. This can be used as an entry point for many attacks, as a series of attacks in autumn 2016 has shown. The future of Ethereum remains uncertain. It is difficult to predict if developers will succeed in transforming Ethereum into Proof of Stake. Ethereum’s token economics raise questions about the long-term security and scalability of the network. These things aside, Ethereum is the most exciting new public blockchain.
Closed and Private Blockchains
This might be a condition that a blockchain-currency must be transparent and open to all. This doesn’t necessarily have to be a condition of a blockchain. Vitalik Buterin, a founder of Ethereum, writes (https://blog.ethereum.org/2015/08/07/on-public-and-private-blockchains/):
Instead of having a completely public network that is uncontrolled and secure, and a state machine protected by crypto-economics (e.g. It is possible to make a system with tighter access permissions, instead of a fully public and uncontrolled network secured by crypto-economics (e.g. PoW, PoS). These permissions must also be able to modify and even read the blockchain state, but only a few users should have access to it. This will allow for partial guarantees of authenticity as well as decentralization that blockchains offer.
What does it mean to have a blockchain open and anonymous? This means that the system’s ability to scale is only as high as its weakest node’s capabilities and that privacy on a blockchain has been seriously reduced. These are two attributes that make blockchains unusable for large companies. Large companies must have significant privacy and scalability.
Some people came up with an idea to build a blockchain that didn’t meet these conditions. It is possible to build a blockchain that hides the entire history of the ledger. You can also create a blockchain in which the process of finding consensus is restricted to a group of trusted nodes.
Sidechains are one way to create such a private blockchain. There are many other ways of doing it. Rootstock and Blockstream, for example, want to create Smart Contract applications and increase privacy. Lisk is a cryptocurrency designed for smart contract sidechains. This cryptocurrency allows the creation of private chains.
Other entities can create completely new blockchains. There are a variety of permission and private blockchains available, making it difficult to keep track of them all. Nearly none of them are ready for production. Other than with cryptocurrency blockchains there is no standard, no leading blockchain you can rely upon. There is also no token that can be traded on the exchange and whose value serves as an indicator of its popularity.
R3 developed Corda. This Blockchain is specifically developed for financial obligations banks share with one another. Richard Gendal Brown, the architect of this Blockchain, writes:
Corda, a distributed ledger platform, was designed from the ground up for financial agreements between regulated financial institutions. It records, manages, and synchronizes them. This platform was inspired by blockchain systems and is not restricted to specific banking situations.
Corda does not allow global data sharing and its consensus mechanism was specifically designed for that purpose. It allows only banks and regulators to take part.
Ethereum Enterprise is an initiative of many actors from the Ethereum space. It is a closed version of Ethereum designed to serve the needs of businesses. There are still many details that remain unknown about this project. Ethereum Enterprise must provide the same privacy, security, and scalability as the public Ethereum. It should also follow the public Ethereum’s roadmap and be compatible with, if possible, interoperable with it.
Tech Company Max creates Eris, a Blockchain Framework. Eris is used by all ledgers to record the history and certificates of diamonds, for example. Eris allows companies to create, manage and host their own blockchain using different smart contract applications. Eris is a blockchain that has features similar to Ethereum but with permission and closed. It is closer to what Ethereum Enterprise wants it to be.
The Hyperledger project, which revolves around the Linux Foundation, developed several Business Blockchain Frameworks in collaboration with companies such as Intel and IBM. It is actually the private Blockchain projects Iroha Fabric and Sawtooth Lake. These three Blockchains are still being incubated and not tested or used. They represent two different approaches to creating new types of Blockchains for different non-currency uses-cases.
Axoni, a company that provides Blockchain solutions to financial markets, promises an advanced smart contract and high throughput. It also boasts a private data management system with its private Blockchains. Axoni’s first and most prominent client is the world-leading clearinghouse DTCC. Its goal is to improve post-trade settlement for derivatives using Axoni’s blockchain solution.
Accenture, a consultant company, suggested a blockchain project where the Chameleon hash allows an administrator to edit the blockchain so that everyone can see what has been changed. This could allow for interesting applications. This is one the most fascinating private blockchain projects. It isn’t known if it was more than a proposal.
BigChainDB, a German startup Ascribe, is a mixture of distributed databases and Blockchain technology. It aims to enable trusted parties to set up a private setup to combine the security and immutability of a Blockchain with the scalability as well as searchability of distributed databases. Trent McConaghy is the founder of BigChainDB. He explains that BigChainCB was created for individuals who are looking for a queryable, scalable database with blockchain features.
Although none of these private blockchain projects have gained any significant traction yet, it doesn’t mean they won’t be an attractive alternative to public blockchains. This could be useful for companies. Blockchains cannot and should not be evaluated by single properties. But, it is how the entire set of attributes they are serving a specific purpose.
Conclusion
Blockchain is undoubtedly one of the most talked about technologies in the world right now. If you have been following financial news for the past few months, you may have seen the term “blockchain” being touted as the wave-of-the future.
Blockchain technology could be used by companies to track their supply chain. For example, how import goods travel from the manufacturing plant to your local supermarket, or how food moves from farm to market. This technology could allow you to book goods and services directly without the need for a central booking agent.
This technology has many potential applications. Blockchain will likely take a while to make a significant impact in your daily life. Companies like Microsoft and IBM are working hard to make the technology more accessible. I predict that the technology will be used in more industries in the near future.
