The most important innovation in the world of technology to grace humanity since the birth of the Internet is probably the invention of Cryptocurrencies. In the January of 2009, through a publication online outlining a digital payment system that works on a peer-to-peer decentralized system, Satoshi Nakamoto laid the foundations of what would be called Bitcoin. It is the first ever cryptocurrency which uses cryptography to formulate and verify the transactions made with this currency. All the data of transactions is then collected into what are known as data blocks and then the data blocks are linked together to form a blockchain. This essentially becomes a record of all the transactions ever made using Bitcoin.
Cryptocurrencies have seen a rise in value never before recorded for any sort of asset in history. Everyone who invested in Bitcoin and the subsequently formulated cryptocurrencies like Ethereum and Litecoin has seen massive returns on their initial investments. The ‘Blockchain’ is the main driving force behind the cryptocurrency as there is no actual physical currency involved, just a record of transactions in the blockchain.
A Democratic System
What’s so special about blockchain technology is that it allows for a democratic system because of the decentralized peer-to-peer database which uses the process of solving complex mathematical equations to validate transactions. Until the invention of blockchain tech, everyone has relied on centralized authoritative bodies to validate and legitimize transactions.
The traditional system has existed and still thrives because it has been a successful one but that does not mean it’s perfect. For providing their services as regulatory bodies, these centralized authorities charge real and significant transaction costs and they also happen to take a cut of each transaction (fairly so). Other than that, it is susceptible to crimes like the theft of identity and manipulation of the centralized authorities (hacking).
What blockchain technology does is that it removes the centralized authority with a decentralized form of computing. This can become a new way for humans to conduct transactions with one another on a day to day basis without all the transactions passing through a central power. Even though blockchain is a relatively infant technology, it is fueling literally billions of transactions on a daily basis that range from trading in the financial market to something as simple as a retail store purchase of clothes.
Being so new, blockchain still has a long way to becoming capable of being properly used widely all around the world. The challenges of scalability, speed and flexibility needs to be resolved and the blockchain network that can achieve solutions to all three first will become the most dominant blockchain out there.
Is the Lord of The Rings reference starting to make sense now?
There are literally hundreds of forms of cryptocurrencies at this point in time and everyone can rest assured that many more will be coming our way with each bringing in something new or building upon those that already exist to become better than their competitors. It remains to be answered whether any single blockchain can become the most dominant one out there. If that does happen, however, it could mean the end of all other blockchain networks and become a singular foundation for all transactions we as a species conduct with one another. This is sort of like what happened with Orkut and Myspace etc when Facebook came along. The other two faded into oblivion while Facebook is the major social media network that is unilaterally used by most of humanity for its social media needs.
Bitcoin being the first blockchain network is one of the biggest and popular blockchain networks in the world along with Ethereum, the second most popular blockchain network right now. However, the bigger they are getting, the bigger are their problems with the scaling. These networks consume an increasing amount of power as they continue to grow and their transactions require a lot of time to process. Blockchain networks need to be able to process their transactions as fast as credit card transactions for them to become truly scalable.
Proof-of-Work and Proof-of-stake
The method used by cryptocurrencies right now to verify transactions is called the proof-of-work method. To add a new set of transactions that have been verified to the network, a lot of computational work is involved to solve the complex cryptographic puzzles. Once the puzzle is solved, it can be verified using much lesser computational effort to verify than the solving of the actual puzzle itself. For making the computational effort, the entity responsible will get a chance to be rewarded with the respective cryptocurrency of the network they’re mining for. By saying that they will ‘get a chance’ to be rewarded with the cryptocurrency tokens, I mean that they’ll only get rewarded for correctly solving the cryptographic puzzle.
Correctly solving these puzzles use an exorable amount of computing power so the miners don’t possess the computing capabilities to influence the outcome of the network to generate blocks which will favor any single miner. The miners just focus on solving puzzles as quickly as they can as a result so that they can increase their chances of being the generators of the next block and collecting the subsequent rewards. With the generation of each new block, the amount of energy required to make the next block increases further.
Introducing a proof-of-stake system will mean that the entities can stake some of their own tokens in the system on one new block or another. The block which will have the most stake backing it up will be added to the blockchain. Network tokens will be given to a random sampling of nodes that chose to validate the latest block on the network as a reward. This will encourage the miners to validate a genuine version of the network so that they can receive an award for validating the genuine block of data. Theoretically, this method would stunt the perplexing growth of power usage to mine cryptocurrencies and that would make it more scalable.
Blockchain technology is still quite new right now. Even though Bitcoin and Ethereum are the biggest blockchain networks, it’s too early to make a call on either of them going on to remain the dominant blockchain in the future. There might come along a Frodo (Tezos possibly?) in the mix, brave and willing to destroy the ring of power (implement the necessary changes before these two).