You keep hearing about Bitcoin, blockchain technology and cryptocurrencies via the news, social media, and even late night talk shows. Considerable amount of newspaper and magazine space has been dedicated to articles about the rise of cryptocurrencies. There have been profiles of individuals who are the movers and shakers in the space - Bitcoin millionaires, crypto-nomads, and people who only use cryptocurrency. Strong opinions on cryptocurrencies are being expressed and there are claims that blockchain will change the world. What is going on here? Did you miss something along the way? How is a person supposed to keep up?
It would be fair to say that Bitcoin’s past has not been the most accessible to the general public. An anonymous individual or group with the name Satoshi Nakamoto self-published a paper in October 2008 to a mailing list describing a peer to peer electronic cash system (referred to as the Bitcoin Whitepaper). As word spread, explanations of Bitcoin's importance have competed with images of upward trending price charts that caused people to be overwhelmingly skeptical or excited about this digital currency. The blockchain, which is the name for the technologies that together underpin the cryptocurrency Bitcoin, has begun to get more attention.
What is a blockchain?
A blockchain is a public distributed ledger, in which all who choose to participate in it have autonomy to access it. Simply put, a blockchain is like a spreadsheet anyone can access. Every participant has a copy of the spreadsheet and is responsible for keeping it up to date. This is a purposeful oversimplification, as this guide will show you in later chapters (using a blockchain to store data as if it were a spreadsheet or even a database does not always make sense, and vice versa). However, we are going to temporarily use this analogy to tie blockchain back to a technology you may already know and use.
Like we said, anyone choosing to participate in the blockchain has the autonomy to access it. Some individuals use that autonomy to download the blockchain to their own computer and play a role in maintaining the blockchain. When the blockchain is downloaded and maintained on a computer, it is referred to as a "node". Those running a "node" have a copy of the blockchain. This copy is actively updated along with every copy on every other node. The blockchain is maintained collaboratively and does not have a single central entity maintaining the ledger. Edits can only be made to the blockchain with general consensus among the individuals running the nodes. When consensus is reached, new data is added to the blockchain. Therefore, all participants are recording the agreed upon changes to the blockchain. There were an estimated 10,000+ Bitcoin nodes operating as of April 2019 according to Bitnodes.
Data on the blockchain is made secure through the creation of hashes, hexadecimal numbers that are created using all the data from the blockchain each time a new block is created. Hexadecimal what? For now, just know that hexadecimal is a base 16 number system - we are much more familiar with the base 10 number system and some may be familiar with base 2 (also known as binary). Hexadecimal numbers look like this: BF35 (48,949 in base 10). Putting data into hexadecimal hashes allows for a high density of information to be encrypted in a consistent format, typically in a hash of a fixed length. This allows for large amounts of data making up the blockchain to be written to a fixed length hash. As the blockchain grows bigger, the number of characters in the hash will always be the same length (the characters themselves change). This is part of a set of rules that makes the blockchain secure - any change to the blockchain will cause a change in the resulting hash, and alert us that the state of the blockchain has changed.
Use cases for the blockchain are now rampant: information about an individual's identity can be stored on the blockchain, banks can record transactions using blockchains, and copyright licenses can be issued via this transparent framework. Any scenario where a ledger is used to keep records may benefit from blockchain technology.
The blockchain is engineered to be open to anyone who has a computer terminal and decentralized so there is no single decision-making authority. No central authority holds power to make decisions and enforce rules. An issue with a system that is open and decentralized is that careful consideration must be given to incentivize individuals to not only participate, but behave in a manner that is not detrimental to other users.
Influence on Economic Systems
Digital currency can be thought of as a tool that enables people in different regions and countries to trade with each other without worrying about an exchange rate or transfer fee from one banking system to another. The excitement we have seen around cryptocurrencies comes from their potential to enable easier exchange of value from an entity to any other entity. More individuals would have the opportunity to buy or sell anything from theoretically anyone from nearly anywhere, as long as they have an internet connection.
What is Ethereum?
Ethereum is an open source, programmable blockchain platform that allows for the development of decentralized applications (or DApps - sometimes stylized as dApps). It was created and conceptualized by Vitalik Buterin. Ethereum runs smart contracts. Smart contracts are pieces of code that allow the Ethereum blockchain to immediately transport or move data without an intermediary. No central authority is required to cause the code in a smart contract to run - the code runs based on the rules contained within it and located on a decentralized platform. Think about running programs in the cloud without having to rely on or trust a cloud service provider (ie Amazon, Google, Microsoft) - the code will always run. The "rules" of a smart contract can be thought of as automatically initiated (sanctioned) after the contract is activated.
Ethereum has received significant support from an ecosystem that has formed around it, with existing and new institutions creating DApps, tools, conferences, forums, meetups, and companies to support and accelerate the adoption of this new technology. The Ethereum Foundation developed Ethereum, and retains the role of an open source project aimed at building out improvements to the software, as well as developing protocols. Some enterprises have further supported the adoption of Ethereum by creating the Enterprise Ethereum Alliance.
Decentralized products and solutions built on Ethereum have already hit the market. Companies are finding solutions for preventing identity theft, improving crowdfunding, paying musicians more fairly for their work, tracking food from farms to grocery stores, and many other use cases.
What’s to come? The Future for Ethereum
While Ethereum use cases are plenty, this technology promises something larger than just a few thousand applications. Creators of these blockchain-based applications can tap into new ways to fund the development of the applications. They can also find new ways for their users to interact with the applications themselves. Tokenization allows for the distribution of tokens - representations of value (potentially outside of an application) or the permission to do some actions within an application. For example, a token could represent a physical object, an opportunity to play a video game or download a song. These tokens are specific to the application. Tokenizing an application is done on top of the Ethereum blockchain, giving creators of DApps new ways to do business on an open source system.
Think of tokens like keys that allow a user to participate in the system, rather than a stock ownership certificate. The founders of the network keep a percentage of the tokens for themselves and if the network gains popularity, demand for the tokens rise while supply remains constant, making the price of the tokens increase. Founders can now monetize the networks they build by tokenizing their system and increasing the value of the system to the users. Ether (ETH) is the token for Ethereum. Any DApp built on top of Ethereum can also use Ether, or create a new token specific to their application.
An example is tokenizing social networks and media platforms. Each platform’s value is designated by its users. As a user, for the first time, it would be possible to purchase a portion of a system and power its entire protocol. While a lot of this is hypothetical, furthering the experimentation and education around blockchain technology gets us a step closer to this kind of future. Decentralized blockchain protocols have the ability to displace centralized internet systems and providers to the point that each user of the internet will have more power in the systems in which they participate.