The Blockchain Generations
|— First-gen blockchains are designed to improve the financial systems in place by offering a decentralized monetary platform that puts the control back in the hands of the people. |
— Second-gen blockchains add a layer of “conditions” to transactions so that people can agree on terms in smart contracts rather than relying on intermediaries.
— Third-gen blockchains aim to resolve fundamental flaws including scalability and interoperability which means blockchain can sustain mass adoption and not suffer problems like slow transaction time and closed systems.
— The future of blockchain and its use-cases is tremendously exciting and we’re only just seeing where it can go.
Blockchains have evolved with time. Let’s explore the blockchain generations.
Blockchain. It’s commonly associated with Bitcoin and cryptocurrency and while that’s not wrong, there’s a lot more to the tech than digital currency. To get into it, we’re going to break down the three blockchain generations and how the technology is evolving. Strap in your bootlaces, the ride is just getting started!
Okay, that’s great, but what exactly is a blockchain?
We won’t get into any of the gritties of the tech too much, but basically, blockchain is a ledger that’s distributed across multiple computers around the world and can be run by anyone with an online connection.
What’s exciting about blockchain is that the data is not owned or run by one central figure (it’s decentralized) and that data can’t be edited or manipulated once it’s been added to the public ledger.
So that’s blockchain in a very small nutshell (we’ve got a bigger nutshell on what blockchain is here). But it’s also an evolving territory that (like the Web) was born with an exciting idea and is expanding with each iteration.
The reason why the first-gen blockchain – specifically Bitcoin – was created was to radically improve the monetary systems in place. By empowering people with the technology to transact with one another (at a peer-to-peer level), they don’t need to rely on centralized entities such as banks.
This is where Bitcoin and blockchain go hand-in-hand. Bitcoin is the first real use case of blockchain technology and its main purpose is as a financial application: Bob can send Bill digital money and there is security in that transaction. Both of them can enjoy privacy because the transaction is anonymous and they can take peace in knowing that the system is secure in the technology and the trust lies in the algorithm and not a centralized figure.
Okay, so Bitcoin is great. There’s trust in the system and not a central authority, there’s privacy in anonymity and there’s security.
But the design only allows you to send, receive and trade. What if you wanted terms and conditions in your transactions? Kind of like an “I’ll only pay Bob his cryptocurrency when he delivers my milk”. Bitcoin simply can’t cater to that.
Thus enters Ethereum.
Ethereum brought two pretty remarkable things to the table:
The innovative smart concept of smart contracts. These are very clever self-executing agreements made between two parties. At the heart of it, a smart contract means that the parties involved draw up the conditions and once they are met, the contract triggers.
So now Bob can deliver Bill’s milk and when that’s done, the digital payment will fire automatically. The beauty of a smart contract is that it offers a faster, more secure way of executing agreements and it doesn’t rely on an expensive intermediary to manage it. (Thanks decentralization!)
And the ease of writing up a new cryptocurrency based on the Ethereum blockchain where developers could launch their own cryptocurrency project and applications (something which wasn’t as accessible before).
In this, Ethereum actually behaves less like a cryptocurrency and more like an entire digital ecosystem that other cryptocurrency projects can operate on. It acts as a platform which developers can use to build on, like apps have iOS, decentralized apps (dApps) have Ethereum. From here, we get an exciting variety of functional uses including decentralized finance (DeFi), web browsing, gaming, identity management, supply chain management and the etceteras.
So while the first and second-gen are exceptional in innovation, there are a couple of fundamental teething problems that they suffer from.
One major issue is that of scaling. Basically, there are too many people trying to transact and too little space for it on the blockchain. It’s the classic “too many cooks and too little kitchen” problem.
Think of it like this: As a startup, a company could get away with one birthday cake for the entire office. As the company grew, the number of people eating that cake increased, but the size of that one cake stayed the same. This means that more people are getting a smaller portion – and they’re having to wait for it in a queue. Bitcoin scalability works the same: Bottlenecking problems emerge as too many people try to transact at the same time. This means delays – which is not sustainable for a financial system – and high fees which present an obstacle for adoption, especially in developing countries.
Third-gen blockchain projects are designed with this in mind and the technology automatically resolves issues of scaling if they emerge. Essentially, more cake is bought automatically when needed so that no one is waiting for their slice.
Another issue that third-gen blockchain projects solve is interoperability. In the same way that you can’t charge an iPhone with a Samsung charger, the first iterations of the blockchain can’t interact with each other. While it might not sound like a big deal, interoperability is actually crucial for the industry to thrive.
The world relies on collaboration and systems where information and data can be shared across platforms is critical. Projects like Cardano and Polkadot introduced interoperability functions into their blockchain from the get-go meaning they can work with other blockchains seamlessly.
So, what’s next?
With the improvements made from generation to generation, it’s not overly optimistic to believe that the next step for blockchain is to see mainstream adoption of the technology.
We’re already starting to see how and where it can be used in cases like the possibility of DeFi, as corporations introduce it in their supply chain systems and as art and gaming find their feet in the digital world.
This means there’s a strong possibility that we’re looking down a tunnel where this technology will radically change the way we can use the online space – with more privacy, more security, and more user-focused potential and oh boy, we are excited about it!
Knowledge is power – so keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video Blockchain Real Use Cases