Episode # 35

Nov 17, 2021

Quick Quiz. Bitcoin, Ethereum, Cosmos.

 

What’s the difference? Well actually maybe this isn’t quite such a quick quiz, because we’ll be here all day.

 

In a nutshell though. Blockchain: Generations. 

 

We don’t need Shatner, Stewart and Goldberg for this though,  because whilst it might not feel like it – blockchain has been around long enough to have moved on to second, and now THIRD generation protocols. 

 

What’s the difference? Why should you care? How could this evolution drive mass adoption?

 

Well, needless to say… crypto moves pretty fast. If you don’t stop and look around once in a while, you could miss it.

 

And that’s why we’re here. Your personal Ferris-vision. 

 

Before I forget – please do like and subscribe, it really does help us help you find your financial freedom.

 

 

INTRO

 

Back in Episode 6 we introduced the concept of Blockchains, explaining what they are and how they work. If you fancy knowing a little more about the ins and outs then I do recommend having a gander at that. 

 

Essentially a blockchain is a long record of transactions that’s stored across many thousands of NODES and updated via a consensus mechanism so all versions of this record remain identical. If one is – for some reason – different, it gets the boot and doesn’t get to stay part of the blockchain. 

 

We call this a DECENTRALIZED LEDGER. The magic of blockchain is that it enables VALUE TRANSFER between individuals – direct peer to peer transactions. Direct, because there’s no middleman… no bank adding friction and slowing down the process.

 

 

One of the other intrinsic properties of a blockchain is that it is IMMUTABLE. You can’t go back and change it. Once a transaction is on it, it’s there forever. 

 

Which is important, because they’re also TRANSPARENT. So anyone can go and look at the blockchain and see which wallet sent how many tokens to which other wallet or address.

 

These core properties of blockchain – PEER TO PEER VALUE TRANSFER, IMMUTABILITY and TRANSPARENCY are the bedrock upon which the flourishing city of crypto is built. 

 

So what actually has been built on top? How has blockchain evolved since Bitcoin first exploded into the world in 2009?

 

— 

 

FIRST AND SECOND GEN

 

Well, our first generation blockchains like Bitcoin, Litecoin, and yes – even Doge, were fantastic at exchanging value directly between peers – but couldn’t do much else. 

 

If you wanted to add some terms and conditions to that value exchange – for example, let’s say you wanted to send Lucian Freud 4 bitcoin once he’s completed his tasteful life drawing of you – well, you’d be stuck.

 

And that’s where smart contracts come in. In Episode 14 we talked about them at length – where they came from, their disruptive power and why DeFi would be in dreamland without them. 

 

 

Basically a smart contract is a self-executing contract where the terms of the agreement between the buyer and seller are written directly into the code. 

 

And they burst onto the scene with the first GEN 2 protocol in 2015. Which, of course, was ETHEREUM.

 

Suddenly a whole new world of opportunity opened up as the CONDITIONAL transfer of DATA and VALUE moved the game on again. 

 

There was no shortage of attention for Ethereum, and a number of other protocols took the opportunity to use the ERC-20 platform to launch their own tokens. 

 

ETH’s adoption and growth was so significant that by 2017 there was talk of the FLIPPENING – where ETH would topple Bitcoin in terms of market cap. Although that did never quite happen.

 

 

THE PROBLEMS

 

However, despite their success, both FIRST and SECOND generation protocols had a number of CRITICAL ISSUES.

 

The first was SCALABILITY. Basically there was only so much traffic these networks could handle. The arguments over Bitcoin’s ability to scale led to numerous forks and forks of forks in 2017, with the fork proponents claiming block size was key. 

 

And as for ETH, well – just look at gas fees today. There’s just too much traffic trying to squeeze down too skinny a pipe.

 

The next problem was INTEROPERABILITY.  Can any of these gen 1 or gen 2 protocols talk to each other? Can you send your ETH to a Litecoin address? Categorically not. If you do, whatever you sent will go PFFFFTTT. For ever. 

 

 

Imagine if you had a gmail account for, you know… email. And imagine it could only send email to other gmail accounts. That would be DREADFUL, wouldn’t it? You’d have basically one mate you could speak to. That’s essentially where 2nd gen chains are right now. 

 

Now imagine that gmail account can email not just any and every other email client but also send texts, snapchats and whatsapps too. Imagine the scope for revolutionising your ability to live, socialise and work. 

 

The potential unleashed by 3rd gen chains, and what it means for the crypto space as a whole is mind boggling. 

 

The final issue was GOVERNANCE and as a consequence, SUSTAINABILITY.

 

One of the most attractive things about crypto is you don’t have your Zuckerbergs or Gates sitting at the top of the tree guzzling the value that gets created. It’s shared between all the participants. But who makes the necessary decisions when it comes to upgrades or evolution? Who pays for necessary infrastructure or development? 

 

These are big questions for which first and second generation protocols don’t have easy answers.


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THE THIRD GENERATION

 

And so it was off the back of these challenges that THIRD GENERATION PROTOCOLS were developed. You may have heard of some of them. POLKADOT, CARDANO, COSMOS, SOLANA. Yes, even ETH 2.0. 

 

These protocols were designed specifically to solve some or all of the critical issues that blighted their predecessors. They’ve been in development for up to 5 years and are now starting to see the light of day.

 

Charles Hoskinson, founder of Cardano and co-founder of Ethereum, believes that these 3rd generation protocols will be the last generation before mainstream adoption, and whoever wins this race will end up with HUNDREDS of MILLIONS of users.

 

Why? Because of their flexibility. You can run governments on them, stock markets, national property ledgers, voting systems, social networks, payments and financial operating systems for a nation state. It’s a really big deal.

 

 

So how do they do it? 

 

Well, each 3rd gen blockchain has its own vision for how to solve the 2nd gen issues. What links them is the ambition to tackle all three of the scalability, interoperability and governance problems, although each does so with a different recipe.

 

ETH 2.0 uses SHARDING and ROLL UPS for scalability. What on earth does that mean? And no, we’re not talking about SHARTING. That’s something completely different, and not really recommended.

 

SHARDING is basically the sharing of the network’s traffic across its nodes. So instead of each node having to take ALL the traffic, it’s shared out so each only takes a part of it. 

 

The information contained in each of these SHARDS can still be shared across other nodes, which keeps the ledger decentralized and secure – but they don’t have to process and store all of it. 

 

And ROLL UPS? No, not a trouser related fashion statement. But the execution of transactions OUTSIDE of the main ‘LAYER 1’ blockchain. Transaction data is posted on LAYER 1 but executing the difficult stuff on LAYER 2 frees up the main blockchain to handle more traffic. And no security is compromised.

 

How much of a difference do SHARDING and ROLL UPS make? Well, ETH 1.0 can support around 30 transactions per second – ETH 2.0 promises up to 100,000 transactions per second. This is a MASSIVE JUMP in performance of the network. It’s the SCALING solution ETH users have been waiting what seems like an eternity for. 

 

 

Meanwhile CARDANO and SOLANA have introduced BRIDGES for INTEROPERABILITY. So you can take your NFTs sitting on ETHEREUM 1.0 (and costing you a small fortune in GAS FEES) and transfer them CROSS-CHAIN via the new NFT bridge to CARDANO. Good for the planet, and good for your wallet. 

 

And SOLANA uses WORMHOLE – a communication bridge between its own network and other top DEFI networks. 

 

When it comes to the THIRD of our CRITICAL ISSUES – GOVERNANCE, the 3rd GEN protocols have a few different solutions. 

 

With BITCOIN and ETH 1.0, only MINERS and CORE DEVELOPERS could vote, whereas with CARDANO – on chain governance means every single token holder can vote for proposals.

 

POLKADOT’S solution to the 3 critical issues was to build a RELAY CHAIN, where individual blockchains, OPTIMISED for their specific use case, can connect in like SPOKES on a WHEEL. 

 

The RELAY CHAIN can process transactions from ALL CHAINS in the network at the same time, drastically increasing traffic through flow, whilst the PARACHAINS – the individual blockchains – can exchange ANY KIND of data with any of the others. 

 

 

What does that mean? Well – with the whole ecosystem interconnected and a seamless interoperability between all projects, whether they’re DEFI, NFTs or INSURANCE… the stage is set for radical innovation to take maximum advantage of the opportunities. This is that gmail account that can send snapchats, whatsapps and even phone your Mum. 

 

And as for GOVERNANCE, similarly to CARDANO, all stakeholders who wish to participate can vote using the native token, DOT. 

 

Another 3rd generation protocol, COSMOS, uses a piece of software called TENDERMINT, which facilitates the creation of new blockchains by doing all the hard work – like solving the byzantine generals problem illustrated in Episode 6. 

 

So ANYONE can program a blockchain without writing all the crypto and networking related code. 

 

The COSMOS blockchain itself is built using TENDERMINT and their PROOF OF STAKE VALIDATION system integrates the other parallel blockchains built on the system, essentially becoming an ecosystem of blockchains that can scale and interoperate with each other. 

 

This IBC, or INTER BLOCKCHAIN COMMUNICATION PROTOCOL, has recently seen a surge of activity – with more than 1 million transfers now logged. And, given the interest in cross chain DEFI and interoperable NFTs, this number is going to grow – quickly. 

 

Especially because INTERLAY’s new development INTERBTC will enable Bitcoin to be used on all DeFi platforms, so users can trustlessly earn, invest and pay with their bitcoin, anywhere. 

 

What’s also fundamentally democratic about these 3rd generation protocols is that they have baked in equality, where Jeff Bezos – should he be a token holder –  has the same voting rights as, well, YOU. 

 

All in, pretty impressive. 

 

 

CONCLUSION

 

Don’t mistake the relative lack of traffic on 3RD GEN BLOCKCHAINS as representative of their potential. Ethereum might be where NFTs are exploding and DEFI has taken root SO FAR – but we will look back on this time in a few years and think… HOW could a 2nd GEN chain support all that? 

 

The answer is (really) that it can’t – and that’s why GAS FEES can run into the hundreds of dollars for a single transaction. 

 

The innovations we’re seeing in 3RD GEN CHAINS are going to enable them to take on BIGGER PROJECTS and give DEFI a platform to fully thrive thanks to INTEROPERABLE services.

 

What does this mean? Basically that you could be using any one of these technologies and NOT EVEN KNOW IT. Right now, users’ experience of DEFI is analogous to watching movies on VHS. Clunky and slow. 

 

3rd GEN will be like instant streaming on your mobile. 

 

And it’s not just DEFI,  the biggest VIDEO GAMES out there will be on the blockchain before long. And the true measure of the progress will be… that you don’t even realise it. 

 

Make it so. 

 

You’ve been watching School of Block, presented by Ledger and the Defiant, demystifying decentralisation, one block at a time. Don’t forget to subscribe, drop us a like if that’s what you’re into, and as always – here’s to your financial freedom.

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