The evolution of blockchain: Transactions, contracts and applications

What is the blockchain?

Blockchain technology is a cryptographic chain of peer-to-peer transactions. Blockchain transactions are stored in a trustless manner, thanks to decentralized nodes that validate and commit them. 

Bitcoin, the first-ever cryptocurrency, introduced blockchain technology and the concept of a blockchain ecosystem to the world. When examining the history of blockchain, we’ve got to look back to 2009. Revealed in 2009 by the anonymous Satoshi Nakamoto, the Bitcoin white paper detailed a solution to the double-spend problem surrounding digital peer-to-peer payments.

Transactions in blockchain

Nakamoto evolved transactions into trustless entities, removing the need for an intermediary.

Nakamoto’s white paper presented their problems with traditional finance, stating that e-commerce had come to rely almost entirely on third-party intermediaries to process digital transactions. These intermediaries must spend time and money on mediating transactions, increasing costs for the transacting parties and limiting the potential for smaller, everyday transactions, among other problems.

This solution entailed immutably timestamping transactions via computational proofs and hashing those transactions into an “ongoing chain of hash-based proof-of-work.” 

Such a chain would exist in a decentralized manner — as a timestamp server distributed among willingly participating nodes. If nodes were to leave and come back, they would take on a copy of the longest existing chain and continue from there.

Decentralizing the transaction process allowed for trustless peer-to-peer interactivity, removing the need for third-party involvement and, ideally, providing cheaper and faster transactions to all. However, once the technology was in place, users needed a way to transact on top of it, which is where Bitcoin came into play. 

So when asking whether Bitcoin or blockchain came first, we now know the answer is blockchain.

Contracts in blockchain

Blockchain technology has evolved past simple peer-to-peer transactions. Innovations have led to decentralized applications (DApps) being built on top of the blockchain, and solutions for speeds and security have increased. Much of this innovation is due to smart contracts.

Since the introduction of Bitcoin’s first-generation blockchain, or blockchain 1.0, the blockchain ecosystem has come into play. Ethereum (ETH), for example, is what many enthusiasts consider to be the future of blockchain. 

This moniker comes from the fact that Ethereum focuses more on blockchain applications and harnessing blockchain smart contracts than simply existing as a decentralized currency.

Ethereum’s founder, Vitalik Buterin, envisioned his platform as a replacement for the online experience, which will decentralize all digital processes. Why stop at revolutionizing peer-to-peer payments when one can revolutionize financial lending and borrowing, gaming and social media, right? 

Buterin harnessed smart contracts to help realize his vision. Smart contracts are digital agreements made between two or more parties, not unlike contracts in real life. However, a real-life contract requires a lawyer or similar intermediary to function, complicating the process. 

A smart contract is enforced by an immutable set of rules agreed upon before its inception. These rules are hard-coded into Ethereum’s blockchain, ensuring no one can alter them once the contract begins and removing the need for an intermediary. The contract will execute when both parties fulfill their side of the agreement.

Applications

Decentralized applications are entirely trustless, ensuring users can harness their abilities without involving an intermediary. 

While a barebones version of smart contract technology exists in Bitcoin, Ethereum took it to the next level by offering developers a platform on which to build DApps while utilizing the power of smart contracts.

Now, one can consider Ethereum a second-generation blockchain or blockchain 2.0, thanks to its capabilities, which extend beyond Bitcoin, a first-generation blockchain. After all, Ethereum allows users to create their cryptocurrencies on top of its platform, harnessing the Ethereum blockchain for security and speed purposes.

For example, developers might build an application for lending and borrowing managed entirely through smart contracts. In this case, smart contracts would act as escrow and hold the funds securely before facilitating the lending of the loan and serving as a space for borrowers to pay back the loan.

However, despite the innovations provided by smart contracts and decentralized applications, Ethereum suffers from severe scalability issues, meaning it struggles to validate transactions when its network becomes too busy. This struggle is due to the consensus method harnessed by both Bitcoin and Ethereum: proof-of-work (PoW). 

PoW asks miners to validate blocks by harnessing their computer power to solve complex equations. However, there can only be so many miners validating so many transactions. If too many people are trying to transact, miners will be overwhelmed, and the validation process will take much longer. To solve such issues, Ethereum is moving to a proof-of-stake (PoS) consensus method in its network upgrade called Ethereum 2.0.

Now, let’s enter the third-generation blockchain, or blockchain 3.0.

Blockchain 1.0 vs. blockchain 2.0 vs. blockchain 3.0

Blockchain 3.0 evolves the concepts introduced by blockchain 1.0 and blockchain 2.0 even more, introducing interoperability solutions and new consensus methods.

A third-generation blockchain ecosystem solves many of the issues that plagued blockchain 1.0 and blockchain 2.0 networks, such as scalability and interoperability. Blockchain 3.0 networks typically solve the scalability issue with a new consensus algorithm: proof-of-stake (PoS). 

Instead of mining, PoS asks users to stake or lock-in their tokens to become validators. Validators ensure that incoming transactions are valid before committing them to the blockchain network, earning transaction fees for their efforts. 

The idea is that users who have a stake in a network would want what’s best for it and would put their best foot forward when it comes to transaction validation. Also, transaction validation is faster than mining, ensuring a network can scale as more validators join.

Then there are blockchain 3.0 interoperability solutions. Despite the vast number of blockchain ecosystems out there, many of them are siloed away from one another. Converting funds from one blockchain ecosystem to another via a cryptocurrency exchange is time-consuming and expensive, locking users out of true financial freedom.

One common blockchain 3.0 interoperability solution is that of bridges. Bridges connect two or more blockchain networks, enabling users to convert assets from one network to another. In doing so, bridges unify all types of blockchain ecosystems, genuinely capitalizing on offering financial freedom.

The various types of blockchain permissions

Blockchain networks run on permission-based consensus methods, enabling various levels of use depending on a user’s needs and permission level.

Aside from the blockchain generations, there are also different types of blockchain when viewed from a permission-based angle. Some of those permission types are public, permissioned or private blockchains. Each of these types offers a different use case for a company or user’s needs. When asked to list the three types of blockchain, you’ll now know the answer.

Public blockchain

A public blockchain is the most basic form of a blockchain ecosystem. A public blockchain is available to anyone who wishes to utilize the database. Bitcoin and Ethereum are considered public blockchains, for instance.

On top of being open to all, these networks exist without a central authority. Instead, upgrades and other changes are implemented by developers from all over the world, and anyone can utilize a public blockchain’s infrastructure to build DApps.

Permissioned blockchain

A permissioned blockchain, also known as a consortium blockchain, restricts some or all parts of the database to nodes with special permission. For example, suppose a centralized team is working to develop a public blockchain network for the rest of the world. In that case, that team might have exclusive permissions to view network-centric information.

Private blockchain

While blockchain technology is essentially a decentralized distributed ledger, sometimes that ledger isn’t required to be public. A corporation’s employee database, for instance, doesn’t need to be shared but can still benefit from the efficiencies offered by blockchain technology. 

In this case, a corporation would employ a private blockchain. This organization can then use its private blockchain just like a traditional database. It might have some information available to the entire workforce, while more private information is only open to C-suite executives.

Hybrid Blockchains

Hybrid blockchains can be considered a future of blockchain development as they employ characteristics from both public and private networks. Corporations might utilize hybrid blockchains with public-facing services.  

Take a blockchain-powered video game, for example. If a team is working to develop a massively multiplayer online video game but doesn’t want to make development public, they might harness a hybrid blockchain.

This way, players can still interact with the public side of things by signing up, playing and possibly even enacting governance when proposing and voting on game mechanics. The private side of the hybrid blockchain enables the game’s developers to keep its code and inner workings from the public.

When choosing between a permissioned or private blockchain, it’s worth noting that enterprises can consider hybrid blockchains due to their multifaceted nature.