What is blockchain?
A blockchain is a data storage approach that can be described as a growing list (or ledger) of records that are stored in blocks which are linked using cryptography. Reading data from the blockchain is permissionless and open for everyone while the creation of a new block is controlled by decentralized consensus. At the moment, there are many consensus algorithms under investigation but only two are really used in practice by major blockchain networks: Proof-of-Work (PoW) and Proof-of-Stake (PoS). A Proof-of-work algorithm was originally developed for e-mail spam protection project Hashcash, but the only launch of the Bitcoin network brought this concept to a wide public. The key idea of PoW is probabilistic right to creation of a new block based on a share of contributed computational work that can be easily verified. Such a principle enables competition of workers (or miners) for block creation and ensures network by economic mechanism: for attacking the network malefactor have to buy a huge amount of computational facilities that are expensive (and expensiveness of necessary amount of hardware is correlated with the total network hash power). The Proof-of-Stake idea is based on a simple competition of coin holders for block creation: more coins are on a wallet balance, the bigger is probability to create a new block. If someone wants to attack the network, he needs to buy a lot of coins what is expensive (and the cost is correlated with the network capitalization). By the way, what is motivation to attack a network in which you are the whale and own a lot of coins? :)
With blockchain technology, there is no centralized entity that controls everything. The decentralization gives it a number of unique properties that are not inherent to other data storage approaches. These include resistance to data modification, the ability to operate in an entirely untrusted environment, and a high level of security and privacy. They allow the creation of different p2p networks and completely new business models that were impossible to imagine before.
The biggest and oldest blockchain network is well-known Bitcoin. The famous p2p “electronic cash” system, as it was defined by its creator Satoshi Nakamoto, helps people all over the world to transfer from $1 bln to $2 bln in assets daily safely, reliably and independent from any third parties such as banks and government structures.
Further important applications of blockchain technology beyond the transfer of value are decentralized finance (DeFi), distributed computing, and different social applications. Projects based on blockchain technology allows people to use services previously offered only by centralized corporations with a completely new user experience such as high levels of data privacy, reliability, and safety from third-party actions. Such projects form a new layer of the internet known as web3, which – as opposed to web2 – is focused on the needs of end-users, not corporations.
What is crypto? The “Crypto” term was initially invented to specify a new type of currencies whose issuance and operation are based on blockchain technology and protected by cryptography. Lately, “crypto” or the “crypto industry” have become synonymous to the “blockchain industry.”
The history of crypto began on 31 October 2008 with the publication of the Bitcoin whitepaper. Several months later, the first Bitcoin block was mined, and the network started growing. During the first five years of network operation, Bitcoin survived a lot of ups and downs of its price, a hack of the major exchange – Mt.Gox – and attracted millions of enthusiasts that started to support the growing industry in different ways such as development, mining and spreading the information.
More recently, Vitalik Buterin and Gavin Wood introduced Ethereum, a distributed computer and operating system that supports smart-contracts and, therefore, allows to build a variety of new applications that are not limited to p2p payments like Bitcoin. It also enabled the creation of a new asset class – tokens. Tokens are digital assets, issued on a blockchain. Tokens can be stores of value but also enable vital services and governance within blockchain projects while not requiring their own, native blockchain protocol. The most popular standard for token issuing at the present moment is Ethereum-based ERC20, used by the majority of decentralized applications (dApps) nowadays. Furthermore, there are other popular cryptocurrencies that include Litecoin (LTC), launched in 2011 as a Bitcoin fork, Monero, EOS, Dash and many others.
By 2017, the prices of Bitcoin, Ethereum and other cryptocurrencies went through a hype period that resulted in a large speculative bubble, which burst in subsequent months and led to stark price drops in 2018-2019. Nevertheless, during the 2017-2019 period, the blockchain industry made a significant step forward and now is presented by dozens of projects that are successfully operating and serving customers at different markets, such as finance, gambling, advertising, and social networks. At the present moment, in the middle of 2019, the crypto industry is boiling up with new projects promising to transform more industries. They are building the foundation and first applications of a new digital world: one based on user-centered business models and a new level of people cooperation.
As the crypto industry develops, it is solving two key challenges. The first is scalability: current technological standards do not allow enough transactions to become the foundation for global industries. For example, while Proof-of-Work builds consensus based on energy-intensive computations, Proof-of-Stake features ‘staking’, a type of accountability for reliable information, as a consensus builder, which is more scalable. Further approaches attempt to reduce the load on the main blockchain by opening up parallel, intertwined forms of information exchange, like state channels and plasma.
Meanwhile, at the user end, blockchain-based applications are making interfaces ever more friendly to non-experts. Different projects are competing to improve user interfaces and interoperability, allowing individuals to get the upsides of crypto services without having to change their habits significantly.