Understanding Blockchain and Cryptocurrencies. Concepts and Definitions.

There are 3 main stages of computer network evolution:

Centralised networks. These were the first computer networks. They are typified by one main computer (server) with a number of other computers connected to it. As a result, if the information on the main computer is erased or lost, it disappears from the other computers in the network as well.

Decentralised networks. The next stage started with the creation of the internet (which is itself a decentralized network). A decentralized network means that there is more than one main server with a number of secondary ones connected to it. Therefore, an issue with one of these servers won’t impact the entire network.

Distributed network. Currently we are witnessing the rise of a completely new, revolutionary type of computer network. In this, all the computers within a distributed network (nodes) are interconnected as peers. If one of the nodes shuts down, the information will still be available on the rest of the computers in the network (until the last node shuts down).

computer network evolution blockchain

Three stages of computer network evolution: centralized, decentralized, and distributed

blockchain is a great example of a distributed network that has a real-life application.

How does it work? Person A wants to send money or any other commodity to Person B. As soon as a record of the transaction is created, it gets sent to all servers (nodes) of a peer-to-peer network (a blockchain). The network then validates the transaction using a number of algorithms. If the validation is successful, a new transaction is added to the block. The transaction is then complete, and Person B gets the commodity transferred by Person A.

transactions-scheme-in-blockchainIn this scenario, a block represents a data record of a certain number of transactions performed within the last 10 minutes. Blocks are connected through “hashing” — each new block contains the hash (a specific ID) of every previous block. This way, they create a “chain” — a blockchain.

The above process was first described as the underlying technology for bitcoin, a “peer-to-peer electronic cash system.” But now it is also used as the basis for a number of other cryptocurrencies, as well as a few other cases that we will cover later.

The main benefit of cryptocurrencies — and one of the reasons they exist at all — is the fact that they have no physical form. This makes theft and financial fraud (which usually require cash transactions) impossible.

The process of performing a blockchain transaction, including a cryptocurrency transfer, is called mining.

There are certain complications involved in this process. One of them is that mining is an incredibly power-consuming process. To process and store all the information recorded in a blockchain, you need an extremely high-performance computing capacity. And because the number of transactions grows every day, the computing capacities required are constantly increasing.

To give you an idea of how much power is actually required, the Bitcoin Energy Consumption Index estimates that the current amount of the electricity used for bitcoin mining equals 32.73 TWh — a figure close to the total power consumption of Denmark. One bitcoin transaction requires an amount of energy that could be used to run a household for a week.

In addition to this, there are certain risks related to the technology. One of them is the fact that China currently accounts for about 80% of all bitcoin mining operations. Taking into account the recent decision to shut down all crypto exchanges in the country, the effect this ban might have on the global bitcoin community is hard to predict.

Real-Life Blockchain Usage Scenarios: Smart Contracts by Ethereum

Cryptocurrencies aside, the blockchain technology is also widely used for smart contracts. Smart contracts are self-executing agreements with terms and conditions for the parties written directly into lines of code. The information about a contract is stored in a blockchain, meaning that any change or transaction related to the contract is processed instantly and automatically, without the need to rewrite the contract.

In other words, they are just like regular contracts, but with a number of additional benefits: they are easy to create and secure, and they don’t require any regulation.

Some of the possible uses of smart contracts include:

  • Financial transactions (money transfers and payments, trading)
  • Insurance (automatic claims processing based on a trigger)
  • Real estate (regulating landlord/tenant relations)
  • Healthcare (electronic medical records, public health data access)
  • Transportation (P2P deliveries)
  • Media (copyrighted content management)

One of the most promising blockchain platforms is Ethereum, which provides the opportunity to create and deploy smart contracts using blockchain as their foundation.

Earlier this year the company caused a stir when it teamed up with a number of blockchain startups, research groups, and Fortune 500 companies to announce the creation of the Enterprise Ethereum Alliance (EEA). Together with its 30 founding members, including big names such as Accenture, Cisco, Deloitte, J.P.Morgan, and UBS, they made a statement about their readiness to adopt the smart contract technology into their operations.

The fact that many large companies have recognized the potential of this technology and made steps to integrate it has given a push towards the global adoption and further development of smart contracts. The EEA currently includes more than 150 companies that actively use blockchain technologies and smart contracts for internal operations. However, the use of smart contracts with outside vendors will be harder to implement, as the process isn’t subject to law.

For instance, to be able to deploy smart contracts at state level, you would need access to the proprietorship register, which isn’t publicly available. Without it, using smart contracts to regulate transfers of ownership wouldn’t be possible, for example in the case of buying/selling assets, or for logistics purposes.

That is why we see the need for cooperation with national governments as the next big step towards the mainstream adoption of blockchain technology.