Crypto Global

Introduction to blockchain and cryptocurrency for beginners

The blockchain technology, previously a popular subject of discussion among IT specialists – or the most avid geeks – has recently become a topic of conversation for a wide range of people. When it comes to the blockchain, the following question arises: do you focus on the technical aspects of this innovative, revolutionary technology, or should the business side of organizations take the lead in blockchain mass adoption?

Many traditional media have touched on this topic, but too often in a superficial and distorted manner, mixing it with the hot topic of impressive cryptocurrency growth, followed by a typical bitcoin post-crash cost. In 2017, Bitcoin mastered the public imagination, becoming more and more popular in investment portfolios. A positive consequence of the biased attention received by Bitcoin in 2018 was to attract more attention to the underlying blockchain technology.

If you look at the number of companies that launched the blockchain-related initiatives in 2018, it significantly exceeds the situation in 2017, when the rush phase began. Now is an interesting and exciting time for those who are just attached to this technology, but it is not easy to understand where to focus in the first place, since the blockchain has many ramifications.

Blockchains

At the beginning of 2017, it was often said that it would be difficult for businesses to use the blockchain, because it is a public platform where anyone can access your transactions. When you join the blockchain space, you begin to see that it develops faster than it seems. At the end of 2017, the Hyperledger platform drew attention to private blockchains, and in mid-2018 we began to hear about exclusive, hybrid and federated blockchains. Now you can use the following blockchains:

Public

This is the initial type of blockchain on which Bitcoin is built. It allows you to conduct peer-to-peer (P2P) transactions, and access is open to all individuals and companies.

Private

Allows you to determine who has access to transactions. Most companies can see the appropriateness of such platforms, given how they currently operate, without disclosing their data to third parties.

Exclusive

Looks like private and allows you to choose who can join the network, which gives a more rigid control over the transaction.

Hybrid

Combine the advantages of public and private: the data remains private, but can be stored in a public blockchain.

Federated

They have stricter controls and a higher level of privacy, but also better transparency and accountability.

In less than a year, 4 improvements to the blockchain appeared, addressing the problems and concerns that people had in mind about using this technology. The blockchain is also associated with digital registry technologies: both are digital database technologies, only they use different processes to validate transactions entering the registry.

Despite rapid progress, the blockchain met with challenges, mainly coming from those who wanted to focus only on what could be heard about cryptocurrencies / tokens and what was happening on the market. Nevertheless, even in this space, over the past year, there has been progress in terms of turning cryptocurrency into a store of value.

Cryptocurrencies

We will not focus too much on the fact that “cryptocurrency” is not an appropriate term, as digital money currently lacks at least two of the three characteristics inherent in currencies (store of value, unit of measure and medium of exchange). However, it is worth focusing on the meaning of the word “cryptocurrency” itself. So they call everything that has value and what can be exchanged in encrypted form without having to rely on intermediaries. This definition does not affect specific characteristics, as it applies to both coins and tokens of cryptocurrencies.

Coins

Most of the coins on the market are the result of forks (splits) of the Bitcoin blockchain. Each coin has its own blockchain and a protocol that can only be used in this blockchain.

Tokens

Tokens are a digital representation of assets (tokenized securities) or functions (utilitarian tokens) emitted by decentralized applications (dApp), usually built on an existing blockchain. Unlike coins, there is no need to create a new blockchain. In fact, through the use of templates based on the main blockchain, tokens can be released much easier and faster than regular coins. The standard protocol (pattern), as a rule, uses the Ethereum blockchain, so 85% of tokens are generated using its platform (ERC20).

Starting in 2016, one could often hear about the initial offers of tokens (ICO), considered as a new, alternative way of attracting private funding for innovative businesses. ICO is just a “promise” to return the collected capital in the form of tokens. The terms are captured digitally in a smart contract and are usually described in whitepaper, which a business publishes to attract investors. A distinction should be made between different types of tokens:

Tokenized securities

These are investments in real physical assets, equity participation in a company, revenue streams or the right to dividends or interest payments. If we talk about the economic function, these tokens are similar to stocks, bonds or derivatives. Therefore, tokenized securities are digital assets that are subject to financial regulation rules. In a legal sense, they are a combination of digital assets (tokens) and traditional financial products. It can be said that this is just a new technology, improving what already existed before. If cryptocurrencies, such as Bitcoin and Ethereum, are sometimes called “programmable money,” then tokenized securities can be considered “programmable assets.” This means that any asset can be (and probably will) token-ated public and private shares.

Utilitarian tokens

These tokens are not subject to current regulation in the field of securities, since, in addition to trading in the markets, they have a specific application within the platform.

Since the order of generation and release of tokens is set in advance and explained in the white paper, unlike coins, they do not require mining performed by network members.

One of the main advantages of the blockchain, in addition to Bitcoin, is smart contracts. In the late 1990s, well-known cryptographer Nick Sabo invented this term to explain a new kind of digital contract that can be entered into with unknown people via the Internet. The blockchain technology has allowed this to be translated into practice, which has become a key factor in the ability for people and organizations to exclude third parties in certain transactions.

Smart contracts are mainly code stored on the blockchain platform and automatically executed based on predefined, agreed rules. When the conditions of these predefined rules are fulfilled, for example: “if … then …”, the contract is automatically executed, giving a pre-agreed result. Among the key properties of smart contracts are their automatic verification and execution, as well as the impossibility of changing or manipulating due to the connection with the blockchain technology.

If you look at industries with a high level of regulation or with the need for contracts or participation of third parties, such as insurance, finance, health care and the legal sector, then smart contracts can solve many of their problems related to efficiency. The ability to use smart contracts allows companies to provide their customers with greater benefits and savings. There are a number of blockchain platforms that are well suited for creating smart contracts, but Ethereum is most famous for its ERC20 tokens.

Challenges of smart contracts

Currently, smart contracts are the most well-known use of the blockchain, which enterprises are familiar with, but at this early stage there are a number of challenges:

Adoption curve

Still need to overcome the various obstacles that exist in business.

Learning curve

Many business roles need to be changed.

Standardization

Each industry must adopt the appropriate standards that best suit its needs.

Data confidentiality

Reconciliation of smart contracts with the General Data Protection Regulations (GDPR).

Human expectations

Excessive arousal due to the opportunities that smart contracts can provide.

The blockchain may have other applications, in particular, related to dApp, which can provide many advantages, but also have their own challenges, due to the novelty of the technology.

dApp is short for decentralized application (decentralized application): software created using smart contracts that connect the Ethereum blockchain or any other suitable platform to the software and hardware side of the application. The dApp developers write a series of smart contracts that define the general functions of the application. At this stage, it is impossible to create a complex application, while retaining the added value of decentralization, due to a number of technical constraints, among which are the following:

The number of transactions per second

On average, Bitcoin allows you to process 5-7 transactions per second, and Ethereum – 12. For comparison: the Visa network supports up to 1200 transactions per second, and a simple application such as Facebook – more than 1,000,000.

Transaction fee

A Bitcoin transaction costs about $ 2-7, and an Ethereum transaction without a smart contract costs $ 0.3-0.8, and such costs are clearly unacceptable for an application that wants to process millions of transactions per second.

Narrow places

The fundamental problem is that all applications run on the same network, which leads to periods of overload, when the number of transactions can grow 10 times, and, consequently, to an increase in commissions and freezing of transactions.

To solve the problem of restrictions related to the number of transactions per second and commissions, while still guaranteeing security, solutions were developed such as the Raiden network for Ethereum and the Lightning network for Bitcoin. Allowing to establish private and distributed communication between several users, where only the first and last transactions are validated in the blockchain, these solutions are especially useful for micropayments and storing data on actions between several less significant participants.

Another solution to the scalability problem promoted by the Ethereum team is called Ethereum Plasma and consists of a protocol for decentralizing federated blockchains. Federated blockchains, differing from other types in that they operate under the control of a group, are mainly used in internal protocols of companies and are infinitely scalable, but at the same time centralized, as they rely on a limited number of selected and non-anonymous validators.

Plasma provides developers with the opportunity to create and customize their own private blockchain using a smart contract, with or without cryptocurrency and federated validators, but maintaining the quality control offered by Ethereum public blockchain, thus creating a parallel offchain model, where Ethereum acts as a kind of ” Supreme Court “, and private blockchain -” state “.

In the past, the blockchain technology underlying cryptoactive assets experienced an exponential growth determined by the demand for the development of the first generation of decentralized applications. This scenario has led to the birth of many second-generation projects that are focused both on testing new and scalable validation methods, both in the case of Casper, NEO or EOS, and on testing new blockchain applications focusing on real-world applications, such as IoT, big data, hosting, etc.

In turn, this led to the concept of a third generation in the blockchain: interoperability. The interoperability implemented by projects such as AION, Polkadot, Cosmos and ICON allows applications to interact with several blockchains, which opens the way for the first real generation of complex decentralized applications capable of choosing the most efficient blockchain for each required function bottlenecks or network defects. Interoperability leads to the fact that we prefer to call “blockchain as microservice”, since we can now structure modern applications, dividing them into many specialized and interchangeable microservices. Likewise, the first generation of decentralized applications will continue to use blockchain technology.

For many years, when innovative technology appeared, as a rule, IT departments played a central role in the development of its companies in order to take advantage of its benefits. Blockchain is making changes to this approach, and one of the obstacles is that it’s hard for companies to realize that this will affect the business side more, where more changes will be needed in IT.

The report of the consulting agency Deloitte ” Blockchain: Mystery, Paradox, Possibilities ” states:

“By estimate, the blockchain is about 80% change in the business process and 20% technical implementation. This means that a more creative approach is needed to understand the possibilities and how things have to change. ”

For many senior managers, this idea that a business needs to make significant changes to master a new technology is a challenge. There is a need for a shift in perceptions of how companies should approach the use of this technology, as this will change the business and management models, as well as existing strategic plans. Companies that have not yet thought about introducing the thinking of digital transformations should pay attention to this if they are going to master the blockchain technology.

Many still prefer to focus only on the functional and properties of the blockchain, without going any further. If we take a closer look at what exactly the blockchain revolution should produce, then it will force us to focus on the business side of organizations and on their adaptation to new ways of doing business with the ever-growing adoption of the blockchain around the world.

With all the advantages that the blockchain will bring to the business side, companies should also explore the possibilities of using its other side – cryptocurrencies and tokens. This side is able to speed up revenue accounting and simplify the processing of financial transactions.

This option of exchanging capital as the offering of tokenized securities (Security Tokens Offering, STO) is receiving more and more attention. This is a way to use this technology by companies with better regulation than before. With $ 15 billion of funds collected worldwide, ICOs are generally unregulated, and therefore those who buy their tokens are at significant risk. The high risk associated with the lack of regulation led to the emergence of a new trend: STO. If you consider tokenized securities as a niche market, then you are mistaken! Although they are more limited than cryptomonettes, the tokenized securities market is growing rapidly and constantly evolving. Such tokens have many characteristics of traditional financial products, but the main difference is that they are tokenized and managed through smart contracts on the blockchain platform.

These innovations provide an opportunity to modernize the system of issuing and exchanging traditional securities. Tokenized securities are a completely new and more efficient way to collect and distribute capital. The effectiveness of tokenized securities is mainly related to the elimination of intermediaries and the automation of the process through smart contracts. However, the technological infrastructure underlying the creation of such digital securities makes possible a wide range of innovations, many of which are still unexplored. Among them are programmable securities, which definitely represent one of the most current opportunities offered by tokenization. In this case, certain rights associated with such digital securities, such as the right to dividends (for example, monthly) or the right to vote, directly programmed into the most valuable paper and automated. In addition, thanks to the blockchain technology, the ownership of tokenized securities after entering into a decentralized registry becomes immutable and undeniable. It also allows you to instantly transfer securities from one owner to another with relatively low costs. The costs of issuing, exchanging, insuring, reporting and complying with the law can be significantly reduced by automating these processes. It also allows you to instantly transfer securities from one owner to another with relatively low costs. The costs of issuing, exchanging, insuring, reporting and complying with the law can be significantly reduced by automating these processes. It also allows you to instantly transfer securities from one owner to another with relatively low costs. The costs of issuing, exchanging, insuring, reporting and complying with the law can be significantly reduced by automating these processes.

All this also makes it possible to divide large investments into smaller units, making it possible to jointly invest. Finally, thanks to the decentralized registry technology, all transactions related to tokenized securities are transparent, which complicates manipulation and corruption. The tokenization process can be applied to many categories of assets in order to increase the liquidity of currently illiquid sectors and to offer new investment opportunities for small investors. In addition to physical and intangible assets, such as patents, assets that may soon be represented by tokenized securities include shares of shares and dividends, as well as individual products of companies, government bonds, exchange-traded funds, real estate investment funds and index funds.

From a sociological and philosophical point of view, the use of blockchain technology requires us to change our understanding of the relationship between different parties: this is no longer a social contract, but trust in the code governing the transactions made by the parties. This brings us to the blind belief in the technological efficiency of the blockchain, which brings us one step closer to what Lawrence Lessig predicted in the book Code and Other Laws of Cyberspace: code is law. In the cyberspace he describes, code becomes the only rule to follow, even if you don’t understand it completely. Those who are particularly enthusiastic about the blockchain, even believe that this technology can inspire the creation of new forms of government, completely reliable and transparent,

However, now many problems still need to be solved, both from the legal and infrastructural point of view. The risk to end up in a chaotic situation with many fragmented blockchains is still very high, which can destroy the idyllic dream of crypto-enthusiasts about a distributed economic system built on a decentralized network.

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