The Blockchain: Advent of decentralization

In our day and age, the blockchain has become very popular. One may come to wonder why exactly. What has the innovation done to win over the hearts of millions of people and possibly change the financial space as we know it?

An illustration: Let’s say you want to transfer money to your friend from your bank account. You would login to your bank app or type in a ussd code and then transfer to the person using his/her account number. When the transaction is done, your bank would update the transaction record by sending you a debit alert or an email and sending your friend a credit alert. That’s seems pretty straightforward.

However, this procedure has some vulnerabilities which the Blockchain has solved for us. The blockchain technology is a structure that stores transactional records(blocks) of the public in several databases(chains) in a network connected through peer-to-peer nodes. This can be likened to a ledger used in business

Now to its perks: • Every transaction in the blockchain is authorized by the digital signature of the owner which authenticates the transaction and safeguards it from tampering. Hence the blockchain is highly secure. Cases abound of banks debiting individuals (authenticating transactions) when the payments did not actually go through. The blockchain eliminates this. • Probably the most amazing feature of the chain is that it is decentralized. You don’t need the approval of your bank before you can make a transaction. Only the consensus of the users is required thus saving a lot of time and stress. • Because the blockchain is automated, it generates systematic actions, events and payments automatically once the criteria of triggering are met. There is no third-party interference.

So, knowing all this, one question plaguing your mind must be “how exactly does the blockchain work”?

The blockchain consists of basically three key features:

Cryptographic keys: This consists of two keys, private key and public key. These keys help in performing successful transactions between two parties. A public key (a long random looking string of numbers) is an address on the blockchain. A private key is like a password that gives its owner access to their digital assets. Each individual has these two keys which they use to produce a secure digital identity reference. This secured identity is the most important aspect of blockchain technology.

A peer-to-peer network containing a shared ledger: The digital signature is merged with the peer-to-peer network. These are a large number of individuals who act as authorities in order to reach a consensus on transactions. Anybody can be part of this network. When they authorize a deal, it is certified by a mathematical verification which results in a secured successful transaction between two parties. Peer to peer blockchain networks lack centralized points of vulnerability that computer crackers can exploit. It has no central point of failure.

A means of computing to store the records and transactions of the network: all transactions carried out on the blockchain are recorded in blocks and are recorded across many computers such that any involved block cannot be altered without altering all subsequent blocks. This means that transactions cannot be tampered with. For example, the bitcoin blockchain file containing records of all the transactions that have occurred on the network was about 20GB in size as at 2014. In 2020, it has grown to be over 200GB in size.

Bitcoin: The rise of the blockchain

The blockchain has been in existence since the late 20th century. However, it was popularized by a person or group of persons under the name Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the cryptocurrency, bitcoin. He made improved the already existing design to enable timestamping of blocks without requiring them to be signed by a trusted party and introducing a difficult parameter to stabilize the rate at which blocks are added to the chain. The currency bitcoin began use in 2009 when its implementation was released as an open-source software.

Because of the massive utility of having a decentralized means of carrying out transactions, the adoption of bitcoin has grown massively since its inception and at the moment, it has been adopted as legal tender in El Salvador.

Mining of bitcoin

Mining is a record keeping service done through the use of computer processing power. Miners keep the blockchain consistent and unalterable by repeatedly grouping new transactions into a block which is then broadcast to the network and verified by recipient nodes (all part of the peer-to-peer network). The successful miner finding the new block is allowed by the rest of the network to collect for themselves all transaction fees from transactions they included in the block as well as a predetermined reward of newly created bitcoins. Therefore, all parties involved benefit from the mining process. The total supply of bitcoin is capped and eventually when the available bitcoin has all been mined, miners would still continue to benefit only this time, it would just be transaction fees.

Note that anyone can become a miner and the issuance of bitcoin is decentralized as they are issued as a reward for the creation of a new block. Forecasters estimate that all available bitcoin would be mined by 2140. Until 2021, over 80% of bitcoin mining was done in China. In June of the same year, China banned bitcoin mining due to the excessive amount of electricity consumed and its environmental impact.

Ethereum

Ethereum is a decentralized open source blockchain second only to bitcoin in market cap. Ethereum blockchain brought with it some innovations and capitalized on some demerits/insufficiencies of the bitcoin blockchain. Most notable of these was its smart contract functionality. It was cofounded in 2015 by Vitalik Buterin.

Ethereum can power a number of applications offering a wide range of functions: Smart contracts: These are a kind of permission-less app that automatically executes when the contract conditions have been met

Decentralized apps or dApps: Ethereum powers digital apps that allow users to play games, invest, send money, track an investment portfolio, follow social media and so on Non fungible tokens (NFTs): These tokens are powered by Ethereum and can allow artists or others to sell art or other items directly to buyers using smart contracts.

Decentralized Finance: it offers traditional financial instruments in a decentralized format such as money market funds which allow users to earn interest. Decentralized finance apps are typically accessed through a web3 enabled browser extension or application such as MetaMask

Ethereum’s wide range of use cases came as an exciting alternative to bitcoin and has provided a wide range of opportunities in the cryptocurrency space. It would be more accurate to think of Ethereum as a coin that powers various aps rather than as merely a cryptocurrency that allows users to send money to each other.

The Ethereum blockchain also allows other tokens to be built on it. This has led to the advent of many L2 tokens that have tried to replicate the Ethereum coin but reduce the high gas fees which is one of its downsides. A classic example of this is Metis. Currently, Ethereum is looking to do a series of upgrades to launch “Ethereum 2.0” which would see a transition from proof of work to proof of stake for miners.

Adoption, innovation and utility are important elements in the cryptocurrency space as shown by the massive growth of bitcoin. Many tokens have capitalized on this and also the faults of the existing systems in order to create their own chains and systems that proffer the necessary solutions.