The simplest of passing comments sparks the initiation of a dive into the world of Crypto. What is? Why is it here? What do we do with it? Why does price go up so much? (and down)
New inventions or new waves of change quite often take a turbulent path to mainstream adoption. Crypto certainly is no exception. From its inception in 2008 to today, Jan 2024, its path to mass adoption has been a series of surging frenzied buying of the tokens to a point of mass panic that everyone is about to sell off and the whole eco system puking out their investments to bring the price crashing down again. It’s no different to any other new technology. Just think of the dot com bubble and bust of 2000.
But crypto is coming of age. The institutions are onboard, ETF funds are available to buy into with Fiat currency and the world of Tradfi has gatewayed itself to the world of Defi. There is now no going back. Blockchain technology is here to stay.
What does this mean for everyday life for everyday people? Probably not a great deal. Blockchain’s real power lies as a payment and contract framework layer for the internet. Its sits behind or below the sites we use. This is what is referred to as Web3.
Using the example of payments:
Currently if I want to buy a product from a website in China the process involves me making a payment on a website with my card in the currency that sits in my bank account. The transaction must make a journey through the banking system from my retail bank to the clearing houses of my county, be converted into the local currency it is destined for to finally ending up in the retail bank account of the company I purchased the product from in China. All quite straight forward and simple and generally quite quick. But is it? Although you may receive a confirmation your order is processed a few seconds after hitting the buy button, the actual transfer of funds takes time. At least a day in most trans currency cases. And with added costs. Bank charges are there for a reason. Processing payments involves people and systems. This is Tradfi (traditional finance)
Defi (decentralised finance) works in a very different way. Firstly, and most importantly, there is no banking system required to make the movement of money happen as no traditional bank accounts are required. Secondly, and following on from this, the transaction is in a straight line from you (the customer) to the company you are making the purchase from. So, amongst other things it is a far more efficient system. This transaction takes place on what is known as a ‘ledger’. This is quite literally a list of all transactions taking place as we speak and all transactions that have ever taken place within that system. (There are multiple Crypto or ‘blockchain’ systems in use. Bitcoin, Ethereum and Solana are currently the tree biggest.)
The significance of these blockchain systems can be summarised as follows:
- Decentralization: One of the fundamental features of blockchain is its decentralized nature. It operates on a peer-to-peer network, eliminating the need for a central authority or intermediary. This decentralization enhances security and reduces the risk of a single point of failure.
- Immutability: Once data is added to a blockchain, it is extremely difficult to alter or tamper with. Each block contains a hash of the previous block, creating a chain of blocks that are linked together. If one block is changed, it would require changing all subsequent blocks, making the blockchain highly secure and resistant to manipulation.
- Transparency: All transactions on a blockchain are visible to participants in the network. This transparency helps build trust among users and ensures accountability. Anyone with access to the blockchain can view the entire transaction history, promoting openness.
- Security: Blockchain uses cryptographic techniques to secure transactions and control access to the network. Consensus mechanisms, such as proof-of-work or proof-of-stake, further enhance security by requiring participants to validate transactions through a process that makes it computationally or economically expensive to cheat.
- Smart Contracts: Smart contracts are self-executing contracts with the terms directly written into code. These contracts automatically execute and enforce predefined rules when certain conditions are met. Smart contracts are typically deployed on blockchain platforms like Ethereum and contribute to automation and efficiency.
- Traceability: Every transaction on a blockchain is recorded and timestamped. This creates a traceable and auditable trail of all activities, improving accountability and providing a transparent history of events.
- Permissioned or Permissionless Access: Depending on the type of blockchain (public or private), participants may have different levels of access. Public blockchains, like Bitcoin and Ethereum, are open to anyone, while private blockchains restrict access to a specific group of participants.
- Cryptocurrency: Many blockchains facilitate the creation and use of digital currencies (cryptocurrencies) as a medium of exchange. Bitcoin, for example, operates on a blockchain and is a decentralized digital currency.
- Distributed Consensus: Blockchain networks use consensus mechanisms to agree on the validity of transactions and to maintain the integrity of the ledger. Common consensus mechanisms include proof-of-work, proof-of-stake, and practical Byzantine fault tolerance (PBFT).
I would strongly encourage you at this point to really go and research deeply each of these following points to fully understand why crypto / blockchain is so important. Particularly point 9.
The Byzantine Generals Problem is a classic problem in distributed computing and computer science. It was introduced by Leslie Lamport, Robert Shostak, and Marshall Pease in their 1982 paper titled “The Byzantine Generals Problem.”
The problem is essentially a scenario where a group of Byzantine generals, each commanding a portion of a Byzantine army, must coordinate their actions to either attack or retreat from a city. The challenge is that some generals might be traitors who will send conflicting information. The loyal generals need to come to a consensus despite the possibility of misinformation from traitorous generals.
In the context of distributed systems, this problem is used as a metaphor to illustrate challenges in achieving consensus among nodes in a network that may be faulty or malicious. Solving the Byzantine Generals Problem is fundamental for the design of fault-tolerant distributed systems.
Bitcoin solved this problem.