The empires of the future are the empires of the mind. This is more than true for blockchain technology. Because the industry is very young it is quite hard to make solid predictions of what will happen in the future. Just as hard as predicting in 2000 that the industry of collecting user data would become a multi trillion-dollar industry. Yep, money is the root cause of user privacy being thrown out of the window.
Predictions are based history, current status, gut feeling and a thorough understanding of the industry. Let’s take a dive in crypto to get a bit more understanding, to find out a bit about history, to find out which problems are being solved and see if we can make some predictions for the future. Although it is quite a lengthy article and some stuff might be a bit technical, I think that it is worth a read.
Central authorities
Blockchain technology solves the Byzantine Generals Problem. The Byzantine Generals problem is a problem of agreement, where no one party can come to agreement with another without fear of misinformation. Solving this means that there is no central authority needed to reach consensus between parties. You might think that this is not a huge deal. Please think again because it is.
In the digitalized world that we live in today, getting rid of central authorities will have a very big impact. Currently we are stuck with an awful lot of central authorities. Think of the central authorities in banking, politics and communication. Think of the “Evil Doers” with slogans like “Don’t be Evil” which we trust with our digital communication.
Now think of what getting rid of them would mean in terms of time savings, cost savings and redistribution of power… There you go! This is what the fuss about cryptocurrencies and blockchain technology is all about. It is safe to say that cryptocurrencies and blockchain technology will revolutionize a lot of aspects of our daily lives and that it will power the empires of the future.
Reaching consensus
When bitcoin was invented the big technological breakthrough was the use of Proof of Work as solution to the Byzantine Generals Problem. You can find the email in Satoshi Nakamoto explains this solution over here. Yes, we still do not know who’s behind the Satoshi Nakamoto alias. The original idea of Proof of Work was first proposed in 1992 for combatting junk email. So, no, a lot of ideas are not new.
Proof of Work is a consensus algorithm and consensus algorithms are essential for blockchain technology. Consensus algorithms are algorithms that requires a selectable amount of work to compute, but the proof can be verified efficiently. If you have a technical background you will immediately see that hash functions are involved.
In simple terms, hashing means taking an input string of any length and giving out an output of a fixed length. The output cannot be turned back into the input and any change in the input results in an easily verifiable change in output.
You can think of it as processing a chicken into a McNugget. It cost quite a lot of effort to create the McNugget, but you can easily proof the McNugget is made of chicken. And you cannot turn the McNugget back into a chicken. If you could, it would be one f&^%$ chicken which would give lectures about how awful that experience was. (thanks John Oliver).
So, now that we have a consensus algorithm lets “Decentralize all the things!”. Hold up, not so fast. There is more than just one consensus algorithm and there is this very important thing called scaling. Blockchains have challenges in the scaling department and consensus algorithms offer challenges and solutions in this department.
Algorithms schmalgorithms
Here comes some technical stuff. Please bear with me, because it is an essential part of understanding the current state of blockchain technology.
Bitcoin, Ethereum, and others have faced serious challenges as they attempt to increase the speed and throughput of their platforms. The main challenge is the so called “scalability trilemma”. Any blockchain system in which every node validates every transaction can only have two of these three properties: safety, scalability and decentralization of block production (DBP).
Consensus algorithms have a lot to do with this scalability challenge, so let’s briefly go through the most important ones, see what pro’s and con’s they have and see where they stand in this challenge.
Proof of Work
With Proof of Work, miners compete against each other to complete transactions on the network and get rewarded. It is proven to be secure and it has, to date, a very high degree of decentralization.
Good old Proof of Work does have a few down sides. First of all, it does not scale very well. This has to do with the high degree of decentralization and the computing waste which is a result of mining. Let’s just mention Cryptokitties and the resulting network congestion.
Second, there is the problem of miner centralization and this has to do with the incentive of the algorithm. The barriers for entry of nodes are getting higher and higher and networks using Proof of Work are becoming more and more centralized. Did I mention that ‘little’ company called Bitmain or those gigantic GPU farms located in parts of the world where electric power is relatively cheap?
Blockchains utilizing this algorithm include Bitcoin, Ethereum, LiteCoin and others.
Proof of Stake
With the Proof of Stake, the creator of a new block is chosen in a deterministic way, depending on its wealth, also defined as stake. This means that with Proof of Stake there is no block reward, so, the ‘miners’ take the transaction fees.
The cryptographic calculations in Proof of Stake are much simpler for computers to solve: you only need to prove you own a certain percentage of all coins available in a given currency.
Proof of Stake is also secure and highly decentralized. The upside are the simpler cryptographic calculations which lead to less computing waste and higher network throughput. It is more cost effective than Proof of work.
The downside is, again, the very high degree of decentralization. Although the speed of a network using Proof of Stake is high, the high degree of decentralization still means that scalability is impacted in a negative way. Remember the scalability trilemma? Right, security and decentralization lead to a less scalable network.
Blockchains utilizing this algorithm include Dash, Neblio, Stratis, Next and others.
Delegated Proof of Stake
Now here is a consensus algorithm that I am very bullish about! Delegated Proof of Stake works by using reputation systems and frictionless, real-time voting to create a panel of limited trusted parties. These parties then have the right to create blocks to add to the blockchain. The panel of trusted parties take turns creating blocks in a randomly assigned order that changes with each iteration.
Did you catch the word panel? It means that the number of block producers e.g. nodes is limited. Yes, this means that this consensus algorithm leads to less decentralized network. When compared with PoW and PoS a blockchain based on DPoS is orders of magnitude more scalable while staying secure.
There are a lot of argues about the less decentralized part. But the goal is not decentralization for its own sake. Decentralization is a feature of systems that allows them to achieve other goals: censorship resistance, open participation, immunity from certain attacks, and elimination of single points of failure.
Furthermore, systems are not decentralized or not. It is next to impossible to quantify decentralization. And even so, in some circumstances, Delegated Proof of Stake has proven to lead to a more decentralized system than Proof of Work or Proof of Stake systems.
So, are there any downsides? Besides the less decentralized argument there are still none. It has been battle-tested and proven to be very safe, even in tough conditions.
Blockchains utilizing this algorithm include EOS, Lisk, BitShares, Steem, Icon, Ark, and others
Back to the future
As you can see, something you might have seen as trivial, has a lot of impact on the future possibilities of a chain or cryptocurrency. For instance, a Proof of Work blockchain can never be used to power credit card transactions. You either will have long waiting lines or the transaction costs will be way to high.
Of course, there are initiatives that try to fix flaws. Lightning Network is one example. But I regard these fixes as duct tape on an imperfect system.
Other initiatives are trying to solve the scalability trilemma. Ethereum is experimenting with sharding. Guess where Vitaliks rant about sharting memes originated… In my opinion, users probably do not care.
We already have a way to reach consensus that overcomes the scalability problem. And scalability is what we need. Almost every utilization of blockchain technology requires a network which is fast and has a very high throughput.
In my view, blockchains that use Delegated Proof of Stake are the future. So, take a look at the ones I listed. Furthermore, there is no such thing as one blockchain to rule them all. We will see different blockchains for different applications. Also, I do not see a future for cryptocurrencies that are smart contracts on Proof of Work blockchains. They just do not scale. Just take a look at what problems Kik faced with their Kin Token on the Ethereum blockchain.
The future will bring a cacophony of decentralized applications. And creating them requires blockchains that are easy to integrate in existing solutions. So, there is a future for easy-to-use blockchains.
Please remember, we need blockchains and decentralized applications that actually solve a problem. Be aware of decentralized applications that promote themselves as “An AirBnB on blockchain”, they are just exchanging on middle man for another.
And be aware of blockchains that promote themselves being everything: “We are building the solution for storage, user identity management, decentralized calculations and more”. There is just no such thing as a single solution for these kind of problems.
Investing in cryptocurrencies requires you to look under the bonnet sometimes. Also, the future is not tomorrow and it will take a lot of time to build the empires of the future. And do not expect the central authorities that are currently calling the shot to roll out the red carpet. They will not give up their position very easily. The good thing is that the cat is out of the bag. The blockchain revolution is impossible stop.
Thank you for reading! If you like this article, please share because sharing is caring. It will help me to motivate myself to write more :D. I am also curious, are you able to clap to 50? See you around and be careful out there!