Blockchain generations
Blockchain is usually associated with Bitcoin and cryptocurrencies and there is much more to technology than digital currency. To delve into this, we will analyze the three generations of blockchain and how technology is evolving. Put on your shoelaces, the journey is just beginning!
What exactly is blockchain?
We won’t get caught up in any of the technology problems too much, but basically, blockchain is a ledger that is distributed to multiple computers around the world and can be run by anyone with an internet connection.
What’s exciting about blockchain is that data is not owned or managed by a central person (it’s decentralized) and that data cannot be processed or manipulated once it’s added to the public ledger.
So, this is blockchain in a nutshell (we have a longer summary of blockchain here). But it’s also an evolving site that (like the web) was born with a fascinating idea and expands with each iteration.
1st generation blockchain
The reason why the first-generation blockchain, specifically Bitcoin, was created was for the radical improvement of monetary systems. Empowering people with technology to transact with each other (peer-to-peer), without having to rely on central entities such as banks (intermediaries).
This is where Bitcoin and blockchain go together. Bitcoin is the first real case of using blockchain technology, and its main purpose is as a financial application: Bob can send digital money to Bill, and there is security in this transaction. Both can enjoy privacy because the transaction is anonymous and they can rest easy knowing that the system is safe in technology and that the trust lies in the algorithm and not in a central entity.
2nd generation blockchain
Okay, so Bitcoin is great. There is trust in the system and not in a central authority, there is secrecy in anonymity and there is security.
But the design only allows you to send, receive and trade. What if you wanted terms and conditions on your transactions? Something like “I’ll only pay Bob his cryptocurrency when he delivers the milk to me.” Bitcoin simply cannot cover this.
Here comes Ethereum which brought to the table two very remarkable things:
The innovative smart idea of smart contracts. These are very clever self-executed agreements between two parties. In essence, a smart contract means that the parties involved determine the terms, and once fulfilled, the contract is activated.
So, now Bob can deliver Bill’s milk and when this is done, the digital payment will be activated automatically. The beauty of a smart contract is that it offers a faster, more secure way to execute deals and doesn’t rely on an expensive middleman to manage it.
And the ease of creating a new cryptocurrency is based onthe Ethereum blockchain, where developers could launch their own cryptocurrency project and applications (something that wasn’t as accessible before).
Ethereum behaves less like cryptocurrency and more like an entire digital ecosystem in which other cryptocurrency projects can operate. It acts as a platform that developers can use to develop, just as applications have iOS, decentralized applications (dApps) have Ethereum. From here, we have an exciting variety of functional uses, such as decentralized finance (DeFi), web browsing, gaming, identity management, supply chain management, and more.
3rd generation Blockchain
So, while the first and second generations are excellent at innovation, there are some key fundamental problems they suffer from.
An important issue is that of escalation. Basically, there are too many people trying to trade and too little space for that on the blockchain. It’s the classic “too many cooks in too small a kitchen” problem.
Think of it this way: In the beginning, a company could settle for a birthday cake for the entire office. As the company grew, the number of people who ate this cake increased, but the size of this cake remained the same. This means that more people are taking a smaller portion and have to wait for it in a queue. Bitcoin’s scalability works the same way: Congestion problems occur as too many people try to trade at the same time. This means delays, which is unsustainable for a financial system and high commissions, which are an obstacle to recognition by the rest of the world, especially in developing countries.
Third generation blockchain projects are designed with this in mind, and the technology automatically resolves scalability issues if they arise. Essentially, more cake is bought automatically when needed so that no one expects its piece.
Another issue that third generation blockchain projects solve is interoperability. In the same way that you cannot charge an iPhone with a Samsung charger, the first versions of the blockchain cannot interact with each other. While it may not sound like a big deal, interoperability is vital to the development of the industry.
The world relies on collaboration and systems where information and data can be shared across platforms are critical. Projects like Cardano and Polkadot introduced interoperability functionalities into their blockchain from the start, which means they can work with other blockchains seamlessly.