Blockchain is a term that has gained prominence in the past year. A quick look at Google Trends shows that interest has spiked rapidly from 2016–2017. This article takes a deeper look at the blockchain, introducing the first of 3 generations of blockchain technology.
Bitcoin (BTC $17,237) has made headlines in the recent months due to its price surging past 10,000 USD, and showing no signs of stopping. The mass market has been drawn to the gains to be had from trading cryptocurrencies, and many have picked up a basic understanding of how the technology works. But with so many ICOs appearing, it can be tough to sift the good from the bad. Understanding the underlying technology is one way to make an informed decision about the quality and viability of a blockchain project.
1st Generation Blockchain Technology
To understand the 1st Generation blockchain technology, we need to take a look at Bitcoin’s Blockchain. Using blockchain technology, Bitcoin was able to become the first successful digital currency in the world. The blockchain ensured that Bitcoin’s supply was set in stone from the onset, meaning that it could never be increased in number even by its mysterious creator. It also ensured that Bitcoin owners would only be able to spend what they had, and that the Bitcoin spent by the individual could not be spent again on another transaction (double spending).
How this was achieved was through the 1st Generation blockchain technology, the distributed ledger. In conventional fiat currency, there exists thousands of private ledgers which did not communicate with each other.
Example of a Bank
John works as a bartender. At the end of the day, he received 200 USD in tips. He takes the money to Bank A and deposits the money. Bank A updates its ledger, and John’s bank account with them now shows that he has 200 USD.
While on the way home, he realizes that he needs some cash on hand to buy dinner. However, the only cash withdrawal machine on his way home belongs to Bank B. Bank B’s ledger does not show that John has 200 USD, and he has no choice but to walk back to Bank A to withdraw his money.
More than just the inconvenience of having to walk to the right cash withdrawal machine, a centralized ledger requires a degree of trust: John has to trust that the bank has his money, and that will return the money to him on request. If the bank’s records are erased, John has essentially lost all his money.
How the Blockchain is different
In the blockchain, the ledger is shared with all participants, making it a decentralized, distributed ledger. Rather than having one central bank recording the transactions, everyone has a copy of the same ledger, and everyone’s ledger is updated regularly. Tampering with a single ledger would not work; if the other ledgers do not record it, it is not validated.
Example of 1st Generation Blockchain
John and 9 other friends have a meet-up session every day. During each session, they tell each other how much each of them has spent, and what they have spent on, over the past day. Each of them has a notebook in which they record down these payments. After they have recorded down all these transactions, they all compare notes to ensure that the results are the same. After ensuring that the results are the same, all 10 of them sign on all 10 notebooks, and they take the notebooks home until their next session.
There are several benefits to this method.
1. The loss of a notebook would have no impact: the records are still stored with everyone else.
2. If any one of them decide to tamper their records, it will immediately become obvious during their next sharing session. A cheater would have to break into 9 other homes, steal their notebooks, replace it with a notebook that looks exactly the same, refill in all the pages that were written on, and forge the signatures for each page before the next session. Now imagine instead of 10 friends, it’s a few thousand friends who hold this session. And instead of a session once a day, it’s once every 10 minutes.
3. There is no need to ‘trust’ one another: transactions are verified, and signed, by all members at the end of each session.
1st Generation blockchain technology was a revolutionary creation that allowed a virtual currency to be valued at 17,000 USD at the time this was written, and was the basis for a new way of thinking about how data should be stored.
Stay tuned for the the upcoming article on Generation 2 Blockchain Technology!