Why is Blockchain Important?
It’s well known that I’m no fan of cryptocurrency. Contrary to the popular image that crypto is a real alternative to fiat currencies, I don’t believe the hype and have deliberately never invested in any cryptocurrency. Based on recent events (Nov-2022) that choice appears to be a good decision.
One of the biggest issues with blockchain is the wastefulness of the proof-of-work model employed in most of the early blockchains. Work should be productive and deliver something of value, but the problem with cryptocurrencies is that they are not valuable. Cryptocurrencies are merely a collection of numbers, the work done is pointless no matter how expensive it is to perform.
However, blockchain is not restricted to proof-of-work models, and there are significant benefits to what blockchain can provide. Blockchain is important because it records transactions that are irreversible since, once they are recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.
How Blockchain Works
The blocks or records contained in the blockchain are securely linked together using cryptography. Each block contains the cryptographic hash (a unique signature) of the previous block, a timestamp, and transaction data.
The timestamp proves that the transaction data existed when the block was created. Since each block contains information about the previous block, they effectively form a chain, with each additional block linking to the ones before it.
Whether a recently appended block can be trusted and will not be revoked in the future requires a kind of guarantee. Finality provides that guarantee.
Proof-of-work blockchains cannot guarantee an immediate finality of a freshly committed block and rely on probabilistic finality. Essentially the deeper the block goes into a blockchain, the lower the probability is of it being altered or reverted by a newly found consensus. As an example, most Bitcoin transaction platforms wait for at least five blocks to be committed on top of the original one before trusting the transaction and this causes confirmation times in the Bitcoin blockchain to take several minutes.
The Byzantine Fault Tolerance-based proof-of-stake protocols provide near-real-time finalisation, so-called absolute finality. A randomly chosen validator proposes a block, the rest of the validators vote on it, and if a supermajority decision approves it the block is irreversibly committed into the blockchain (finalised). A modification of this method, known as economic finality, is where the validators’ leveraged stake becomes subject to forfeiture if they sign two different blocks at the same position in the blockchain.
Proof of Work vs Proof of Stake
Proof of work (PoW) is a form of cryptographic proof in which one party (the prover) proves to others (the verifiers) that a certain amount of a specific computational effort has been expended. PoW is used by Bitcoin as a foundation for consensus in a permissionless decentralized network. Miners compete to append blocks and mint new currency, each miner experiencing a success probability proportional to the computational effort expended.
A key feature of proof-of-work schemes is their asymmetry: the work – the computation – must be moderately hard (yet feasible) on the prover or requester side but easy to check for the verifier or service provider. This idea is also known as a CPU cost function, client puzzle, computational puzzle, or CPU pricing function. Another common feature is built-in incentive structures that reward allocating computational capacity to the network with value in the form of money.
However, proof of work is extremely bad for the environment. Bitcoin uses 100,000 times more energy for each block than proof-of-stake blockchains and in 2021 the Bitcoin blockchain was responsible for 121 terawatt-hours of electricity consumption, equivalent to the energy consumption of Argentina for the same period. The computational effort and energy expended for Bitcoin mining have no other use (hence my comments in the second paragraph of this article).
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators (minters) in proportion to their quantity of holdings in the associated cryptocurrency. There are potential issues with them being attacked and compromised as a result of their computational energy consumption advantages. This is somewhat mitigated by economic finality, where the validators are penalised if they allow a double-spend or two blocks in the same position.
Fungible or Non-Fungible
In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts is indistinguishable from any other part. Fungible tokens can be exchanged or replaced; for example, a $100 note can easily be exchanged for twenty $5 bills. In contrast, non-fungible tokens cannot be exchanged in the same manner.
For example, gold is fungible because its value doesn’t depend on any specific form. However, a unique item such as intricately crafted gold jewellery would not be considered fungible. In short, a thing is fungible when all equivalent amounts of that thing are interchangeable. Fungible commodities include crude oil, company shares, bonds, other precious metals, and currencies.
Fungibility refers only to the equivalence and indistinguishability of each unit of a commodity with other units of the same commodity, and not to the exchange of one commodity for another.
Non-Fungible Tokens (NFT) are a form of a smart contract recorded on the blockchain. NFTs can’t be copied, substituted, or subdivided.
Business Use Cases for Blockchain
There are several compelling business use cases for blockchain, but smart contracts are the feature that underpins most of them. Blockchain-based smart contracts are proposed contracts that can be partially or fully executed or enforced without human interaction. One of the main objectives of a smart contract is automated escrow. A key feature of smart contracts is that they do not need a trusted third party (such as a trustee) to act as an intermediary between contracting entities — the blockchain network executes the contract on its own.
Verified centralised identity services allow users to create, issue, and verify privacy-respecting decentralized identity credentials helping you enable more secure interactions with anyone or anything.
Other business use cases include the insurance industry such as peer-to-peer insurance, parametric insurance and microinsurance. Financial services are a prime candidate for utilising blockchain for distributed ledgers, and decentralised finance (DeFi) operations. Supply-chain applications for blockchain have been identified for shipping, precious commodities mining, food supply and the fashion industry.
Key Industries Supported
The following industries are likely to benefit or be disrupted by this technology.
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