A Beginner’s Intro to Blockchain and Crypto
Blockchain technology, once the most popular subject of discussion just among IT experts — or, should we say, “nerdy nerds” — has recently become a topic of relatively common debate. The challenge when it comes to Blockchain is this: do you focus on the technical aspects of this innovative, disruptive technology or is it something the business side of organizations will need to lead when bringing Blockchain into mass adoption?
Many traditional media outlets have been dealing with this topic, too often in a superficial and distorted manner, confusing it with the other hot topic of cryptocurrencies and the impressive growth, followed by the typical post-hype dump in the value of the Bitcoin. During 2017, Bitcoin strongly took hold of the public imagination, becoming more and more popular in the investment portfolio of many. The positive outcome of all the biased attention Bitcoin received in 2018 was that it drew more attention to its underlying Blockchain technology.
When you look at the number of enterprise companies that started initiating plans for Blockchain in 2018, it vastly outnumbers the amount in 2017 when it started to move into its Hype Cycle. It’s an interesting and exciting time for people that are getting into this technology space, but it might be hard to know what to focus on first since there are many directions you can go with Blockchain.
Blockchains
In early 2017, the main thing people talked about was that it would be hard for enterprises to use Blockchain because it was a public platform in which everyone could have access to your transactions. When you get into the Blockchain space, you start to learn that is moving faster than you think. I like to say “Blockchain is moving at a fast snail’s pace”. By the end of 2017, the Hyperledger platform brought attention to private Blockchains, and as we moved into mid-2018 you started hearing more about Permissioned, Hybrid, and Federated Blockchains. Now you have the following Blockchains to leverage:
Allow for the interaction of peer-to-peer (P2P) transactions, which is what Blockchain was originally built on, giving birth to Bitcoin and allowing any person or company to be a part of it.
Allow for you to decide the number of people that have access to its transactions. Most companies might see this as a platform that makes sense, because of how they currently operate and keep their data internal.
Are similar to Private ones and allows you to select who is a part of the network, which brings tighter controls on your transactions.
Combines the benefit of both public and private ones, with the benefits of keeping the data private but allowing for it to be stored on a public Blockchain.
Is considered to be highly private with having stricter controls, allowing for more privacy but also better visibility and accountability.
In the span of almost a year, you more or less had the equivalent of 4 upgrades on Blockchain that addressed issues and concerns that people had before they would look at using this technology. You also now hear of Blockchain being associated with Digital Ledger Technology (DLT’s), as they both fall within the digital database technology but each has different processes for validating transactions entered into the ledger.
Even with the fast advancements Blockchain has seemed to make, the technology faced challenges, which came mainly from people who only wanted to focus on what they were hearing about cryptocurrency/tokens and what the market was doing. However, even that space has made great advancements over the past year in the way we are beginning to look at what a store of value is becoming.
Cryptocurrencies
Not wanting to focus too much on the fact that “cryptocurrency” is an improper term — at present digital currencies lack at least two of the three characteristics attributable to currencies (value reserve, unit of measure, and medium of exchange). We must, however, focus on the meaning of the word “cryptocurrency” itself. It refers to anything that has value and can be exchanged in an encrypted manner between individuals, without the need to rely on a third-party guarantor. This definition goes beyond the characteristics of the instrument since it applies to both coins and tokens, which are nothing but a subset of cryptocurrencies.
● Coins
Most of the coins on the market are the result of forks (splits) of the Bitcoin blockchain. Each coin has its own reference blockchain and has a protocol that can only be used on it.
● Tokens
Tokens are a digital representation of any asset (equity token) or function (utility token) issued by a decentralized application (dApp) normally built on another blockchain. Unlike coins, there is no need to build a chain of ad-hoc blocks. In fact, by using templates based on the main blockchain, tokens can be released in a much less burdensome and faster manner than any other normal coin. The standard protocol (template) usually uses the Ethereum blockchain, and that is why 85% of tokens are generated using the Ethereum platform (ERC20).
Since 2016, we have been hearing a lot about Initial Coin Offers (ICOs), which have been regarded as a new, alternative way of raising private funds for innovative businesses. An ICO is nothing more than a “promise”, with its terms and conditions digitally written on a smart contract, to return the capital raised through tokens, usually written in the whitepaper that the business itself releases to attract investors. At this point though, a distinction must be made between the various kinds of tokens:
Represent investments in real physical underlying assets, company shares, income streams, or a right to dividends or interest payments. In terms of economic function, tokens are analogous to stocks, bonds or derivatives. This ensures that security tokens are digital assets that are subject to the rules of financial regulators. In legal terms, they are a mixture of digital assets (tokens) and traditional financial products; one may say that they simply represent a new technology that enhances old things. If cryptocurrencies, such as Bitcoin and Ethereum are sometimes referred to as “programmable money”, security tokens can be considered as a form of “programmable property”. This means that any property asset can (and will probably) be tokenized (public and private actions, debts, real estate, etc.).
Are tokens that do not comply with the current regime in the field of equity securities because, in addition to being tradable on the markets, they have a concrete use within the platform.
Since the ways in which tokens are generated and released are established in advance and explained in the whitepaper itself, unlike what happens for cryptocurrencies, they do not involve any mining activity from the network of ecosystem actors.
One of the biggest benefits of Blockchain, besides Bitcoin, is smart contracts. In the late ’90s, the well-known cryptographer Nick Szabo coined the term to explain a new form of digital protocols you could have with unknown individuals over the internet. Blockchain technology has been able to bring that to fruition and is seen as a key factor in allowing for people and organizations the possibility to phase out third parties in certain transactions.
Smart contacts are primarily code that sits on a Blockchain platform and self-executes based on pre-set, agreed upon rules. When those pre-set rules are met e.g. “If this, Then That” the contract executes by itself with the predetermined approved output. Some of the key components of smart contracts are that it self-verifies and executes, and it can’t be altered or manipulated because of its connection to Blockchain technology.
If you look at all the industries that are highly regulated or have the need for contracts or 3rdparty involvement like insurance, finance, healthcare, and the legal sector, smart contracts have the ability to address many of the bottleneck issues those industries face. Being able to leverage smart contracts gives those companies the opportunity to bring greater value and bigger savings to their customers. There are more than a few Blockchain platforms that are good for building smart contracts, but the most known one is Ethereum and their ERC20 token.
Challenges With Smart Contracts
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Right now, smart contacts are the most known application that enterprise organizations are becoming familiar with, but they do come with some challenges in this early stage of the technology like:
There are still various business obstacles it needs to overcome.
● Learning Curve
Many business roles will need to be changed.
● Standardization
Each industry will need to establish the right standards to benefit their needs
● Data Privacy
How to address GDPR regulations with existing smart contracts
● People’s Expectations
Some over-excitement on the existing ability current smart contacts can provide at this time
There are other applications that can be built with Blockchain with the addition of smart contacts called dApps, and these bring other great benefits that can be leveraged, but also come with some challenges because of the newness of the technology.
The word dApp is an acronym for decentralized application: a software created through smart contracts that link the Ethereum blockchain, or any other suitable platform, to the back-end of an app. The dApps developers write sets of smart contracts that determine the overall function of each decentralized application. At the current state of technology, it is impossible to create a complex application and at the same time preserve the added value of decentralization, due to several technological limitations, among which the most impacting are:
Bitcoin can bear an average of 5–7 tx/s, Ethereum 12 tx/s, compared to a Visa circuit, which can sustain up to 1,200 tx/s or a simple application like Facebook, which can even manage more than 1,000,000 tx/s;
A Bitcoin transaction costs about USD 2.00–7.00 and an Ethereum transaction without a smart contract costs about USD 0.3–0.8, clearly showing how such costs are not acceptable for an application that requires millions of transactions per second;
● Bottlenecks
A fundamental problem is that all applications run on the same network, leading to periods of congestion where transactions can increase tenfold, driving up costs or even fail.
In order to solve the limitations related to transactions per second and costs, while still guaranteeing security, solutions such as the Raiden Network for Ethereum and the Lighting Network for Bitcoin have been created. Allowing to establish a private and distributed connection between multiple users, where only the first and the last transactions are validated on the blockchain, these solutions prove to be particularly useful for micro-payments and to store data on actions taken among several less significant participants.
Another solution to the problem of scalability, which has been promoted by the Ethereum team, is called Ethereum Plasma and consists of a protocol for the decentralization of federated blockchains. Federated blockchains, which differ from the other kinds of blockchain in the fact that they operate under the leadership of a group, are mainly used in internal company protocols and are infinitely scalable, but at the same time centralized, since they rely on a limited number of selected and non-anonymous validators.
Plasma offers developers the ability to create and customize their own private blockchain through a smart contract, with or without a reference cryptocurrency and federated validators, but still maintaining the quality control offered by the Ethereum Public Blockchain, thus generating a parallel, off-chain model, where Ethereum acts much like the “Supreme Court” and the private blockchain as the “State”.
In the last year, the blockchain technology underlying crypto-assets has experienced exponential growth, determined by the demand for the development of the first generation of decentralized applications. This scenario has led to the birth of many second-generation projects, both aimed at testing new and scalable methods of validation, such as Casper, NEO, or EOS, and at testing new blockchain applications focused on specific real-life uses, such as IOT, Big Data, Hosting, etc.
This, in turn, led to the third-generation concept of blockchain: interoperability. Interoperability carried out by projects such as AION, Polkadot, Cosmos, and ICON, allows an application to interact with multiple blockchains, opening the way to the first real generation of complex decentralized applications, which for each function needed, are capable of selecting the most performing blockchain and applying it to the use case without risking bottlenecks or network defects. Interoperability leads to what we like to call “Blockchain as a Microservice”, since we are now able to structure modern applications as divided into many dedicated and replaceable microservices. Much in the same way, the first generation of decentralized applications will continue to use blockchain technology, constantly catalyzing innovation and stimulating further research into its evolution, guaranteeing the possibility of scaling over time, without downgrading in terms of data validation efficiency.
Over the years, when any new or innovative technology came out it, was normally the IT departments who played a central role in getting their companies up to speed on its benefits and managing it. Blockchain is bringing a change to that approach, and one of the hurdles faced is that businesses are having a challenge in understanding that the business side will be more affected and need to change more than IT.
In the report Blockchain, Enigma, Paradox Opportunity conducted by Deloitte Consulting, they go on to say:
“It has been estimated that Blockchain is about 80 percent business process change and 20 percent technology implementation. This means that a more imaginative approach is needed to understand opportunities and also how things will change”
This concept of the business needing to make the major adoption changes associated with new technology is challenging for many senior leadership types. It will require a shift in the mindset of how companies will need to look at leveraging this technology since it’s going to change business and governance models along with whatever strategic roadmaps might already be in place. If organizations haven’t started looking at implementing a digital transformation mentality, it should be an area that should be considered if they are thinking of moving forward with the adoption of blockchain technology.
Many people still like to focus on just the functionality and features of Blockchain and get stuck there. If you look closer to where the disruption from Blockchain will come, it will lead you to focus on the business side of organizations, and the ways in which they will need to adapt to how the world will be doing business as Blockchain is increasingly adopted globally.
Even with all the great benefits Blockchain will bring to the business side, it will behoove businesses to become more educated on how they can leverage the crypto/tokenization side of Blockchain as well. It has the opportunity to advance faster recognition of revenue and increase the ability to conduct business transactions with easier processing of funds.
A new offering that has been gaining more attention for the exchange of capital is Security Tokens Offerings (STO’s). They bring a more regulated way for companies to leverage this technology than was previously thought. With over USD 15 billion raised worldwide, ICOs are generally unregulated and therefore expose those who purchase their tokens to significant risk. The high risk associated with the absence of regulation has led to the emergence of a new trend: STOs. If you think of security tokens as a niche market, you are wrong! Although more restricted than cryptocurrencies, the security tokens market is rapidly growing and continues to evolve. Security tokens have many of the characteristics of traditional financial products, but the main difference is that they are tokenized and managed through smart contracts on a blockchain platform.
These innovations present the opportunity to renew the traditional securities issue and exchange system. Security tokens represent a completely new and more efficient method of collecting and allocating capital. The efficiency of security tokens derives largely from the removal of intermediaries, given that the smart contracts involved allow for the automation of all processes. However, the technological infrastructure underlying the creation of such digital securities makes it possible to create a wide range of innovations, many of which still to this day remain unexplored. Among these, there are programmable securities, which certainly represent one of the most relevant opportunities introduced by security tokens. In this case, certain rights embedded in any one of these digital securities, such as the right to payment of dividends (e.g., monthly dividends) and the right to vote, are directly programmed in the security itself and automated. Furthermore, thanks to the blockchain technology, the property of tokenized securities becomes immutable and unquestionable, once registered on a decentralized ledger. This also allows instant transfer of securities from one owner to another at relatively low costs. The costs of issuing, exchanging, underwriting, reporting and compliance can be dramatically reduced due to the automation of these processes.
Nonetheless, all this makes it possible for the largest investments to be split into smaller units, allowing co-investing. Finally, thanks to the decentralized ledger technology, all operations related to security tokens are visible, making manipulation and corruption more difficult. The asset tokenization process can be applied to numerous categories of assets to increase the liquidity of currently illiquid sectors and offer new investment opportunities to small investors. In addition to physical and intangible assets, such as patents, assets that may soon be represented by security tokens include fractions of shares and dividends, as well as individual company products, public debt, exchange-traded funds (ETFs), Real Estate Investment Trusts (REITs), and Index Funds.
From a sociological and philosophical point of view, the use of the blockchain technology requires us to change our conception of relationships among different parties: it is no longer a social pact, but a matter of trust in the code regulating transactions carried out by such parties. We are, thus, pushed to believe blindly in the technological efficiency of the blockchain, coming one step closer to what Lawrence Lessig had predicted in his book “Code and other Laws of Cyberspace”: the code is law. In the cyberspace that he envisions, the code that governs the blockchain becomes the one and only rule to follow, even when not fully understood. Those that are particularly enthusiastic about blockchain even believe that this technology may inspire the creation of new forms of government, completely reliable and transparent, shifting the political paradigm from competition to cooperation between the parties and redistributing the economic value produced.
For now, however, there are still many problems to be solved both from a legal and an infrastructural standpoint. The risk of ending up in a chaotic situation with many fragmented blockchains is still to this day very high and could break the crypto-enthusiasts’ idyllic dream of having an economic system of businesses distributed in the decentralized network.
About John Riley III
John Riley III is the CEO and Co-Founder of C-N-C Blockchain Advisory company. He has over 17 years’ experience in the software applications space working for companies like Oracle and SAP. He has primarily worked in the consulting services sector assisting organizations with their software implementations, business process changes, digital transformation initiatives, and end-user adoption training. He has spoken at various Blockchain conferences and events, and was recognized in Bitcoin Magazine in 2017 for his work with Blockchain Meet-Up groups. He’s also a U.S. Marine war veteran.
He is the Organizer of the BlockEv West Palm Beach Blockchain Meet-Up group and Co-Organizer of the West Palm Beach Linux Foundation Hyperledger Blockchain Meet-Up group.
ABOUT ELOISA MARCHESONI
Eloisa Marchesoni is the youngest ICO, IEO and STO Advisor in the crypto scene at the moment, as well as an influential Article Author for some of the most important media, and a Blockchain Evangelist. She has been nominated Europe’s #1 Token Model Architect and Due Diligence Expert. Eloisa is one of the leading women in the blockchain industry, being listed as such by Humans of Blockchain and actively involved with the NYC Women in Blockchain, and is a member of various blockchain associations. She is a Director of the Bocconi Startup Grind Chapter, being that she is an Economics and Management student at Bocconi, getting ready to attend a MiB at Hult Int’l.
Published March 1, 2019. Views are the author’s own and are not financial, legal or tax advice.
