Diving into the history of cryptocurrency and blockchain technologies and why they gained importance
1991 & 1992: Securing Document Timestamps
The first time a cryptographically secured chain of blocks was used, was back in 1991 by Stuart Haber and W. Scott Stornetta. Their goal was to implement a system where the timestamps of documents could not be manipulated. In 1992, Merkle Trees were included to the design, which enabled the collection of documents into a block.
2008 – Bitcoin, Satoshi Nakamoto & Blockchain 1.0
Blockchain 1.0: Satoshi Nakamoto can be referred to as the unknown inventor of Bitcoin, a peer to peer electronic cash system, as described in Nakamoto’s whitepaper, published in 2008. That’s when Blockchain technology made its public debut.
The underlying Blockchain technology of Bitcoin has developed to be one of today’s biggest ground-breaking technologies with potential to revolutionize and disrupt industries. The most prominent industry is the financial industry. Bitcoin may make banks & custodians obsolete, due to its widely decentralized Blockchain network, which takes care of securely storing and transacting assets all by itself. Ever since its emergence, the Bitcoin network could not be hacked, and the network can be seen a global phenomenon.
Since the project as well as the whitepaper of Bitcoin is open source, it allowed anyone who is interested to build on the existing code. That’s how the emergence of alternative cryptocurrencies (Altcoins) have begun. Litecoin and Namecoin were two of the first early adopters of the Bitcoin source code.
As for a while, Bitcoin and Blockchain were perceived to be the same thing, Bitcoin is an application powered by Blockchain technologies.
Cryptocurrency advocates often show traits of anarcho-capitalism, which is a political philosophy that favors the elimination of a centralized state dictum in favor of self-ownership, private property and free markets. According to the philosophy, money, along with all other goods and services, would be privately and competitively provided in an open market.
Bitcoin serves that purpose by being a viable, secure, decentralized & global alternative to fiat currency.
What is Blockchain?
Blockchain itself is a decentralized, distributed ledger, designed to record transactions permanently, without third-party authentication. Over the course of time, multiple different types of Blockchain solutions have emerged.
2013 – Ethereum, Smart Contracts, Blockchain 2.0
Vitalik Buterin founded Ethereum, the underlying technology of today’s second largest cryptocurrency by market capitalization: Ether, in 2013.
Blockchain 2.0: Ethereum is designed to be more than just the framework for the cryptocurrency Ether. Its vision is to be a framework and tool to build decentralized Blockchain applications.
Smart contracts shall enable the exchange of any data type peer-to-peer, without any middlemen involved. Previously in the Bitcoin network, only bitcoin tokens could be transmitted. With Ethereum, anyone with technical knowledge shall be able to emit and transfer different types of tokens. These tokens could then be used to resemble bonds, products or services.
From PoW to PoS
Miners are servers that keep up the network by receiving and verifying transactions. Miners are incentivized to do so via reward systems where they earn a share of transaction fees or generate new coins by each solved block of transactions.
The Proof of Work (PoW) system enables mining cryptocurrencies as it is responsible for creating blocks of transactions and verifying them by solving complex mathematical problems using computing power. As a result, those with the largest computational power can mine the most coins.
The Proof of Stake (PoS) system is a different algorithm used for the mining process. Its primary goal is to improve upon issues of cost and energy consumption in PoW, which are concerns perceived by many.
The concept of PoS is to give to most mining power to those who hold the most amount of coins. Prominent coins adopting the PoS system are Peercoin and Nxt. Even though PoW is still most liked among the cryptocurrency community, Ethereum is currently working on switching the consensus algorithm to verify transactions from Poof of Work to Proof of Stake.
Blockchain 3.0: Solving the Blockchain Trilemma: Decentralization, Scalability, Security
Over the course of time, scaling issues became more prominent. As Blockchain technologies offer great security due to decentralization, developers are doing their best to enhance scalability, which shall enable faster transactions and more use cases for decentralized applications in decentralized networks.
According to Vitalik Buterin, founder of Ethereum Foundation, Blockchain systems can only at most have two of the following three properties: decentralization, security, scalability.
Solving the Blockchain Trilemma? Blockchain 3.0: Projects such as IOTA, Nano, Cardano and Hashgraph are examples of projects using enhanced blockchain technologies, directed acyclic graph (DAG) infrastructures or similar, to overcome the so-called trilemma.
One would have to keep in mind that most Distributed Ledger Technology (DLT) solutions are still a work in progress, and they will continue to be a work in progress for an indefinite time. Just as internet and mobile applications become better, faster and more reliable – DLTs will most likely continue to thrive for advancements.
One can say that Bitcoin, resembling Blockchain 1.0, is still the most adopted cryptocurrency and has enhanced its scalability with second layer solutions, such as the Lightning Network, by a lot.
In what area Blockchain technologies will have its biggest impact is highly discussed. One may say it is cryptocurrencies such as Bitcoin, others may say it is in industrial processes such as supply chain management, in order to automize processes and keep track of immutable data.
The traditional financial world doesn’t seem to understand the impact of such decentralized monetary systems just yet, and often still believe in the death of digital commodities such as Bitcoin while they subsidize Blockchain solutions for industrial applications. Some may also say that the traditional banking system is threatened by the technological advancement – the so-called Bitcoin phenomenon – because eventually, it eradicates their business purpose and their power over money supply.
Even the cryptocurrency community is unsure about the future development of Blockchain technologies, but the majority would say that decentralized, public & permissionless blockchain technologies such as Bitcoin will form our future, as it serves the highest value to large number of people, especially in developing countries, where cryptocurrencies facilitate the unbanked and give them freedom and liberty over their own assets.