Blockchain 101

In this post I will attempt to outline common blockchain terminology along with the pro’s and con’s of new projects or processes. I will continue to add to this over time as new terms crop onto my radar or are created. Feel free to comment term requests if you have others to add.

Blockchain – Blockchain is a decentralised (distributed and shared), record or ledger which is public and ever growing. Each user of the blockchain holds a copy (updated by consensus) and each user can validate what is and what is not included on the blockchain making it a secure and trustless process.

Cryptocurrency – is a digital asset based on the blockchain which can be bought and sold using an online ledger with strong cryptography to secure online transactions.

Bitcoin – Bitcoin is a decentralised currency that was finally created in 2009. It was however originally presented in 2008 in a paper called Bitcoin: A Peer-to-Peer Electrconic Cash System, by Satoshi Nakamoto. Satoshi Nakamoto was used as a pseudonym as no-one knows the real identify of the author and hasn’t been active in the online community since 2011. Bitcoin is a type of cryptocurrency because is uses cryptography and keeps the balance in a public ledger on the blockchain. Bitcoin is part of the 1st generation of coins.

Ethereum – is the second largest cryptocurrency and has been largely adopted due to its increased transaction speed and smart contract capabilities which is now the backbone of the majority of communities.

DAO – Decentralised Autonomous Organisation. In 2016 a group of developers created an organisation to automate decisions and processes. However due to programming errors, hackers were able to access the organisation’s 3.6 million ETH and was de-listed as a DAO Token in September 2016. In 2021 the rise of DAO’s returned with mission led groups uniting as decentralised organisations.

DeFi – Decentralised finance. DeFi refers to a group of financial products where software written on the blockchain makes it open to anyone to use, trustless interactions peer to peer or with a software based middleman instead of a company, bank or institution. The aim of DeFi is to decentralise finance and remove intermediaries in a financial transaction. The infrastructure is still in development with regulation and oversight minimal or absent.

In a centralised economy we expect an intermediary to take responsibility and control over every area of our ecosystem. Although this works well, it is not without issue and is open to dishonesty, deceit and fraud by its very nature of being centralised it has a lack of transparency and trust of the intermediary is required. Blockchain enables the opposite, a decentralised and transparent foundation. Block and its uses are still developing and it does mean that you must take responsibility for your own actions and risks as there is no third-party taking responsibility for your decisions, so nowhere for you to go to complain or sue if something goes awry.

DApps – Decentralised Finance apps

Typical benefits of Blockchain / DeFi – Reduced costs in many areas as you eliminate intermediaries you significantly reduce additional costs of doing business and therefore reduces the cost to users. Faster than traditional methods – governed by smart contracts you remove additional validation and human layers traditionally involved to validate and approve which means you can receive validation of your transfer in minutes not days all at a lower cost. Full transparency, anyone can check what is on the blockchain so you do not need to trust anyone you just need to validate if true. Automation is in its nature taking the manual element out of typical processes.

Challenges with Blockchain, DeFI, Cryptocurrency,

• Liquidity, although as of October 2021 there is over $12.5 billion in DeFi, liquidity is still an issue for DeFi as compared to traditional systems it is tiny. Liquidity is defined as the speed you can buy or sell an asset without it affecting the stability of the asset’s price and also how readily it can be converted into cash. Liquidity in cryptocurrency enables fairer pricing for buyers and sellers in the market, making the market more stable and facilitates faster transactions.

• Complexity is still quite a hurdle for the average person, as with centralised finance or centralised processes the third party has had years to build solutions to do all the hard work for us. With DeFi still in progress processes in the Web 2.0 world are quite complex in comparison to today’s click a button world.

• Scalability – scalability issues affect the entire blockchain and any dependents. In DeFi the scalability issues are typically due to the way in which the Ethereum network has been built (which most of DeFi is built on). Ethereum can only process 20 transactions per second, and it takes a few minutes for the system to confirm a transaction. Along with this the transaction or gas fees are high and encounter price fluctuations due to usage spikes. However In Feb 2022 Ethereum 2.0 will address this problem completely when they roll out Ethereum 2.0. Bitcoin also suffers from the same issue (this issue was in part what gave birth to Ethereum which is more than double the speed of Bitcoin) which can only process 6-7 transactions per second. Layer 2 protocols are currently the solution to this problem, as heavy processes are done off blockchain and result in faster transactions which solve Bitcoin’s scalability issues.

• Security within fraudulent closed source third parties – In this decentralised world you are responsible for what you approve. You must do your research and be very wary, especially if you are asked to blind sign something that you are not sure what it’s doing. Biggest lesson to learn from recent issues such as Luna Yield, is do not trust a closed source on the blockchain and do not blindly sign anything. We need to develop a new set of behaviours in the decentralised world than in our centralised one.