Widely praised as a potentially revolutionary technology with applications in most industries, blockchain technology is still a relatively new tool that was first made public in October 2008 with the release of the seminal Bitcoin whitepaper, titled: Bitcoin: A Peer-to-Peer Electronic Cash System.
Produced in response to the then global financial crisis now known as the “Great Recession”, Bitcoin was designed to address the shortcomings of fractional reserve banking — an almost ubiquitous form of banking that allows banks to hold just a small fraction of depositor funds as reserves while using the rest for various business purposes. This arguably leads to greater default risk and has required some banks to be bailed out.
This crisis fueled a revolution in alternate monetary systems that are 100% backed, globally accessible, and completely decentralized — removing banks, governments, and other centralized intermediaries from the financial equation.
By the end of this lesson, you should have a basic grasp of the rationale behind modern blockchain platforms and should have an understanding of the direction the blockchain industry is currently moving in.
Contrary to popular belief, the words blockchain and Bitcoin are not synonymous. The former is a type of decentralized network that allows a large number of people to contribute to its operation and security in a peer-to-peer fashion by operating a node or participating in the process of mining. Whereas the latter refers to a decentralized currency system built on a specific blockchain implementation.
Not coincidentally, the inventor of both blockchain architecture and the Bitcoin payment system is a single anonymous entity, known only as Satoshi Nakamoto. Despite all attempts, the real-world identity of Satoshi has eluded investigators — though some potential candidates have been put forward.
That said, these are properties inherent to the Bitcoin blockchain. As we’ll soon see, later blockchain implementations make some trade-offs to better fit their use cases.
Bitcoin is known as a first-generation blockchain. As the first of its kind, it was the proving ground for decentralized ledgers, and its potential was quickly recognized by cryptographers, engineers, and developers the world around — who found that blockchain technology could be applied to a huge number of use cases (besides peer-to-peer payments).
One of these use cases is smart contracts, which are blockchain-based programs that run on a decentralized virtual machine. The second generation of blockchains, more broadly known as smart contract platforms, include the ability to run decentralized applications (DApps). These are simply smart contracts that connect with a front-end user interface, which allows users to easily interact with them.
But while smart contract platforms have become incredibly successful, they also proved to be extremely resource-intensive and early platforms ended up suffering from a problem known as ‘blockchain bloat’ and congestion — due to a lack of scalability. Indeed, most smart contract platforms can only process around 14 transactions per second (tps). This limited their utility while somewhat stalling the uptake of smart contracts and DApps.
So-called third-generation blockchains seek to address this issue by incorporating a number of efficiency improvements, including energy efficient consensus mechanisms (e.g. Proof-of-Stake) as well as several scalability solutions — such as sharding and second layers. Nonetheless, some argue that most present Proof-of-Stake blockchains are more centralized than their Proof-of-Work counterparts.
Finally, there are the fourth generation blockchains. These seek to simultaneously tackle all the problems faced by earlier generations, while bolting on additional functionality — such as cross-chain interoperability and support for multiple programming languages.
The number of fourth generation platforms is currently quite limited but will likely expand in the months and years ahead as third-gen platforms incorporate upgrades to transition to fourth-gen specifications.
Pre-2008: The prelude to Bitcoin: Asymmetric encryption, Merkle trees, elliptic curve encryption, SHA256, and the first Proof-of-Work algorithm (HashCash) are invented.
August 2008: The enigmatic Satoshi Nakamoto publishes the Bitcoin whitepaper.
January 2009: The first Bitcoin block was mined and the first transaction was made between Hal Finney and Satoshi Nakamoto.
August 2012: Peercoin launched and introduced Proof-of-Stake — a more efficient decentralized consensus system.
December 2013: Ethereum Co-Founder Vitalik Buterin introduces the first blockchain-based smart contract platform.
July 2015: The Ethereum blockchain mainnet launched. Several months later, the first wave of Ethereum-based tokens were funded and deployed.
December 2015: The Linux Foundation unveils the Hyperledger platform, which is designed to provide a standard for enterprise blockchains. The first permissioned blockchains enter development.
August 2017: Bitcoin Cash split off from Bitcoin following a hard fork. Shorter after, it briefly held the position of second-largest cryptocurrency by mark capitalization.
October 2017: The Polkadot Foundation raises $140 million as part of its ICO for the interoperable Polkadot platform.
June 2019: Facebook announced a new cryptocurrency known as Libra (and later Diem). The project would later be scrapped.
March 2020: Solana concludes its initial coin offering (ICO), crowdfunding arguably the first third-gen blockchain.
May 2020: Polkadot's Relay Chain goes live as the genesis block is launched.
December 2020: The Ethereum beacon chain activates, marking a significant step toward resolving Ethereum's energy and scalability challenges.