Blockchain, the Story of Decentralization and Tokenization

What is Blockchain and why should you care?

First published in ESTIEM Magazine (https://issuu.com/estiem/docs/magazine_54_rgb - 10.str)

In essence, Blockchain is just a transactional database that stores data in a decentralized manner and has never been hacked. Sounds boring, I know.

Current state of Blockchain is very similar to the Internet in the 80s, as it is still underdeveloped, lacks standards and there are very few mature use cases and production-ready applications.

The main difference is that, unlike the 80s, we now actually do have Internet and many opportunities and problems that Blockchain created are now discussed very publicly and hyped like crazy, which leads to unrealistic expectations, which positions Blockchain pretty much at the peak of inflated expectations of Gartner’s hype cycle.

So why is it important now if most of it is still hype? Mostly because the opportunity behind it is so huge as it offers us a possible way to remove any middle-man from any transaction in the world.

It enables us to store and share high-value information without a central authority that could cancel, change or force transactions and is a very powerful way to introduce trust and remove middle-men from industries that have competitors that are sometimes forced to cooperate with one another and need third-party services to keep them in check and honest.

Cryptocurrencies

Most people associate Blockchain with a cryptocurrency that we call Bitcoin. Bitcoin is the first Blockchain use-case that saw the light of day and it was followed by many other cryptocurrencies.

Satoshi Nakamoto, creator of Bitcoin announced the first release of Bitcoin, as a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority.

Double-spending is a potential flaw in a digital cash system in which the same “coin” can be spent more than once. This is possible because digital money consists of a digital file that can be duplicated or falsified. As with counterfeit money, such double-spending leads to inflation by creating a new amount of fraudulent currency that did not previously exist. This devalues the currency relative to other monetary units and diminishes user trust as well as the circulation and retention of the currency.

There have been many attempts to create digital money in the past, but they all failed in the end because they tried to solve the double spend problem by introducing centralized ledgers where the creator of the digital currency was the one responsible for maintaining the system and trust in all transactions.

In order to eliminate the double spend problem, we have to have someone verify all transactions and stand behind them. However, it is very hard to trust that single entity as it can be compromised, tricked or hacked.

So, the single most important part of Satoshi‘s invention was that he found a way to build a decentralized digital cash system that introduced trust as its main component by introducing something called Proof of Work, which is a way to verify transactions entered into a digital ledger by having verifiers (called ‘miners) solve hard cryptographic functions by investing some work of their computers to qualify for this task.

This makes it very expensive to verify false transactions and protects the system while making it completely transparent, immutable and decentralized.

Bitcoin is no longer the only cryptocurrency. It solved one of the hardest problems related to digital money and introduced us to the world of decentralized ledgers and databases (Blockchain). However, Bitcoin transactions are quite expensive and the current price is volatile which makes it hard to be used for real life payments. There are many problems with Bitcoin scalability and speed which are mostly showing up due to limitations of Proof of Work and size of the database itself which is growing more and more every day.

So many more Cryptocurrencies showed up in a desire to solve problems that Bitcoin has and also to introduce other use cases for public Blockchains besides digital money.

Today cryptocurrencies have become a global phenomenon known to most people. The number of different cryptocurrencies available over the internet as of 7 January 2018 is over 1384 and growing.

Tokenization and Decentralization

Blockchain technology radically changed the way we think of investment and finance.

If you really think about it, Bitcoin, as a decentralized network of peers which keep a consensus about accounts and balances, is more currency than the numbers you see in your bank account. What are these numbers more than entries in a database – a database which can be changed by people you don‘t see and by rules you don‘t know?

People who really believe into the power of Blockchain believe that in the coming years' everything will be tokenized, creating a world where the value is held and distributed via peer-to-peer networks rather than centralized hubs.

This means that any value could be represented by a “coin” or a “token” that could be traded on an open token market. I could issue my own “token” called Ivan’s coin and have people hire me as a consultant by buying these tokens that could represent my consultant services. The more people are willing to pay for money I personally issued the more its value would rise making me richer.

So, the idea of tokenization is that anything scarce will ultimately be tokenized because the benefits of digitization and increased liquidity are so great. That means cash, stocks, bonds, commodities, houses, cars, digital goods of every kind, and perhaps human time as well in the form of the personal token described above.

This already created a hype around ICO’s (Initial Coin Offerings), which is a way to crowdfund Blockchain based projects by investing into them and hoping their value will rise over time.

The ICO market is huge with billions of dollars being raised and still mainly unregulated, although more and more steps for introducing regulation and more security for investors into cryptocurrencies and Blockchain projects are being made.

Private vs Public

In some cases having a transparent, immutable and decentralized system that anyone can is not always beneficial for everyone involved.

Companies might want to exclude middle-man and cooperate but don’t always require to have public tokens anyone can use to trade or want everyone to have access to some of their data.

So one disadvantage is the openness of public Blockchains, which implies little to no privacy for transactions.

Second drawback of a public blockchain is the substantial amount of computational power that is necessary to maintain a distributed ledger via Proof of Work at a large scale.

Both of these issues are important considerations for enterprise use cases of Blockchain.

So, the main distinction between public and private blockchains is related to who is allowed to participate in the network, execute the consensus protocol and maintain the shared ledger.

The second distinction is the lack of Proof of Work. Private Blockchains solve PoW problems mostly by using other ways to reach a consensus that is less expensive. Some examples are Proof of Authority and Proof of Delegated Stake, which are considered quite safe in an environment where only trusted individuals are allowed into the network.

Hyperledger Fabric is an example of a Permissioned blockchain framework implementation and one of the Hyperledger projects hosted and maintained by The Linux Foundation and IBM. It has been designed ground up to cater to these enterprise requirements.

So what is next?

While Blockchain is still in its early development stages it looks like it’s here to stay and continue growing.

Cryptocurrencies are still the most talked about current use-case because of rapid growth in value some of them saw in the near past.

However, more and more companies are playing around with proof of concept solutions based on public and private Blockchains and the blockchain market size is expected to grow from USD 241.9 million in 2016 to USD 7,683.7 million by 2022 with more and more market share coming from private Blockchains and enterprise market.

The new wave of Internet technologies is definitely coming and fun times are ahead.

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This topic is kept alive in our Proof of Value publication.