Developers have been talking about the benefits of blockchain technology for many years. They argued this with vague “use cases” along with vague definitions of how the technology works, what it is actually for, and how the platforms that use it differ from each other. Not surprisingly, this has caused confusion and distrust of blockchain technology.
In this article, I want to describe a set of mental models that will help you understand how potential use cases lead to the technical trade-offs that every platform has to make. These mental models are built on the basis of the progress that blockchain technology has made over the past 10 years, having passed through 3 generations in its development: open money, open finance and, finally, the open Internet.
My goal is to help you form a clear understanding of what blockchain is, understand why different platforms are needed, and imagine the future of the open Internet.
A Brief Introduction to Blockchain
A few basics. Blockchain is essentially just a database that is managed by a group of different operators, instead of a single enterprise (like Amazon, Microsoft or Google). An important difference between a blockchain and the cloud is that you don't have to trust the database "owner" (or their operational security) to store valuable data. When a blockchain is public (and all major blockchains are public), anyone can use it for anything.
For such a system to work on a large number of anonymous devices around the world, it must have a digital token that will be used as a means of payment. With these tokens, chain users will pay system operators. At the same time, the token provides a guarantee of security, which is determined by the game theory embedded in it. And although the idea was largely compromised by the boom in fraudulent ICOs in 2017, the very idea of tokens and tokenization in general, which is that a single digital asset can be uniquely identified and sent, has incredible potential.
It is also important to separate the part of the database that stores the data from the part that modifies the data (the virtual machine).
Various circuit characteristics can be optimized. For example, security (in bitcoin), speed, price or scalability. In addition, the modification logic can also be optimized in many ways: it can be a simple addition and subtraction calculator (like in Bitcoin), or maybe a Turing-complete virtual machine (like in Ethereum and NEAR).
So two blockchain platforms can “configure” their blockchain and virtual machine to perform completely different functions, and they may never compete with each other in the market. For example, Bitcoin compared to Ethereum or NEAR is a completely different world, and Ethereum and NEAR, in turn, have nothing to do with Ripple and Stellar - despite the fact that they all work on “blockchain technology”.
Three generations of blockchain
Technological advances and specific solutions in system design have made it possible to expand the functionality of the blockchain over 3 generations of its development over the past 10 years. These generations can be divided as follows:
- Open money: give everyone access to digital money.
- Open finance: make digital money programmable and push the limits of its use.
- Open Internet: expand open finance to include valuable information of any kind and become available for mass use.
Let's start with open money.
First generation: open money
Money is the foundation of capitalism. The first stage allowed anyone from anywhere to access money.
One of the most important data that can be stored in a database is the money itself. This is the innovation of bitcoin: to have a simple distributed ledger that allows everyone to agree that Joe has 30 bitcoins and just sent Jill 1,5 bitcoins. Bitcoin is set up to prioritize security over all other options. Bitcoin consensus is incredibly expensive, time-consuming, and bottleneck-based, and in terms of modification level, it is essentially a simple addition and subtraction calculator that allows transactions and some other very limited operations.
Bitcoin is a good example showing the main advantages of storing data on the blockchain: it does not depend on any intermediaries and is available to everyone. That is, anyone who has bitcoins can make a p2p transfer without resorting to anyone's help.
Because of the simplicity and power of what Bitcoin promised, “money” became one of the earliest and most successful use cases for blockchain. But "too slow, too expensive, and too secure" the bitcoin system works well for storing assets - similar to gold, but not for daily use for services such as internet payments or international transfers.
Setting up open money
For these usage patterns, other circuits have been created with different settings:
- Transfers: In order for millions of people to be able to send arbitrary amounts around the world every day, you need something far more performant and less expensive than Bitcoin. However, your system should still provide a sufficient level of security. Ripple and Stellar are projects that have optimized their chains to achieve this goal.
- Fast transactions: For billions of people to use digital money in the same way they use credit cards, you need the chain to scale well, have high performance, and remain inexpensive. This can be done in two ways, at the cost of security. The first is to build a faster “second layer” on top of bitcoin, which optimizes the network for high performance, and after the transaction is completed, moves the assets back to the bitcoin “vault”. An example of such a solution is the Lightning Network. The second way is to create a new blockchain that will provide the maximum level of security, while allowing fast, cheap transactions, like in Libra.
- Private transactions: in order to maintain complete confidentiality during a transaction, you need to add an anonymization layer. This reduces performance and increases the price, which is how Zcash and Monero work.
Since such money is tokens, which are a completely digital asset, they can also be programmed at the basic level of the system. For example, the total amount of bitcoin that will be produced over time is programmed into the underlying bitcoin system. By building a good computing system on top of a basic level, it can be taken to a whole new level.
This is where open finance comes into play.
Second generation: open finance
With open finance, money is no longer just a store of value or a tool for transactions - now you can benefit from it, which increases its potential.
The properties that allow people to make Bitcoin transfers publicly also allow developers to write programs that do the same. Based on this, let's assume that digital money has its own independent API, which does not require an API key or user agreement from any company to use.
This is what “open finance”, also known as “decentralized finance” (DeFi), promises.
ETHEREUM
As mentioned earlier, the Bitcoin API is quite simple and unproductive. It is enough to deploy scripts on the Bitcoin network that allow it to work. In order to do something more interesting, you need to transfer Bitcoin itself to another blockchain platform, which is not an easy task.
Other platforms have worked to combine the high level of security required to work with digital money with a more sophisticated level of modification. Ethereum was the first to launch this. Instead of a bitcoin “calculator” working on addition and subtraction, Ethereum created an entire virtual machine on top of the storage layer, which allowed developers to write full-fledged programs and run them right on the chain.
The importance lies in the fact that the security of a digital asset (for example, money) that is stored on a chain is the same as the security and reliability of programs that can natively change the state of this chain. Ethereum smart contract programs are essentially serverless scripts that run on the chain in exactly the same way as the most common transaction “send Jill 23 tokens” is performed on bitcoin. Ethereum's native token is ether, or ETH.
Blockchain Components as a Pipeline
Since the API on top of ETH is public (like in Bitcoin) but infinitely programmable, it was possible to create a series of building blocks that transfer ether to each other to do useful work for the end user.
In the “familiar world”, this would require, for example, a large bank that would negotiate the terms of contracts and access to the API with each individual provider. But on the blockchain, each of these blocks was independently created by developers and rapidly scaled to millions of dollars of throughput and over $1 billion in value storage as of early 2020.
For example, let's start with Dharma, a wallet that allows users to store digital tokens and earn interest on them. This is a fundamental principle of using the traditional banking system. The developers of Dharma offer an interest rate for their users by connecting many components that were created on the basis of Ethereum. For example, user dollars are converted into DAI, an Ethereum-based stablecoin that is equal to the US dollar. This stablecoin is then pipelined into Compound, a protocol that lends that money at interest and thus earns instant interest for users.
Application of open finance
The main takeaway is that the final product that reached the user was created using many components, each created by a separate team, and these components did not require permission or an API key to use. Billions of dollars are currently circulating in this system. It's almost like open source software, but if open source requires downloading a copy of a certain library for each implementation, then the open components are deployed only once, and then each user can send requests to a specific component in order to access its general state.
Each of the teams that created these components are not responsible for any excessive EC2 bills due to the abuse of their API. Reading and charging for the use of these components essentially happens automatically within the chain.
Performance and tuning
Ethereum works with the same parameters as bitcoin, but blocks are transferred to the network about 30 times faster and cheaper - the cost of a transaction is $0,1 instead of about $0,5 in bitcoin. This provides a sufficient level of security for applications that manage financial assets and do not require high bandwidth.
The Ethereum network, being a first-generation technology, succumbed to the high volume of requests and suffered throughput of 15 transactions per second. This performance gap has left open finance stuck in a proof-of-concept state. The overloaded network operated like the global financial system in the era of analog devices with paper checks and telephone confirmations because Ethereum has less computing power than 1990 year.
Ethereum has demonstrated the ability to combine components for financial use cases and opened up access to a wider range of applications called the open internet.
Third Generation: The Open Internet
Now everything of value can become money by connecting the internet with open finance and thus creating an internet of value and an open internet.
As noted earlier, the concept of open money has many applications. It has also been described how the next generation technology, Ethereum, has made open money more useful by creating opportunities to combine the components of open finance. Now let's look at how another generation of technology is expanding the possibilities of open finance and unleashing the true potential of the blockchain.
Initially, all the “money” that was mentioned is just types of data that is stored on a blockchain with its own public API. But the database can store anything.
Because of its design, blockchain is best suited for data of significant value. The definition of "meaningful value" is extremely flexible. Any data that has potential value to humans can be tokenized. Tokenization in this context is the process by which an existing asset (not created from scratch like bitcoin) is transferred to the blockchain and given the same public API as bitcoin or Ethereum. As with bitcoin, this allows for scarcity (be it 21 million tokens or just one).
Consider the example of Reddit where users earn online reputation in the form of "karma". And let's take a project like Sofi, where many criteria are used to assess the solvency of a particular person. In today's world, if a hackathon team developing a new Sofi wanted to embed a Reddit karma rating into their lending algorithm, they would need to enter into a bilateral agreement with the Reddit team in order to gain certified access to the API. If "karma" were tokenized, then this team would have all the necessary tools to integrate with "karma" and Reddit would not even know about it. He would just capitalize on the fact that even more users want to improve their karma, because now it is useful not only within Reddit, but all over the world.
Going even further, 100 different teams in the next hackathon could come up with new ways to use this and other assets to create a new set of publicly available reusable components or build new applications for consumers. This is the idea behind the open internet.
Ethereum has made it easy to “pipeline” large amounts through public components, similarly allowing any asset that can be tokenized to be transferred, spent, exchanged, collateralized, altered, or otherwise interacted with, as laid out in its public domain. API.
Setting up for the open internet
The open Internet is essentially no different from open finance: it's just a superstructure on top of them. Increasing use cases for the open Internet requires a significant jump in productivity as well as the ability to attract new users.
To maintain the open Internet, the platform needs the following properties:
- Greater throughput, faster speed and cheaper transactions. Since the chain is no longer just passing slow asset management decisions, it needs to scale to support more complex data types and use cases.
- Usability. As use cases will translate into applications for users, it's important that the components that developers create, or applications developed with them, provide a good experience for the end user. For example, when they create an account or link an existing one to different assets and platforms and at the same time retain control over the data in the hands of the user.
None of the platforms had such characteristics before because of their complexity. It took years of research to get to the point where new consensus mechanisms merge with new execution environments and new ways of scaling, while still maintaining the performance and security that monetary assets demand.
open internet platform
Dozens of blockchain projects coming to market this year have customized their platforms to serve a variety of open money and open finance use cases. Given the limitations of the technology at this stage, it was beneficial for them to optimize their platform for a specific niche.
NEAR is the only chain that has consciously refined its technology and tuned its performance characteristics to fully meet the needs of the open internet.
NEAR combines scaling approaches from the world of high-performance databases with runtime improvements and years of usability improvements. Like Ethereum, NEAR has a full-fledged virtual machine built on top of the blockchain, but in order to “keep up with demand”, the underlying chain balances the throughput of the virtual machine by splitting computations into parallel processes (sharding). And at the same time maintains security at the level necessary for reliable data storage.
This means that all possible use cases can be implemented on NEAR: fiat-backed coins that give everyone access to a stable currency, open finance mechanisms that scale to complex financial instruments and back before ordinary people use them, and finally open source applications. Internet, which absorb all this for daily trading and interaction.
Conclusion
The story of the open internet is only just beginning because we have just developed the necessary technologies to bring it to its true scale. Now that this big step has been taken, the future will be built on the innovations that can be created from these new technologies, as well as the technological equipment of developers and entrepreneurs who are at the forefront of the new reality.
To understand the potential impact of an open internet, consider the "Cambrian explosion" that occurred during the creation of the early internet protocols needed to allow users to finally spend money online in the late 1990s. For the next 25 years, e-commerce grew, generating over $2 trillion in volume every year.
Likewise, the open internet expands the scope and reach of open finance financial primitives and allows them to be incorporated into business and consumer-oriented applications in ways that we can guess but certainly not predict.
Let's build an open internet together!
A small list of resources for those who want to dig deeper now:
1. See how development under NEAR looks like, and you can experiment in the online IDE .
2. Developers wishing to join the ecosystem .
3. Extensive developer documentation in English is available .
4. You can follow all the news in Russian in And
5. If you have ideas for community driven services and would like to work on them, please visit our support for entrepreneurs.
Source: habr.com