A Look At One Of The Most Revolutionary And Disruptive New Technologies
By Jesús Cedeño
The words blockchain and cryptocurrency are becoming increasingly familiar. It seems like they’re mentioned on the news almost every day, generally speaking about Bitcoin. Since some articles talk about the bitcoin blockchain and some about the bitcoin cryptocurrency, a lot of people think the two words are synonyms. However, that’s not true. Those words refer to two different, albeit related concepts. Blockchains are the technology that makes cryptocurrencies possible. And, when push comes to shove, they are just very sophisticated and secure ledgers. In this article, we’ll be taking a look at blockchains to find out what they are, how they work, and why there’s so much fuss about them.
Blockchains have the potential to revolutionize not only finance but also areas like education, healthcare, and others.
Remember Ledgers?
Ledgers have been at the center of financial transactions for thousands of years. They probably started out somewhere in the Middle East as clay tablets where merchants could keep track of their sales or inventory.
Fast forward a few centuries and, with the exception of having switched clay for paper, ledgers remained pretty much unchanged. You’ve probably seen them in films or TV shows, generally in the form of large, heavy tomes full of rows and rows of numbers. Even in recent times, ledgers switched from physical to digital but otherwise remain the same. But why are we talking about ledgers in a story about what’s supposed to be one of the most revolutionary and disruptive of new technologies? It’s because, at their core, blockchains are ledgers. But of a new kind, called distributed ledgers.
Distribu- What?
Let’s imagine you are a small business owner, circa 1985. You’re using the latest technology for your accounting needs, meaning a PC running MS-DOS and the latest version of Quickbooks. But, despite how modern your system is, it carries over a problem from the physical ledgers your father and grandfather had in their businesses: They are centralized. That means that there is only one original copy of the entire ledger.
If your computer crashes, you might end up with nothing. If someone hacks into your computer, your accounting could be corrupted. You can make backups, of course. But will you do it regularly or forget to do it every once in a while? Can you always be absolutely sure that the latest changes in your date have been backed up? I’m sure you’re seeing the problem by now.
But what if you had a backup system that would automatically create thousands of identical copies of your ledger, spread out over thousands of computers all over the world? A system that contains in itself the ability to verify each transaction and make sure everything is recorded correctly and consistently in a way that is also tamper-proof. Since there is now not just one copy stored in a single place, your ledger is no longer centralized; it’s distributed. Keep in your mind that image of thousands of identical and verified copies of a ledger spread out over thousands of locations. Now you have a much better idea of what a blockchain actually is.
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So how do you build a blockchain?
Let’s stick with the paper-based ledgers for a while longer to illustrate how this all works.
Suppose you want to hire an accountant to keep your books. But you want to not only have the best one you can find, but you also want to make sure their work is completely spot-on. So you place an ad in the paper. But this ad isn’t like the others. The ad includes a puzzle. Maybe a riddle or something only people who are really good with numbers will be able to solve. And you will hire the first person to come up with the correct solution, but you’ll hire them for just one day.
That person will then record all the day’s transactions into the ledger, send a copy to all the other participants, and get paid. At the end of the day, you publish a new ad with a new riddle, just like the day before, but with one difference: All entries must include the previous day’s solution at the top of the page. But otherwise, it’s all the same.
The first person to answer the new puzzle correctly gets the job, sends out copies, and gets paid. And so the process repeats itself over and over again. Finally, each participant ends up with a complete copy of the ledger, with each page linked to the one before by the answer to the previous day’s puzzle.
What happens if someone tries tampering with the information on one of those pages? You would end up with a page that is different from all other copies of that page, which would be automatically rejected, deleted, and replaced with an untampered copy. This is basically how a blockchain operates, except that it’s completely digital, with no paper pages.
Why are they called “Blockchains”?
This might be the easiest question to answer. Remember the example in the previous section with the ads for accountants? In that example, the information was recorded on physical pages.
Computers, of course, do things differently. The information will now be stored in a unit or information called a “block” and since each new block is linked to the one before it, we are effectively creating a “chain of blocks.”
What are blockchains good for?
Blockchains have the capacity to greatly influence many aspects of our everyday lives. Since they are, as you are now aware of, just ledgers (admittedly, a new generation of ledgers, but still ledgers at their core), they are great for holding any kind of record, especially those that require security and immutability. And that means they can go way beyond financial transactions.
They could hold academic grades, degrees and transcripts, legal transcripts and records, land and property ownership records, you name it.
Newer blockchains even have the capacity to run smart contracts and even whole applications. Now, a whole new generation of blockchain-based social media tools is emerging. And they are providing interesting alternatives to traditional platforms like YouTube, Twitter, or Facebook.
But Aren’t Blockchains Bad For The Environment?
You may have heard a lot of talk about Blockchains being bad for the environment.
For example, back in May 2021, Tesla CEO Elon Musk stated via Twitter the company would stop accepting Bitcoin payments due to environmental concerns1. However, the United Nations stated that blockchains could have a positive impact on the people fighting the climate crisis and on the environment in general.2 So which is it? Are they good or bad?
First of all, now that you know that Bitcoin and Blockchain are two different concepts, look again at both statements. Elon referred to the Bitcoin cryptocurrency (and, implicitly, the Bitcoin blockchain it runs on), while the UN is talking about blockchains in general. But if one blockchain is bad, they must all be equally bad right?
Not at all. How much energy a blockchain needs to operate depends, largely, on its consensus mechanism.
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Consensus What?
A blockchain’s consensus mechanism or consensus algorithm is essential to the chain’s operation. It’s what allows computers on the network to validate and secure the information stored in it. There are several different mechanisms in use today, but the main ones are called Proof of Work (PoW) and Proof of Stake (PoS). There’s also a newer iteration of the latter called Delegated Proof of Stake (DPoS). Let’s look at them a little closer:
PoW
In Proof of Work blockchains, each computer that’s plugged into the network as a node competes with all other nodes to be the first to solve a complex mathematical puzzle. The winner gets to create the new block (which is then transmitted to every other node) and receives a reward.
The computers doing this are called miners. The thing is, blockchains are designed to generate a block in a specific average time. The Bitcoin blockchain, for example, is designed to produce one block every 10 minutes. The more miners you have working, the more complex those puzzles have to be to make sure they aren’t solved too quickly. While this mechanism has proven to be very secure, it does have one big drawback: Each miner consumes a lot of power and things just get worse as more and more miners are installed. Bitcoin and Ethereum both use Proof of Work consensus, although there are plans to switch Ethereum over to Proof of Stake.
PoS
Proof of Stake was proposed as a consensus mechanism to solve the problem of PoW’s massive energy requirements.
First, PoS blockchains involve no actual mining. Any person who owns some of a PoS blockchain’s native token can “lock” or “stake” them into the blockchain itself. It chooses a small number of Validators from those stakers. Several factors make a person more or less likely to be chosen as a Validator, including how many tokens they staked and how long they’ve been staking them.
Since only Validators do the actual computing, it secures the blockchain. Also, only a small number of validators are ever selected. So, PoS blockchains can run using only a tiny fraction of the energy required by PoW blockchains. Cosmos, Cardano and Solana are some of the popular PoS blockchains today.
DPoS
Delegated Proof of Stake is a variation of the Proof of Stake consensus algorithm designed to be more democratic. In DPoS, Validators aren’t randomly selected by the blockchain but are voted in by users who own the blockchain’s native token. EOS is the most popular DPoS blockchain.
Other consensus mechanisms are out there. Some of them, just as DPoS, are variations on PoS. These all have the advantages of allowing token owners to earn passive income by staking their tokens. Also, they have much faster transaction speeds compared to PoW blockchains. (For example, the average transaction time on Bitcoin is 10 minutes. Meanwhile, on EOS, it’s almost instantaneous.)
Furthermore, they are much more energy-efficient. It’s estimated that EOS is over 66,000 times more energy-efficient than Bitcoin and has been stated to be the world’s first major carbon-neutral blockchain.3
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So how Power-Hungry are Blockchains?
We’ve pretty much established that Bitcoin consumes more power than any other blockchain. But just how much power is that? How bad is it really?
The University of Cambridge’s Centre for Alternative Finance estimates that Bitcoin consumes about 124 TWh of electricity per year.4 That number represents about 0.6% of the world’s total annual energy production. That means it uses more power than countries like Norway or Argentina.5
That’s certainly a lot of power and no one can deny it. However, the traditional banking system uses about three times as much electricity, taking into account the consumption of branch offices, ATMs, servers, and security. 6 Of course, traditional banking serves a lot more users but uses even more power in things like printing bills, minting coins, and getting the raw materials (cotton, metals, and plastics) used to make currency. All in all, Bitcoin likely uses less power than the traditional system.
If we start talking about more energy-efficient blockchains like Cardano, EOS or Ripple, we could be talking about a global financial network or payment processor that can run on a tiny fraction of the traditional system’s power. In short, while there are understandable issues with the amount of power Bitcoin requires, other blockchains are a lot greener than most people give them credit for.
Wrapping it all up…
I hope this article has given you a clearer picture of what blockchains are; the latest iteration of the ledgers we’ve been using to store transactions and other kinds of information for thousands of years. You now know that blockchains can be used to store all kinds of information in a secure, immutable way. They have the potential to revolutionize not only finance but other aspects like education, healthcare, and others.
You also know a bit about the different consensus mechanisms blockchains use and how that relates to their energy requirements and environmental impact.
Blockchains are still in their growth phase, with many interesting projects in development or early deployment. It’s sure to be an exciting time to watch and I hope you’ll be along for the ride.
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Sources
1. Elon Musk. Tesla & Bitcoin [Internet]. @elonmusk. 2021 [cited 2021 Dec 17].
2. Sustainability solution or climate calamity? The dangers and promise of cryptocurrency technology [Internet]. UN News. [Cited 2021. Dec 17.]
3. Authority EOS. Making EOS the first major carbon neutral blockchain [Internet]. [cited 2022 Jan 5].
4. Cambridge Bitcoin Electricity Consumption Index (CBECI) [Internet]. [cited 2022 Jan 5].
5. Bitcoin consumption beats Argentina’s annual energy use [Internet]. [cited 2022 Jan 5].
6. Bitcoin mining actually uses less energy than traditional banking, new report claims [Internet]. The Independent. 2021 [cited 2022 Jan 5].
