DeFi services that go beyond simple payment transactions have been around since 2017, but DeFi only really got going in the summer of 2020 – the so-called DeFi summer 2020. So DeFi is still a whole new trend in the crypto space. But the blockchain technology itself – i.e. the heart of every DeFi application – is much older: The launch of the Bitcoin blockchain was almost 14 years ago. Not surprisingly, blockchain technology has evolved significantly over this “long” period of time. In the following we try to give an overview of four generations of blockchains that we can observe.
Blockchain 1.0 – Bitcoin
The launch of Bitcoin in 2009 marked the birth of blockchain technology, this legendary decentralized register which is operated jointly by the nodes of a distributed computer network and which remains correct as long as no more than 50% (or 33% depending on the consensus mechanism) conspire against the network.
From the beginning (and still today… and maybe forever) Bitcoin was based on the Proof-of-Work (PoW) consensus mechanism, i.e. that energy-guzzling protocol that guarantees the security of the blockchain through the brute computing power of the entire network. It is important to understand that the term “Bitcoin” refers to both the blockchain technology itself and the application on this blockchain – i.e. the crypto currency Bitcoin. That both the technology and the currency bear the same name “Bitcoin” is not entirely coincidental, since the code of this first blockchain is not really modular and more or less just allows for the Bitcoin application. This is because the code is a monolith in which the individual layers of the blockchain stack (e.g., application layer and consensus layer) are mixed up quite wildly, making it really difficult to separate the application code (the Bitcoin currency) from the platform code (i.e. the bitcoin blockchain).
The approach for the other blockchain 1.0 applications that followed Bitcoin looks similar: These applications were usually not launched as additional applications on the Bitcoin blockchain, but the Bitcoin blockchain was mostly forked (i.e., the code was copied and adapted), to launch a new application on a new, separate blockchain.
Blockchain 2.0 – Ethereum
In 2015, Ethereum launched and introduced a whole new blockchain approach: Ethereum moved away from the monolithic approach by clearly separating the application layer from the lower rest of the blockchain, thereby allowing a wide audience of developers to build their own decentralized applications (dApps) and run them on the one Ethereum blockchain. This means that an ecosystem was introduced in which thousands of different dApps could run on a single, flexible (one size fits all) blockchain. The dApp developer did not have to worry about the security of the blockchain, but could concentrate on the application. This was made possible by the introduction of so-called smart contracts (application programs) with which developers can program any imaginable type of application (because it’s a Turing-complete machine) in order to then deploy them on the Ethereum blockchain.
Blockchain 3.0 – Post-PoW
Like Bitcoin, Ethereum is also based on the proof-of-work mechanism, which has a few massive disadvantages. One of them is certainly the enormous energy consumption that the PoW mechanism entails. For comparison: The Digiconomist estimates that the electrical energy consumption of just Bitcoin alone has now reached the level of all of Thailand.
However, the high energy consumption is only one of the disadvantages of the PoW generation of blockchains. Another is the limited transaction volume: With Ethereum, the maximum possible number of transactions per second (TPS) by design is around 15 TPS. If we compare this to the VISA network, which processes around 1,700 TPS, then the limitations of this blockchain technology become obvious. As early as 2017, for example, this limitation led to Ethereum being blocked in connection with the Crypto Kitties run, so that transactions could only be carried out with a long delay.
But it is also understandable that a new technology is not perfect from the start, and many new blockchains have successfully tackled these problems by turning away from the PoW mechanism and introducing, for example, the Proof-of-Stake (PoS) approach, in which the security of the network is not achieved through brute computing power but through staking tokens. This makes transaction speeds like on the VISA network feasible and also solves the energy problem of PoW. Ethereum is also planning to switch from PoW to PoS this year (unfortunately the June release was recently pushed back) and is calculating here that this will massively reduce the energy consumption of blockchain transactions (in the graph below, ETH PoW denotes today’s Ethereum chain and ETH PoS denotes the future one, which will be based on Proof-of-Stake):
Blockchain 4.0 – Internet of blockchains?
So… with the blockchains of generation 3.0 everything is solved and that’s it?! No, probably not. This is certainly not the end of the road. Where the journey will lead next is still in the stars (“Predictions are difficult… especially when they concern the future!”), but perhaps the next big thing is the internet of blockchains.
The internet of blockchains describes the vision of connecting the countless separate and independent blockchains that exist today into a unified network so that values (tokens or coins) can be transferred from one blockchain to the other and that a dApp in one blockchain can use the services of another dApp in another blockchain. In this vision, the individual blockchains are not simply connected to each other with bridges, but a common, all-connecting protocol is laid across all the different blockchains. Actually exactly the same as what we already have in our Internet today, in which all types of networks (radio network, coax cable network, tin cans over cord network, etc.) are connected by a common, all-connecting TCP/IP protocol (the Internet Protocol). The Inter-Blockchain Communication Protocol (IBC) seems to have the best cards at the moment to become the TCP/IP equivalent for the blockchain world. As far as we know, the two camps which are currently closest to the vision of an internet of blockchains are Cosmos and Polkadot. More information about these two ecosystems will follow shortly in a separate post.
So much for the four generations of blockchains. We hope that with this overview we have brought a little more clarity to the diverse developments surrounding these new technologies.