concept of Blockchain was first introduced in 2008 with a publication of :
“Bitcoin- A peer-to-peer Electronic cash system”, a paper by an anonymous
person or group named Satoshi Nakamoto (A pseudonym and till date no one is
sure as to who it is).
was then practically implemented in 2009 as a core component of the digital
currency, Bitcoin. It served as a digital public ledger which would store all
the transaction data on the network.
January 12 2009, the first Bitcoin transaction took place between Hal Finney
and Satoshi Nakamoto and on October 12 2009, #bitcoin-dev is registered as a
discussion topic on freenode IRC (an open source project forum) and the
Bitcoin market is established in October 31 2009 and it allows people to
exchange paper money for Bitcoin. This is when people begin to recognize it as
a digital currency.
In May 2010, the
first Bitcoin purchase was of 10,000 bitcoins for a pizza. The cost at that
time was $25 and today, it is about $ 120000000. By November 210, participation
in the Bitcoin marketplace increases the market cap to exceed $1M USD.
By Febuary 2011, BTC
continued to increase in value and reached parity with USD ($1 USD= 1 BTC) and
by March 2013, BTC market surpasses $1B USD. 10 times the growth in less than 3
claimed to have solved the problem of ‘Double spend’ in digital currency using
the blockchain technology in Bitcoin. Double spend is basically the idea of
spending digital currency in two places. This is a problem which is unique to
digital currencies since it can be replicated or produced again easily. This
would not be an issue is case of physical currencies since they cannot be
easily replicated and the parties involved in the transaction can easily verify
them. In case of digital currency, there is a risk that the holder of the
currency could make a copy of the digital token and send it to the merchant or
someone else while retaining the original.
became the first digital currency to have solved this problem of double spend
without requiring a third party or a trusted administrator.
Nakamoto disappeared from public (that is from Bitcoin forums, papers and code
contributors) in 2011. Bitcoin however continued to be developed and marketized
by the community which was focused to address various other issues in the code,
even in his absence.
is used by millions of people for payments, including growing remittances market and its market capitalization hovers
between $20-$25 Billion US Dollars.
It was in 2014, that people realized Blockchain can be
separated from the currency and can be applied to various other use-cases. This
is when the attention shifted from Bitcoin to Blockchain. Almost every major
financial institutions in the world is researching on blockchain now and some
15-20% of banks are expected to be using blockchain in the current year.
innovation embodied in the second generation blockchain system called Ethereum
was the “Smart Contracts”.
December 2013, a person named, Vitalik Buterin releases a white paper on what
would become the “Ethereum project” – a blockchain platform with the ability to
build decentralized applications (i.e. Smart contracts). Ethereum is a
blockchain based distributed computing, public, open-source platform featuring
smart contract facility.
was a prominent Bitcoin enthusiast for several years and was a co-founder of
the Bitcoin magazine in 2012. He tried to update the original Bitcoin protocol
and failed to gain agreement within the Bitcoin community, post which he
gathered a team of super programmers to develop a completely new blockchain
protocol featuring ‘Smart contracts’ that would allow programmers to build
scripts into the blockchain which would act as contractual agreement and
execute when the mentioned conditions are met. He named this new blockchain
Smart contract is a piece of code which is stored on the
blockchain network. Anything of value, like money, property or shares can be
exchanged with the help of smart contract in a conflict-free , transparent way
while avoiding the services of a middleman. It defines the conditions
to which all parties using the contract would agree, so certain actions are
executed if the required conditions are met. A smart contract is saved on each
computer on the network and all of them must execute it to get the same result.
In this way users can be sure that the outcome is correct.
Let us try to understand Smart contracts with the help of an
Let’s say you want to ship some goods to your friend Alice.
You trust Alice, however you do not trust the trucker Bob , who will carry your
pallet of goods. On the other hand, Bob does not trust you as well, may be you
won’t pay him?
Hence, you sign an agreement with Bob stating you would do
the payment in a few days after the goods are shipped. Normally, in this
process, legal papers, contracts are scanned, printed, signed for which a third
party is involved.
With the help of smart contracts, this can be made simpler
and the rules can be added in the code.
You can make a payment for shipment to smart contract on a
day of loading and it would not process the payment till shipment delivery is
confirmed by Alice. Then smart contract would then release the payment and the
money would be transferred to Bob automatically. Let’s move a little bit
forward. What if we would have a GPS tracker attached to the pallet? Then we
simply could eliminate Alice from this process and just release the payment
automatically, when the location rule is met.
To use a smart contract on Ethereum blockchain , mini
payments of Ether, the cryptocurrency for Ethereum were required. Since smart
contracts are stored on Ethereum blockchain, anyone can access or inspect the
contract for an bugs or irregularities since its contents are public.
Additionally, no one can access the funds on the smart contracts, not even the
This innovation of smart contract in the blockchain system
ethereum, built small computer programs directly into blockchain that allowed financial instruments, like loans or bonds, to
be represented, rather than only the cash-like tokens of the bitcoin. The ethereum smart contract platform has a market
capitalization of billions of dollars and has hundreds of projects heading
towards the market.
Ever since its launch in 2014, Ethereum has grown
significantly and is now considered the second largest cryptocurrency after
Bitcoin. By June 2014, the Ethereum project was funded by a crowd sale.
Investors realized how Ethereum could unlock a new level of functionality for
blockchains and were keen on investing in the same. It has been growing ever
Proof of Stake
The next major innovation in the blockchain world was
“Proof-of-stake” (POS). A cryptocurrency blockchain network aims to achieve
distributed consensus by the Proof-of-stake algorithm. It can also be
considered as an alternate process for transaction verification on the
Proof-of-stake was first introduced by Sunny King and Scott
Nadal in a paper in 2012 and it intended to solve the problem of Bitcoin
mining’s high energy consumption. The average cost of maintain a bitcoin
network at that time was around $150,000 a day. Today this cost would be around
In order to understand Proof-of-stake, it is important to
have a basic idea about Proof-of-work.
A mining process wherein a user installs a powerful computer
or a mining rig to solve complex mathematical problems/puzzles called as proof
of work problems is ‘Proof of work’. The verified transactions of
several successfully performed calculations of various transactions are stacked
together and stored on a ‘new’ block on the distributed ledger or public
blockchain. Mining creates new currency units after verifying the legitimacy of
The work would be difficult for the miner to perform, however
it would be considerably easy for the network to check. Each miner on the
network attempts to solve the mathematical puzzle first, so as to receive a
cryptocurrency as a reward. As more power is added to the network, more coins
are mined and the number of calculations required to create new block
increases, thus increasing the difficulty level for miners. Miners need to
recover electricity and hardware costs in case of Proof-of-work currencies.
In case of a proof-of-stake system, the
creator of a new block is chosen in a deterministic way, depending on its
wealth, also defined as stake, unlike where the algorithm rewards miners who
solve mathematical problems with the goal of validating transactions and
creating new blocks. Blocks are said to be ‘forged’ or ‘minted’ and not
‘mined’, in the proof-of-stake systems. Here, forgers (users wo create new
blocks by validating transactions) are given a transaction fee as reward and not
cryptocurrencies, since the digital currencies are created in the very
beginning and their number is fixed.
switching to Proof-of-stake from Proof-of-work in blockchain led to huge energy
savings and a safer network as the attacks becomes more expensive. Proof-of-stake
systems are said to be the future!