Blockchain technology grew quickly since its inception in 2008 as the backbone and public ledger for Satoshi Nakamoto’s bitcoin.

The first generation blockchain design inspired many other applications and developments in blockchain technology, which so far be fall into four categories, or generations.

Digital currencies

Bitcoin’s blockchain enabled the first decentralized digital currency. Its open, public, shared ledger solved the problem of double-spending.  

Previously, the largest flaws in digital currency creation were the possibilities of duplication or falsification. Double spending, the spending of fake or additional units of currency, causes distrust and inflation, devaluing a currency.

First generation blockchains like bitcoin uniquely allowed the secure, peer-to-peer transfer of funds independently of financial institutions, governments or central servers. Transactions become blocks on an open-distributed ledger called a blockchain. Digital currency miners and owners are responsible for updating and holding ledgers. 

Blockchains as assets

Moving away from digital currencies, blockchains became a way to record assets, a medium to issue shares, and a way to vote.

These broader use cases allowed for the administration of assets.

At this phase of development, organizations and developers realized blockchains could be realistically and quickly used for many applications.

Blockchain technology is now developed for both systems and processes within finance and banking. But also further afield from blockchain origins, in broader technology, industry, supply chains and inter and intra-organizational processes.

The most common use case of this expansion so far, though, is the Initial Coin Offering, or ICO, a form of crowdsale that developed from the successful concept of crowdfunding.

Businesses and groups launch ICO’s, the market for which is subject to much scrutiny at the moment, to raise capital for their projects.

Investors in return receive blockchain based coins, or tokens, to prove their asset ownership. These tokens let investors acquire the product or service generated by the ICO or trade them on the open market as a digital coin.

Blockchains as contracts

Depending on the school of thought, Blockchain 2.0 technology could be termed second generation. However, there is leap from blockchains as assets, to blockchain as smart contracts.

With advances in the underlying technology, blockchains can do more than ever. For instance, they can record information such as identity, intellectual property, or an agreement like an insurance contract.

They also are reliable for the fast retrieval of digital identification, or for the management and collection of royalties, and protection of copyright.

Ethereum represents a second generation blockchain system where the “blocks” contain programming and data, and are not just a coin or token like previous intimations.  There are many hundreds of projects and applications in development using Ethereum based smart contracts.

Blockchains can now also be used to enable the Internet of Things (IoT), becoming the secure backbone for the transfer of data between computers and machines.

Proof of stake and scaling

Earlier generations of blockchain technologies used “proof of work” systems.   Under this system, groups of computer owners used software to discover and validate the blocks of a blockchain. In return, owners receive units of the digital currency as compensation.

Blockchain technologies are now becoming “proof of stake,” financial instruments. This model offers the same security, but doesn’t require groups of miners.

In an open-distributed ledger, every computer involved in the network processes every transaction. As the number of transactions increases, though, the network slows. Proof of stake uses a different system. With scaled blockchains using proof of stake methods, the processing and validation work divides evenly across the right number of computers for the size of the task.

It’s this next generation smart contract based blockchain technology that could power the Internet of Things (IoT), or process payments fast enough to compete with the likes of Visa.

The road ahead

Blockchains remain the administrative mechanism for digital currencies like bitcoin, which now have recognition as a powerful asset class.

Digital currencies still have a long way to go. Soon, however, we could see digital currencies accepted by retailers just as fiat currency denominations are today.

Major leaps have been made in 2017 for bitcoin as an investment option, bitcoin futures will be traded on Wall Street for the first time this December.

The potential of blockchain away from digital currencies compares well to the infiltration of the internet in our daily lives. Its qualities as a secure, time-stamped, transparent ledger of transactions can now record data and carry programming. This means blockchain now applies to thousands of systems and processes that exchange and record of information.

Blockchains are also update-able by multiple simultaneous users, in real time, reducing transaction costs and improving accuracy.

The future is bright for blockchain technology. It could well become the foundation for the entire global economy.

 

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