Consensus systems in Blockchain

Cryptocurrencies have been all the trend this year and its only fair considering how wide spread their adoption has been. There have also been significant innovations around the world to support this trend as we shift towards the fourth industrial revolution which further connects us through our devices and incorporates more ESG guidelines through stakeholder management and sustainable consumption. This post will be an attempt to go a mile wide and an inch deep into the recent trends that I have noticed come about and the innovations brought about by the pandemic.
The history of digital money goes back to some time in the 80s with a couple of significant papers being written that incorporate the concepts of Public and private key cryptography into electronic and digital signatures through hashing and encryption however the key accelerant for the trend came about nearly 20 years after the inception of the concept when pseudonymous Satoshi Nakamoto released a white paper for Bitcoin in 2008. At this time anyone could get into mining as the technology was quite permitting of entry level computers, which were still not anywhere close to efficient as the ones we have today. Mining was also further facilitated by the introduction of faster internet speeds as we shifted from 3G to 4G internet connectivity at the beginning of the last decade. The 5G internet connection was a further accelerant to this trend of digitization and internet of things, however there had been some key shifts in blockchain technology that happened along the way which led to further adoption from those that were still skeptical of the concept.
While bitcoin was the first cryptocurrency created, there were several other cryptocurrencies that followed suit due to the nature of innovation and the problem it provided a solution for. Blockchain provided a solution for a variety of problems that we could use it to solve, with the most crucial one being Trust. Trust amongst counterparts of a transaction has been a key issue for as long as humans have existed. This technology provided for a way for us to transact on a trust-less, permission-less format which was possible due to a fundamental component of blockchain. While cloud services allowed us to have scalability diagonally, these systems were still fundamentally centralized as servers would need to be housed through the private companies that would create this software as a service. This was known as mutable as the data on these ledgers could be changed or even erased. There was a consensus issue where should the leading authority of the company not be pleased with certain messaging, there was potential for silencing those that would oppose their protocols of operation. This is where blockchain technology took over as it provided the concept of smart contracts.
Blockchain is the concept of a decentralized ledger system which essentially could be described as a ledger or spreadsheet shared by users all over the world, known as nodes, where any information was add-only. Due to the nature of cryptography, these blocks would then need to be verified by other nodes on the computers, following which they would be added to the existing chain of blocks, hence the term. This was the first consensus system proposed through this technology as it represented a solution for the ability for any central authority to exert influence, at least without it being clearly visible to the rest of the nodes on the blockchain. Blockchains have a few integral components to its success with the most important being the developers, who write lines of code onto smart contracts, which are self executing contracts that operate digitally and without the need for an intermediary to facilitate it. These developers could also take the role of miners at the same time, where they would take on the responsibility of solving complex mathematical algorithms in order to validate transactions on the chain, for which they would receive a reward in bitcoin. Then there were also full nodes, that would serve the purpose of validating transactions, and other nodes such as wallets which did the same but with little influence over the consensus system. This was referred to as ‘proof of work’ as the miners would have to prove to the rest of the system, through the blockchain that they were in fact responsible for generating these bitcoins that they claimed to mine. This represented a shift away from the traditional banking system that would require a settling and clearance department which would have to work during specified hours and even then we were only able to achieve T+2 systems which allowed us to settle transactions in 2 days.
While this was an innovative solution, we would face a lower transaction per second than traditional banking or even centralized online systems which stemmed from the concept of the entire blockchain having to verify a hash key in order for a transaction to be added to the blockchain. Imagine a piece of code having to travel from one end of the world to another simply for a transaction to be verified. This is when the concept of an alternative type of crypto currency started to gain popularity. We then made the shift towards a proof of stake system, which was truly a game changer to facilitate transaction speeds, along with other benefits. This consensus system allowed nodes to consider staking their coins in order to achieve minted rewards in the form of liquidity for their work. They would delegate these coins towards validating a pool of transactions, in exchange for a transaction fee, as opposed to solving the complex algorithms that would usually require a lot of computational power. This would also be another reason why Bitcoin would go on to attract rarity as it would need a higher investment in funds for equipment and computing power simply to achieve economic scale as a miner. Towards when Ethereum was gaining popularity was also when miners had begun to use complex ASICs rigs which would work off the graphics cards inside of CPUs in order to be combined into a rig for more computation power.
This was solved by the adoption of a Proof of Stake system by Ethereum, which is set to complete some time in 2021. This was not the only solution however, as we also had the upcoming of blockchains such as Polkadot, which essentially added to the concept of proof of stake. Polkadot would allow for a central chain to run as a validator, with other chains running alongside parallel to its main in order to let it achieve the concept of transparency and data integrity without giving up the trade off for transactions per second. This would allow us to do more than simply transfer funds on the blockchain but also through more layers, add on application programming interfaces, or APIs, on these secondary chains. These could be run through smart contracts and facilitated for further transactions amongst the Crypto space, by allowing for off-chain transactions amongst other types of coins.
We also saw further developments of a newer kind of consensus mechanism called the Proof of Authority system, which entailed nominees to be selected by the block for a chance to become validators of a block and receive compensation in turn for their contribution. This differed a bit from its predecessors as it would add an element of centralization to this decentralized technology although it would still improve on the efficiency of existing centralized systems to reach consensus. Another popular concept was that of Tether, which was a blockchain that attempted to solve the issue of unstable market prices and volatility that the crypto space was known to face in the early days. This coin would essentially ‘tether’ or be pegged to a fiat currency, allowing for collateral to be put behind the asset. We also saw the concept of Non fungible tokens gain popularity as we continued to expand further possibilities with what this technology could help us accomplish.
Fungibility of a token essentially means we can exchange this for the same value. You and I could swap $10 bank notes and the value of both our notes would still be the same. While imperfectly, fungible tokens such as Bitcoin and Tether attempted to do just that. Non-Fungible Tokens, or NFTs would gain popularity due to their being unique in nature, where one NFT would not be the same as another, often having distinctly unique features. This came at a time where encryption over packets was already facilitating high data transfer speeds for us to be able to post pictures, videos and audio files to share with one another. NFTs would allow us the ability to clearly trace back to the creator of the token, as well as all those wallet addresses that had ownership along the way, up until the final owner. This was truly revolutionary for artists of all spheres ranging from painters, musicians, photographers, painters and graphic designers. This would allow them a platform to be not only credited for their work, but to also be rewarded for the fruits of their labor through the ability to tokenize their work. This would also introduce the concept of sharing a piece of art in the hopes that it would appreciate in value over time. This would also give the artists the ability to self destruct the piece of art, adding another level of possibility for the rarity of artists who wished to do so. Smart Contracts and tokenization also allowed us to truly become owners of property as NFTs would be deployed towards title deeds for homes and other real estate.
This industry of real estate still has plenty of potential from this space as there is a vast number of transactions occurring amongst renters and landlords through systems that are falling behind, where smart contracts could overcome the same obstacle in a matter of minutes, as opposed to days maybe weeks with the help of humans needed to complete these tasks. These innovations came with some difficult challenges with scaling as the first few cryptocurrencies would not be able to keep up with the demand that they attracted. The concept of ‘forking’ was that of being able to build additional functionality onto the code through what could be described as a ‘software update’ would be a game changer as it would allow developers to work on the original source code while making their modifications. A hard fork would be the initial method as we got to know more about how to scale these technologies but essentially it would entail a new piece of code being written that would deem those that had mined older versions of the code unable to continue to validate their transactions. This was followed by the concept of soft forks which would allow for backward compatibility and essentially meant if you mined coins before the fork, your coins would still hold up their value if you wanted to exchange them. These also came gas fees or “Gwei” for the case of Ethereum which would work as compensation for those involved in staking their coins to help validate transactions. These transaction fees helped us accomplish the issue of significant computational power being needed to validate transactions, as opposed to the Proof of Work consensus system where miners would have a significant advantage by having access to more capital to purchase bigger rigs. These bigger rigs would also come at a trade off for electricity as GPUs consumed a lot of electricity which often fed off electric grids powered by coal, deeming them unsustainable over the long run. These machines would also generate a lot of heat which would drive up the average temperature in the vicinity of the mine, leading to some governments such as Iran and China outright banning mining and transactions in cryptocurrencies.
Energy was a key issue in considering the sustainability factor as some countries were more welcoming of these heat generating mining rigs, such as Canada, Iceland and Russia, due to their cold climate providing natural cooling while China would go on to ban it citing environmental concerns. This was also at a time where so much tech was needed to fuel our shift towards online ecosystems as we shifted towards the fourth industrial revolution. We began to use more tech through heavier reliance on communication tools like our smart phones and personal computers which got smaller and smaller thanks to innovations the silicone chip industry. These would also facilitate our home devices to see significant improvement through electrification such as stoves, microwaves, air conditioners and TV screens. Although we got a lot of benefits from this added connectivity, we also ended up consuming more energy as it would lead to a higher throughput on our grid system to continue to charge and power these devices. There was also more innovation to be seen on the electric car front as these began to gain popularity in contrast to their gasoline counterparts which contributed to not only air pollution but also global warming.
This also led to improvements in batteries for the storage of power that we now had the option to generate off our roofs and maybe even windmills, if you had the space and resources to do so. Not only did we get electrically powered cars, we also had innovations towards self driving capabilities that came pre built into these cars. Google is known to be making significant headway in their autonomous driving assistance software, which can be implemented in other cars such as the Honda Civic which can now automatically steer itself, maintain speeds and even complete lane switches. Tesla has taken this a step further by allowing buyers the option to purchase fully self driving cars right out of the showroom. This has led to competition following from the likes of Lucid and Nio in China, which works on swappable batteries for convenience. This has also led to a higher demand for Lithium around the world which is needed to produce these batteries and semiconductors. Lithium can be mined in a couple of ways, with the oldest technique involving digging at the surface level to extract the raw material for further processing. While this is a cheaper and faster method of extraction, it is significantly worse for the environment as it reduces the mine age and leaves the environment worse than it picked it up. The alternative also involves going deeper underneath the surface where a lot more land space is needed to produce a smaller output while taking more time to do so, however it is better for the environment. This is when there is a drive for more clean energy due to rising global temperatures and climate taxes being imposed, while carbon capture credits become easier to trade in spot commodity markets.
This is just a sign of more innovation to be on the way as markets begin to rebound from the virus, at least some markets like the US and some in Europe. Vaccine roll outs begin to show some signs of normalcy however reports have also emerged for higher levels of stress and anxiety from being cooped up indoors due to having worked from home in a more repetitive environment. This has also been due to lesser movement due to social distancing measures, although this has not resulted in lesser intimacy as we are connected online increasingly. Companies have found a way to pivot by arranging meetings over zoom and smaller businesses opting to advertise their goods and services on Instagram and Tiktok. This has also led to higher levels of non verbal communication which is good for those suffering from the autism spectrum of disorders due to normally having difficulty with social interactions in person. Though there have been studies conflicting previous ones lately, it has been said that roughly 60% of these disorders are genetic or hereditary whereas the other 40% have said to be as a result of their environment. Those with such disorders could be diagnosed at a young age or even as adults. Environmental concerns would be growing up part of a household that is not supportive of mental health or due to lack of intimacy and support from family and friends, which would lead to difficulty fitting into group settings. This has said to been driven further by research reports released deeming traditional IQ, or intelligence quotient tests being ruled as insufficient in judging children’s abilities. These standardized tests are applied on the basis of a standardized test where the raw score is considered in comparison to the raw scores of others within their age group. Conflicting reports claimed that these tests do not factor in non-verbal communication, visual learning and problem solving skills that would traditionally not be measured in classrooms. Why this is noteworthy is because these IQ tests have statistically been proven to be linked towards performance at school or at work in the future. This is why the online learning environment facilitated by the pandemic has developed so many ways for us to connect and work remotely. This trend has also been further supported by policy backing from big tech firms such as Google which have gone onto make it optional for employees to work from the office once the pandemic resumes, which will likely lead the way for others such as Facebook, Salesforce, Oracle and more.
The pandemic has also seen innovation in the space of Genomics and study of how genetics affect our ability to cope with diseases and disorders, with Cathie Wood being quite vocal about her ARK Genomics fund showing significant returns due to innovations. She has also been quite vocal about innovations in the telematics space due to the increase in wearable technology and more through that generated by our self-driving electric cars. These devices generate a lot of data which can be further analyzed through deep learning and artificial intelligence to provide better suggestions and improve our interaction with technology. There has also been a rise in home tech devices such as the Google Echo, Amazon Alexa and Apple’s Siri providing not only Virtual assistant services but also capability for easy to install access control devices on our doors and cameras around our homes. This has been paired with simple ‘if this then that’ functionality being supported by these apps which lead to a workflow of actions that automatically occur when we program them to do so. We could program these systems to automatically turn on the garage lights when we enter our parking garages, cue our favorite music while the sprinklers are turned on and the oven is turned on to self heat for you to show up just in time for it all.
We are also moving towards the acceptance of solar power into our grids with more and more private players incentivized to enter the space through green energy subsidies and flexible power sharing agreements such as Power Purchase agreements, that tokenize the use of solar energy into smaller units. These also facilitate for a smarter grid in replacement of our centuries old alternatives as we shift towards an incorporating more data into our lives to ensure we are using our resources as efficiently as we can. Our washing machines can be turned to only function at off-peak hours while facilitating for our cars to be charged at times while we sleep. This has also seen a significant adoption of blockchain technology to facilitate the faster transfer of data amongst these systems to achieve efficiency. Another key sector that has seen improvements due to blockchain is that of our supply chain as we now have the ability to check the source code of where which item originated from, how long it spent in inventory and whether it was truly fresh enough to be consumed, through simple tagging. We have also seen innovations in the space of vegan alternatives for meat as well as through new farming techniques such as vertical farming, which can be conducted even underground due to advancements in technology.
All of this has seen a rise in demand for solutions to store and power our energy through superconductors and lithium batteries. Lithium is undoubtedly a resource that is quite scarce as global supply chains span cross continents to feed the demand that keeps on growing due to more tech and more batteries. Big tech firms are undoubtedly a significant driver of this demand, with China and Australia leading the race with substantial deposits of the resource, not only within their home country but also through subsidiaries in South American countries.
Not only has blockchain further facilitated how we interact with one another, it has also led to improvements in so many industries. Finance and Banking has undoubtedly been at the forefront of that movement as it has also facilitated faster remittance, clearing and settlement amongst institutions and their customers. This has also led to tokenization of securities into smaller denominations, lowering the bar for inclusivity and participation in financial markets. Lawyers can now execute smart contracts with ease, paving the way for more automation and ease of transactions as well.
Another key sector that has seen the benefits of rise in blockchain has been the healthcare sector, which has seen a shift away from volume based care towards outcome based care. This has been facilitated by storage and transfer of sensitive patient data through decentralized blockchain technologies which ensure the patient is able to be connected with the right type of caregiver at the right facility. The pandemic has also helped us scale facilities available to serve more patients in an exponential manner as unfortunately we have needed more hospital beds for patients due to vaccine supply chains. Thankfully we saw the vaccine roll out quite fast, due to the growth in medical studies and expertise in working in lab environments. These have also facilitated further studies in the fields of chemotherapy due to discoveries of healing properties through quartz, which was traditionally used by ancient healers in China to treat cuts, burns and scars. This century has seen plenty of innovation and I am enthusiastic to see all that it goes on to bring us.