What is a Blockchain?

At a very high level, the blockchain is a decentralized ledger, or list, of all transactions across a peer-to-peer network. This is the technology underlying Bitcoin and other cryptocurrencies that will soon be revolutionising a wide variety of business processes.

Blockchain technology is the underpinning of a radical rethinking of how we pay for things - as well as how we verify who owns what and who has the right to buy or sell it.

Using this technology, participants can transfer value across the Internet without the need for a central third party. The buyer and seller interact directly without needing verification by a trusted third-party intermediary.

Transactions are not anonymous, but are typically pseudonymous: a transaction record is created, but breakthroughs in the latest encryption methods ensure that the record cannot be falsified, while identifying information cannot be found by third parties without the relevant key.

What is a Cryptocurrency?

Cryptocurrencies are the digital assets that get transferred between parties, where the resulting transaction is recorded on the blockchain.

"Cryptocurrency" is technically a misnomer that has led to much confusion over the classification of modern digital assets, which can be separated into three generic groups: (i) Coins, (ii) Alt Coins and (iii) Tokens.

  1. (i) Coins, as the name suggests, are digital assets acting in the same way as a currency i.e. they are a store of value and general medium of transfer. The term is often used for all three categories, but does in fact refer to assets traded across bitcoin-derived blockchains.
    Bitcoin was the original economic experiment created by the anonymous, Satoshi Nakamoto. It remains the market leader and is considered by many as too large to fail, but the limitations of its early technology have resulted in numerous “forks” which are effectively spin-offs from the original blockchain. These include bitcoin cash, bitcoin gold, litecoin and many more.
  2. (ii) Alt Coins, as the name suggests, are also a general medium of transfer, but are traded across alternative networks and confirmed on alternative blockchains i.e. those that are not derived from the original bitcoin.
    The past several years of development have seen an explosion in the number of alt coins, each of which have their own unique traits, resulting in speculation as to their value. For example, Monero and ZCash use different forms of ring signature to create highly encrypted and completely anonymous transactions, while ripple is largely centralised to provide transaction speeds thousands of times faster than bitcoin.
  3. (iii) Tokens, are a well-established economic concept that have seen a new revival when integrated with modern blockchain technology. They are transferred in the same way as coins, and similarly confirmed on the chain by a network. But instead of being a general store of value, they are specialised and representative of a specific asset or service.
    Another typical, though not exclusive, characteristic of tokens is that they can be developed on third party blockchains with the use of smart contracts (see below What are smart contracts?). These applications allow anybody to code the proprietary coins of the chain into their own digital asset.
    Tokens are therefore able to revolutionise the business strategy of almost every company, in almost every industry. By enabling customers to carry out transactions with tokens, businesses are able to maximise their efficiency, while creating a permanent and trustworthy record of all their transactions.

How does this network work?

Cryptocurrencies need to be stored in what are known as “wallets”, each of which has a specific address. When an asset is transferred from wallet A to wallet B, it will only arrive at its destination once the decentralised network has confirmed it. This requires a multitude of users, known as “nodes” to reach a consensus that the asset has in fact been sent from A to B.

As the network confirms these transactions, it encrypts and compresses the data into a “block” which has to match the specific criteria, protocol or algorithm of the blockchain in question. When all transactions in the block have been confirmed, it is added to the blockchain, and all the digital assets will arrive at their destination i.e. wallet B.

how it works diagram

What are smart contracts?

Smart contracts are pieces of self-executing code which can be programmed into particular blockchains known as a smart contract platform. In the same way that code can confirm an asset was transferred from A to B, it is also able to confirm that the asset will be transferred somewhere else once certain conditions are met.

The platform however, will have a variety of accessible applications (decentralised applications or DApps) that can create escrow procedures, regular automatic payments or format the blockchain’s proprietary coins into new cryptocurrencies.

The most well-known smart contract platform so far has been Ethereum, made up of the Ethereum Virtual Machine (EVM) and its proprietary coin, Ether. This open source software has its own programming language, Solidity, and has grown immensely throughout 2017, hosting well over 90% of all Initial Coin Offerings (ICOs) and Token Generation Events (TGEs).

smart contracts diagram

What are Initial Coin Offerings (ICOs) and Token Generation Events (TGEs)?

An Initial Coin Offering (or ICO) occurs when a coin is first made available for sale. It will last several weeks, and usually consists of both a private pre-sale and a public crowdsale. The same is true of tokens, but while a coin is completely novel, a token is produced from an existing coin e.g. Ether, via a smart contract platform e.g. EVM. It is therefore technically not an offering and so is referred to as a Token Generation Event (or TGE).

The pre-sale is often carried out in several rounds, where different quantities of the new token are sold at a decreasing discount, so as to incentivise early adoption of the new cryptocurrency. This stage is often by invitation only, while crowdsales then enable any member of the public to purchase the new token, either from the company itself, or through third party exchanges on which the token is listed.

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