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Blockchain technology continues to adapt and evolve to suit the demands of its growing user base.  From the original Bitcoin protocols, it has evolved into the 2nd generation Ethereum platform, and today we are in the process of building the 3rd generation of blockchains. The technology has progressed from a simple distributed database into a more powerful distributed based computer. But where is it going?

The first blockchain was thought up in 2008 by the anonymous developer known as Satoshi Nakamoto. This technology gave Bitcoin its engine, which became the first digital currency to solve the problems associated with requiring a central server, or trusted authority, to regulate the transactions.

Since then it has been recognized that the distributed ledger technology can have many uses beyond digital currencies and can be used for tracking and recording the trade of anything valuable.  The Bitcoin design has been inspirational, acting as a large-scale proof of concept.

Second Generation Blockchain

Within just a few years of the genesis of blockchain technology, there was an evolutionary jump as the 2nd generation emerged. This 2nd gen technology was designed as a network for developers to build applications on. This is where the evolution of the technology allowed blockchain to become a distributed virtual computer, which was made possible by the developments associated with the Ethereum platform which is an open source, public blockchain distributed computer platform featuring smart contract functionality.

This new virtual machine, which went live in 2015, runs computer programs using a global network of computers. The goal of this technology was for the express purpose of building distributed applications. So far, the system has been very successful at getting the attention of a large and growing community of developers, supporters, and enterprises who continue to push the evolution and development of this new technology.

The most important contribution of this system, as the second generation of blockchain technology, is that it has brought the system up from being primarily used as relatively simple distributed database used as the platform for Bitcoin, to a much more evolved and useful distributed computing platform designed for running decentralized applications and smart contracts.

blockchain revolution

Right now, Ethereum is the most popular and viable platform for building applications on.  Many types of applications have been built on this foundation already, from popular social networks to financial applications.

Ethereum has been a major step forward, and with its success has given us a look into the future of what is possible to achieve with blockchain.  It seems that this technology will soon become a massive, globally distributed cloud computing platform for which we will be able to run applications of any type, and at the same scale and speed as today’s major websites.  All with the security assurances of today’s blockchains.

However, right now these new platforms are more like extremely inefficient computers that don’t do much except proving concepts. Getting to the next link in the evolutionary chain will involve some serious mathematical problem solving not for the faint of heart.  The ability to handle high volume transactional workloads remain at the heart of the problem and what this 3rd generation of blockchains are currently trying to solve.

Keeping the transaction ledgers current to support Bitcoin transactions uses more energy than some small countries.  Currently, the consumption of power equals that of Denmark, and costs over a billion and a half dollars a year.  Most of this consumption is being fueled by cheap, dirty, energy sources in China, which is where about 60% of the transaction mining happens. Using this much energy is simply not viable for obvious reasons, especially as these networks continue to grow.

Technical wizardry and monetary incentives to maintain the accuracy and records of who owns what, without a centralized authority controlling the whole thing is how it’s done today.  The problem is that it’s difficult to maintain this balancing act while also trying to grow the number of users using the system. Currently, blockchain requires a global consensus on the order and outcome of all transfers, which is what gives the technology its unique ability to police itself with high assurances of accuracy.

Transactions

In Ethereum, all transactions are stored publicly on every node of the blockchain, which has its downside as well as its upside. The downside is that performance slows down because every computer handling transactions has to calculate all of them in real time. The reason for this is that it is clearly a cumbersome task that sees the total number of transactions increasing every 10 to 12 seconds with each new block added.

bitcoin volume

The volume of transactions is also an existing constraint of the system.  With cryptocurrency, transaction speed is calculated by measuring the number of transactions per second that can be handled. The Bitcoin network’s capacity, theoretically, is somewhere around seven transactions per second, while Ethereum blockchains run about twice as many.

Comparatively, a credit card network is typically able to handle over 20,000 transactions per second. Facebook, might have about close to a million users on their site at any given moment, can handle about 175,000 requests for action per second.

Cost

Another major issue is that this is all pretty expensive.  The fact is that it costs a good deal of coins to pay the data miners for maintaining the ledger, and the system we have now is only ok for a limited amount of large transactions. However, using the blockchain to make small purchases, like a cup of coffee at Starbucks would currently not be possible, because, in their current form, they simply can’t handle a large number of small transactions such as what would be needed to handle high-volume exchanges like what you would find typically at most places like grocery stores, restaurants, and coffee shops.

Attempting these types of transactions would be, under the current system, entirely too expensive.  Looking into the future, it is easy to see how people will want to use the blockchain for these types of transactions.  Currently under development, many different companies are now laboring to put together a next-generation blockchain infrastructure, with each organization experimenting with different methods to try and eliminate existing problems with the system.

Moving Blockchain Into the Future

One of these networks is the Lightning Network, which is trying to extend the capacity of existing blockchains.  Their idea is that small, insignificant transactions, like your cup of coffee, will not have to be stored on the main blockchain, which is known as an “off-chain” approach. It works by creating small subnetworks where many smaller transactions can take place without each of those transactions needing to be recorded on the main ledger. A payment network channel is opened up between a group of people. The money the network represents is then frozen on the main blockchain.  Those members can then transact with one another using their private keys to validate their transactions.

This is a bit like having a bar tab, and the exchanges are marked down without making a log on the main blockchain, and then, at a designated point, the sum of those transactions is logged and the ledger is updated.  This only requires a couple transactions on the main ledger.

blockchain technology

This makes much less work to maintain the main blockchain and allows for the ability to handle many small transactions within the subnetworks.  As of the start of this year, there is a beta system running live on the Bitcoin test net, but the system will not be ready for a little while yet.

IOTA is another example of a beta system where existing blockchains are able to handle a high volume of transactions by using parallel operations, with the data structure acting more like a network than a linear chain. With this system structure, the processing and validation can happen right alongside each other.

The difference with this system is that there are no specialized miners in the network because every node that uses this network does the same work.  In this system, every node making a transaction also works to form a consensus. The diffusion of mining activities within these networks is what eliminates those bottlenecks that slow the whole thing down and demands tons of energy.

Also, with this network, there are no transaction fees for validation, and because this system is user-generated, the more people that use the network the faster it becomes.  This is the complete opposite of existing systems today, making IOTA very scalable.

These are only two of the ideas being explored today to make the 3rd generation of blockchain technology useable for tomorrow’s demand.  As you can see, the blockchain is an emerging technology, and, as it expands and evolves, its applications could be endless.  If everything continues to grow as it has since the beginning, investing in blockchain would be a smart decision. The advancement of this technology could, and most probably will evolve into a globally distributed computer system that will change everything.  Just as the light bulb changed the world in 1879, so could blockchain technology if only we continue to find viable solutions that allow it to grow.

About the author:

Chris Douthit
@chris_douthit

Chris Douthit is a stock and cryptocurrency analyst who’s worked in both finance and technology for nearly 20 years. With his insight and technical analysis, he achieved over a 2000% return in the cryptocurrency space in 2017. Today his training and research center, CryptoInvestingInsider.com is quickly becoming the go-to website for investors looking to fast-track their success.

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