Blockchain Basics Part 1: Web3 & decentralization, Tech stack, Bitcoin protocol
Before the terms– Bitcoin or crypto could make their way into people’s everyday vocabulary, NFTs became a rage. In February 2021, Nyan Cat — a gif of a cat with a rainbow behind it, sold for 300 ETH, equivalent to US $587,000. Since then, NFTs have become a buzzword with an ever-growing enthusiasm, both within and outside the crypto community.
The idea of selling images as NFTs sounds lucrative to many. However, it is crucial to invest time and energy in understanding the underlying blockchain technology which enables cryptocurrency trading, purchasing NFTs, and powers decentralized platforms for social media or sciences.
In this“Blockchain Basics” series, I aim to simplify the concepts with a layperson in mind. The topics are organized to overview how different pieces fit in this evolving space.
Web1 vs. Web2 vs. Web3
If you have heard about NFTs and blockchain, you would likely have come across this term –Web3. Let’s explore this bit first.
Technology advances in phases and the terms — Web3 and blockchain go hand in hand. It is essential to learn a bit about the internet’s history to understand what the various web versions mean and what Web3 promises to offer.
The earliest version of the web was static pages that people accessed from their personal computers. This phase is commonly referred to as Web1. People could access different websites and only read content from the web pages. The communication was one-way.
Web2 changed that by providing means to interact with that content. People could read, leave comments, fill up forms or interact with other people via online forums. Communication was no longer one-way.
The platforms and services that evolved (and evolving) in Web2 are centralized in nature which means that a single company/institution gives you a platform to consume content, interact with it, produce content, use products and services, store data, and then processes the data you provide them directly or indirectly. Entities like governmental bodies, financial institutions, and corporations are largely centralized in nature.
Social media platforms also make a great example of Web2. Platforms like Facebook and Twitter operate on separate databases of their users. Companies like Google or Amazon have separate sets of free or paid services for users worldwide. These organizations can also access user data and implement artificial intelligence to provide a personalized platform experience. This is the advanced version of Web2we access through our internet connections.
Web3 aims to reimagine offerings products and services without needing centralized systems in place or their permissions. Web3 through blockchain technology aims to empower web users by giving them built-in trust and share of infrastructure that enables running blockchain — a network of securely linked blocks of transactional data. I will cover this in detail in future posts.
For now, think of blockchain-enabled Web3 as a public database shared by various computers that record each transaction on the network. The difference here is that unlike the databases of Web 2 which can also store images and videos, blockchain register only transactions at the moment and are hence often termed as a distributed ledger. Though it is possible to store images, it becomes a costly affair. I will cover more about this in future articles.
Blockchains work on a consensus mechanism which means that any change in the blockchain network must be approved by the rest of the computers. This makes a blockchain state the same i.e. the data is the same data for any user.
This version of Web3 is currently realized in many blockchain networks. Apart from the popular one –Ethereum, other networks like Hyperledger Fabric, Ripple, etc also exist that are built with specific goals in mind.
For a more in-depth understanding of web versions, the introduction of advertisement models, ethical concerns like data privacy and protection, and the future of Web3, you may want to watch this video by Web3 Foundation — What exactly is Web3? by Juan Benet at Web3 Summit 2018.
Distributed vs Decentralization
Now that we have a fair understanding of web versions and the centralized systems we interact with daily, let’s have a clearer understanding of decentralization.
Though many people are quick to onboard apps and platforms for cryptocurrency trading or selling NFTs, a few people look into the nature of the platforms they use. A company may choose to place a portion of its database across different physical locations and networks. It would still own it and hold all controls on database operations. It is distributed set-up.
On the other hand, a decentralized database distributes ownership to the community that runs the blockchain. While a blockchain network indicates that it is decentralized, some apps or services built on blockchains can be centralized in nature if the ownership is with a person or a company.
This is a key concept that many crypto enthusiasts skip when engaging with cryptocurrency exchanges and setting appropriate crypto wallets. I will cover this in detail in future posts on decentralized finance (DeFi) and trading apps.
The takeaway here is that it all boils down to ownership — who owns the blockchain network? And it is particularly important when dealing with DeFi apps.
Blockchain tech stack
Now this section will be a little technical but hang on. I keep it simple and to the point.
Blockchain differs in its implementation on how we are accustomed to using the internet. A typical centralized system uses a client-server architecture. A company owns the infrastructure fully or partly, keeps the data, and serves user requests who access it via mobile phones or PCs. The simplest example would be a Google query from your end, and the results Google serves you. Millions of people similarly interact with Google on daily basis.
Blockchains work differently from this model. Instead of multiple requests to a single centralized client, all the blocks in the chain can communicate with each other. This makes blockchain a peer-to-peer network.
So ideally, unlike interacting with Google to look for information or send mail, you can directly communicate with another person. On blockchain networks, peer-to-peer activities, for now, are largely about cryptocurrency exchanges or sending NFTs to people’s wallets.
In addition, blockchain is also layered. Refer to the image below:
The image above depicts a typical blockchain architecture. It has an infra layer, data layer, network layer, consensus layer, and finally the application layer. They are depicted in different colors. However, blockchain layers are talked about as layer 0 to layer 3 where each layer is responsible for specific tasks.
This YouTube video explains the architecture and layers well.
What you would also notice is that “Crypto” is a common component in the architecture. “Crypto” is often used synonymously with cryptocurrencies. In reality, “crypto” denotes cryptography — a branch of computer science that deals with encrypting and decrypting messages, so it is relayed securely between two parties. Your WhatsApp messages are also encrypted using cryptography. Blockchains employ a math-based mechanism called cryptographic hashing that makes the blocks securely linked and nearly infeasible to hack.
For technical readers, there’s a Web3 Blockchain Fundamentals MOOC by Web3 Foundations on YouTube that you can watch for more in-depth understanding: LINK
Bitcoin protocol
This is the concluding section of this part in the series and understanding this helps you gain an insight into currency and cryptocurrency.
When a centralized authority (like a government in this case) issues currency, it’s called fiat money. All kinds of government-issued legal tenders across the globe are regularized and have their values defined by exchange rates. However, transactions between parties need to be verified for legitimacy.
When money was digitized as a replacement for cash transactions, the banking systems ran into a Double Spend Problem, which put simply is a doubt that whether or not the same digital money was used twice. In this way, digital money could be misused, and the banking systems have to verify each transaction before the money could be transacted between two parties. Notice the involvement of a central financial authority here? The 1st episode of Web3 Blockchain Fundamentals MOOC mentioned above explains the Double Spend Problem in detail.
The Bitcoin protocol eliminates the Double Spend Problem by introducing transactional history and computation as currency and adds verifiability to the system by using cryptography. It shifts the idea of using traditionally backed assets for currencies and replaces them with computation.
This video — “But how does bitcoin actually work?” by 3Blue1Brown does an extremely fine job of explaining the Bitcoin protocol. It is difficult to digest, and you may have to watch it often, but it provides a solid ground for understanding blockchain from the bottom-up.
The Bitcoin protocol gave rise to cryptocurrencies. Ethereum’s website puts it well by defining cryptocurrencies as a medium of exchange that can be used as a currency for payment of goods and services. While the Bitcoin protocol solves the issue of verifiable payment without needing a central authority, Ethereum builds on the idea and expands its network to incorporate more third-party elements and functions more like a library that can be used to build things further.
Final thoughts
Blockchain technology is promising in many ways and just like any emerging tech, it undergoes optimization. Unlike social media platforms that are easy to onboard, blockchain networks or the apps built on them are intimidating to many.
Hence, it is advisable to look into things for yourself. You need not know about blockchain’s architecture or how cryptocurrencies are created to trade them, however, putting efforts to look behind the curtain can help you distinguish facts from the hype, and avoid serious losses.
